Health Reimbursement Arrangements: An Option for Small Employers

Though the employer shared responsibility provisions of the Patient Protection and Affordable Care Act (PPACA) do not apply to small employers (generally, employers with fewer than 50 full-time equivalent employees), many small employers still want to provide some level of health benefits to their employees.

One option for providing health benefits outside of adopting a traditional health plan is the health reimbursement arrangement (HRA). Although health reimbursement arrangements may appear straightforward and easy to administer, employers must be aware of certain compliance requirements.

What Is an HRA?

Under an HRA, an employer makes available funds (up to a specified maximum dollar value) to reimburse employees and their dependents for certain healthcare expenses. Common medical expenses that may be reimbursed under an HRA include copays and deductibles, prescription drugs and insurance premiums. If properly structured, neither the employer's contributions to the HRA, nor reimbursements to participants, are treated as taxable income.

What's the Catch?

Under current law, subject to a few limited exceptions, employers generally may not offer "stand-alone" HRAs – i.e., HRAs that are not integrated with major medical coverage – to current employees. One exception to this rule, which may be an attractive option for some small employers, is a qualified small employer HRA (QSEHRA).

QSEHRA Requirements

Generally, the requirements of a QSEHRA are the following:

• To adopt a QSEHRA, the employer must not be an "applicable large employer" (ALE), within the meaning of the PPACA, and must not maintain another group health plan. (Both of these restrictions apply on a controlled group/affiliated service group basis.)
• The QSEHRA must be solely funded by employer contributions, with no employee funding (including through a cafeteria plan).
• The QSEHRA must be made available to all eligible employees on the same terms.
• The QSEHRA may reimburse expenses, up to an annual limit that is indexed for inflation, only after employees provide proof of minimum essential coverage under another health plan.
• The employer must provide certain notices to all eligible employees prior to the beginning of the plan year.
• The employer must report the eligible benefit under the QSEHRA and taxable expenses paid (if any) on employees' Forms W-2 each year.

Further information about the rules applicable to QSEHRAs is available in IRS Notice 2017-67.

Small employers considering the use of a QSEHRA should carefully review the applicable guidance or contact experienced counsel, as some of the requirements in the Notice may be surprising. For example, the IRS takes the position that offering dental or vision coverage (which employers may not typically consider a "health plan") will disqualify an employer from offering a QSEHRA.

What Are Some Compliance Considerations When Offering a QSEHRA?

Unlike traditional HRAs, QSEHRAs generally are not subject to the 1) group health plan requirements under the Internal Revenue Code, Employee Retirement Income Security Act of 1974 (ERISA) and Public Health Service Act (e.g., the requirement to provide a Summary of Benefits and Coverage, or SBC), 2) Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage requirements or 3) PPACA reporting requirements.

However, unless a specific exception applies, QSEHRAs generally are subject to other rules that do not depend on "group health plan" status, including:

• ERISA requirements for welfare plans – e.g., the requirement to maintain a written plan document and summary plan description (SPD)
• Medicare secondary payer/Medicare Part D reporting and disclosure requirements
• Patient-Centered Outcomes Research Institute (PCORI) fee filing
• Health Insurance Portability and Accountability Act (HIPAA) privacy and security requirements (unless the QSEHRA is self-administered by the employer)

The considerations under federal law discussed here are not exhaustive. Additionally, a number of states restrict employer contributions to individual health insurance coverage (although some states have added exemptions for QSEHRAs, and other state restrictions may be preempted by ERISA).

Conclusion

Reimbursing medical expenses may seem simple enough – however, under current law, employers cannot reimburse medical expenses, including individual medical coverage premiums, without meeting the requirements of a permissible HRA (such as a QSEHRA). Offering a QSEHRA can be an attractive option for small employers that are prepared to comply with certain requirements.

If you would like assistance with adopting or updating a QSEHRA for legal compliance, or if you have questions about other health and welfare plan options, contact the authors, another member of Holland & Knight's Executive Compensation and Benefits Team or your primary Holland & Knight attorney.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.