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One of the most important benefits small-business owners can provide is health insurance. However, not all small businesses can afford to offer health insurance plans to their employees — and the passage of the Affordable Care Act in 2010 made standalone HRAs noncompliant.
In 2016, the passage of the qualified small employer health reimbursement arrangement (QSEHRA) provided business owners with a new option. A QSEHRA plan, allows small-business owners who are unable to provide their employees with health insurance to once again help employees pay for their personal health plan costs.
This guide explains everything you need to know about the QSEHRA, including how it works, eligibility requirements and whether or not this option might be right for your small business. But first, let’s learn a little bit more about what exactly a QSEHRA is.
What is a QSEHRA?
A QSEHRA is essentially an HRA for small businesses. Currently, a QSEHRA plan allows employers to reimburse up to $5,150 for single coverage and $10,450 for family coverage (adjusted for inflation) for qualified health care expenses. This includes premiums on personal health insurance plans purchased on the open market and medical expenses, such as doctor’s visits and prescription drugs. To receive reimbursement, employees must provide proof of their medical costs.
How do QSEHRAs work?
If an employer offers a QSEHRA, it will set aside a fixed amount of money each month for qualified expenses. Employees will receive reimbursements from the QSEHRA up to the employer specified annual limit. If employees don’t make claims or don’t claim the full amount, the money stays with the employer. QSEHRA reimbursements are typically administered via payroll and employers don’t have to pay payroll taxes on benefits paid to employees via a QSEHRA.
It’s important to note that, in order for a QSEHRA to be compliant with the law, all employees must benefit from it equally. This means employer contributions to each employee’s QSEHRA must be the same. However, if one employee has an individual plan, and another employee has a family plan, you can arrange for the employee with the family plan to receive a higher reimbursement limit because their plan is more expensive. So, for example, if you offer a single employee $400 per month in reimbursements, an employee with dependents would get $800 per month.
Other common ways to administer your QSEHRA is to offer all employees the maximum reimbursement or to offer different reimbursement amounts based on age. You can also opt to reimburse premiums only or reimburse both premiums and medical expenses.
Employees who don’t become eligible for the QSEHRA until mid-year will receive a prorated amount of the full year maximum reimbursement. Employers are also not required to cover contractors, part-time workers and seasonal workers under a QSEHRA. New hires are only eligible to participate in a QSEHRA after 90 days of employment.
All QSEHRA plans must remain compliant with the Affordable Care Act and the Employer Retirement Income Security Act (ERISA). ERISA sets minimum standards for most voluntarily-established retirement and health plans in private industry in order to provide protection for individuals in these plans.
There are two main qualifications employers must meet to be eligible to set up a QSEHRA:
Your business cannot already offer a group health insurance plan to your employees.
Your business cannot be an applicable large employer (ALE). This means your business must have less than 50 full-time employees.
Even if you do qualify, there are a variety of requirements both employees and employers must adhere to. Let’s break all of them down.
In order for an employee to be eligible to participate in a QSEHRA, they must have health insurance that meets minimum requirements. Types of eligible health insurance include:
An individual health insurance plan through an insurance company or the ACA marketplace.
A spouse’s or parent’s insurance (if the employee is under the age of 26).
Government-sponsored insurance like Medicare and Medicaid.
In addition, employees must show proof of their health insurance and medical costs in order to be reimbursed.
Employers are required to fund the entire QSEHRA — employees are not allowed to contribute through their paychecks. As previously mentioned, the employer must offer all employees the same terms and benefits.
If an employer decides to set up a QSEHRA, it must give employees notice at least 90 days before the beginning of the year in which the QSEHRA is to be provided. If an employee is not eligible at the beginning of the year, they must receive notice once they become eligible.
Interestingly, in some situations, an employer can participate in their own QSEHRA. This allows them to provide themselves with a tax deductible benefit. However, an employer’s eligibility to participate in a QSEHRA depends on their business entity type.
Generally, corporation owners are able to participate in a QSEHRA. However, an S-corpowner who owns more than 20% of their corporation is considered self-employed and ineligible. In addition, if you own an LLC, sole proprietorship or partnership, you are also considered self-employed and ineligible for a QSEHRA.
How to set up a QSEHRA
Setting up a QSEHRA is a multi-step process. Before you get started, we recommend consulting with a third-party HR service provider or professional employer organization like Gusto or Paychex. These types of businesses can not only advise you on how to set up your QSEHRA, but assist you with doing so.
If you choose to go it alone, here are the steps you need to take:
Step 1: Design your plan
Designing your plan means creating the terms and reimbursement rules around your QSEHRA. How much will you offer each employee every month? Will you offer the same reimbursement rate to all employees, or provide more for employees with dependents? Will you cover only their premiums, or their premiums and their medical costs. These are the types of questions you need to answer when designing your plan.
Step 2: Create plan documents
You are required by law to have your QSEHRA laid out on legal documents. Your documentation should include an explanation of your plan and what it covers. It should also tell employees to inform their health insurance provider of their QSEHRA benefit amount, and explain that reimbursements may be taxable if the employee does not maintain their minimum essential coverage health insurance.
Step 3: Set up a process to administer your QSEHRA
Employees must provide proof of their health insurance and medical costs to be eligible to apply for reimbursement. However, under the Health Insurance Portability and Accountability Act (HIPAA), employers cannot actually ask employees for their medical records. Furthermore, the IRS requires employers offering a QSEHRA to keep employees’ medical receipts for up to seven years.
Because of these reasons, it’s fairly common for a small-business owner to seek out a third-party QSEHRA administrator to help them maintain their QSEHRA. There does seem to be an emerging market in QSEHRA administration with software like Cobra Solutions and other third-party programs. These have the capability to draft your plan for you and help you make sure you’re in compliance with the law.
Step 4: Pick a start date
You can start your QSEHRA any time you want, as new plans do not adhere to the 90-day requirement. From a logistics standpoint, it is generally easier to launch a QSEHRA at the beginning of a new month or calendar year. Note that if you’re currently offering group health insurance to your employees, you’ll have to wait until the coverage expires to launch your QSEHRA.
Should you offer a QSEHRA?
Now that you know all about what QSEHRA’s are and how they work, the only question left is: Should you offer a QSEHRA to your employees? Well, let’s consider the pros and cons.
There are a variety of benefits to offering a QSEHRA as an employer. Here are some advantages to consider:
More variety: Small-business owners often can’t afford comprehensive health care coverage, leaving employees to sign up for a one-size-fits-all group plan. A QSEHRA fixes this problem by providing employees with cash tax-free that they can put toward a health care plan of their choosing. What’s more, plans with medical reimbursements allow employees to be reimbursed for a variety of different costs, such as prescription drugs or visits to the dentist.
Tax incentives: Like group health care plans, a QSEHRA is also tax deductible for both the employer and employee. An employer can make reimbursements without having to pay payroll taxes, and employees don’t have to pay income tax on the reimbursement. In addition, reimbursements made by the company count as a tax deduction.
Flexibility: With many group health care plans, employers are required to contribute a certain amount of the employee-only costs. With a QSEHRA, there are no minimum contribution amounts required. Employers also have more control over which expenses they will reimburse and how much reimbursement employees are eligible for.
Cost control: A QSEHRA allows employers to make monthly health care costs predictable by allowing them to set their own reimbursement limits. This means there will be no budget surprises come the end of the month.
Location agnostic: Employees who work out of state can still participate in a QSEHRA without any administrative or financial issues.
There are also some downsides to a QSEHRA:
Limited contribution methods: With a QSEHRA, employers are limited to offering $5,150 to employees with no dependents and $10,450 to employees with families. What’s more, employers can adjust contribution amounts based on family status, but not seniority. When trying to hire for your small business, these factors may be perceived as a drawback by prospective employees.
Complex administration: For reasons previously mentioned, it’s hard for a small-business owner to manage a QSEHRA on their own. If you make any errors in your management of a QSEHRA, you’ll be subject to steep fines. This is why many businesses resort to hiring a QSEHRA administrator. However, this is another expense you’ll have to consider when doing your cost/benefit analysis.
Lack of understanding: The qualified small employer health reimbursement arrangement only became law in 2017. This means that when talking about QSEHRA in 2019, you’re likely facing a learning curve when trying to educate employees about this benefit, despite its various benefits regarding taxes, money and flexibility.
A version of this article was first published on Fundera, a subsidiary of NerdWallet