Some Small Employers May Reimburse Employees' Premium and Other Uninsured Medical Expenses

By Nancy L. Farnam / Dec 19, 2016

The IRS previously determined that employers are not allowed to reimburse employees for premium expenses incurred for an individual health insurance policy or directly pay such premiums without violating the Patient Protection and Affordable Care Act ("ACA"). That position was reversed in the 21st Century Cures Act, signed into law on December 13, 2016.

Under the new law, starting January 1, 2017, small employers (those with fewer than 50 full-time and full-time equivalent employees) that do not offer group health insurance to any employees may reimburse eligible employees on a pre-tax basis for premiums paid for individual health coverage (including coverage purchased through the Marketplace) as well as for eligible unreimbursed medical expenses. Under the new law, these arrangements are called "qualified small employer health reimbursement arrangements" ("QSEHRA"). However, premiums paid to purchase other group health coverage, such as through a spouse's employer's plan, are not eligible. 

QSEHRAs must meet a number of additional rules:

  • Only employers may contribute.
  • Generally, the employer must provide the QSEHRA on the same terms to all employees; however the employer may exclude employees with fewer than 90 days of service, those under age 25, and certain part-time and seasonal employees.
  • The maximum amount of reimbursement for any year may not exceed $4,950 for employee coverage (or $10,000 if the QSEHRA also provides for payments or reimbursements for family members) (both numbers are indexed). Differences are permitted in accordance with price variations based on age or number of covered family members. These amounts are pro-rated for an employee who is not covered by the QSEHRA for the entire year.
  • An employer is required to verify that the employee is covered under either an individual or group health plan that meets the minimum essential coverage requirement of the ACA. In the situation of other group health plan coverage, the QSEHRA could not reimburse premium costs for that group coverage, but could reimburse other uninsured medical expenses.
  • An employer must provide a notice to employees who are eligible at least 90 days before the start of the year, or within 90 days after the law's enactment for this year, and to those who become eligible during the year. The notice must state the amount of the benefit under the QSEHRA, instruct the employee to disclose the benefit to the Marketplace if the employee applies for an advance payment of the premium tax credit, and include a statement that if the employee is not covered for any month by minimum essential coverage, the employee may be subject to a tax for that month and reimbursements under the QSEHRA may be included in gross income.
  • Starting in 2018 for the 2017 tax year, benefits must be reported on Form W-2.

The IRS is also providing transition relief retroactive for all plan years beginning on or before December 31, 2016 so that small employers that reimbursed employee premiums for individual policies will not be subject to a penalty under the ACA.

If you have any questions, please contact Nancy L. Farnam at nfarnam@clarkhill.com | (248) 530-6333; Douglas J. Ellis at dellis@clarkhill.com | (412) 394-2367; Edward C. Hammond at ehammond@clarkhill.com | (248) 988-1821; or another member of Clark Hill's Labor and Employment Practice Group.