Small Business Sponsored Health Reimbursement Accounts Allowed

For tax years beginning after December 31, 2016, qualified small employer health reimbursement arrangements (QSEHRAs) are not treated as group health plans for purposes of the group health plan requirements provided by the Patient Protection and Affordable Care Act (ACA).

Therefore, for plan years starting after 2016, small employers may adopt QSEHRAs to reimburse employees for the cost of premiums for individual and family health coverage without being subject to an excise tax for failure to comply with ACA's market reforms. For small employers that provided these arrangements prior to 2017, transition relief that expired June 30, 2015, has been extended to apply to any plan year beginning on or before December 31, 2016.

Background. Group health plan requirements were significantly amended and expanded by the ACA, generaly effective after 2014. The IRS took the position that group health plans that reimbursed or paid employee premiums for individual coverage were subject to an excise tax (up to $100 per affected individual per day) for violating the group plan rules. Under transition relief, small employers were temporarily exempted from the excise tax from January 1, 2014, to June 30, 2015.

To qualify as a QSEHRA, an arrangement must provide minimum essential coverage and meet affordability standards. These arrangements are permitted to be integrated with individual employee coverage including ACA exchange coverage. The arrangement must be provided on the same terms to all eligible employees of the eligible employer.

In addition, the arrangements must:

  • be funded solely by the eligible employer; no salary reduction contributions under a cafeteria plan are allowed;
  • provide for the payment or reimbursement of medical expenses incurred by the eligible employee or employee's family member, and
  • provide that the total payments and reimbursements for any year cannot exceed $4,950 ($10,000 for family coverage). The annual dollar limit is adjusted for inflation for years beginning after 2016 in $50 increments.
Although the arrangement must be provided on the same terms to all eligible employees, an employee's permitted benefit may vary in accordance with the variation in the price of an insurance policy based on the employee's (or family member's) age(s) and the number of family members covered.

An eligible employer is an employer that is not an "applicable large employer" as defined for purposes of the large employer shared responsibility payment provisions of the ACA, and one that does not offer a group health plan to any of its employees.