There has been substantial discussion about the potential repeal of all or portions of the Affordable Care Act (ACA) (P.L. 111-148), but the current law remains in place for now. While the ACA doesn’t require small businesses to purchase health insurance for their employees, some small businesses do choose to use Health Reimbursement Arrangements (HRAs) to help their employees cover medical expenses or individual health insurance premiums. Those small businesses that do use HRAs need to be mindful of relevant ACA provisions as well as two recent developments that impact the use of HRAs: an October 2017 executive order issued by President Trump and a subsequent IRS notice.


To look at small businesses and the concerns with HRAs, it’s helpful to go back a few years and begin with IRS Notice 2013-54, which created quite a stir among tax practitioners when the IRS issued it. The notice stated that a stand-alone HRA couldn’t be used to reimburse employees who purchased healthcare policies individually and then claimed reimbursement from the HRA. Such a reimbursement from the HRA would violate the ACA provisions regarding coordination with a group employer health insurance plan.

A second area of concern for small businesses involves S corporations. An owner-employee who owns more than 2% of the stock in the S corporation is required to include employer-provided health insurance into wages (but not subject to employment taxes) and then, if qualified, can claim a self-employed health deduction for purposes of adjusted gross income. IRS Notices 2013-54 and 2015-17 also detail that the relevant ACA reforms don’t affect plans with fewer than two participants, so a plan covering only a single person wouldn’t be subject to the group plan rules.

The 21st Century Cures Act (P.L. 114-255), signed into law in December 2016, provides relief for many small businesses from the penalty for using an HRA to reimburse for the purchasing of individual policies by employees. This relief affects employers who aren’t considered large employers for ACA purposes—usually those with fewer than 50 full-time equivalent employees and who don’t provide an overall group health plan to employees. These employers may use a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) to reimburse, within limits, the purchasing of health insurance in the individual market on a nondiscriminatory basis. The maximum amount that can be reimbursed is limited to $4,950 for an individual employee for self-only coverage or $10,000 if there’s a provision for families. The rules allow that reimbursement is considered to be provided on the same terms (i.e., provided on a nondiscriminatory basis) across employees if there are variations based on age or the number of family members covered. The employer must notify employees in advance that this type of arrangement is provided. The rules are also coordinated with the premium tax credit provision to prevent a double benefit.


Things changed on October 12, 2017, when President Trump issued “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States.” The most publicized piece of that executive order is the reform to allow interstate competition among insurers by potentially allowing small businesses to be part of Association Health Plans. A less-publicized area of this order is its call for the Secretaries of the Treasury, Labor, and Health and Human Services to consider, within 120 days of the signing date, proposing regulations or revising guidance to increase the ability of employers to offer and make use of HRAs.

The IRS subsequently released Notice 2017-37, providing guidance in a question-and-answer format that addresses issues related to QSEHRAs. Question 3 asks whether an S corporation fails to be an eligible employer if it reimburses the health insurance policy premiums of 2% shareholders who are employees. Fortunately, the answer is no. But the answer also refers to Question 9, which points out that a QSEHRA may only be provided to employees. If the plan is offered to retirees, other former employees, or nonemployee owners, it would be considered a group plan. Thus, the QSEHRA can only be used with owner-employees and not nonemployee owners of the S corporation.

Another interesting item is Question 11, which addresses whether an eligible employee can waive participation in the QSEHRA. Offering the coverage to all is insufficient. In order for the HRA to be a QSEHRA, the benefits must be provided to all eligible employees. Employees are eligible except: those who haven’t completed 90 days of service, those not yet 25 before the beginning of the plan year, part-time or seasonal employees, those covered by certain collective bargaining agreements, and those who are nonresident aliens with no U.S.-sourced earned income.

With respect to nondiscrimination, Notice 2017-37 allows the amount of reimbursement for health insurance to be gauged using age and the number of family members covered. Question 13 clarifies that the policy used for gauging must be a health insurance policy that meets the requirements for minimum essential coverage and be available for purchase by at least one of the employees. A qualifying arrangement can reimburse for Medicare or Medicare supplemental policies. The employee does need to obtain minimum essential coverage. If a reimbursement is made to an employee without such coverage, the amount would be included in taxable income (see Question 40).

The notice also provides the inflation adjusted limits for 2018. The amounts are $5,050 for self-only coverage and $10,250 for family coverage. If a QSEHRA is provided during 2017 or 2018, the employer must give written notice to the eligible employees by the later of February 19, 2018, or 90 days before the first day of the plan year. Care should be taken if the QSEHRA will reimburse cost sharing. A health savings account (HSA) requires a high-deductible insurance plan. A QSEHRA that reimbursed the cost-sharing pieces would cause a loss of eligibility for the HSA. If the QSEHRA only allows for reimbursement of premiums or disregarded types of coverage, but not cost-sharing payments, then the ability to offer the HSA wouldn’t be lost (see Questions 75-77).

As these developments show, tax-related issues will remain a source of uncertainty as the future of the ACA continues to be debated. Small businesses not offering group health plans but desiring to reimburse employees for part of the cost of their individual health insurance policies should do so on a nondiscriminatory basis whenever the business has more than one employee (including owner-employees). Small businesses should also watch for regulatory guidance that may allow them to participate in trade groups to obtain insurance in a more cost-effective manner.

© 2018 A.P. Curatola

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