The New HRA for Qualified Small Employers
The passage of the 21st Century Cures Act in December of 2016 minted a new HRA benefit, the Qualified Small Employer HRA. The law was essentially a compromise between lawmakers, who understood that small businesses that did not offer traditional group health benefits wanted to provide a non-traditional health benefit, and the Departments of Labor and Treasury, which had issued coordinated guidance in 2013 effectively barring small businesses from using existing tax law under 26 CFR 1.105-11 for tax free reimbursement of medical expenses if the plan had two or more eligible participants.
The Departments contended that “old” Section 105 plans were “group health plans” and therefore subject to the ACA’s “market reforms” which apply to all group health plans. To bypass the ACA, congress wrote the “new” law, forming the QSEHRA, under 26 U.S. Code §9831, exceptions to group health plans.
The Same but, Different
The reimbursement plans constructed under these two code sections are very similar, in some respects. Both allow for the tax free reimbursement of qualified medical expenses. Both are 100% employer funded with no salary reduction contributions however, the QSEHRA does have some advantages regarding administration.
The entirety of the QSEHRA is found in Public Law 114-255, Section 18001.
Benefits of the QSEHRA
Under the current law, there are no statutory substantiation requirements for employers. The law gives Treasury the ability to issue substantiation rules but does not require them. The law specifically exempts QSEHRAs from compliance with 29 U.S. Code Part 7 including the “market reforms,” HIPAA, COBRA, Portability, Access, Renewability and other requirements. The exemption from these provisions means the QSEHRA is easier to administer for small businesses.
The law has very few employer requirements:
- Offer the benefit on an equal basis to all full time employees
- Provide a prescribed notice
- Verify Minimum Essential Coverage to determine eligibility
- Adhere to an annual benefit limit
- W-2 Reporting
The employee is tasked with determining the tax treatment of any reimbursements through the required notice.
Benefits and Additional Requirements of Section 105
Section 105 plans or, Self Insured Medical Reimbursement Plans, as they are called in the law, have several appealing advantages. For one, there is no statutory benefit limit, making it a more realistic plan in terms of modern medical expenses. Without the annual limit, employers can allow unused balances to roll over and accumulate (although federal law restricts the accumulated balance to four times the annual benefit). Second, there is no requirement to carry minimum essential coverage. And finally, employers can group employees into job-criteria based eligibility classes and each class is essentially treated as a separate plan with different allowance amounts. This gives employers almost unlimited flexibility in terms of plan design. Those benefits are somewhat counterbalanced by additional administrative burdens.
§ 1.105-11 Self-insured medical reimbursement plan is a group health plan subject to all of the provisions set forth in 29 U.S. Code Part 7. This simply means there are more rules to follow, substantiation requirements, HIPAA and COBRA requirements. These rules can be fairly easy to comply with for smaller employer but, the more participants in the plan, the more complex the administration.
The Future of Health Expense Reimbursement
We are anticipating a roll-back of the guidance provided under IRS Notice 2013-54 and Technical Release 2013-03, which subjected Section 105, Self Insured Medical Reimbursement Plans, commonly referred to as HRAs, to the “market reforms” of the ACA. The recent Executive Order on Health care instructs the Departments of Treasury, HHS and Labor to explore how they can allow more businesses to use Health Reimbursement Arrangements (HRAs).
What does a rollback of the guidance mean for the QSEHRA?
We do not anticipate a repeal of IRC 9831(d). I believe the QSEHRA is here to stay. Eventually, small businesses will have the option of choosing the type of HRA they want, a simple, self-administered QSEHRA or, a more flexible but slightly more complex Section 105 HRA.