What Is a QSEHRA — and How Can It Benefit Small Businesses?

A QSEHRA allows employers with less than 50 employees to provide non-taxed reimbursement of certain healthcare expenses.

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What Is a QSEHRA

With health insurance costs rising every year, not every employer can afford to offer group coverage. Fortunately, there’s an alternative if you have fewer than 50 employees. This option is called the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).

What is a QSEHRA?

Created by the United States Congress in 2016, the QSEHRA allows employers with less than 50 employees to offer nontaxable healthcare-expense reimbursements to employees who buy individual coverage from the Health Insurance Marketplace. The QSEHRA is part of the 21st Century Cures Act, which was signed into law on December 13, 2016.

Like other health reimbursement arrangements (HRAs), the QSEHRA is essentially a reimbursement vehicle. It is funded entirely by the employer; employees cannot make any contributions.

The QSEHRA covers eligible healthcare expenses for not only employees but also their dependents, such as their spouse and children.

If you have 50 or more full-time employees, you cannot offer a QSEHRA. You must provide health insurance under the Affordable Care Act, or pay a penalty for not doing so.

The QSEHRA allows employers with less than 50 employees to offer nontaxable healthcare-expense reimbursements to employees who buy individual coverage from the Health Insurance Marketplace.

Which expenses are covered by a QSEHRA?

To be reimbursed through a QSEHRA, the employee and (applicable dependents) must have “minimum essential coverage” — as defined by the Internal Revenue Code.

The list of expenses that can be reimbursed tax-free through a QSEHRA is comprehensive, and includes:

  • Medical insurance premiums
  • Dental and vision insurance premiums
  • Long-term care insurance premiums
  • Copayments
  • Coinsurance
  • Deductibles
  • Prescription drugs
  • Hospital services
  • Nursing services
  • Chiropractor services
  • Therapy received as medical treatment

Certain items are not eligible for QSEHRA reimbursement, including:

  • Babysitting and childcare
  • Cosmetic surgery
  • Controlled substances
  • Funeral expenses
  • Expenses that are reimbursed by a flexible spending arrangement
  • Future medical care

For more information on eligible and ineligible healthcare expenses, see Internal Revenue Service (IRS) Publication 502.

Which employers can offer a QSEHRA?

To provide a QSEHRA, you must meet these criteria:

Which employees are eligible for QSEHRA?

You can offer the QSEHRA benefit to all of your full-time employees. Or, you can choose to exclude the following:

  • Employees with less than 90 days of service
  • Employees under the age of 25
  • Part-time and seasonal employees
  • Nonresident aliens with no income earned in the U.S.
  • Union employees, except those subject to eligibility under a collective bargaining agreement

You must offer the same QSEHRA terms to all eligible employees. However, the reimbursement amount can differ based on age and how many people are covered under the employee’s plan.

The employee must provide you with proof of “minimum essential coverage” (for themselves and any dependents) before they can participate in the QSEHRA.

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How can a QSEHRA benefit small employers?

Advantages include:

  • Provides an affordable alternative (to group health insurance) for smaller employers
  • Serves as an attraction and retention tool. Offering an alternative to health insurance rather than nothing at all can make you more appealing to candidates and employees.
  • Reimbursements are tax-deductible for the employer.
  • Employees do not pay taxes on the reimbursements that they receive.
  • Employees might be eligible for a premium tax credit, depending on the reimbursement amount.
  • No minimum contribution requirements for employers. This helps with cost control. However, the IRS limits the annual maximum contributions.

What are the maximum QSEHRA contributions for 2022?

Below are the limits for single and family plans in 2021 and 2022.

Plan Type 2021 Maximum Reimbursement 2022 Maximum Reimbursement
Employee-Only $5,300 $5,450
Family $10,700 $11,050

Setting up a QSEHRA

You can set up a QSEHRA at any time, so long as your small business meets the eligibility requirements.

Here’s an overview of how the process works:

  • Establish the monthly reimbursement/allowance amount. Remember, you can contribute as little as you want, but not more than the IRS’ annual limit.
  • Decide on what date the QSEHRA benefit will begin.
  • Determine which employees are eligible for the QSEHRA. You can offer it to both full-time and part-time employees.
  • Develop a plan document and a Summary Plan Description SPD that satisfy the requirements of the IRC and the Employee Retirement Income Security Act. These documents must include relevant details about the QSEHRA, including participation rules and how the plan is funded.
  • Give each eligible employee a written notice/SPD. Do this at least 90 days prior to the start of the plan year.
  • Communicate the QSEHRA benefit to your employees. Don’t just rely on the written notice. Actively inform employees that the QSEHRA is available and include this messaging in your talent acquisition process.
  • Require employees to submit proof – such as receipts or invoices – of their healthcare expenses. Review the proof carefully before approving or denying reimbursement requests.
  • Report in Box 12 of Form W-2 the amount of QSEHRA reimbursements your employees are entitled to. You should do this regardless of how much they actually receive.

Considerations

The QSEHRA is a viable alternative if you’re looking to attract and retain employees but cannot afford to offer group health insurance.

Despite the various benefits of a QSEHRA, it’s important to keep the following caveats in mind:

  • You can give your employees resources for obtaining individual health insurance. For example, you may direct them to the federal or state Marketplace. Legally though, you cannot help them make actual decisions — such as regarding the type of policy or provider they should choose.
  • Continuation benefits under the Consolidated Omnibus Budget Reconciliation Act do not apply to the QSEHRA.
  • Noncompliant employers can face penalties. For example, failure to provide timely, written notices to employees comes with a fine of $50 per employee, up to $2,500 per year. Furthermore, failure to operate a compliant plan document can result in a fine of up to $100 per affected participant per day.

The QSEHRA is a viable alternative if you’re looking to attract and retain employees but cannot afford to offer group health insurance. However, administering the program can be complex. You can alleviate this burden by hiring a QSEHRA administrator. Another option is to use payroll software that facilitates QSEHRA reimbursements.

For more information on QSEHRAs, see IRS Notice 2017-67.

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