Qualified Small Employer Health Reimbursement Arrangements

1. Qualified Small Employer Health Reimbursement Arrangements New in 2020: ICHRA and EBHRA Plus…updates on Association Health Plans

2. You may download this presentation right now – search in the “Training Center”

3. You may download this presentation right now – search in the “Training Center”

4. Agenda • The 21st Century Cures Act Introduces QSEHRAs • Benefits of a QSEHRA • Eligible QSEHRA Expenses • QSEHRA Administration • New HRAs in 2020: ICHRA and EBHRA • Case Examples • Association Health Plan Updates

5. The 21st Century Cures Act(“The Act”) • United States law enacted by the 114th United States Congress in December 2016 • The last law President Obama signed was The 21stCentury Cures Act • The Act authorized $6.3 billion in funding • The mental health component was the most significant attempt at mental health reform in the last decade

6. The 21st Century Cures Act • Among other things, the Act: • Increases the availability of psychiatric hospital beds • Establishes a new assistant secretary for mental health and substance use disorders in the Department of Health and Human Services (HHS) • Boosts treatment for mental health patients • Resources to fight the “opioid epidemic” • Quicker FDA approval of new drugs/devices • Additional funding for cancer research

7. “The Act” Introduces QSEHRAs • “The Act” also allows small employers (fewer than 50 FTEs) to offer QSEHRAs to their workforce to help cover the cost of: • Unreimbursed medical expenses and • Certain insurance premiums • Previously, the Affordable Care Act (ACA) prohibited businesses from offering HRAs for reimbursing individual major medical insurance premiums

8. What are the benefits of a QSEHRA?

9. Benefits of a QSEHRA – for Employers • Simplifies the Employee benefits administration • Helps Employers control their benefits budget • Creates good will towards the Employees with flexible benefit options designed to meet their household needs

10. Benefits of a QSEHRA – for Employees • Empowers Employees and their dependents with customized benefits: • Potential for a better doctor network match • Potential for a better formulary match • May add supplemental plans like dental or Critical Illness • Offers a tax favored method to: • purchase certain insurance products • get reimbursed for Section 213(d) expenses

11. What are the health plan requirements for employees? • Employees must purchase a health plan that has minimum essential coverage (MEC), as stated by the ACA  • Learn more about minimum essential coverage (see next slide) • If an individual purchases health coverage without MEC, then they may be taxed and reimbursements from the QSEHRA may be included in their gross income

12. MEC Coverage Required • Employers may pay or reimburse expenses only after employee provides proof of “other coverage” • Employee’s “other coverage” must be at least Minimum Essential Coverage (MEC) • ACA Individual Qualified Health Plan • (with and/or without APTCs) • Another employer’s group health plan • Medicare, Medicaid, CHIP or TRICARE

14. What eligible expenses may be reimbursed from a QSEHRA?

15. Eligible QSEHRA Expenses • Insurance related products • Qualified Health Plans (QHPs) • On-Exchange • Off-Exchange • Other • Dental, Vision and Hearing plans • Supplemental health plans • Documented, unreimbursed Section 213(d) expenses(examples on next slide)

16. Eligible QSEHRA Expenses: Section 213 (d) Eligible: Not Eligible: Controlled substances Cosmetic surgery Nutritional Supplements Expenses already reimbursed through another mechanism: FSA reimbursements HSA reimbursements • Doctor Visits • Prescriptions • Dental treatment • Durable medical equipment • Diagnostics • Contact Lenses & Glasses • Chiropractor • Hearing Aids • Therapy For a full list of 213(d) expenses, see https://www.irs.gov/pub/irs-pdf/p502.pdf

17. Tax Considerations: No “double dipping” • Section 105 • Health Savings Accounts • Health Reimbursement Arrangements • Medical Expense Reimbursement Plans (MERPs) • Advanced Premium Tax Credits, or “Subsidies” • Are offset dollar for dollar with QSEHRA contributions

18. QSEHRA Administration

19. QSEHRA Administration Set up process • Employer • Design QSEHRA legal document • Communicate plan information to employees (including required notice) • Provide process for employees to enroll in plan and submit expenses • Employee • Provide proof of coverage and “opt-in” to participate Reimbursement • Present eligible expenses to be reimbursed by the QSEHRA • Reimbursing the Employee’s paycheck

20. Is a QSEHRA subject to COBRA or ERISA rules? • A QSEHRA is not a group insurance coverage • Employers are not required to offer COBRA coverage • not subject to certain ERISA mandates • Therefore, eligible employees may use a QSEHRA to purchase coverage through the individual market Note: this may be an attractive feature to Employers looking to simplify their benefits administration!

21. New HRAs have been proposed for 2020 Introducing ICHRAs and EBHRAs

26. What clients would be a good fit for QSEHRA or ICHRA? Benefit from QSEHRA Other Options Traditional Group Plan Require large, expensive PPO Doctor Networks PPOs plans may not be available on the individual market, but vary based on the office location Continue “Increasing Salaries” or no benefits Employees may qualify for large tax credits Employer would be paying money through QSEHRA that employees could get through federal tax credits Under 50 employees (5-20 sweet-spot) 1st Time to Offer Benefits: Not currently offering benefits but want to provide something Recently cancelled their group plan Too expensive Couldn’t meet minimum participation rates Mix of full-time and part-time employees Employees vary in age, health needs, and family status and would benefit from multiple plan options

27. Example: Why using a QSEHRA is better than offering benefits by “increasing salaries” Scenario Tax Analysis • Client with 10 employees is providing a “health stipend” by increasing salaries • This is a common practice for small firms • Many business owners are not aware of the new QSEHRA opportunity • Example: • 10 employees • Average “stipend” = $300/mo • Total Reimbursement = $3,000/mo Client and Employees would save $1,150/moin taxes

28. Example: How QSEHRA compares to a Group Plan Typical Dental Office Two Health Insurance Options 1 Dentist & Staff: 2 Dentist Partners 4 Hygienists (2 part-time) 4 Chair-side Assistants (2 part-time) 4 Office Staff Benefit Needs: Not currently offering benefits, and very price sensitive Benefits key for hiring and retention Some staff would prefer to stay on their spouse’s plan Staff is relatively healthy, but have preferred primary care doctors on different networks Different Rx needs per Employee Group Plan • Pay for 50% of a plan like Blue Cross Silver HMO+ • Employee Only = $575/mo • Employee + Family = $1,450/mo • Would need at least 75% of employees to participate • Total employer cost $3K-4K/mo QSEHRA • Set reimbursement rates (optional). Example: • Employees optimize their health coverage based on their needs • Total employer cost around $2.5K/mo 2

29. Case Examples

30. Case Example: Sole Proprietor Example Tax Analysis • John Smith is a sole proprietor • d.b.a “John Smith Landscaping” • John has 4 full-time employees and desires to setup an HRA to reimburse for healthcare expenses • Got a quote for a group plan, but was too expensive Notes: • All Employee HRA disbursements are tax-deductible to the entity • Owners are not eligible for tax-free reimbursement • Owners may deduct the cost of health insurance premiums for employees against income Make sure to consult the client’s CPA! Key: Full Tax-Benefit Tracking Only

31. Case Example: LLC taxed as a C-corp Example Tax Analysis • HighTech Designs, Inc. is a technology design company • Previously had a group plan, but struggled with participation rates and constant premium increases • The executive team (owners) decides to setup an HRA to reimburse for healthcare expenses for the 20 full-time employee company Notes: • All Employee [and Owner] HRA disbursements are tax-deductible to the entity • Employees receive the reimbursement as a pre-tax benefit on their monthly paycheck Make sure to consult the client’s CPA! Key: Full Tax-Benefit Tracking Only

32. Case Example: LLC taxed as a Partnership Example Tax Analysis • Edison Electrical, LLC provides commercial electrician services • Have never offered benefits before • The partners decide to setup an HRA to reimburse their 5 full-time employees and 2 part-time employees for healthcare expenses Notes: • All Employee HRA disbursements are tax-deductible to the entity • Employees receive the reimbursement as a pre-tax benefit on their monthly paycheck • Partners are not eligible for tax-free reimbursement • The company may deduct the cost of the partners health insurance premiums against business income for tax purposes but must include this as income on their W-2 or K-1 Make sure to consult the client’s CPA! Key: Full Tax-Benefit Tracking Only

33. QSEHRA with “Affordable” and “Unaffordable” Coverage

34. Example: QSEHRA and Affordable Coverage 35 YEAR OLD EMPLOYEE • Spouse who is same age with two children who are 20 years old or younger • Household Income: $60,000 • 9.86% x $60,000 = $5,916 or $493 per month Second Lowest Silver Plan for Self-Only $251.09 1/12 of QSEHRA benefit ($5,150 divided by 12 months) = $429.17 Net Cost of EE Only Coverage: $0 Additional available for cost-sharing $178.08 EMPLOYER COVERAGE due to QSEHRA is affordable ($0 < $493.00) Employee will lose premium tax credit subsidy (plus any cost-sharing subsidies they are receiving)

35. Example: QSEHRA and Unaffordable Coverage 55 YEAR OLD EMPLOYEE • Spouse, same age, two children who are 20 years old or younger • Household Income: $40,000 • 9.86% of EE’s monthly household income = $3,944 or $328.67 per month Second Lowest Silver Plan for Self-Only $835.55 1/12 of QSEHRA benefit ($5,150/12) $429.17 Net Cost of EE Only Coverage: $406.38 EMPLOYER COVERAGE due to QSEHRA is unaffordable ($414.72 > $328.67)

36. Frequently Asked Questions About QSEHRAs

37. Which employers can offer QSEHRAs? Small employers • with fewer than 50 full-time equivalent (FTE) employees AND • who do not offer a group health plan to any of their employees can offer QSEHRAs to their staff Remember: An FTE employee is one who works 130 hours per month, or 30 or more hours per week for 120 consecutive days

38. What benefits does a QSEHRA cover? • QSEHRA can cover the cost of any documented healthcare expense • As defined in Section 213(d) of the Internal Revenue Code • Employees can use their QSEHRA to help pay for individual health insurance premiums Remember: Keep in mind is that all covered costs, including medical expenses and insurance premiums, must be documented

39. Who can contribute to the QSEHRA? • Like a regular HRA, a QSEHRA is funded solely (100%) by the employer • Therefore, employees cannot contribute and the employer’s contributions are not deducted from the employees’ pay

40. Are there contribution limits? Yes: • For single employees, the employer may contribute a maximum of $5,150 in 2019 • IRS Notice 2017-67 announced 2019 limit • For employees with family expenses, the employer may contribute a maximum of $10,450 in 2019

41. Which employees are eligible for a QSEHRA? • Full-time employees who work 130 hours per month, or 30 or more hours per week for 120 consecutive days Remember: Generally, all employees must be offered coverage under the same terms with some exceptions

42. Can employees be excluded? Yes, some employees may be excluded. Employers may exclude the following from receiving a QSEHRA: • Seasonal employees • Part-time employees • Workers who are covered by a collective bargaining agreement in which accident and health benefits were the subject of good faith negotiations • Employees with less than 90 service days • Employees who are under age 25 • Certain non-resident aliens

43. Are individuals who purchase subsidized health insurance affected by QSEHRA? • Yes…for employees who obtain health insurance through a public exchange and qualify for subsidized coverage, they must report the amount in the QSEHRA to the exchange • Their federal subsidy amount will be reduced by the amount in the QSEHRA benefit For example: if John Doe qualifies for a $2,000 annual subsidy, and he receives $1,500 in the QSEHRA, then Mr. Doe’s subsidy is reduced by $1,500

44. Are there administrative requirements for QSEHRA? • Yes. Employers must provide a written notice to their workforce 90 days before the start of the plan year with the following information: • Informing employees to notify the exchange of the QSEHRA if they apply for a subsidy • Consequences of not getting MEC, which may result in taxes and the inclusion of reimbursements in their gross income • Amount in the QSEHRA benefit Note: New QSEHRAs can be started throughout the year as long as notice is provided to employees.

45. Are there any other administrative requirements for QSEHRA? • Yes…Employers must also include the amount of available QSEHRA benefits on their employees’ W-2s at the end of the year Remember: In order to get reimbursed for medical or insurance expenses, employees must provide ‘proof of coverage’ to their employer

46. Association Health Plans A look at the final rule…or is it the final rule?

47. Association Health Plans • The purpose of AHPs is to make it easier for Employers to form a group in order to provide health benefits to their Employees • The new AHPs would have more freedom to restrict benefits in order to provide more affordable coverage • The extent to which AHPs will be able to restrict benefits remains to be seen due to the ability of states to regulate AHPs

48. Association Health Plans Groups may be formed either by: • Being in the same trade, industry, line of business, or profession, regardless of state boundaries • Having a principal place of business within the same state or the same metropolitan area Note: Allowing employer groups to form based solely on geography is an entirely new concept

49. AHPs • An AHP is considered a multiple employer welfare arrangement (MEWA) under ERISA • AHPs must comply with COBRA continuation requirements when applicable • The DOL declined to opine on the applicability of other federal laws such as: • Employer shared responsibility payments under the ACA • Premium tax credit eligibility rules under the ACA • Network adequacy standards • Medicare Secondary Payer rules