Small Business Reimbursement of Medical Expenses

The 21st Century Cures Act, which was signed into law on December 13, 2016, exempts certain qualified small employer health reimbursement arrangements (QSEHRA) from the $100 per day excise tax imposed by the IRS under the Affordable Care Act. The act is in effect as of January 1, 2017 and extends relief for 2015 and 2016. The 2015 and 2016 tax relief is only granted for reimbursed medical insurance premiums, no guidance has been released whether the reimbursement of other medical expenses will be exempt from the excise tax.

To be exempt from the excise tax, small employers must create a QSEHRA that meets the following requirements:

  • Employers must have had, on average, less than 50 full-time or full-time equivalent employees in the prior calendar year. Aggregation rules of common owners and services apply.
  • A group health plan cannot be offered to any employees.
  • All employees must be eligible to participate. Employers can exclude employees who:
    • Have less than 90 days of service
    • Certain part-time and seasonal employees
    • Union employees
    • Employees under the age of 25
    • Non-resident aliens
  • The arrangement must be solely funded by the employer, no employee contributions can be made to the QSEHRA.
  • The arrangement must be offered to all eligible employees on the same terms. However, the reimbursement limit can vary based on the cost of health insurance. For example, older employees or family coverage can result in greater reimbursements.
  • QSEHRAs can reimburse only qualified medical expenses that the employee provides documentation for:
    • Out-of-pocket medical costs
    • Employee premiums for individual health insurance policies
    • Medicare premiums
    • TRICARE expenses
    • Individual health insurance premiums for two percent shareholders of S Corporations
  • The limits of annual reimbursements are $4,950 for individuals and $10,000 for families. Any employees in the QSEHRA for less than 12 months must have these amounts prorated. Employers can offer reimbursements for less than the maximum limits.
  • Employers must provide 90 days of written notice before the beginning of the plan year to all eligible employees. This notice must include the dollar amount of reimbursements available. For 2017, employers have until March 13 to issue the notice. If notice is not issued employers may face a penalty of $50 per employee, up to $2,500 a year.
  • The employer will report the reimbursements from the QSEHRA on the employee’s W-2. It will be listed as a non-taxable item unless the employee does not have minimum essential health coverage. Without the proper coverage, the reimbursements will be taxable.

It is to be noted that any employees who purchase healthcare through the Marketplace will receive a smaller premium tax credit due to their participation in the QSEHRA. The QSEHRA is not subject to COBRA rules, so they will lose their coverage in the arrangement upon termination of employment. Individual health insurance for premiums of two percent shareholders of S Corporations are also exempt from the excise tax under the law.

Should you have further questions regarding the QSEHRA please contact Nikki Allen at [email protected]. We can also assist you in providing notice to your employees regarding your QSEHRA.

Sources: RSM US, CCH Incorporated