Federal legislation enacted just before former President Barack Obama left office offers small employers a new option to consider for employee health benefits.
Language in the 21st Century Cures Act allows employers that meet the federal definition for a small business to give employees a contribution through a health reimbursement arrangement that they can use to buy their own health coverage.
Small employers can reimburse employees up to $10,000 annually for a family policy and $4,500 for an individual policy.
Rules for the Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) took effect Dec. 31. Employees can use the funds from their employers to pay their out-of-pocket health care costs, including health insurance premiums.
That kind of arrangement was previously prohibited under rules adopted to implement the Affordable Care Act when the IRS and Department of Health and Human Services in 2013 ruled that HRAs were a form of group coverage. An employer that gave employees money to buy individual coverage risked getting hit with a fine of up to $36,500 per employee if they got caught.
Under the new law, small employers now may use the QSEHRA if they do not otherwise offer group health benefits to their workers.
“That really changes the world for that smaller employer who previously was not only prevented from offering a tax-advantage deal — basically a financial stipend to employees — but also if they did so and got caught, there was a huge penalty,” said Jim Kenyon, a client executive for employee benefits at the Grand Rapids office of Hylant. “Now they can legitimately offer a financial incentive for people to go buy their own.”
That’s the scenario at least for small employers who can afford to help employees buy health coverage, which in West Michigan last year cost an average of $475 per month for a one-person plan and $1,342 for a family plan, according to the 2016 survey of health care costs by The Employer’s Association in Grand Rapids.
Most employers in West Michigan who can afford it already offer health benefits to employees, Kenyon said.
Where QSEHRA is most likely to come into play is for small employers who have never been able to offer group benefits or are considering dropping group health coverage because of the rising cost and administrative burden, he said. QSEHRA opens a new option for some small employers to contribute something to an employee’s health coverage based on what they can afford, Kenyon said.
Employees would receive the contribution tax free, and the amount would be tax deductible for the employer as a business expense.
“Here’s a chance for somebody to say, ‘Well, I’m going to help you,’ which previously they couldn’t do at all,” Kenyon said. “It goes toward that individual who wants to do something but can’t go all in and offer a (group) benefit program.”
However, Kenyon doubts many small employers now offering group health benefits would actually drop coverage in favor of QSEHRA “unless the financial situation really left them no choice.” That’s especially true given the present labor market and competition for talent, he said.
“For people to discontinue a plan that’s been in place for a while, I’m not sure that’s typical of the environment that we work in here,” Kenyon said.
Because of the need to compete for talent, QSEHRA is “not a silver bullet, but another arrow in the quiver” for small employers to consider using, said Shannon Enders, a partner at Lakeshore Employee Benefits in Norton Shores.
Prior to the Affordable Care Act, Enders occasionally saw small employers provide a stipend to employees to buy coverage.
Enders views QSEHRA as becoming “kind of a niche” option for small employers, although “any option that is an additional option to manage costs and give employees choice is good.”
“It certainly fit a need for some employers (pre-ACA) and I think there’s definitely going to be some interest in this,” Enders said. “What I’m hoping is that these small employers that are offering nothing will start offering something.”