Issue

Most small Christian colleges have heard about the Affordable Care Act’s rule that reimbursing health insurance premiums could result in $100 per day per employee penalties. Now, there may be a program to help “qualified small employers” go back to health insurance reimbursements – and without the onerous penalties.  A new law provides an opportunity for small employers to reimburse health insurance premiums on a pre-tax basis.

Situation

Troas Bible College (TBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii). They are required to file Form 990 annually. In 2014, TBC ceased reimbursing health insurance premiums for their employees due to edicts in IRS Notice 2013-54. As we discussed tax issues with their Controller, we told her the new “21st Century Cures Act” and she indicated that they might like to take advantage of these changes.

This Act allows “Qualified Small Employers” to offer a new kind of health reimbursement arrangement (“HRA”) to assist employees in paying for their medical expenses. It was effective January 1, 2017. The new “arrangement” is called a QSEHRA – “Qualified Small Employer Health Reimbursement

Arrangement.” QSEHRAs are not be considered “group health plans” under the Affordable Care Act. Thus, the market reform requirements – with $100 per day per employee penalties – do not apply.

Employers are eligible to offer a QSEHRA if they:

  1. Are not applicable large employers as defined under the Affordable Care Act
  2. Do not offer a group health plan to any of their employees

Eligible qualified small employers will be allowed to pay or reimburse employees’ eligible medical care expenses through a QSEHRA on a pre-tax basis.

The 21st Century Cures Act also provided additional transitional relief for some small employers who had the arrangement to reimburse health insurance premiums for plan years beginning on or before December 31, 2016.

Rules

The Qualified Small Employer Health Reimbursement Arrangement is codified in Internal Revenue Code section 9831(d)(2). A summary of the qualifications – and a “notice requirement” – are as follows:

A QSEHRA (like a “traditional” HRA) must be funded solely by the employer.   The arrangement must reimburse medical expenses as defined by Internal Revenue Code Section 213(d) and must be provided on the same terms to all eligible employees, except that the benefit amount may vary to reflect differences in individual health insurance premiums that are based on age and family size.

Employees may be excluded from coverage if they:

  • Are part-time or seasonal;
  • Are under 25 years of age;
  • Have worked less than 90 days for the employer;
  • Are nonresident aliens with no domestic earned income; or
  • Are union members covered by a collective bargaining agreement?

QSEHRA annual contributions have a limit of up to $4,950 for single or $10,000 for family coverage. These limits will be adjusted for inflation and prorated for partial years.

A QSEHRA sponsor (qualified small employer) must provide all eligible employees with a notice at least 90 days before the start of the plan year (or 90 days before they become eligible, if in mid-year). The notice must include things like the employee’s permitted benefit for the year; an statement that the employee is to provide the benefit amount on any application for an ACA exchange premium subsidy; and a warning that the employee may be taxed under the ACA’s individual mandate, and owe income tax on QSEHRA reimbursements, unless they maintain “minimum essential coverage.”

Bottom Line

There is a new opportunity for “Qualified Small Employers” – those who are not “Applicable Large Employers” – to provide health reimbursements – including health insurance premiums – to employees when the employer does not offer a group health plan. This could be advantageous to your institution if you are not an “ALE.” Always ensure that you are getting counsel from a knowledgeable, enthusiastic advocate. He or she will be able to help you develop a set of post-issuance compliance procedures that will ensure that your school is operating within IRS rules.

Specific questions? Email Dave Moja.

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.