On December 13, 2016, President Obama signed the 21st Century Cures Act into law. Called “the most important bill of the year,” the bipartisan Act makes changes to a wide range of healthcare issues. These include allocating billions for cancer research, easing the FDA drug approval process, and allowing doctors to test medical devices without a patient’s informed consent in certain situations. One item that will be of interest to finance and human resource professionals at small employers is the creation of Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). Through a QSEHRA, qualified small employers will once again be able to give pre-tax money to employees to purchase individual health insurance coverage.
Before the Affordable Care Act (ACA) was enacted, some small employers used a Health Reimbursement Arrangement (HRA) to give pre-tax money to employees for individual health insurance premiums rather than sponsor a group health plan. This practice has been prohibited since 2014 because stand-alone HRAs were deemed to be group health plans by the ACA. As such, they had to comply with the ACA’s requirements to cover certain preventive services without cost sharing and not have annual dollar limits on benefits.
In 2013, the Department of Labor made clear that stand alone HRAs would not comply with these requirements because they only reimburse or pay employees up to a certain dollar amount each year. Employers who were caught reimbursing employees for individual premiums faced penalties of $100 per employee per day. This led most employer to abandon the practice, despite the fact that some benefits firms continued to promote the concept.
Due in part to confusion about the new rules, the IRS provided small employers with relief from these penalties until June 30, 2015. The 21st Century Cures Act extends this penalty relief through the end of 2016 and permanently exempts QSEHRAs from ACA penalties as of January 1, 2017.
Not all employers and HRAs are eligible for this relief, however. In order to be eligible to offer a QSEHRA, an employer may not be an applicable large employer and may not offer a group health plan to any of its employees. Further, an employer payment plan offered by a qualified small employer will only qualify as a QSEHRA if it meets the following criteria:
1) The arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;
2) The arrangement provides for the payment to, or reimbursement of, an eligible employee expense for medical care incurred by the eligible employee or the eligible employee’s family members after the employee provides proof of coverage;
3) The amount of payments and reimbursements for any year do not exceed $4,950 for an individual employee or $10,000 for arrangements that provide payments or reimbursements for employees’ family members;
4) The arrangement is provided on the same terms to all eligible employees of the eligible employer.
QSEHRA Pros and Cons
The return of IRS-compliant employer payment plans may be welcome news to some small employers who don’t offer a group plan but want to help employees with their health insurance costs. Giving money to employees for individual coverage offers employers the advantages of limited administration and predictable budgeting, as well as employee choice of insurance plans and provider networks.
However, a QSEHRA-based strategy has many disadvantages that will make it unappealing for most small employers. Chief among these disadvantages is the well-known fact that the individual health insurance market is failing to control costs and faces an uncertain future.
In Southeastern Wisconsin, all of the individual health plans currently available use small networks that do not provide access to all health systems in the area. Employees may miss the ability to choose to see doctors affiliated with different health systems (especially for different family members) like they can with a broad network group plan. Adding insult to injury, even these narrow network plans can be quite expensive. For example, the average price for a Silver-level plan for a 40 year old couple with two children in Waukesha County is more than $1,300 per month.
What’s more, employees may be overwhelmed by the variety of plan designs offered in the individual market. They may also have a hard time finding an agent or broker who will take the time to fairly and thoroughly explain their options and help them with their service needs outside of open enrollment. Looking ahead, employees with lower incomes and/or pre-existing health conditions may be priced out of the individual market (even with employer assistance through a QSEHRA) if the ACA’s rating structure and tax credits are repealed.
Should I start a QSEHRA?
At the end of the day, a small employer’s decision to offer a group health plan, a QSEHRA, or no health benefits will be driven by the unique demands of its industry. If a company that does not offer health benefits has no problem recruiting and retaining talent, it may not make sense to offer health benefits. And if a company’s competition does not offer benefits, adding a QSEHRA may be a simple way to gain a competitive advantage. But if a company is losing the “war for talent” to competitors who offer group benefits, a QSEHRA will not move the needle like a well-designed group health plan could.