QSEHRAs: A Vehicle for Expanding Health Insurance Coverage?

Background

Small employers are not required by federal law to offer health insurance coverage options to employees, and many choose not to. In a recent Kaiser Family Foundation Employer Health Benefits Survey, only 50 percent of small employers (defined as those who employ between 3-49 employees) offered health benefits.² Instead, employees can purchase insurance from state or federally-run health insurance marketplaces. Employees may also be eligible for state Medicaid coverage, depending on criteria.

QSEHRAs were created to address concerns raised by small employers after passage of the Patient Protection and Affordable Care Act of 2010 (PPACA). A health reimbursement arrangement (HRA) is an arrangement in which an employer reimburses medical expenses incurred by employees, up to a certain dollar amount. In 2013, regulatory agencies opined³ that HRAs were group health plans as defined by PPACA. A carve out was created to permit non-PPACA compliant HRAs: HRAs “integrated” with a PPACA-compliant group health plan would not have to comply with PPACA group health plan requirements.⁴ However, an HRA could not “integrate” with an individual health plan and satisfy the carve out requirements. This left employers unable to offer an HRA to be used for employee purchase of an individual market policy. The QSEHRA is a type of HRA created to allow certain employers to fund employee purchases of individual market policies.

QSEHRAs are limited in nature. Only “small employers” - those employers who are not Applicable Large Employers⁵ under Section 4980H of the Internal Revenue Code - can offer QSEHRAs.⁶ Additionally, these small employers are prohibited from offering group health plans or flexible savings accounts (FSAs)⁷ alongside QSEHRAs. This prohibition extends to controlled groups. A controlled group is a group of related businesses that have common ownership, as defined by the Internal Revenue Code.⁸  If one entity in the controlled group offers a group health plan, then all entities in the controlled group are unable to offer QSEHRAs.⁹

Small employers must fund QSEHRAs completely.¹⁰ For calendar year 2018, limits are $5,050 for single coverage and $10,250 for family coverage.¹¹ While QSEHRAs provide a funding option for employees to pay for health insurance premiums, they are not “group health plans” under PPACA. This means that QSEHRAs are not subject to any of PPACA’s regulatory requirements for group health plans.¹² QSEHRAs can only reimburse for eligible medical expenses, as defined by the Internal Revenue Code and subregulatory guidance.¹³ These expenses include items commonly excluded from health insurance coverage, such as guide dog expenses, certain legal fees, and vehicle modifications.¹⁴

QSEHRAs offer unique employer and employee benefits. Employers are able to fund employee premiums used for individual marketplace policies. This allows them to offer health insurance options without having to purchase PPACA-compliant health insurance. Employees are able to subsidize individual market place plan premiums and other expenses which are commonly excluded from health plan coverage. 

Limitations: Employer

A range of reasons make QSEHRAs an unlikely vehicle to expand insurance coverage. While QSEHRAs are not group health plans under PPACA, they are subject to other ERISA benefit plan requirements.¹⁵ Small employers will need to meet these requirements - such as development and dissemination of the Plan Document and Summary Plan Descriptions - and assume ERISA fiduciary responsibilities as plan sponsor. Employers must also determine whether the QSEHRA constitutes affordable coverage, and provide notice to employees.¹⁶ Employers must additionally substantiate items paid for directly by employees.¹⁷ These administrative burdens may be too high for an employer to want to offer a QSEHRA.

Whether to take on this additional administrative burden is also influenced by the health of the individual marketplaces in the regions in which the employers operate. The elimination of the individual mandate¹⁸ could further erode employer desire to offer QSEHRAs. Employers may not want to offer QSEHRAs if employees are uninterested in purchasing insurance without the individual mandate-related penalty.

Employers are restricted from differentiating across employee classes in QSEHRA offerings; they must offer the QSEHRA on the same terms to all eligible employees.¹⁹ The only permitted variances relate to age of covered individuals or number of individuals covered.²⁰ This leaves employers with less flexibility than they would have with a group health plan. Employers are able to exclude certain employees from QSEHRA offerings, such as those who have not completed 90 days of service with the employer, those who have not attained 25 years of age prior to the beginning of the plan year, and part-time or seasonal employees.²¹ These restrictions similarly leave employers with limited flexibility to craft their plan offerings. For some small employers, a one-size-fits-all approach may be appropriate. For others, the QHSEHRA requirements may prove too restrictive.

Limitations: Employee

QSEHRA funding limits are set so low that in many locations a fully funded QSEHRA would be insufficient to meet the total premium cost for coverage. A Kaiser Family Foundation analysis of 2018 benchmark plan premiums showed an average cost of $481 per month for the second lowest-cost silver plan²² for a 40-year old.²³ Even using a fully funded QSEHRA, the individual would have to pay an additional $722 out of pocket for premium coverage. Most importantly, QSEHRA funds reduce or eliminate the amount of premium tax credit (PTC) that an employee is eligible for. PTC is a tax credit taken in advance to lower monthly premiums for the purchase of Qualified Health Plans.²⁴ If the QSEHRA is considered “affordable coverage,” the employee is not eligible for PTC at all.²⁵ If the QSEHRA is not considered affordable coverage, an employee must reduce the total PTC amount by the permitted - not the used - QSEHRA benefit amount.²⁶ Employees who fail to reduce PTC and take excess PTC will be liable for paying excess PTC at tax filing. This could have deleterious consequences for an employee who is not expecting to pay these amounts. Moreover, employees are unable to opt-out or waive participation in a QSEHRA.²⁷

In addition, employees who receive QSEHRA reimbursement during months in which they do not have Minimum Essential Coverage²⁸ will find QSEHRA dollars added to their gross income.²⁹This is a statutory requirement.³⁰  Increased taxable income can have a range of effects, including rendering employees ineligible for PTCs or Medicaid. Similarly, employees cannot take a cash-out of unused QSEHRA dollars without those dollars being added to income and wages for all employees under the QSEHRA.³¹ This, again, results in higher taxable income and its potential negative effects.

Conclusion

QSEHRAs will likely not expand health insurance coverage in small employer employee populations since many employers may choose not to offer these products.  Small employers do not have to offer or fund health insurance coverage for employees. Employees can purchase individual marketplace coverage without employer intervention.

1.  P.L. 114-255, 130 Stat. 1033.
2.  Kaiser Family Foundation, “2017 Employer Health Benefits Survey”, https://www.kff.org/report-section/ehbs-2017-summary-of-findings/ (accessed December 7, 2017).
3.  The Department of Labor, the Treasury Department, the Internal Revenue Service, and the Department of Health and Human Services issued guidance concurring that health reimbursement arrangements are group health plans subject to PPACA requirements. See Technical Release 2013-03; Notice 2013-54, 2013-40 I.R.B. 287; and “Application of Affordable Care Act Provisions to Certain Healthcare Arrangements,” https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-2013.pdf (accessed January 10, 2018).
4.  26 C.F.R. § 54.9815-2711(d), 29 C.F.R. § 2590.715-2711(d), 45 C.F.R. § 147.126(d).
5.  I.R.C. § 4980H(c)(2).
6.  I.R.C. § 9831(d)(3)(B)(ii).
7.  A flexible spending account is an account used to pay for medical expenses. It differs from an HRA in that it can be employee funded and has an IRS limit on how much money can be carried over per year. 
8.  I.R.C. § 414(b), (c), (m); I.R.C. § 1563(a).
9.  Notice 2017-67, 2017-47 I.R.B. 517, Question 40.
10.  P.L. 114-255, 130 Stat. 1033.           
11.  Rev. Proc. 2017-58.
12.  US Department of Labor, “FAQs About Affordable Care Act Implementation Part 35,” https://www.dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-35.pdf (accessed December 14, 2017).
13.  I.R.C. § 9831(d)(2)(B)(ii), I.R.C. § 213(d).
14.  Medical and Dental Expenses (Including the Health Coverage Tax Credit), Pub. 502 (Rev. Dec. 1, 2017).
15.  The Employee Retirement Income Security Act of 1974 established minimum standards for most voluntarily established pension and health plans in private industry. See https://www.dol.gov/general/topic/retirement/erisa.
16.  Notice 2017-67, 2017-47 I.R.B. 517, Question 38.
17.  Id., Question 44.
18.  The ‘individual mandate’ is a colloquialism used to describe an individual’s statutory requirement to maintain minimum essential coverage or incur a shared responsibility payment. I.R.C. § 5000A.  Established by PPACA, it was repealed in the Tax Cuts and Jobs Act, Public Law No. 115-97, signed into law December 2017.
19.  I.R.C. § 9831(d)(2)(A)(ii).
20.  Id.
21.  I.R.C. § 9831(d)(3)(A).
22.  Plans sold in the health insurance marketplace are offered at four different tiers named for metals: bronze, silver, gold, and platinum. Platinum plans offer the highest monthly premium and lowest costs when getting care; bronze plans offer the lowest monthly premiums and the highest costs when getting care. For more information, see Healthcare.gov, “The ‘metal’ categories: Bronze, Silver, Gold & Platinum”, https://www.healthcare.gov/choose-a-plan/plans-categories/ (accessed January 10, 2018).
23.  Kaiser Family Foundation, “Marketplace Average Benchmark Premiums,” https://www.kff.org/health-reform/state-indicator/marketplace-average-benchmark-premiums/?currentTimeframe=0&selectedRows=%7B%22states%22:%7B%22all%22:%7B%7D%7D,%22wrapups%22:%7B%22united-states%22:%7B%7D%7D%7D&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D (accessed December 7, 2018).
24.  A “qualified health plan” is an insurance plan that’s certified by the Health Insurance Marketplace, provides essential health benefits, follows established limits on cost-sharing (like deductibles, copayments, and out-of-pocket maximum amounts), and meets other requirements under PPACA. Centers for Medicare & Medicaid Services, “Healthcare.gov Glossary,” https://www.healthcare.gov/glossary/premium-tax-credit/ (accessed December 7, 2017).
25.  Notice 2017-67, 2017-47 I.R.B. 517, Section K.
26.  Id., Questions 66, 71.
27.  I.R.C. § 9831(d)(2)(A)(ii).
28.  The Internal Revenue Code identifies certain plan types as “Minimum Essential Coverage,” including coverage offered on individual marketplaces; see I.R.C. § 5000A(f).
29.  Notice 2017-67, 2017-47 I.R.B. 517, Question 40.
30.  I.R.C. § 106(g).
31.  Notice 2017-67, 2017-47 I.R.B. 517, Question 46.