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IRS Issues New Guidance on QSEHRA Plans

Three weeks ago, we told you about the executive order the President signed (in our blog post Executive Order Seeks to Expand Use of HRAs). The order asked the Departments of Treasury, HHS and Labor to explore how they could allow more businesses to use Health Reimbursement Arrangements (HRAs).

Today, the Internal Revenue Service (IRS) issued Notice 2017-67

This notice provides long awaited guidance on the qualified small employer health reimbursement arrangement (QSEHRA). The QSEHRA plan is a great small business alternative group coverage. The plan was welcomed when it was signed into law in 2017 and, it overturned guidance previously issued by the Internal Revenue Service and the Department of Labor that stated that HRAs violated the ACA’s market reforms, subjecting small employers to a penalty for providing such arrangements. In this post, we will cover the notice in detail. What it means moving forward and its impact on existing plans.

The Notice

Today’s 59-page notice uses the language that Treasury and IRS intend to incorporate into proposed regulations. This means there will be an open public process period for comments and, soon thereafter, publication of the proposed and final rules in the Federal register. It is likely most of the guidance in the notice will eventually be codified however, there are one or two guidelines that may not make it all the way to the code.

Anyone interested, (individuals and groups), may respond with comments aimed at developing and improving the guidance or by recommending against issuing a rule by writing and including a reference to Notice 2017-67 to:

CC:PA: LPD:PR (Notice 2017-67) Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station, 54
Washington, DC 20044


The guidance in Notice 2017-67 has established administrative procedures that will be required of all plans established on or after October 31, 2017. All employers that established QSEHRA plans prior to this date may continue to operate the QSEHRA according to its terms until the last day of the plan year that began in 2017 so long as the employer established and operated the plan in accordance with a reasonable good faith interpretation of the applicable statutory provisions.

Because of the language in IRS 2017-20 which provided transitional relief from the required employee notice provision, 2018 initial written plan notices to eligible employees must be provided by the later of (a) February 19, 2018, or (b) 90 days before the first day of the plan year of the QSEHRA.

Eligible Employers

To “qualify” to offer a QSEHRA an employer cannot offer a group health plan. The departments clarified that an employer will not qualify to offer a QSEHRA if it offers any group health plan benefits, including group vision, dental or flexible spending account (FSA) plans. Employers may offer HSA contributions, HSA elective deferrals and retirement HRAs without jeopardizing their qualified small employer status. And finally, the notice clarified that control groups may not be treated as separate entities for purposes of qualifying as a small employer. 

Eligible Employees

The guidance adopts IRC § 1.105-11(c)(2)(iii)(C) for purposes of determining whether an employee may be excluded from eligibility based on part time employment. It also clarifies, the plan is for the benefit of employees only and employees may not “waive participation” in the plan. The QSEHRA is provided rather that offered to eligible employees.

The departments illustrate that a married couple working for an employer that provides a QSEHRA are entitled to separate permitted benefits however, the plan may not provide duplicate reimbursements of a single expense. 

The plan may not offer a choice between two benefit options, e.g. all medical expenses verses premium only plans however, employers are permitted to uniformly exclude specific expenses from eligibility. Plans may reimburse Medicare and Medicare Supplement plans but may not limit reimbursement to only Medicare expenses.

The notice provides that carryover of unused funds is allowed however, the sum of the carryover and the permitted benefit may not exceed the annual statutory limit. Where this could come in handy is in reporting the QSEHRA allowances. Premium tax credits are essentially reduced by the permitted benefit which is reported on the employees W-2. The notice allows carryover of unused funds and requires an adjustment to the permitted benefit when the sum of the two would exceed the annual limit. In cases where the permitted benefit has been reduced to make room for carryover funds, the reported allowance amount is also decreased.

The notice clarifies that the same terms requirement applies to excludable employees. Although not required, if the QSEHRA is provided to employees in an excludable class, they must be provided the permitted benefit on the same terms as non-excludable employees.

MEC Requirement

The notice reiterates that before a QSEHRA can reimburse an expense for any plan year, the eligible employee must first provide proof that the eligible employee and (if different) the individual whose expense will be reimbursed has MEC for the month during which the expense was incurred. Moreover, the guidance requires employers to obtain a statement from the employee with each reimbursement claim attesting that MEC is in place on the individual whose expense is being reimbursed, this in addition to the annual, initial proof of MEC. Additionally, the guidance prohibits post-tax reimbursements of expenses incurred by participants failing to provide proof of MEC.  

Substantiation requirement


One of the expected requirements imposed by the guidance is the adoption of substantiation requirements under Proposed Treasury Regulation Section §1.125-6, which provides rules for substantiation of expenses that must be satisfied before paying or reimbursing any expense for a qualified benefit (outlined in IRB 2007-39). This regulation also defines how claims are to be substantiated and provides a framework of eligibility determination. 



If an eligible employer pays an issuer directly for an employee’s premium payment or uses the methods for payment of premiums described in Rev. Rul. 61-146, 1961-2 C. For other expenses not directly paid for by the employer, §1.125-6 must be followed.




Self-substantiation by an employee does not satisfy the substantiation requirements. In other words, a participant cannot attach a note to their claim form that basically attests to the fact that they incurred an eligible expense during their period of coverage. The substantiation must be verified by s third party such as a designated plan administrator or claims administrator. An explanation of benefits (EOB) provided by an insurance company would qualify as third-party substantiation for this rule. Failure to properly substantiate claims for reimbursement would cause the QSEHRA to fail to satisfy the requirements for the payments to be excluded from the employee’s income, and all payments to all employees under the arrangement, substantiated and unsubstantiated, on or after the date the failure occurred, become taxable.

Reimbursement of medical expenses


IRS Notice 2017-67 prohibits employers from cashing out unused funds at the conclusion of the plan year. Also, the guidance prohibits the plan from imposing deductibles or cost sharing requirements on participants. 



Employers providing a QSEHRA are not required to file IRS Informational return 1094-B however, they are required to file IRS Form 720 and pay the annual Patient Centered Outcomes Research Institute (PCORI) tax each year.

Interaction with HSA requirements

The notice provides straightforward guidance on how the QSEHRA impacts HSA contribution eligibility. If the QSEHRA is structured to reimburse all medical expenses, it disqualifies the participants from making tax advantaged contributions to an HSA in the same year. If the QSEHRA is structured to reimburse health insurance premiums only (QSEHRA-POP), it does not disqualify participants from making tax-advantaged contributions to an HSA in the same year.

Failure to satisfy the requirements to be a QSEHRA

The QSEHRA is structured under "exceptions" to group health plan law (26 U.S. Code § 9831). The consequence of noncompliance, such as  providing a QSEHRA when you're not an eligible employer, not providing the benefit on the same terms to all eligible employees, reimbursing medical expenses without first requiring proof of MEC, or providing a permitted benefit in excess of the statutory dollar limits, will not only cause the plan to lose tax favored status but may also subject a non compliant employer to penalties under 26 U.S. Code § 4980D ($100 per day per employee).


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