On October 31, 2017, the Internal Revenue Service (IRS) and the Department of the Treasury issued Notice 2017-67 effective for plan years beginning on or after November 20, 2017. The notice, published in a Q&A format, includes 79 questions, covering several topics, with the applicable answers involving additional requirements for valid small employers offering Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). See my column in the April 2017 issue on QSEHRAs for background information.
Due to the breadth of Notice 2017-67, this column is the second of two—covering Q&As 35 thru 79.
Internal Revenue Code Section 9831(d) provides the foundation for QSEHRAs, while these Q&As afford additional definitions and guidance on:
- Written notice, minimum essential coverage (MEC), and Proof of MEC requirements;
- Substantiation, reimbursement, and reporting requirements;
- Coordination with the Premium Tax Credit;
- Consequences of failure to satisfy the requirements of a QSEHRA; and,
- Interaction with Health Savings Accounts (HSAs).
Notice Requirements, Minimum Essential Coverage (MEC) Requirement, and Proof of MEC (Q&A 35-43)
- Employers offering a QSEHRA must provide written notice to each eligible employee at least 90 days before the beginning of each plan year or the date on which the individual first becomes eligible to participate in the QSEHRA.
- There are special transition notice rules for 2017 and 2018, and the first written employee notice must be issued no later than February 19, 2018, or 90 days before the first day of the plan year.
- Notices may be provided electronically and must contain the following information: (1) the amount available under the arrangement; (2) a statement that the employee must inform any Marketplace to which he or she applies for an advance premium tax credit of the amount of the benefit available under the arrangement; and (3) a statement that if the employee does not have MEC he or she may be liable for a payment under the employee mandate.
- The sponsoring employer need not directly provide information to a Marketplace concerning their QSEHRA.
- Employees must provide annual proof of MEC prior to an employer reimbursing any expense. The proof can be either a document from a third party, such as the insurer, or an attestation by the employee.
- Notably, the employee must attest to MEC coverage with each new request for reimbursement, even in the same plan year. See Appendix B of this notice for a sample attestation.
- Payments made from a QSEHRA are includible in income for the month in which they are provided if the employee does not maintain MEC for the month in which the charges were incurred or reimbursed. Eligibility is determined on a month-by-month basis throughout the plan year.
- And, the QSEHRA may not routinely reimburse an eligible employee on an after-tax basis—with a couple of exceptions. Those being over-the-counter drugs purchased without a prescription and reimbursement of premiums paid on a pre-tax basis for a spouse’s health plan.
Substantiation, Reimbursement, and Reporting Requirements (Q&A 44-64)
- All claims for reimbursement must be substantiated.
- The notice provides for detailed rules concerning the tax consequences of reimbursement absent substantiation.
- If permitted by the plan, over-the-counter drugs purchased without a prescription may be reimbursed but are taxable to the eligible employee.
- The employer may provide for eligible employees to pay the excess of a health insurance premium, over the amount paid by the QSEHRA, with after-tax payroll deductions as long the employer does not endorse the insurance product. See Q&A 55
- Very significantly, if a QSEHRA operationally or even mistakenly reimburses an eligible employee’s expense without first receiving substantiation, all payments to all employees under the arrangement —whether or not those payments were substantiated—made on or after the date of mistaken reimbursement become taxable. The same rule applies for mistaken reimbursements of non-medical expenses.
- No cash-out of unused permitted benefits may be returned to eligible employees.
- The notice provides detailed rules for how the reimbursement of medical expenses of the employee and the employee’s family are treated for tax purposes.
- QSEHRAs may make reimbursements ratably on a month-by-month basis. However, no deductible or other cost-sharing requirements that must be met can be imposed and medical expenses incurred before the eligible employee is provided QSEHRA coverage may not be reimbursed.
- Self-employed taxpayers will not be allowed a deduction under IRC Section 162(I) when the self-employed taxpayer, for any month, is eligible to participate in any subsidized health plan or QSEHRA maintained by any employer of the taxpayer or the taxpayer’s family members.
- In general, if all of the rules are followed, reimbursements are excluded from taxation.
- Generally, QSEHRA amounts (i.e., permitted benefits) must be reported in Box 12 of an employee’s Form W-2 using code FF.
- The notice provides rules on reporting and calculation of the amounts to be reported. See Q&A 58, 59, 60, 61, 62, 63, and 64.
- The notice clarifies that QSEHRAs should not be reported using a Form 1095-B (used for reporting health coverage offered by an employer).
- The QSEHRA is an applicable self-insured health plan and is subject to the Patient-Center Outcomes Research (PCOR) fee for plans ending before September 30, 2019.
Coordination with the Premium Tax Credit (Q&A 65-71)
- The notice provides detailed rules for how to calculate the amount of Premium Tax Credit for individuals who participate in a QSEHRA. See Q&A 65, 66, 67, 68, 69, 70, and 71.
- Generally, participation in a QSEHRA reduces the amount of Premium Tax Credit for which an individual qualifies.
Failure to Satisfy the Notice’s Requirements (Q&A 72-78)
If an arrangement fails to meet the requirements of a QSEHRA, it will generally be considered a group health plan subject to all of the requirements of such plans, including the Affordable Care Act requirements, and will be subject to an excise tax of $100 per person per day for any violations of the group health plan requirements. Those violations include the prohibition against annual and lifetime limits. Plus the QSEHRA would not be integrated with a group health plan. In addition to the excise tax, all amounts paid under the arrangement are included in every employee’s gross income and wages.
Interaction with Health Savings Accounts (HSAs)
- An individual in a QSEHRA does not fail to be eligible to contribute to an HSA if the QSEHRA only reimburses expenses that qualify as permitted insurance or disregarded coverage under IRC section 223(c) in addition to premiums for health insurance policies. Note: Employer reimbursement or payment of individually-owned health insurance policy premiums may not be allowed in your state. Please check with the State Insurance Commissioner to determine the eligibility of these expenses in a QSEHRA.
- A switch from a group health plan, during the calendar year, to a program including an individual high-deductible health plan (HDHP) and a QSEHRA may take into account, for purposes of the HDHP’s deductible, the unreimbursed medical expenses incurred by the employee while covered under the group health plan before termination.
The notice provides a comprehensive list of types of MEC, a model attestation for initial proof of MEC, language for a reimbursement form, plus a wealth of details and examples to further assist in answering your questions about QSEHRAs. Please refer to the notice for in-depth guidance.
WageWorks will continue to comment and lobby for even more generous stand-alone HRA guidance in general for both small and large employers.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
