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IRS Issues Comprehensive Guidance on QSEHRAs

EBIA  

EBIA  

IRS Notice 2017-67 (Oct. 31, 2017)

The IRS has issued comprehensive guidance on qualified small employer health reimbursement arrangements (QSEHRAs). QSEHRAs are a type of HRA that became available this year (see our Checkpoint article). Unlike other HRAs, QSEHRAs are not considered “group health plans” for most purposes under the Code, ERISA, and the Public Health Service Act (PHSA), and they can only be offered by employers that do not offer group health plans and are not applicable large employers (ALEs) as defined in Code § 4980H. The guidance includes 79 FAQs and addresses a range of issues. Here are highlights:

  • Eligible Employers. Whether an employer is ineligible because it offers group health plan coverage is determined monthly (FAQ-4), taking into account all entities treated as a single employer under the Code’s controlled and affiliated service group rules (FAQ-5). A plan providing only excepted benefits (e.g., vision or dental benefits) is disqualifying, as is continued access to previously accrued amounts in an HRA or health FSA (FAQ-2). A retiree-only plan, however, is not disqualifying because former employees are not considered employees under the QSEHRA rules. (FAQ-1). Employers become ineligible on the date they acquire ALE status, even if that occurs during the QSEHRA’s plan year, but a run-out period is permitted for expenses incurred during the period of QSEHRA coverage (FAQ-7).
  • Eligible Employees. Former employees and non-employee owners cannot participate in a QSEHRA (FAQ-9). The “part-time” and “seasonal” employees who can be excluded must be determined using the definition in the Code § 105(h) nondiscrimination regulations (FAQ-8). If an employee ceases to be excludable, the QSEHRA benefit must begin no later than the day after the exclusion ends (FAQ-10).
  • “Same Terms” Requirement. The requirement that a QSEHRA be provided on the same terms to all eligible employees is only satisfied if the QSEHRA is operated on a “uniform and consistent basis.” An example shows that the requirement is not met if different types of medical expenses may be reimbursed for different categories of employees (FAQ-12). Violations also occur if the QSEHRA is not offered by all employers treated as a single employer under the controlled and affiliated service group rules (FAQ-24), if excludable employees are provided a QSEHRA but with different benefits from other employees (FAQ-25), or if a QSEHRA offering family coverage gives an employee the lesser, self-only benefit because the employee’s minimum essential coverage (MEC) is self-only, even though the employee’s spouse also has MEC (FAQ-16). If multiple eligible employees are covered under the same family policy, their QSEHRA benefit cannot be limited to the benefit for a single employee (FAQ-19). In contrast, no violation occurs if reimbursements differ because of permissible carryovers (FAQ-23), because benefits are capped at a single dollar amount regardless of whether an employee has self-only or family coverage (FAQ-14), if the self-only and family limits are the same percentage of the statutory dollar limits (FAQ-15), or if reimbursements are limited to certain medical expenses (provided that the limitation does not keep the QSEHRA from being “effectively available” to all eligible employees) (FAQ-21).
  • “Proof of MEC” Requirement. Before an expense can be reimbursed, the QSEHRA must obtain proof that the eligible employee and the individual who incurred the expense (if different) have MEC for the month in which the expense was incurred. After that initial proof, which must be repeated annually, an additional attestation from the employee is required with each request for reimbursement (FAQs 41 and 42). Model attestations for both purposes are provided in an appendix.
  • Dollar Limits. QSEHRAs may use the annual dollar limits in effect for the immediately preceding year, rather than those for the current year (which might not be announced in time to incorporate into employee notices) (FAQ-27). If a QSEHRA permits carryovers, the total permitted benefit (including the carryover) cannot exceed the applicable dollar limit (FAQ-29). Additional FAQs explain when the annual dollar limit must be prorated—including for non-calendar-year QSEHRAs (FAQ-28), midyear entry by a newly eligible employee (FAQ-30), and short plan years (FAQ-32).
  • Written Notice. The guidance establishes the deadline for employers to furnish initial written notice to eligible employees, which earlier guidance had delayed (see our Checkpoint article). The deadline for QSEHRAs provided in 2017 or 2018 is the later of February 19, 2018, or 90 days before the first day of the QSEHRA’s plan year (FAQ-35). Subject to that special rule, notice must be given to newly eligible employees on or before the date they become eligible to participate (FAQ-37). The FAQs elaborate on the content of the notice (FAQ-38), and they affirm that the notice may be furnished electronically (FAQ-36).
  • Reimbursements. Premiums for coverage under the group health plan of a spouse’s employer are reimbursable, but reimbursements will be taxable to the extent premiums were paid on a pre-tax basis (FAQ-48). Expenses for over-the-counter drugs purchased without a prescription are also reimbursable but taxable (FAQ-54). QSEHRA balances can be made available ratably over the year and reimbursements limited to the amount available (FAQ-50). QSEHRAs can also have a run-out period (FAQ-53). QSEHRAs cannot reimburse expenses incurred before an employee is provided the QSEHRA, and guidance is provided on when premium expenses are incurred (FAQ-52). Expenses can be substantiated using the substantiation requirements for health FSAs under the 2007 proposed cafeteria plan regulations (FAQ-44).
  • W-2 Reporting. Seven FAQs explain how to report an employee’s permitted benefit on Form W-2. Situations addressed include non-calendar-year plans (FAQ-59), carryovers (FAQ-60), midyear permitted benefit changes (FAQ-61), and taxable reimbursements (FAQs 62 and 63).
  • HSAs. A QSEHRA sponsor can contribute to its employees’ HSAs and allow employees to make pre-tax HSA contributions through a cafeteria plan (FAQ-6). However, employees’ HSA eligibility may be lost if the QSEHRA’s coverage is not HSA-compatible (FAQs 75–77).
  • Premium Tax Credits and Other Health Care Reform Issues. The guidance addresses the effect of QSEHRA benefits on eligibility for premium tax credits and how permitted benefits reduce those credits (FAQs 65–70). It also affirms that for years ending before September 30, 2019, QSEHRAs are subject to Patient-Centered Outcomes Research (PCOR) fees (FAQ-74).
  • Errors and Correction. Different consequences result from failing to qualify as a QSEHRA and becoming a group health plan (FAQ-72), versus failing to limit reimbursements to permissible, substantiated expenses (FAQ-73). In the latter case, all amounts paid under the arrangement are included in every employee’s gross income and wages. However, the drastic consequences of some failures—including reimbursements in excess of the statutory dollar limit (FAQ-34) and substantiation failures (FAQ-45)—can be avoided by timely correction.
  • Effective Date. The guidance applies to plan years beginning on or after November 20, 2017. While it can be relied on before that date, QSEHRAs established before that date and operated under a “reasonable good faith interpretation” of the statutory provisions may continue to operate that way until the end of their 2017 plan year (FAQ-79).

EBIA Comment: This guidance covers a lot of ground, and should be studied carefully by employers and advisors (and by employees’ personal tax return preparers). The IRS has indicated that the rules articulated in the FAQs will become the basis for proposed regulations, and has requested input to help it craft those regulations. Comments should be submitted by January 19, 2018. For more information, see EBIA’s Consumer-Driven Health Care manual at Section XXVII (“Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)”).

Contributing Editors: EBIA Staff.

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