The Return of Tax-Free Medical Premium Payments

New act addresses ACA penalty many employers, including churches, faced.

Church Finance Today

The Return of Tax-Free Medical Premium Payments

New act addresses ACA penalty many employers, including churches, faced.

At the close of 2016, Congress enacted the 21st Century Cures Act, with massive bipartisan support. While the Act addresses several health-related issues, perhaps of most interest to church leaders is a provision relieving many small employers of one of the most feared provisions in the Affordable Care Act: the infamous $100 per day per employee penalty. Prior to the passage of the 21st Century Cures Act, the Internal Revenue Service could impose this penalty on any employer that continued to pay or reimburse employees’ medical insurance under a private plan.

The $100 per day penalty applied to all employers, including churches and other religious employers. Employer payment plans have been popular not just among churches, but also among small for-profit employers. As awareness of this penalty built, Congress came under mounting pressure to provide permanent relief. Several employer groups and trade associations lobbied Congress for change, including the National Association for the Self-Employed. Eventually, Congress offered the much sought-after relief through the 21st Century Cures Act.

Small employers are not required to provide health insurance coverage to their employees, and, for some small employers, doing so may not be feasible. Nonetheless, many small employers wish to provide pre-tax funds that employees may use to purchase their own health insurance or pay for expenses not covered by their insurance. However, prior to the 21st Century Cures Act, providing such funds may have exposed a small employer to a substantial excise tax.

Get to know QSEHRA

Under the 21st Century Cures Act, a “qualified small employer health reimbursement arrangement” (QSEHRA) is generally not a group health plan under the tax code, Employee Retirement Income Security Act (ERISA), or Public Health Service Act (PHSA) and, thus, is not subject to the group health plan requirements. And, most importantly, this means that a QSEHRA will not be assessed the $100 per day per employee penalty for failure to comply with the ACA’s market reforms that apply to group health plans.

A QSEHRA is defined as an arrangement that:

  • is provided on the same terms to all eligible employees (defined below) of an eligible employer (defined below);
  • is funded solely by the eligible employer and no salary reduction contributions may be made under the arrangement;
  • provides, after an employee provides proof of minimum essential coverage, for the payment or reimbursement of medical expenses of the employee and family members; and
  • the amount of payments and reimbursements under the arrangement for a year cannot exceed specified dollar limits (for 2017, the dollar limits are $4,950 and $10,000 in the case of expenses of an employee and family members).

The maximum dollar amount of payments or reimbursements that may be made under a QSEHRA, with respect to an eligible employee for a year, is the employee’s “permitted benefit.” An arrangement does not fail to be provided on the same terms to all eligible employees merely because employees’ permitted benefits vary with the price of a health insurance policy in the individual insurance market, based on the ages of the employee and family members, or the number of family members covered by the arrangement, provided that the variation is determined by reference to the same insurance policy for all eligible employees.

Eligible employee

An “eligible employee” means any employee of an eligible employer, except that the terms of the QSEHRA may exclude:

  • employees who have not completed 90 days of service with the employer;
  • employees under age 25;
  • part-time or seasonal employees; or
  • nonresident aliens with no earned income from sources within the United States.

Eligible employer

“Eligible employer” means an employer that:

  • is not an applicable large employer, as defined for purposes of the requirement that an applicable large employer offer its employees minimum essential coverage (that is, generally, an employer with fewer than 50 full-time equivalent employees during the preceding year), and
  • does not offer a group health plan to any of its employees.

Churches could still be penalized

The relief from the $100 per day per employee excise tax will not benefit all churches. A church may still be subject to the penalty if, for example, an employer pays or reimburses premiums for health insurance for the employee and family members purchased in the individual insurance market (referred to as an employer payment plan or EPP), or an employer reimburses the employee for medical expenses generally of the employee and family members (referred to as a health reimbursement arrangement or HRA), and:

  • it is an applicable large employer with an average of 50 full-time employees, and “full-time equivalents” (FTEs) during the previous calendar year;
  • it offers a group health plan to any of its employees;
  • it contributes more than $4,950 ($10,000 for a family) to an EPP or HRA (defined above); or
  • the arrangement fails to satisfy one or more of the other requirements for a QSEHRA summarized above.

Notice and reporting requirements

Within 90 days of the beginning of a year in which an employer will fund a QSEHRA (or, if later, the date on which an employee becomes eligible for the QSEHRA), the employer must provide eligible employees with a written notice containing the amount of the employee’s permitted benefit and certain other information. An employer that fails to provide the notice may be subject to a tax penalty of $50 per employee, subject to a maximum of $2,500 for the year.

In addition, the employer must report an employee’s permitted benefit for a year on the employee’s W-2 for the year. An eligible employee who applies for advance premium assistance with respect to Exchange coverage for a year must provide the Exchange with the amount of his or her permitted benefit for the year.

Effective date

The new law’s provision of relief from the $100 per employee per day penalty for noncompliant group plans is effective retroactively.

Richard R. Hammar is an attorney, CPA and author specializing in legal and tax issues for churches and clergy.

This content is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. "From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations." Due to the nature of the U.S. legal system, laws and regulations constantly change. The editors encourage readers to carefully search the site for all content related to the topic of interest and consult qualified local counsel to verify the status of specific statutes, laws, regulations, and precedential court holdings.

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