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3 things every doctor should know about the new health reimbursement arrangements

Aug. 8, 2017
Here are three things every doctor should know about Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) before implementing them in their practices.

Congress recently created the ability for employers to use Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) to pay or reimburse employees for their out-of-pocket medical expenses, including health insurance premiums. Here are three things every doctor should know about QSEHRAs before implementing them in their practices.

1. You can use a QSEHRA to pay for staff health insurance

In 2013 the IRS ruled that stand-alone medical expense reimbursement plans (MERPs) were considered group health plans and thus subject to Affordable Care Act (ACA) provisions. The IRS further ruled that doctors offering only a stand-alone MERP, without providing staff health insurance coverage, were subject to draconian penalties of $100 per employee per day, or $36,500 per employee per year. This included any reimbursements for health insurance premiums. This torpedoed medical expense reimbursement plans for practices, to the detriment of both doctors and staff.

Under the new law, eligible small practices (fewer than 50 full-time equivalent employees) can now offer QSEHRAs to pay or reimburse employees for their out-of-pocket medical expenses, including health insurance premiums. The draconian ACA penalties do not apply to QSEHRAs since they are not considered to be a group health plan.

2. A QSEHRA can be a big benefit to staff

For plan participants, annual reimbursements are limited to no more than $4,950 annually for individuals and $10,000 for plans that cover the employee’s family members. However, benefits must be offered on the same terms to all eligible employees, except for variations based on the health insurance policy premiums due to age and number of family members covered. This is a serious benefit to those who previously could not meet living expenses due to the high cost of health insurance. These benefits are delivered without payroll taxes, which results in big savings for the doctor and employee.

Not only can the benefits be substantial, doctors can elect to either allow employees to carry over part or all of their unused health reimbursement account (HRA) balances at the end of the year, or require that any unused amounts be forfeited at year-end. This election must be made in a written plan document and adopted by the practice. This means that doctors can help staff members protect themselves from rising deductibles in the health-care market by providing rollover benefits that can be used to meet deductibles if an employee has a catastrophic injury or illness.

3. It requires some planning to use

At least 90 days before each plan year (October 1 for calendar-year taxpayers), practices offering an HRA must provide written notice to their employees. This notice must include a statement of the amount of an employee’s benefit for the upcoming year, and state that the employee must provide information about the amount of any health insurance exchange premium assistance tax credit he or she is receiving. Finally, the notice must state that if the employee is not maintaining health insurance coverage that he or she will be subject to the ACA individual mandate penalty tax, and any HRA reimbursements will be included in gross income.

Practices that fail to provide the required written notice are subject to penalties of $50 per employee, with a maximum penalty of $2,500 annually. Finally, employers will be required to report the value of HRA benefits on the employee’s W-2 Form, beginning with W-2s issued in 2018 for the 2017 calendar year.

Andrew Tucker, JD, CPA, CFP, and John K. McGill, JD, MBA, CPA, provide tax and business planning for the dental profession and publish the McGill Advisory newsletter through John K. McGill & Company Inc., a member of the McGill & Hill Group LLC. This is dentists’ one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com.

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