Tax-Free Health Reimbursement for Small Employers

Under the Affordable Care Act (ACA), qualified employers who provide group health coverage also can offer tax-free health reimbursement arrangements (HRAs), which allow employers to reimburse employees for health expenses on a tax-free basis. The ACA, however, does not allow employers to offer standalone HRAs. Therefore, under the ACA, small employers who do not provide group health insurance have no feasible way of reimbursing their employees for health expenses on a tax-free basis.

Thanks to the 21st Century Cures Act, which was passed in 2016, small employers who do not meet the ACA’s definition of Applicable Large Employer (ALE) can offer a Qualified Small Employer (tax-free) Health Reimbursement Arrangement (QSEHRA), which enables employers to reimburse employees for health expenses on a tax-free basis.

Basically, the employer sponsoring the QSEHRA offers the participating employee a monthly allowance for individual or family coverage. Then, the employer reimburses the employee for eligible expenses paid for by the employee, up to the monthly allowance amount.

Eligibility Criteria

Small employers are eligible for the QSEHRA as long as they meet two conditions:

1. They are not an ALE, meaning, they have less than 50 full-time or full-time equivalent employees.
2. They do not provide a group health plan to any of their employees.

The QSEHRA must be offered to all employees, except for the following:

• Part-time employees
• Seasonal employees
• Employees under the age of 25
• Employees with less than 90 days of service
• Union employees covered by a collective bargaining agreement
• Nonresident alien employees who do not receive income from U.S. sources

Expenses eligible for reimbursement include medical, dental, and vision insurance premiums; copays; and deductibles. To receive the QSEHRA benefit, the employee must provide proof of his or her health insurance coverage. To be reimbursed for health expenses, the employee must provide proof of those expenses.

Funding, Contributions, and Tax Advantages

QSEHRAs are funded entirely by employer contributions; employees cannot make any contributions toward the plan. When setting your contribution amount, keep in mind that the same terms must be offered to all eligible employees, and you must abide by the maximum annual threshold. For 2018, you can reimburse up to $5,050 in health costs for employees with individual coverage and up to $10,250 for employees with family coverage.

Because QSEHRA benefits are not subject to employment taxes, you will receive tax savings on your contributions and your employees will receive tax savings on their reimbursements. It is important to speak with your accountant about tax implications.

Reporting Requirements

If you offer a QSEHRA, you must provide employees a written notice about the plan before the start of the plan year, or on the date an employee becomes eligible. The notice must state the following:

• The annual amount the employee will receive for the benefit
• That the employee must report the benefit to the health insurance marketplace when renewing coverage
• That the employee will be responsible for taxes on his or her QSEHRA reimbursements if he or she fails to maintain health coverage while receiving the benefit

You must also report the value of each employee’s QSEHRA benefit on Form W-2.

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© 2018