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IRS Issues New Guidance on Qualified Small Employer HRAs - November 2017
On Oct. 31, 2017, the Internal Revenue Service (IRS) issued
Notice 2017-67 to provide comprehensive guidance on a variety of topics
regarding qualified small employer health reimbursement arrangements (QSEHRAs).
Small employers that do not maintain group health plans may establish QSEHRAs
for their employees, effective for plan years beginning on or after Jan. 1,
2017. Unlike other health accounts, QSEHRAs can be used to reimburse employees
for their health insurance premiums.
Notice 2017-67 clarifies the technical rules for QSEHRAs,
including the requirements that employees provide proof of minimum essential
coverage (MEC) and that employers provide a written notice to eligible
employees each year.
Small employers with QSEHRAs should confirm that their
QSEHRAs comply with this new guidance. Notice 2017-62 applies to plan years
beginning on or after Nov. 20, 2017. In addition, employers may need to provide
their initial written notice by Feb. 19, 2018.
Beginning Jan. 1, 2017, employers that are not applicable
large employers under the Affordable Care Act and do not maintain group health
plans may sponsor QSEHRAs to pay for employees’ individual health insurance
policies and other out-of-pocket medical expenses on a tax-favored basis. To
qualify as a QSEHRA, the reimbursement arrangement must meet the following
- The QSEHRA must be funded solely
by the employer. Employees cannot make their own salary reduction
- QSEHRA payments or reimbursements
must be limited to medical care expenses incurred by the employee or the
employee’s family members, after the employee provides proof of coverage.
- The maximum amount of payments
and reimbursements from the QSEHRA for any year cannot exceed $4,950 (or
$10,000 for QSEHRAs that also reimburse medical expenses of the employee’s
family members). These amounts are adjusted annually for inflation. For 2018,
the total amount of payments and reimbursements from a QSEHRA cannot exceed
$5,050 ($10,250 for family coverage).
- The QSEHRA must be provided on
the same terms to all eligible employees.
IRS Guidance on QSEHRAs – Notice 2017-67
Notice 2017-67 provides detailed guidance on a wide range of
topics for QSEHRAs, including the criteria for QSEHRAs, the tax consequences of
the arrangement, the impact on eligibility for health savings account (HSA)
contributions and the written notice requirement.
The guidance applies for plan years beginning on or after
Nov. 20, 2017, although QSEHRAs established before that date may rely on this
guidance. Also, employers that established QSEHRAs for 2017 in accordance with
a reasonable good faith interpretation of the law may continue to operate their
QSEHRAs based on those terms until the last day of the plan year that began in
An employer funding a QSEHRA for any year must provide a
written notice to each eligible employee at least 90 days before the beginning
of each year. For employees who become eligible to participate in the QSEHRA
during the year, the notice must be provided by the date on which the employee
becomes eligible to participate. If an employer fails to provide this notice
for a reason other than reasonable cause, the employer may be subject to a
penalty of $50 per employee for each failure, up to a maximum annual penalty of
$2,500 for all notice failures during the year. On Feb. 27, 2017, the IRS
delayed the initial notice deadline pending its issuance of further
Notice 2017-67 provides a new deadline for the initial
QSEHRA notice, as well as sample language that employers may use.
Initial Notice Deadline – An eligible employer that provides a
QSEHRA during 2017 or 2018 must provide the initial written notice to eligible
employees by the later of (1) Feb. 19, 2018, or (2) 90 days before the first
day of the QSEHRA’s plan year. According to the IRS, penalties may apply to any
employer that does not timely provide the written notice.
Same Terms Requirement
Notice 2017-67 explains what it means for a QSEHRA to be
provided on the same terms to all eligible employees. For example, to satisfy
- The QSEHRA must be operated on a
uniform and consistent basis for all eligible employees;
- Eligible employees cannot be
allowed to waive coverage; and
- If an employer is part of a
controlled group or affiliated service group (as determined under Internal
Revenue Code Section 414), each employer in the group must provide a QSEHRA to
all eligible employees on the same terms.
In addition, Notice 2017-67 confirms that a QSEHRA may be
designed to limit reimbursements to certain medical expenses (for example,
health insurance premiums or cost-sharing expenses that are medical expenses).
However, a QSEHRA will fail to satisfy the same terms requirement if, under the
facts and circumstances, the plan’s reimbursement limit causes the QSEHRA not
to be effectively available to all eligible employees. This may occur, for
example, if a QSEHRA limits reimbursements to Medicare or Medicare supplement
Maximum Benefit and Reimbursements
QSEHRAs may use the statutory dollar limits in effect for
the preceding year to determine permitted benefits, rather than the dollar
limits in effect for the current year. IRS Notice 2017-67 also confirms that
any carryovers of unused amounts from a prior plan year are taken into account
when determining an employee’s maximum annual benefit. An employee’s total
permitted benefit, taking into account both carry-over amounts and newly
available amounts, may not exceed the applicable statutory dollar limit.
In addition, a QSEHRA may reimburse premiums for coverage
under the group health plan of a spouse’s employer. However, the reimbursement
is taxable to the extent that the spouse’s share of premiums was paid on a
Proof of Coverage
Before a QSEHRA can reimburse an expense for any plan year,
the eligible employee must first provide proof that he or she had MEC for the
month during which the expense was incurred. This proof must consist of either:
- A document from a third party
(for example, the insurer) showing that the employee had coverage (for example,
an insurance card or explanation of benefits) and an attestation by the
employee that the coverage was MEC; or
- An attestation by the employee
stating that the employee had MEC, the date the coverage began and the name of
the coverage provider.
Notice 2017-67 includes model attestation language that
employers may use. The initial proof of MEC must be provided with respect to
each individual whose expenses are eligible for reimbursement before the first
expense reimbursement. Following the initial proof, the employee must attest
with each new request for reimbursement during the plan year that the employee
and the individual whose expenses are being reimbursed (if different) continue
to have MEC. This attestation can be part of the form for requesting
Employers that sponsor QSEHRAs must report the amount of
payments and reimbursements that an eligible employee is entitled to receive
from the QSEHRA for the calendar year in box 12 of the employee’s Form W-2
using code FF, without regard to the payments or reimbursements actually
received. Notice 2017-67 provides detailed rules for this reporting.
In addition, Notice 2017-67 confirms that an employer
providing a QSEHRA is not required to provide IRS Forms 1095-B (Section 6056
statements) to covered employees. However, a QSEHRA is subject to the
Patient-Centered Outcomes Research Institute (PCORI) fee, which applies for
plan years ending before Oct. 1, 2019.
Employers that sponsor QSEHRAs may contribute to employees’
HSAs and may allow employees to make pre-tax HSA contributions through a
Section 125 plan.
Notice 2017-67 also addresses how QSEHRA coverage impacts an
individual’s eligibility for HSA contributions. To be HSA-eligible, an
individual must be covered by a high deductible health plan (HDHP) and not be
covered by other health coverage that provides benefits below the HDHP minimum
deductible. According to the IRS, if the QSEHRA only reimburses health
insurance premiums, it will not cause an individual to be ineligible for HSA
contributions. However, individuals who are covered by QSEHRAs that reimburse
any medical expenses, including cost sharing, are not eligible for HSA