• Small employers can help employees with individual health insurance | Expert column
  • February 26, 2018 | Authors: Cher E. Wynkoop; Corina V. San-Marina
  • Law Firms: Willcox & Savage, P.C. - Norfolk Office; Willcox & Savage, P.C. - Norfolk Office
  • Now that the economy is strengthening and the job market is heating up, companies large and small are looking for employee perks.

    The most expensive and valued benefit is health insurance. Small employers now have a viable, tax-free option to help employees purchase health insurance or pay for medical expenses, while getting out of the business of offering group health insurance.

    On Oct. 31, 2017, the Internal Revenue Service issued guidance on how small employers can provide tax-free cash to their employees to help pay for medical expenses or health insurance premiums. To be eligible, the employer must not have more the 50 full-time employees in the prior calendar year (including full-time equivalent employees) and they must not offer a group health plan.

    The arrangement, called a qualified small employer health reimbursement arrangement may reimburse eligible employees for the cost of obtaining their own health insurance and certain other medical expenses. A health reimbursement arrangement is funded entirely by the employer up to $5,050 for an employee with self-only coverage and $10,250 for an employee with family coverage. These are 2018 limits.

    These health reimbursement arrangements may exclude employees who have not completed 90 days of service or those who are not age 25; part-time and seasonal employees, and employees covered by a collective bargaining agreement. Any amounts left in the arrangement at the end of the plan year can be forfeited or carried over to the next plan year, as determined by the employer.

    Eligible employees must be provided a written notice at least 90 days before the beginning of each year or by the date when they first become eligible (special transition rule for 2018). Failure to provide the notice will subject an employer to a $50 penalty per employee, up to a maximum of $2,500 per calendar year. The IRS provides specific information that must be included in the notice.

    An employer can reimburse participants only if they provide proof that they have coverage that provides minimum essential coverage, such as an individual health plan offered on the exchange. Also, participants must provide proof that the expenses incurred were eligible expenses. If an employer reimburses a participant for medical expenses that have not been substantiated or expenses that don’t qualify, all payments to all participants in the arrangement on or after the date the reimbursement is made, become taxable.

    To avoid this harsh consequence, participants are allowed to substantiate the medical expenses incurred or repay with after-tax dollars non-medical expenses within a certain period of time. Health reimbursements must be reported by the employer in box 12 of the W-2 form using code FF. If the arrangement allows for carryover amounts to the next year, the carryover amounts are not included in the amount reported for the current year.

    Failure of the arrangement to meet all the requirements will trigger an excise tax of $100 per affected person per day. An arrangement fails to qualify if it is not provided by an eligible employer, it is not provided on the same terms to all eligible employees, it reimburses medical expenses without proof of minimum essential coverage or if it provides benefits in excess of the statutory limits.

    Employers interested in offering a health reimbursement arrangement must memorialize the terms of the arrangement in a written plan document and a summary plan description to be provided to eligible employees. Given the harsh tax consequences employers should consult with legal counsel to ensure that the written plan document meets all the legal requirements.