Since the 21st Century Cures Act created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) in December 2016, concerns have surfaced over whether certain state laws conflict with the new benefit.
While the specifics of these laws vary, many seem designed to discourage or even prohibit small businesses from reimbursing employees for individual health insurance. At least two states ban this practice outright, while others prohibit insurers and insurance brokers from selling individual coverage to small businesses offering reimbursement arrangements.
The bottom line, though, is that every qualifying small business can legally offer the QSEHRA—regardless of where it operates.
In this post, we’ll give you an overview of these laws, how they relate to federal laws, and how they affect the QSEHRA. We’ll also examine one specific state law as a case study.
What do these state laws say and where are they in place?
Small businesses, insurance companies, brokers, and trusted advisors are governed by state laws as well as federal laws. Some of these laws seem to place limitations on the Cures Act and its creation of the QSEHRA.
For example, at least two states have regulations aiming to prohibit companies from reimbursing employees for individual policies. Others prohibit insurance companies from offering individual coverage to companies using reimbursement arrangements like the QSEHRA.
Here’s a breakdown of state regulations on individual reimbursements.
States with regulations restricting small businesses from reimbursing individual health insurance premiums:
- New Jersey
For further explanation of these laws, see "Can states really prevent small businesses from using a QSEHRA?" below.
States with regulations prohibiting insurance companies and brokers from offering individual coverage to companies using reimbursement plans:
- The District of Columbia
- North Carolina
- North Dakota
- Rhode Island
- South Dakota
For further explanation of these laws, see "What about other state laws and regulations?" below.
All other states have no restrictions on companies, insurance companies, or brokers relating to health insurance reimbursement.
Can states really prevent small businesses from using a QSEHRA?
Outdated, unenforceable insurance regulations in some states imply that small businesses can’t reimburse employees for individual health insurance premiums. This isn’t the case, however.
First, many of these laws rely on the authority of the state’s Department of Insurance to enforce the restriction. But while insurance departments have jurisdiction over insurance-related business, they cannot dictate which health insurance plans small businesses choose to offer. Similarly, they can’t take action against businesses when they do offer supposedly restricted plans.
Second, the QSEHRA is considered an employer health plan under the Employee Retirement Income Security Act (ERISA), and is therefore under the purview of that law. This means the QSEHRA is governed at a federal level and is not subject to state laws, including those that seem to prevent small businesses from reimbursing employees’ individual insurance premiums.
Knowing this, state laws like Minnesota’s and New Jersey's aren't valid with regard to the QSEHRA. In fact, the states have acknowledged this.
In a May 2017 letter to insurers offering health policies in Minnesota, the state's insurance department explicitly validates the QSEHRA and calls it "an exception to the previous prohibition on employers providing cash or compensation to employees, if the money is conditioned on the purchase of health insurance."
New Jersey's Department of Banking and Insurance has also acknowledged HRAs and even included them as an option in its 2017 "New Jersey Small Employer Health Benefits Program Buyer's Guide."
Case study: Colorado
This conflict has played out in the past. To see how ERISA affects laws that seek to prevent small businesses from establishing an arrangement like the QSEHRA, let’s use a Colorado statute as a case study.
Prior to November 2010, Colorado had a statute in place (C.R.S. 10-8-513(2)) that excluded certain individuals from eligibility for the state exchange, CoverColorado. Among those excluded from eligibility were people who had their premiums reimbursed by “any private entity or person … if such payer could financially benefit from the coverage of an individual under CoverColorado.”
Because businesses using an HRA received cost savings by forgoing group coverage to reimburse employees for CoverColorado premiums, they were considered to be “financially benefitting” from the arrangement. As such, employees were considered ineligible for coverage.
This was challenged in June 2010, however, and the law was rescinded in November. In its judgment, the Colorado Department of Insurance concluded that HRAs were not a “health benefit plan” or insurance policy under the state statutes. Instead, they were an employee welfare benefit plan under ERISA.
“ERISA broadly preempts, with certain exceptions, ‘any and all state laws insofar as they may now or hereafter relate to any employee benefit plan’ covered by ERISA,” the department wrote.
Furthermore, the department declared that HRAs were “not subject to the jurisdiction of the Commissioner.”
Following this reasoning, all QSEHRAs can be considered under ERISA’s jurisdiction and therefore not subject to state laws that seem to limit them.
What about other state laws and regulations?
Thirty states currently have laws or regulations restricting insurance companies or insurance brokers—and sometimes both—from offering individual coverage to businesses that reimburse employees for their premiums.
Because state Departments of Insurance regulate these entities, insurance companies, brokers, and third-party administrators (TPAs) in affected states should proceed with caution when handling QSEHRAs.
But because these laws don’t apply to self-administered ERISA plans, small businesses in these states are perfectly able to offer a QSEHRA.
There are several state laws and regulations relating to health insurance reimbursement that seem to conflict with the 21st Century Cures Act and limit small businesses’ ability to offer the QSEHRA.
While some of these laws may affect insurance companies, brokers, and TPAs, the limited purview of state Departments of Insurance and ERISA’s preemptive status mean there are no legal reasons why small businesses can’t offer a QSEHRA.