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The Riddle of QSEHRAs is Solved - Part 1


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 our initial compliance alert on QSEHRAs for background information.

Due to the breadth of Notice 2017-67 this Alert is the first of two covering Q&As 1 thru 34.

Internal Revenue Code Section 9831(d) provides the foundation for QSEHRAs, while these Q&As afford additional definitions and guidance on:

  • Eligible employers and employees,
  • Same terms requirement for offering a QSEHRA, and
  • Statutory dollar limits

Eligible Employers and Employees (Q&A 1 – 11)

  • The notice makes clear that an eligible employer may not offer any group health plans, on any day of any month, (including another HRA, a Healthcare Flexible Spending Arrangement (FSA), or a plan consisting entirely of excepted benefits such as vision and dental plans) to its employees if it wishes to utilize the QSEHRA. However, both employers and employees may contribute to Health Savings Accounts (HSAs) through a cafeteria plan and remain eligible for QSEHRAs.
  • Relatedly, an employer may not provide employees with continued access to amounts accumulated in an HRA in prior years or carryover amounts from an FSA. However, the employer may suspend access to amounts in the HRA during the period of QSEHRA coverage.
  • Eligible employers may, however, offer a group health plan to former employees, including retirees.
  • As with the employer mandate, employers that are members of a controlled group under Code section 414(b), (c), (m), or (o) are treated as a single employer for purposes of the QSEHRA requirements. One employer of a controlled group may not offer group health insurance and expect the remaining employers to remain a QSEHRA eligible employer. An eligible employer has fewer than 50 full-time or full-time equivalent employees.
  • An eligible employer that employs 50 or more full-time employees during the current year becomes ineligible to sponsor a QSEHRA as of January 1 of the following year.
  • The notice distinctly points out that all employees of an eligible employer are eligible employees. If a QSEHRA is offered, all eligible employees must be offered the QSEHRA.
  • Employers are permitted, however, to exclude certain employees, including:
    • Employees who have not completed 90 days of service with the employer;
    • Employees under the age of 25;
    • Part-time or seasonal employees. Generally part-time employees are those whose customary weekly employment is less than 35 hours and seasonal employees are those whose customary annual employment is less than nine months. (IRC section 1.105-11(c)(2)(iii)(C)); and
    • Employees covered under certain collective bargaining agreements.
  • A previously excluded employee who becomes eligible must be provided a QSEHRA no later than the day immediately following the date the employee is no longer excludable under the terms of the plan.
  • QSEHRAs may not be offered to non-employee owners, such as a more-than 2% shareholder of an S-Corp.
  • Very importantly, employers may not permit eligible employees to waive participation in a QSEHRA.

Same Terms Requirements (Q&A 12 - 26)

  • A QSEHRA must be provided on the same terms to all eligible employees of the eligible employer, including all employees of employers in a controlled group.
  • For purposes of this rule, the maximum amount available under a QSEHRA may vary between employees only based on (i) age or (ii) the “number of individuals covered,” and only in accordance with the variation in the price of a baseline insurance policy in a relevant individual health insurance market. The baseline policy must be the same for all eligible employees, and may be any minimum essential coverage (MEC), as defined in section 5000A(f), policy available for purchase by at least one eligible employee. (See Appendix A for a list of examples of plans and arrangements that are MEC.)
  • Individuals may be reimbursed different amounts because they submit different expenses.
  • The arrangement may provide for the same single dollar amount or the same percentage of the statutory dollar limits, regardless of whether the employee enrolls in self-only or family coverage.
  • A QSEHRA provided to two or more eligible employees of the same eligible employer who are in the same family must provide separate benefits to each employee. Thus, for example, if an employer offers a self-only benefit of $3,960 and a family benefit of $8,040, and three members of the same family work for the employer, the employer must reimburse up to $11,880 ($3,960 x 3) even if all three family members are covered under a single insurance policy.
  • QSEHRAs do not have to allow for a change in permitted benefits, for instance from self-only to family QSEHRA limits if the employee changes coverage during the plan year.
  • Limits may be established in increments of $50 to the nearest whole dollar that does not exceed the applicable statutory dollar limit.
  • Employees generally may not be offered a choice between different QSEHRAs (e.g., one that only reimburses premiums and one that only reimburses non-premium expenses) without violating the same terms requirement.
  • QSEHRAs may be limited to insurance premiums, cost-sharing expenses that are medical expenses, or certain other medical expenses specified by the plan if the arrangement is effectively available to all eligible employees. A plan that only reimbursements Medicare and Medicaid premiums would not be effectively available to all eligible employees.
  • Amounts may be carried over from year to year without violating the same terms requirement, subject to certain account limit/coordination rules. (See Statutory Dollar Limits (Q&A 27 - 34 for carryover limits.)
  • If coverage is offered to those employees who may be excluded based on age, length of employment, part-time or seasonal status, or coverage under a collective bargaining agreement, coverage must be the same as that offered to all eligible employees.

Statutory Dollar Limits (Q&A 27 – 34)

  • Amounts in a QSEHRA are limited by statute to $4,950 for an individual and $10,000 for a family. However, they are indexed for inflation after 2016.
  • The 2017 amounts are $4,950 for individuals and $10,050 for families; the 2018 amounts are $5,050 for individuals and $10,250 for families. 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.
  • For a calendar year QSEHRA, the indexed statutory dollar limits are not expected to be published before mid-October of the preceding year. However, a 90-day notice must be given to all eligible employees prior to the beginning of the plan year. A calendar year QSEHRA may rely on the prior year’s indexed figures when providing the notice and setting limits for the future calendar year plan.
  • A QSEHRA may allow for carryover of unused amounts from previous years. However, taking into account both carryover amounts and newly available amounts may not exceed the applicable statutory dollar limit.
    Example: QSEHRA with a permitted benefit of $3,000 that allows the use of carryover amounts from the prior plan year. In year one, the employee received $500 in reimbursements from the QSEHRA for the year, leaving a carryover amount of $2,500. In year two the applicable statutory dollar limit is $5,000. The employee may receive the permitted benefit of $3,000 from the employer plus $2,000 of the $2,500 carried over from year one.
  • Newly eligible employees’ statutory dollar limits are prorated to reflect the actual months they are eligible for the QSEHRA, including a full month if the employee is eligible on any day of that month.
  • Eligible employees may receive reimbursements equal to the dollar limit, but later terminate employment midyear and would not be considered covered by the entire plan year. If the reimbursements prior to his termination were not in excess of the annual limit, but were in excess of the prorated amount for the year, the dollar limit received is not taxable.
  • But, for expenses incurred before termination, and submitted during a run-out period after termination of employment, the QSEHRA may not reimburse medical expenses in excess of the prorated statutory dollar limit. Extended periods following the plan year end for claims incurred during the plan year to be submitted for reimbursement are permissible.
  • Amounts under a QSEHRA offered for a short plan are prorated for the number of months the QSEHRA is provided.
  • QSEHRAs provided by different employers to one eligible employee may each reimburse the statutory dollar limit.
  • There are special rules for non-calendar year plans, such as prorating dollar limits for each portion of the taxable year or utilizing the limit in place at the beginning of a non-calendar plan year for the entire 12-month plan year.
  • A mistaken reimbursement must be paid back with after-tax funds before March 15 of the year following the year in which the excess reimbursement was made, or in the case of an eligible employer whose federal income tax return is under examination for the taxable year during which the excess reimbursement was made, the date the eligible employer receives written notification from the examining agent(s) specifically citing the excess reimbursement as an issue under consideration.

Our next Alert will cover:

  • 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)