Health reimbursement arrangements for small employers.

• Author: Sanchez, James

The IRS recently issued Notice 2017-67 to provide guidance on "qualified small employer health reimbursement arrangements" (qualified small employer HRAs) under Sec. 9831(d). Qualified small employer HRAs enable an eligible employer to reimburse employees for medical expenses, such as health insurance premiums, as defined under Sec. 213(d). Qualified small employer HRAs are solely employer-funded; employees cannot contribute to them. Payments from a qualified small employer HRA to an employee are not includible in the employee's income, as long as the employee has obtained qualifying health insurance. An employer can establish a qualified small employer HRA for tax years beginning after Dec. 31, 2016. The guidance within Notice 2017-67 is effective for arrangement plan years beginning on or after Nov. 20, 2017.

Qualified small employer HRAs are an exception to the otherwise applicable requirement of the Patient Protection and Affordable Care Act of 2010 (PPACA), PL. 111-148, that an HRA may not be maintained by an employer that does not also maintain a group health plan for its employees. Violations can result in the imposition of an excise tax under Sec. 4980D of S100 per day (136,500 per year) per employee. The qualified small employer HRA legislation came about to provide relief from these penalties, but as discussed below, this relief is only for small employers. It should be noted, however, that under Notice 2015-17, an HRA maintained by an S corporation for its 2% shareholder-employees does not subject the S corporation employer to the Sec. 4980D tax until the IRS issues further guidance.

To be eligible to provide a qualified small employer HRA, an employer must not be an "applicable large employer" (ALE), defined by Sec. 4980H(c)(2) as an employer "who employed an average of at least 50 full-time employees on business days during the preceding calendar year." A full-time employee is defined as an employee who works on average 30 or more hours per week. Sec. 4980H(c)(2)(E) requires full-time-equivalent (FTE) employees also to be taken into account in determining whether an employer is an ALE.

The number of FTE employees is determined for each calendar month by dividing the total number of hours worked during the month by non-full-time employees by 120. Regs. Sec. 54.4980H-2(b) provides that the average number of full-time employees for the preceding calendar year is the sum of full-time and FTE employees for each calendar month in the...