President Obama signs the 21st Century Cures Act.
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“QSEHRAs give employers a fourth option: Not sponsor or administer group medical insurance, but provide employees with a tax-free stipend to help them purchase a policy that fits their medical and financial needs in the individual market.”
By William G. (Bill) Stuart
Director of Strategy and Compliance
January 19, 2017
The federal government has created a new opportunity for employers to contribute to employees’ medical insurance premiums with the passage last month of the 21st Century Cures Act.
The law, broadly supported by both Democrats and Republicans, focused primarily on streamlining certain Food and Drug Administration (FDA) testing requirements that pharmaceutical manufacturers must meet before FDA approval of a new drug. It also provides additional cancer, precision medicine and biomedical research funding.
Section 18001 of the law, relevant to benefits advisors, employers, employees and third-party administrators, allows small employers to help employees offset the cost of medical premiums in the individual insurance market by funding Health Reimbursement Arrangements (HRAs). This new form of HRA has been dubbed the Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA.
Brief history of HRAs and premiums
Employers have used HRAs to fund retiree medical coverage for a decade, thereby switching funding strategies from defined benefit (employer sponsors a plan and pays a high percentage of the premium) to a defined contribution (employer sends employees to a private Medicare exchange with a fixed dollar premium subsidy).
Prior to 2013, employers had the option of using the same arrangement for active employees as well. The Internal Revenue Service (IRS), Department of Labor (DOL) and Department of Health and Human Services (HHS) determined that the Affordable Care Act (ACA) didn’t allow this use of HRAs and issued clear guidance against the practice again (Section III A, Q&A 1) and again (Q&A 1) and again (Q&A 2).
While some third –party administrators continued to sell the concept to employers, the federal regulators made it clear that violations were subject to fines of $100 per day ($36,500 annually) per employee covered.
Led by a physician, since-retired US Rep. Charles Boustany (R-LA), a bipartisan coalition in the House and Senate introduced the Small Business Healthcare Relief Act of 2015. The bill did not become law on its own, but it was subsequently – and to many of its supporters, somewhat surprisingly – included as part of the 21st Century Cures Act.
You can read more about the legislative history of this movement here and an excellent in-depth profile of two companies’ very different approaches to the issue here. [Note: One of the companies profiled in the article, WEX Health, leases its software to a number of TPAs, including Benefit Strategies LLC.]
How QSEHRAs work in practice
Here are some key points (but not an exhaustive list of rules) to help you understand QSEHRAs:
- Only QSEs can offer HRAs that reimburse premiums. QSEs don’t face penalties for failing to offer affordable coverage to their employees, as large employers do.
- Only employers who don’t offer group coverage can sponsor a QSEHRA.
- Employers are required to give written notice to employees 90 days before the effective date that a QSEHRA will be offered. There is transitional relief for 2017 due to the sudden passage of the provision in mid-December.
- As with standard HRAs, contributions are limited to employers. QSEHRAs cannot be funded by employee salary reductions.
- The value is capped. Employers can’t offer more premium subsidy through a QSEHRA than $4,950 (individual coverage) or $10,000 (family coverage) – figures that will be indexed in future years. And these figures are pro-rated if the coverage is for less than 12 months (for example, a new hire picks up individual insurance during the HRA plan year).
- Unlike standard HRAs, individuals who terminate coverage while covered by a QSEHRA don’t have COBRA continuation rights to the QSEHRA. Also, QSEHRAs don’t fall under ERISA regulations that require plan documents and SPDs.
- Employees can’t apply for federal premium subsidies (available based on income through public exchanges) AND employer QSEHRA allotments in full toward their premium. If employees qualify for advance premium tax credits (the technical name for premium subsidies), the amount of their monthly subsidy is reduced dollar-for-dollar for any funds that their employer provides through a QSEHRA.
- They can reimburse all or a subset of Section 213(d) expenses only.
- An employer who offers QSEHRAs must offer them to all full-time employees except those who haven’t completed the employer’s qualifying service time requirement (not to exceed 90 days), are under age 25 or are covered by a collective-bargaining agreement. Employers may exclude part-time and seasonal workers from participation.
- Employers generally make the same contribution to all employees with individual coverage and usually a higher uniform contribution to those with family coverage. Employers can adjust QSEHRA contributions to reflect differences in premium resulting from premiums dependent on the number and/or ages of family members covered.
Note that particularly with the last two flexible provisions, it’s important to understand the regulations to keep the program in compliance while adjusting for certain eligibility standards or employees’ different costs of coverage. Before consulting with a benefits attorney to evaluate and establish a plan, you might want to absorb information here, here, here and here].
Impact of QSEHRAs
Fewer than half of all small businesses offer group medical plans to their employees. The most common reason cited is cost – both premium cost and the commitment of resources to sponsor and administer the plan. Many of those companies are small, family businesses with owners or employees who have access to group insurance elsewhere. They’re unlikely to offer QSEHRAs.
On the other hand, larger small groups that want to provide some assistance to employees to purchase medical coverage without placing the financial future of the company in peril may find QSEHRAs an attractive middle ground for employers and employees.
You can read more about the coverage statistics for small businesses and forecasts of QSEHRA adoption here.
Are QSEHRAs good or bad?
That remains to be seen.
What’s good about QSEHRAs is that they provide an additional option for employers. Employers had three choices before the 21st Century Cures Act became law. They could sponsor, administer and contribute toward the cost of group insurance; not offer insurance; or not offer insurance but help employees with a post-tax stipend (that typically would shrink by 20% to 30% of its value, depending on the employee’s marginal federal income tax rate and the applicable state and local income taxes, if any.
QSEHRAs give employers a fourth option: Not sponsor or administer group medical insurance, but provide employees with a tax-free stipend to help them purchase a policy that fits their medical and financial needs in the individual market. This option relieves employers of the burden of administering a group plan while making tax-free provisions to help employees purchase their own insurance. For employees, QSEHRAs provide them with financial assistance when purchasing insurance.
Some observers are concerned that QSEHRAs may result in less group coverage as employers find them a reasonable middle ground between continuing to provide group coverage that they can no longer afford and dropping group coverage altogether. QSEHRAs allow employers to shed the administrative burden of offering group coverage and manage their annual commitment through a fixed-dollar (defined) contribution decoupled from premium increases while still helping employees offset premiums on a tax-advantaged basis.
You can read more about the pros and cons here.
The benefits advisor’s role
Where do benefits advisors fit into the QSEHRA opportunity? That’s an open question.
Many small employers who don’t offer insurance are very small (1-9 eligible employees). They don’t hire benefits advisors, and they may be less likely to value an investment in professional benefits advisory services on a contract basis.
Brokers with one or more of the following characteristics may benefit from QSEHRAs:
- Property and casualty insurers with existing relationships who deliver demonstrated value to their clients. If the P&C houses have benefits advisors, they have a natural entrée to these clients.
- Benefits advisors who can offer efficient education and enrollment services – for example, brokers with a private exchange that accommodates nongroup business.
- Benefits advisors who support aggregators like chambers of commerce and trade associations. Advisors would benefit from a captive audience and member organizations would find value in having a turnkey program to help employees manage medical premium costs. A key factor in any successful program is an efficient education and enrollment service through which an advisor can make a profit on small navigator payments or insurer commissions on nongroup sales.
Perhaps the greatest potential lies with advisors whose existing group insurance clients drop coverage. Prior to the 21st Century Cures Act, these employers exited the benefits business entirely and left advisors without an income stream. The introduction of QSEs allows these employers to remain in the game with a different model. Incumbent advisors may be able to secure a fee-based contract to support the client’s initial move and ongoing business with the new model.
In any of these cases, the winners among advisors will be those who can offer an efficient, effective turnkey solution to their clients. A turnkey solution includes (A) a TPA partner who provides value at a reasonable cost, (B) an educational portal that can automate much of the process of informing employees about the program and (C) an electronic enrollment tool that replaces paper. Without this favorable pricing and automation, the program is unlikely to contribute to agency profitability.
Benefit Strategies’ role
Our system accommodates the QSEHRA program. We’re working now to create a program to support this new option. We anticipate a roll-out in early spring. Stay tuned for more information.
What we’re reading
If you aren’t offering a Health Savings Account (HSA) program to your employees, you may soon be a late adopter, according to this recent article.
Do you (or does your client) have an employee who applied for a subsidy to purchase medical insurance on a public exchange.? Employers in this situation receive a notice and may be subject to fines, or the employee may have made a mistake and will receive an unexpected tax bill. What is the process, and what does an employer need to do? Here’s a good article, at the end of which you can download a helpful book.