What every TAHU Member should know about This C.E. course is provided to you by the Texas Association of Health Underwriters P. O. Box 266682 Houston, TX 77207 713-645-1490 Course # 110029 Provider # 32408 What every TAHU Member should know about QSEHRAs February, 2018 You must attend at least 90% of this presentation, complete all required forms and include your license number in order to receive continuing education credit. All comments regarding this CE may be sent to the address above or by email to admin@tahu.org

Jessica J. Watts VP, Compliance Frost Insurance Presented by: Jessica J. Watts VP, Compliance Frost Insurance

Health Reimbursement Arrangements Mid-1990’s : Employer funding of individual insurance plans prohibited. TIC Secs. 1501.003(2) and 1501.004(2) 2006: TDI Bulletin #B-0028-06 explained prohibitions 2011: TIC Sec. 1221 added to permit this funding practice for certain policies and if it complied with state and federal laws 2013: IRS Notice 2013-54 prohibits employers from reimbursing individual policy premiums for employees. 2015: IRS Notice 2015-17 provides transition relief, but only for non-ALEs and only through June 30, 2015. 2016: Congress passes the 21st Century Cures Act with Sec. 18001 creating an exemption to federal law and permitting this funding practice by employers. Texas Insurance Code Federal Law

Health Reimbursement Arrangements With numerous pieces of conflicting guidance, there have been two general acceptable approaches with HRAs. Integrated HRA Standalone HRA

Integrated vs. Standalone Integrated HRA Standalone HRA Must be “integrated” with a group health plan Used to reimburse deductibles, co- insurance or co-payments Generally prohibits payment of individual premiums through standalone HRA Exceptions for spousal coverage, retiree-only and Medicare enrollees

Standalone HRAs Medicare HRA Retiree HRA Spousal HRA Employee must be covered on spouse’s group health plan. Employer can reimburse co- pays, deductibles, co- insurance of being covered on spouse’s plan, but not premiums. Former employees eligible based on employer’s definition of retiree Employer can reimburse all or a portion of the individual health insurance premiums or Medicare related costs Benefit is tax-free to retiree Employer had 1-19 employees for 50% or more business days of preceding calendar year Employer can reimburse all or a portion of the cost of Medicare related coverage (Part B, PDP, Supp premiums) Benefit is tax-free to employee

New Standalone HRA QSE HRA With the passage of the 21st Century Cures Act in December, 2016, a new type of Standalone HRA is permitted: Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) QSE HRA This new type of arrangements permits certain employers to offer their employees a special type of stand-alone HRA to help pay for medical care expenses on a pre-tax basis- including the purchase of individual policies and major medical coverage. It avoids the ACA’s prohibition on “employer payment plans” which were prohibited under IRS Notice 2013-54 and prohibit employer reimbursement of individual insurance premiums.

Qualified Small Employer 1. Not an Applicable Large Employer (ALE) Must average fewer than 50 full-time equivalent employees during prior calendar year Remember that ALE determination includes other employers based on controlled group rules. For any employer in the group to offer a QSEHRA, the group as a whole must have had fewer than 50 full-time equivalent employees in prior calendar year. State definitions of small employer do affect the calculation 2. Does not offer group health to any employee If currently offering health insurance, must terminate plan prior to offering benefits under QSEHRA QSE HRA Open Issue: Do the controlled group rules apply, such that if any employer in the controlled group offers a GHP, all employers in the group are ineligible? Open Issue: What is a “group health plan” for this purpose? Does it include an excepted benefit, such as a dental plan? There has been no clarification to date from the IRS.

Eligible Employee QSE HRA QSEHRA must be offered to all nonexcludable “employees” May exclude employees who: Have less than 90 days of service Are under age 25 Part-time or seasonal workers (not defined) Covered under collective bargaining agreement Non-resident aliens with no U.S. earned income Uniform reimbursement Variations in the amount of the Permitted Benefit are permitted based on age and number of family members. This is determined based on the premiums of certain insurance policies in the relevant individual health insurance market. QSE HRA Open Issue: Cures Act does NOT define “employee” or “family member.” Best practice is to use common-law employee definition until further guidance.

Benefits QSEHRA pays or reimburses for any 213(d) qualified medical expense Includes paying premium for individual coverage Employer can set maximum benefit amount up to annual limits Annual maximum benefit of $4,950 for self-only or $10,050* for family Limits will increase based on changes to Consumer Price Index Amount could vary based on employee age Maximum benefit is prorated based on months that employee eligible during calendar year (similar to HSA, not FSA) Permitted to limit benefit to employee only Employer must fund 100% of the QSEHRA’s benefits No employee contributions allowed (either pre- or post-tax) *indexed limit for 2017. QSE HRA Open Issue: The fact that Cures did not define “family member” could be problematic for determining if reimbursement is tax-free. For example, there is an employer who decides to reimburse expenses for dependents who are full-time students up to age 29, or a domestic partner. These individuals are not covered under the IRS definition of tax dependent for health coverage purposes, therefore reimbursement must be taxable and employer needs to impute income. Open Issue: May an employer further limit which family members whose qualifying medical expenses may be reimbursed?

Benefits QSE HRA Examples of Ineligible Expenses: Already reimbursed from a different source Premiums paid by the employee on a pre-tax basis for coverage under a group health plan of another employer (such as through a spouse). May an employer design its program to further restrict eligible expenses, for example, premiums only, or all 213(d) expenses except premiums? Substantiating claims will likely mean most employers need to engage a TPA Employer must fund 100% of the QSEHRA’s benefits No employee contributions allowed QSE HRA Open Issue: The fact that Cures did not define “family member” could be problematic for determining if reimbursement is tax-free. For example, there is an employer who decides to reimburse expenses for dependents who are full-time students up to age 29, or a domestic partner. These individuals are not covered under the IRS definition of tax dependent for health coverage purposes, therefore reimbursement must be taxable and employer needs to impute income. Open Issue: May an employer further limit which family members whose qualifying medical expenses may be reimbursed?

MEC Coverage Required QSE HRA Employers may pay or reimburse expenses only after employee provides proof of “other coverage” Employee’s “other coverage” must be Minimum Essential Coverage (MEC) Excepted benefits are not MEC (standalone dental or vision) Under Code Section 5000A, MEC includes individual market coverage (whether purchased through the Marketplace or not), another employer’s group health plan, Medicare, Medicaid, CHIP or TRICARE What proof is acceptable? Self-certification, copy of insurance policy, other? QSE HRA

Employer Plan Document Although excepted from IRS Code, ERISA and PHSA Provisions, QSEHRAs were not excepted from compliance with requirements under the IRS Code, ERISA or PHSA that do not depend on GHP status such as: ERISA Title I general compliance requirements (plan document, SPD and 5500 reporting requirements) The ACA’s Cadillac Tax Requirements under other federal laws, such as HIPAA’s privacy and security rules Audience Participation: What changes need to be made to an existing HRA document to create a QSEHRA plan document? Open Issue: The HIPAA Exception for a plan with fewer than 50 participants applies only if the plan is self-administered. For a majority of these plans, a TPA will administer and thus, it appears this exception will NOT apply. Audience Participation Possible Answers: Take all references to COBRA out of document, Remove annual accrual information, replace with monthly accrual. HRA’s inherently have a carryover feature, so does this inadvertently violate annual maximum or nondiscrimination issues? QSE HRA

Employer Reporting QSE HRA Report benefit amount on employee’s Form W-2 Separate reporting requirement than ACA’s Box 12, Code “DD” Form W-2 reporting requirement. Amount reported is the “Permitted Benefit”- i.e. maximum amount QSEHRA can distribute for the year. Does not impact employee’s taxable income, but will likely be used to coordinate entitlement to premium tax credits/cost- sharing subsidies. QSE HRA

Employer Notice QSE HRA Annual notice to all eligible employees Outlines who is eligible and QSEHRA permitted benefit. Inform employee to notify Marketplace of QSEHRA benefit if applying for premium tax credit. Remind employee of requirement to maintain MEC or else, individual mandate penalty could apply. Remind employee that QSEHRA payments can be taxable if MEC is not maintained. Deadline: 90 days prior to beginning of year* and no later than first day of eligibility for new hires. Limited Penalties for Failure to Provide Notice $50 per employee $2,500 calendar year maximum *Pending guidance (See IRS Notice 2017-20), for years beginning in 2017, an initial notice is not yet required but employers may rely on reasonable good faith interpretation of the statute to determine notice content QSE HRA

Important Clarification Needed Is an employer required to pay for any 213(d) health care expense? Silent as to whether employer can limit reimbursements to: only certain types of expenses (e.g. deductible, premiums) or after some amount has been satisfied (e.g. paying $1,000 toward deductible expenses) No clear guidance on whether employer may limit Permitted Benefit Despite prorated benefit limit, can an employer set monthly maximum reimbursement (e.g. $300 of health insurance premium)? Employee must substantiate “proof of other coverage” Employer must maintain records to substantiate health care expenses reimbursed or paid to employee- but without running afoul of HIPAA PHI issues. QSE HRA Open Issue: “Other coverage” is not defined. Statutory language does not require the other coverage to be individual market coverage. Open Issue: Is MEC coverage required when someone has an exemption from Section 5000A such as participation in a Health Care Sharing Ministry or income is below 100% of FPL? Open Issue: What proof is required, what must an employer do to verify it? Employee’s self-certification, May an employer require other documentation, such as a copy of an insurance policy or certification from the coverage provider? Open Issue: Must dependents whose expenses may be reimbursed by the QSEHRA also have MEC?

Important Clarification Needed TDI Bulletin #B-0028-06 is still in place Carriers are restricted from accepting an application for individual policies if employer is providing a reimbursement Many other states currently prohibit or restrict funding of individual medical policies by employers (by imposing penalties on carriers and brokers/agents) Examples: Montana, Tennessee have similar language to Texas Texas Insurance Code

Important Clarification Needed On Aug. 11, 2017, Attorney General Ken Paxton acknowledged receipt of a request to clarify the state/federal preemption conflict from Sen. Charles Perry. Texas Insurance Code

Important Clarification Needed Will states enact Legislation to permit employer funding due to 21st Century Cures? Minnesota just did! SF 1/Chapter 2 (Benson / Hoppe)   Minnesota Statutes, 62L.12, subdivision 2(m)- Exceptions: (m) A health carrier may offer, sell, issue, or renew an individual health plan to one or more employees of a small employer if the small employer, eligible employee, and individual health plan are in compliance with the 21st Century Cures Act, Public Law 114-255, section 18001. https://www.revisor.mn.gov/laws/?id=2&year=2017&type=0#laws.2.12.0 21st Century Cures Act - The bill also includes a provision that allows carriers to sell, issue or renew an individual health plan to one or more employees of a small employer if the small employer, eligible employee, and individual health plan are in compliance with the 21st Century Cures Act. This provision became effective when it was signed into law. Minnesota Insurance Code

Regulatory Relief QSE HRA No COBRA continuation requirement Employer does not have to allow a previously eligible employee to continue to receive QSEHRA benefit QSEHRA is not subject to certain ERISA mandates No exemption from Title I (plan document, SPD and reporting) Other mandates may still apply (e.g. HIPAA Privacy & Security) QSE HRA

Types of Standalone HRAs QSEHRA Spousal HRA Retiree HRA Medicare HRA Active Employees? Yes No Employer Size Non-ALE All 1-19 EEs Offer Group Health Plan Prohibited Required Impact on Premium Subsidies Complicated APTC Prohibited n/a Reimburse health premiums Yes and other 213(d) expenses Only cost of coverage on spouse’s plan Medicare only Flexibility to limit amount or benefits Unclear

QSEHRA vs. Premium Tax Subsidies Is Employer Coverage Affordable? Three “safe harbors” today to answer this question New law creates a special way to assess affordability when there is a QSEHRA in place: EMPLOYEE COST QSEHRA is “affordable” for a month if the excess of the Second Lowest Silver Plan for Self-Only coverage minus 1/12 of QSEHRA benefit is not greater than 1/12 of 9.69%* of EE’s household income *Affordability percentage for 2017

QSEHRA Impact 55 YEAR OLD EMPLOYEE Spouse who is same age with two children who are 20 years old or younger Household Income: $40,000 Living in Clay County, TX Second Lowest Silver Plan for Self-Only $835.55 1/12 of QSEHRA benefit ($4,950/12) $412.50 Net Cost of EE Only Coverage: $423.05 9.69% of EE’s household income (monthly amount) $323.00 EMPLOYER COVERAGE due to QSEHRA is unaffordable ($423.05 > $323.00) Since QSEHRA does not meet affordability standard, the employee would be eligible for a premium tax credit. However, the monthly premium tax credit is reduced by 1/12 of the employee’s permitted benefit under the QSEHRA. In this case, by $412.50 per month.

QSEHRA Impact 35 YEAR OLD EMPLOYEE Spouse who is same age with two children who are 20 years old or younger Household Income: $60,000 Living in Collin County, TX Second Lowest Silver Plan for Self-Only $251.09 1/12 of QSEHRA benefit ($4,950/12) $412.50 Net Cost of EE Only Coverage: $0 plus $161.41 additional available for cost-sharing 9.69% of EE’s household income (monthly amount) $484.50 EMPLOYER COVERAGE due to QSEHRA is affordable ($0 < $484.50) Employee will lose premium tax credit subsidy (plus any cost-sharing subsidies they are receiving) We are generally seeing that QSEHRA plans are best suited for small employers with only highly paid employees, because generally the design will end up leaving lesser paid employees ineligible for premium tax credits and cost-sharing subsidies.

Consequences of Noncompliance Failure to satisfy QSEHRA requirements means… the design is not a QSEHRA. ACA’s PHSA Mandates likely apply Employer excise tax of $100 per day, per employee ($36,500 annually) could be assessed Common failures Employer has 50 or more full-time equivalent employees (is actually an Applicable Large Employer) Offers other group health plan coverage (such as a plan to managers) Fails to require proof of “other coverage” Fails to comply with nondiscrimination requirements

Questions?

This program provided by: Texas Association of Health Underwriters This course is approved for 1.0 Hour of General CE Course # 110029 Provider # 32408 P. O. Box 266682 Houston, Texas 77207 713-645-1490 If you feel this course was not conducted in accordance with the continuing education requirements determined by the Texas Department of Insurance, please address all concerns to Kellie Merritt, Executive Director, Phone 713-645-1490.