Health benefits are an essential component of any employee compensation package—but you wouldn’t know that by looking at how small businesses handle them.
Because traditional group benefits are becoming increasingly expensive, complex, and one-size-fits-all, fewer than half of small businesses currently offer health benefits to their employees.
But traditional group policies aren’t the only way to offer health benefits. As of January 2017, there’s a new option: the qualified small employer health reimbursement arrangement (QSEHRA), or Small Business HRA.
With a QSEHRA, small businesses can reimburse employees tax-free for their medical expenses, including personal insurance premiums.
In this post, we’ll go over everything you need to know about the QSEHRA—where it came from, how it works, who can offer it, and how to use it successfully and compliantly.
Where did the QSEHRA come from?
In 2013, IRS Notice 2013-54 issued guidance on the Affordable Care Act that seriously limited businesses’ ability to use health reimbursement arrangements (HRAs).
Congress recognized the importance of HRAs to small businesses, though. A bipartisan group of senators and representatives introduced legislation called the Small Business Healthcare Relief Act (SBHRA), which created a new HRA—the QSEHRA—specifically for small businesses.
In December 2016, the SBHRA was repackaged and passed as part of the larger 21st Century Cures Act.
The QSEHRA provisions went into effect January 1, 2017.
How does the QSEHRA work?
The QSEHRA is a company-funded, tax-free health benefit used to reimburse employees for personal health care expenses.
With a QSEHRA, businesses offer employees a monthly allowance. Employees then choose and pay for health care, potentially including insurance policies, and the business reimburses them up to their allowance amount.
With the QSEHRA, all reimbursements are free of payroll tax for the business and its employees. Reimbursements can be free of income tax for employees, too, if the employee is covered by a policy providing minimum essential coverage (MEC).
Here’s a more detailed breakdown of how the QSEHRA works:
Step 1: Businesses set the allowance.
A small business offering a QSEHRA must choose a monthly, per-employee allowance of tax-free money to make available. There are no minimum contribution requirements, and small businesses may offer different allowance amounts to employees based on whether they’re single or have a family.
In 2018, businesses can offer up to $420.83 a month for single employees and $854.16 a month for employees with a family.
Step 2: Employees make purchases.
With a QSEHRA, employees buy what fits their personal needs. There are a large number of expenses eligible for reimbursement through the QSEHRA, including:
- Individual health insurance premiums
- Individual dental, vision, or long-term care insurance premiums
- Prescription and nonprescription drugs (with a note from a doctor)
- Mileage (for travel to and from eligible health care)
Step 3: Employees submit proof of expenses.
After incurring a qualified expense, employees submit proof to their company through documents that include:
- A description of the product or service
- The cost of the expense
- The date the employee incurred the expense
Invoices or receipts typically satisfy this requirement, but so does an explanation of benefits from the employee’s insurance company.
For recurring expenses, like a policy premium, employees only need to submit one document showing the expense and how often it’s charged. That will satisfy documentation requirements for all future expenses in the series.
Step 4: Businesses review and reimburse employees’ expenses.
After an employee submits an expense, the business should review the documentation and, if the expense is qualified, reimburse the employee from their monthly allowance.
These reimbursements are free of payroll tax for both the small business and its employees, and free of income tax for employees as long as they have insurance. Employees who don’t have insurance must report reimbursements as taxable income at the end of the year.
Which businesses can offer a QSEHRA?
The QSEHRA was designed specifically for small businesses looking for an alternative to traditional group health insurance.
A small business qualifies for the QSEHRA if it:
a) employs fewer than 50 full-time-equivalent (FTE) employees, and
b) doesn’t offer a group health policy to any of its employees.
Businesses that are interested in the QSEHRA but are currently offering a group policy can cancel it and become eligible.
Who qualifies as eligible employees under a QSEHRA?
When a business offers a QSEHRA, all full-time employees and their families are automatically eligible. The business can also choose to extend eligibility to part-time employees, though it must offer them the same monthly allowances full-time employees receive.
Unlike traditional group policies, the QSEHRA provides value to all employees, regardless of their situation.
Employees covered under a spouse’s group policy, for example, can still use QSEHRA funds toward their deductible, copay, and other medical expenses. And employees without MEC can still receive reimbursements for their expenses, though the reimbursements are subject to income tax.
For a full look at how the QSEHRA works in a variety of employee situations, check out “How the QSEHRA Works for Employees.”
How do businesses set up a QSEHRA?
Small businesses that want to get started with a QSEHRA should follow a seven-step process:
- Pick a start date. This is the date the QSEHRA benefit will begin.
- If necessary, cancel the business’s group policy. If the business offers a group health insurance policy, the business must cancel it before the QSEHRA begins.
- Confirm QSEHRA eligibility. Though the business is required to offer the benefit to full-time employees, it can extend eligibility to part-time workers as well.
- Determine a budget and set allowances. The business can offer any amount, up to $420.83 a month for single employees and $854.16 a month for employees with a family in 2018.
- Establish legal plan documents and compliant administration policies and procedures. The business must establish legal plan documents, including a summary plan description (SPD), to comply with IRS and Department of Labor requirements.
- Communicate the new benefit to employees. The business must comply with QSEHRA notice requirements (see “FAQs about the QSEHRA” below), but it’s also a good idea to work with employees as they learn about and use the QSEHRA for the first time.
- Provide resources to help employees buy individual health insurance. The business should be prepared to support employees as they use the QSEHRA. Part of this includes helping them purchase personal health policies.
You can read more about how to set up a QSEHRA here.
How do businesses manage a QSEHRA?
Once the QSEHRA is set up, businesses must manage and administer it appropriately.
There are three key points to keep in mind:
- Update the benefit concurrently with staff changes. As employees move on and new workers come on board, QSEHRA administrators must update the benefit to reflect staffing changes.
- Process reimbursements and store documentation. The business must properly review reimbursement requests, record them, and store the supporting documentation in accordance with IRS and Department of Labor regulations.
- Evaluate allowance amounts and update plan documents. Whenever it needs, the business can change allowance amounts. To do so, they must update their plan documents and send employees appropriate notice.
While these steps may look simple, there are a number of very complicated laws and regulations guiding each. If a business missteps, it could be subject to hefty fines from the federal government.
Due to this concern, as well as personal time constraints, most businesses turn to an administration tool like PeopleKeep to help.
PeopleKeep generates real-time QSEHRA plan documents, automates expense verification, provides employee shopping assistance, and answers any and all employee questions.
You can learn more about PeopleKeep here.
FAQs about the QSEHRA
Because the QSEHRA is a relatively new benefit, most small businesses have a lot of questions.
Here are some of the most frequently asked questions regarding the QSEHRA.
Can business owners participate in the QSEHRA?
Depending on the business’s corporate filing status, the business owner may be able to participate in the QSEHRA.
Generally, if the business owner is considered a W-2 employee, he or she is eligible for the benefit.
For a quick overview of who is and isn’t eligible, check out our Business Owner Eligibility Under a QSEHRA infographic.
Can a QSEHRA be used in conjunction with a health savings account (HSA)?
Yes, but the HRA must be adjusted.
HSAs require that account holders receive no coverage before they meet the HSA’s annual deductible except for five exempted categories of expenses.
In years when QSEHRA participants or their spouses make or receive HSA contributions, they can use the QSEHRA to reimburse only these five types of expenses before they meet their HSA deductible.
These expenses include:
- Health insurance premiums
- Wellness or preventive care (e.g., checkups, mammograms, smoking cessation, weight loss)
- Dental expenses
- Vision expenses
- Long-term care premiums
These adjustments are necessary only for QSEHRA participants who make or receive contributions to their or their spouses’ HSAs. Other employees wouldn’t be affected.
How does the QSEHRA interact with premium tax credits?
QSEHRA participants can access premium tax credits, but they must coordinate their credit with their monthly HRA allowance.
Generally, if the employee’s QSEHRA allowance doesn’t qualify as “affordable coverage” under federal standards, the employee must reduce the amount of their credit dollar-for-dollar by the amount of the monthly HRA allowance.
For example, an employee with a $200 HRA allowance who is eligible for a $500 premium tax credit would be able to access only $300 of that credit.
For more information, see How to Calculate Your Premium Tax Credit with a Small Business HRA.
How does the QSEHRA interact with health care sharing ministries?
Employees enrolled in a health care sharing ministry, such as Medi-Share, can have eligible expenses reimbursed through the QSEHRA.
However, because health care sharing ministries don’t qualify as MEC, all reimbursements they receive will be taxable.
Membership fees associated with a health care sharing ministry don’t qualify for reimbursement.
For more information, see HRAs and Health Care Sharing Ministry Programs.
Are there any notice requirements associated with the QSEHRA?
Yes. Small businesses that intend to offer a QSEHRA must send employees a notice detailing the benefit at least 90 days before the start of each calendar year in which the business will offer the HRA.
For new QSEHRAs, businesses must send the notice at any point up to and including the day the QSEHRA goes into effect.
For more information, including what the notice must include, see The Small Business HRA’s Notice Requirements.
Group health insurance is too expensive, too complex, and too one-size-fits-all for most small businesses. Yet without a health benefit, businesses stand to lose their best employees and miss out on potential hires.
The QSEHRA offers a solution.
Small businesses using a QSEHRA can set their own budget, escape the hassle of dealing with insurance companies, and offer a benefit that provides value to all employees. At the same time, employees are free to use tax-free money to buy what fits their personal needs.
And administering a QSEHRA through PeopleKeep makes benefits simple, painless, and personal for everyone. Learn more about PeopleKeep here.
For more information on the QSEHRA, we recommend you check out:
- The Comprehensive Guide to the Small Business HRA
- How the QSEHRA Works for Employees
- How to Self-Administer a QSEHRA
- Personalized Benefits: A New Way to Hire and Keep People