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A new law passed by Congress reinstates the ability of eligible small employers to reimburse employee paid premiums to purchase individual health insurance policies. The law reverses the application of huge penalties that would have applied to such reimbursement actions under the IRS’ interpretation of the Affordable Care Act.
The new law (the 21st Century Cures Act) takes effect January 1, 2017 and includes a retroactive exemption eliminating application of huge IRS fines on eligible small employers who made premium reimbursements before 2017. Eligible small employers who want to use the new option for 2017 can do so, but must act fast.
Under the new law, eligible small employers can establish special health reimbursement accounts (called QSEHRAs) that provide funds to employees to pay for eligible medical expenses (as defined by the IRS). The expenses covered can be those of the employee and/or his or her dependents such as premiums to purchase individual health insurance policies and out of pocket medical expenses. Premiums to purchase other group health coverage, such as through the spouse’s employer, are not reimbursable.
To be eligible, the small employer must
- Have less than 50 full time employees (using the Affordable Care Act’s methods for counting “full time” employees which includes “full time equivalent” employees),
- Not offer a group health plan to any of its workers,
- Provide funding to a QSEHRA for each eligible employee that does not exceed maximum annual limits ($4,950 per year, $10,000 for family coverage – with both numbers indexed),
- Provide QSEHRA funding on the same terms to all eligible employees (although contributions can vary based on age or number of family members the employee has) and
- Must provide an annual notice to each eligible employee at least 90 days before the beginning of the year.
To be eligible, an employee must have insurance coverage that provides minimum essential benefits.
To qualify for exemption from the ACA tax penalties ($36,500 per person per year), the QSEHRA must be funded exclusively by employer contributions. Unused monies in the QSEHRA may be carried forward to later years. Monies deposited to and used through the QSEHRA are income tax free (neither the employer nor employee pay income taxes on the amounts provided the special QSEHRA rules are followed).
Employees receiving QSEHRA contributions will either lose their premium tax credits completely, or have the amount of the premium tax credit reduced by the amount of the QSEHRA contribution.
The annual notice must inform the employee of the amount of annual benefit provided, the fact that the employee must have minimum essential coverage for the QSEHRA benefits to be tax free, and, that the employee should notify the marketplace of his/her eligibility to receive the QSEHRA premium reimbursements if the employee applies for coverage on the exchange marketplace. Employers are also required to report the amount of the benefit provided on each employee’s W-2 for the year.