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Qualified Small Business Health Reimbursement Arrangements

January 15, 2019

The 21st Century Cures Act removed the $100 per day per employee penalty for small employers who adopt a qualified small employer health reimbursement arrangement (QSEHRA). IRC Sec. 9831(d) contains the provisions for relief of the penalty. IRS Notice 2017-67 provides guidance in a question and answer format.

This new plan allows small employers who may not be looking to offer a group health insurance plan the ability to reimburse employees for their out-of-pocket medical costs, including health insurance premiums and other eligible medical expenses outlined in IRC Sec. 213(d) on a tax-free basis to the employee.

An eligible small employer is one who employs fewer than 50 full-time employees and does not offer a group health insurance plan to any of its employees. The employee must furnish proof of health insurance coverage for the reimbursement of insurance premiums and other medical expenses. The employer must provide all reimbursements from the plan, and no salary reduction contributions by the employee are allowed. For 2019, the amount of employer payments and reimbursements may not exceed $5,150 per year for single coverage and $10,450 per year for family coverage. These limits are indexed for inflation.

Reimbursements made to an employee from a health reimbursement arrangement are tax deductible by the employer and tax free to the employee. However, reimbursements are taxable to employees that do not maintain health insurance coverage, measured on a monthly basis. A small employer adopting a health reimbursement arrangement must meet written notification requirements as outlined in IRC Sec. 9831(d)(4).

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