Qualified small employer HRAs get guidance

With 79 questions and answers and a request for comments, Notice 2017-67 was issued in late October providing guidance on many aspects of the new qualified small employer health reimbursement arrangements (HRAs), by which eligible employers may pay or reimburse medical expenses of employees and their families.

Before being reinstated in modified form by legislation in 2016 (21st Century Cures Act, P.L. 114-255), HRAs had long been familiar to many employers, particularly small businesses, until the “market reform” rules of the Patient Protection and Affordable Care Act of 2010 (PPACA), P.L. 111-148, made them technically subject to a penalty. With the Cures Act, by creating a carve-out from group health plan rules, Congress restored the option for eligible employers, generally, those with fewer than 50 full-time employees or equivalents that do not offer a group health plan to any of their employees. The penalty exception is codified at Sec. 9831(d).

Under a small employer HRA, payments for, or to reimburse, an eligible employee’s medical expenses (as defined in Sec. 213(d)) are not includible in the employee’s gross income if the employee provides to the employer proof of having minimum essential coverage, as defined in Sec. 5000A(f). The arrangement must be funded solely by the employer, with no salary reduction contributions. The amount of payments and reimbursements is limited per eligible employee to $5,050 per year (in 2018) for self-only coverage and $10,250 for family coverage. Part-time, seasonal, and new (up to their first 90 days of employment) employees, and a few others listed at Sec. 105(h)(3)(B), may be excluded from the HRA, but otherwise, the arrangement must be offered on the same terms to all an eligible employer’s employees. Retirees of the employer are not included.

The notice also addresses questions with respect to eligible employers, interaction with the health savings account requirements, groups of employers, and HRA amounts accumulated in prior years or carryover amounts in a flexible spending arrangement.

With respect to eligible employees, the notice discusses ineligible employees and states that eligible employees may not waive participation. In guidance on the “same terms” provision, the notice states that a small employer HRA must be operated on a uniform and consistent basis with respect to all eligible employees but notes that an arrangement will not fail this requirement merely because employees submit differing amounts of expenses for reimbursement within the statutory limits. It also addresses prorating the statutory limits monthly where required, and states that an arrangement will not fail the same-terms requirement if it allows for carryover of unused benefit amounts from a prior plan year. However, any carryover must be included within the subsequent-year statutory limit.

The guidance further addresses the timing, format, and contents of a required written notification of the HRA to employees, how employees may prove they have minimum essential coverage (with a model attestation document as an appendix), and substantiation requirements for reimbursed medical expenses. It discusses reporting of HRA amounts on Form W-2, Wage and Tax Statement (code FF in box 12), and notes that employers do not need to also file and furnish Form 1095-B, Health Coverage.

Finally, the notice states that the IRS plans to issue proposed regulations on small employer HRAs and asks for comments to be submitted by Jan. 19, 2018.

• Notice 2017-67

—By Paul Bonner, a JofA senior editor.