QSEHRAs: Withholding may be required

Qualified small employers—those with fewer than 50 employees—that offer health reimbursement accounts, but no other major medical plan to employees, don’t have to worry about the Affordable Care Act’s excise tax on group plans that don’t meet the market reform provisions.

The IRS has now filled in details about how qualified small employer health reimbursement accounts work.

Bad news: Your QSEHRA contributions may be taxable and subject to withholding. These rules became effective with plan years beginning on or after Nov. 20, 2017. (Notice 2017-67, IRB 2017-47)

Requirements for QSEHRAs. QSEHRAs operate like traditional HRAs: only employers can contribute, they can’t be part of a cafeteria plan and employees use them primarily to pay their monthly premiums for individual insurance. But there are some significant differences, too:

  • Employees can’t opt out of the QSEHRA
  • Your contributions are limited to $5,050 for employees who take up self-only coverage and $10,250 for employees with family coverage (for 2018)
  • QSEHRAs must be provided to all eligible full-time and part-time employees (i.e., those working at least 25 hours a week) on the same terms; variations are allowed based on family size and age
  • 90 days prior to the beginning of a year, employees must receive written notice informing them of their QSEHRA contribution; that they need to provide this information to their individual health insurer; and that those who don’t buy individual insurance are liable for an individual responsibility payment (for 2018)
  • Your contributions are taxable if employees don’t buy individual insurance that qualifies as minimum essential coverage. To avoid taxation, employees must attest to you annually that they have qualified insurance and they must present substantiation each time they request reimbursement.

Taxing QSEHRAs. The entire QSEHRA plan will fail, and all reimbursements to all employees will become fully taxable and subject to withholding, under the following circumstances:

  • Employees fail to substantiate their expenses
  • The QSEHRA reimburses expenses other than medical expenses
  • The QSEHRA reimburses expenses without regard to whether employees have incurred medical expenses.

On the other hand, the entire plan won’t fail, but employees’ reimbursement will be taxable to them and subject to withholding, if they buy over-the-counter medication without a prescription or pay for their spouses’ premiums on a pretax basis when their spouses work for other employers. Finally, reimbursements to employees who don’t buy minimum essential coverage will be taxable to them, but not subject to withholding; you add this amount to employees’ other W-2, Box 1 wages.

MODEL NOTICES: Page 25 of the IRS’ notice contains some model language you can use to satisfy your responsibility to notify employees annually of their QSEHRA contributions. In addition, the IRS has provided a model attestation form employees can use, located in Appendix B. Visit tinyurl.com/hranotice to download the notice.