20 Things to Know About QSEHRAs

QSEHRAs allow small employers to provide health reimbursement arrangement (HRA) funds for employees to purchase individual coverage. They were part of the 21st Century Cures Act enacted on December 13, 2016. While the concept may sound simple enough, recent IRS guidance shows that these arrangements are complex tax arrangements.

Notice 2017-67 provides IRS guidance on the requirements for employers wishing to offer these arrangements. The complete notice can be found here.

Here are 20 things to know about QSEHRAS:

  1. A “qualified small employer health reimbursement arrangement” is one that is funded solely by an eligible employer without salary reduction. It is provided on the same terms to all eligible employees.


  1. An eligible employer is one that is not an ALE under the definition in section 4980H of the ACA. An employer whose workforce increases to 50 or more full-time employees during a calendar year will not become an ALE before the first day of the following calendar year. Importantly, if a QSEHRA is provided on a non-calendar year basis, eligibility for the QSEHRA terminates on January 1 if the employer has become an ALE due to an increase in employees as noted.


  1. An employer must not offer a group health plan to any of its employees. For this purpose, a group health plan includes a plan that provides only excepted benefits such as a vision or dental plan.


  1. The amount of the benefit may vary based on the price of a policy in the individual insurance market based on the age of the employee and/or family members and the number of family members eligible.


  1. The maximum dollar limit per year for 2017 is $4,950 for an individual employee and $10,050 for family coverage. The maximum benefit may be prorated based on the months that an individual is covered by the arrangement. The annual maximum is to be adjusted for inflation using the Consumer Price Index (CPI) inflation rate. The 2018 maximum permitted benefit is $5,050 for self-only coverage and $10,250 for family coverage.


  1. The plan is subject to nondiscrimination requirements and may exclude employees defined in Section 105(h)(3)(B). The Act amends these requirements for the purposes of this provision by substituting 90 days for “3 years” in clause (i). As such, employees that may be excluded are:
  • Employees who have not completed 90 days of service
  • Employees who have not attained age 25
  • Part-time and seasonal employees
  • Employees who are members of a collective bargaining agreement
  • Employees who are nonresident aliens and who receive no earned income in the US.


  1. Employers are required to provide a notice 90 days before the beginning of the year or when an employee is first eligible for the plan. An employer that provides a QSEHRA during 2017 or 2018 may have until the later of February 19, 2018 or 90 days before the first day of the plan year to provide the notice. The notice must contain:
  • Statement of the amount of the eligible employee’s permitted benefit
  • Statement that information regarding the benefit must be provided by the employee to any health insurance exchange if applying for APTC
  • Statement that if the employee is not covered under MEC (minimum essential coverage) for any month that the employee may be subject to the individual mandate tax for the month and any reimbursements under the arrangement may be included in gross income.


  1. The HRA reimbursement is treated as affordable coverage for a month if the amount that would be paid by the employee as premium for self-only coverage under the second lowest cost silver plan offered in their respective individual health insurance market does not exceed the household affordability threshold. The applicable amount for a month is calculated based on 1/12 of the employee’s permitted benefit.


  1. Controlled group rules apply when determining whether an employer is an eligible employer to offer a QSEHRA. Each employer in the controlled group must provide a QSEHRA to all eligible employees with the same terms and same amounts of permitted benefits.


  1. Employees cannot waive the QSEHRA benefit.


  1. A safe harbor describes which employees may be deemed ineligible as part-time or seasonal. These would be any employee whose customary weekly employment is less than 25 hours or any employee whose customary annual employment is less than 7 months.


  1. A QSEHRA can only be provided to active employees. A 2% shareholder who is otherwise an employee is not an employee for QSEHRA nor is a retiree.


  1. An employer must base the permitted benefit on the number of family members who have minimum essential coverage (MEC). This would mean that an employee with self-only coverage would have to receive the family permitted benefit is their spouse is enrolled in a different plan or policy that provides MEC, even though the plan may be from another employer.


  1. A QSEHRA arrangement can limit reimbursements to one or more of: insurance premiums, cost-sharing expenses that are medical expenses or certain other medical expenses. It may also reimburse premiums for Medicare or Medigap policies. The arrangement must still be “effectively available” to all eligible employees.


  1. Eligible employees must provide proof that they have MEC at least annually in order to obtain QSEHRA reimbursements. Each reimbursement request must include an attestation that the individual seeking the reimbursement continues to have MEC.


  1. Requested reimbursements must be substantiated as qualified medical expenses. Substantiation requirements for FSAs (flexible spending arrangements) will satisfy this requirement.


  1. A QSEHRA is subject to the PCORI fee.


  1. A QSEHRA that reimburses any medical expense including cost-sharing disqualifies the person from making HSA contributions.



  1. Mistakes in reimbursements may result in the QSEHRA arrangement failing to satisfy the requirements for the QSEHRA. This failure may result in all payments to all employees under the arrangement becoming taxable.


  1. The guidance in Notice 2017-67 applies to plan years beginning on or after November 20, 2017.










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