Small businesses that had been offering health reimbursement arrangements to their employees, under which the business reimburses the employee for individually obtained health insurance coverage, and were forced to stop under threat of penalties imposed under the Affordable Care Act, may now return to health reimbursement arrangements if some additional requirements are met.

In addition, small businesses that were living under a rock and never altered their health reimbursement arrangements in the face of penalties now have a penalty waiver, but may still have to alter their arrangements somewhat to meet some new requirements. These changes are a result of provisions in the 21st Century Cures Act signed by President Obama on Dec. 13, 2016.


Health reimbursement arrangements had been a fairly popular method for small businesses to offer health insurance benefits to their employees. In 2010, with the passage of the Affordable Care Act, many of these small businesses that were not applicable large employers with 50 or more employees (and therefore not subject to the penalties imposed on ALEs for failure to offer affordable coverage to employees) kept offering health reimbursement arrangements with the view that the ACA did not apply to them.

However, in 2013, the Internal Revenue Service determined that, although small businesses that were not ALEs were not required to offer health insurance, those that did offer health insurance were required to comply with the ACA, and health reimbursement arrangements did not meet the minimum benefits standards of the ACA, subjecting employers who offered them to penalties of $100 per employee per day. The IRS waived those penalties through June 2015, but those penalties started to apply after that date.

Some small employers may have simply dropped health reimbursement arrangements, perhaps raising pay somewhat but not having the amount paid to the employees tied specifically to health insurance costs. Other small employers adopted health insurance plans that complied with the ACA. Some, as mentioned above, may have continued with their old health reimbursement arrangements oblivious to the penalty threat.


With small-business pressure to address the penalty problem with offering health reimbursement arrangements, Congress acted in late 2016 with the 21st Century Cures Act. The legislation addresses many health care issues, but the tax-related one sought to restore the ability of small businesses to offer health reimbursement arrangements without being subject to penalties. The legislation specifies what requirements health reimbursement arrangements must meet to avoid penalties — by becoming a qualified small employer health reimbursement arrangement (QSEHRA). The legislation also provides for a continuation of the waiver of penalties on health reimbursement arrangements from July 1, 2015, for all plan years beginning on or before Dec. 31, 2016.

President Obama signs the 21st Century Cures Act
President Obama signs the 21st Century Cures Act Bloomberg News


The use of QSEHRAs became effective as of Jan. 1, 2017. However, for employers hoping to put a QSEHRA in place for the 2017 calendar year, an important deadline is fast approaching. Employers must provide an annual notice to each eligible employee at least 90 days before the beginning of the plan year or, if later, the employee’s initial eligibility date. For 2017, the notice must be provided on or before March 13, 2017. There are also a number of additional requirements for QSEHRA status:

  • Only employers that are not ALEs — i.e., have less than an average of 50 full-time or full-time equivalent employees for the prior year — are eligible to establish QSEHRAs.
  • The employer must not otherwise offer a group health plan.
  • The QSEHRA must be offered to all full-time employees who have completed at least 90 days of service and are at least 25 years of age. Certain exclusions are provided for employees who are nonresident aliens, part-time workers, seasonal workers, or those covered by a collective bargaining agreement.
  • The QSEHRA must be funded exclusively with employer contributions — no employee contributions through salary reduction or otherwise.
  • QSEHRA contributions are limited to $4,950 per year for single coverage and $10,000 per year for family coverage, with the possibility provided for the IRS to permit certain variations based on local insurance costs, age or family size.
  • The employer may only reimburse qualified medical expenses under Code Section 213(d), including health insurance premiums.
  • In order for the QSEHRA reimbursements not to be taxable to the employee, the employee must provide proof that the employee and any included family members have obtained minimum essential coverage from a health insurance exchange or other third-party provider.
  • The notice mentioned above that must be provided to employees must include the amount of the employee’s benefit, inform the employee that the benefit must be disclosed to any health insurance exchange if the employee is claiming advance premium tax credits, and warn the employee of possible tax penalties if the employee and any applicable family members do not have minimum essential coverage.


As of this writing, the IRS had not yet issued any guidance with respect to adopting a QSEHRA under the Cures Act; however, that guidance was expected in the near future and may have been released by the time this column is published.

Also, as of this writing, the new Congress has just convened, with one of its first priorities being the repeal and possible replacement of the Affordable Care Act. Such legislation, if enacted, could also have an impact on the requirements for health reimbursement arrangements going forward.

Also, keep in mind that if a small business desires to place a QSEHRA in effect for calendar year 2017, under the Cures Act it must provide the required notice to employees by March 13, 2017.

Many employers may have already put their health plan coverages in place for 2017 before the Cures Act was enacted. However, small employers who had continued to offer health reimbursement arrangements in spite of the threat of penalties will want to quickly conform to the new requirements, particularly the deadline for this notice requirement. It is possible that the IRS guidance, when promulgated, will extend this deadline somewhat, but that guidance had not yet been promulgated as of this writing.

The dollar limits for QSEHRAs are also somewhat low and may be below the amounts at which the business had been offering health reimbursement arrangements in the past.

Even with the new requirements, small employers should appreciate the restored option to offer QSEHRAs to their employees as an alternative to offering either nothing or offering a qualified employer-sponsored health insurance plan.

Tax advisors will want to make sure that their small-business clients are aware of these changes, as well as the impending deadline for calendar year 2017 adoption.

George G. Jones

George G. Jones, JD, LL.M, is managing editor at Wolters Kluwer US, Tax & Accounting.

Mark Luscombe

Mark Luscombe, JD, LLM, a CPA and attorney, is the principal federal tax analyst for the company and is a key member of the CCH Tax Legislation team tracking and analyzing legislation before Congress.