WHAT IS A QSEHRA? A COMPLETE GUIDE FOR SMALL BUSINESSES

WHAT IS A QSEHRA? 

QSEHRA, which stands for Qualified Small Employer Health Reimbursement Arrangement, is a way for small businesses—that don’t offer a group health insurance plan—to reimburse employees for health-related and medical costs. Technically, a QSEHRA is a health reimbursement arrangement (HRA) for small businesses. It doesn’t replace health insurance, but rather allows eligible employees to be reimbursed for qualified medical expenses. 

This guide walks you through everything small businesses owners need to know about QSEHRA.

HOW DOES A QSEHRA WORK? 

A QSEHRA is quite simple: employees pay for their health expenses (either health insurance premiums or medical services or eligible medical product expenses) and employers reimburse them after approval. Employees pay the insurance company or medical bill directly and then submit eligible claims to get reimbursed by their employer. These are considered reimbursements and as such are (almost always) tax-free for employees and employers. 

QSEHRA doesn’t replace health insurance. Employees must get qualifying health insurance coverage through the health insurance marketplace, or another employer-sponsored plan (like through a spouse’s or parent’s coverage), to participate in a QSEHRA. 

The employer sets a maximum allowance; this is the maximum amount per year that can be reimbursed for each employee. The IRS has dictated a ceiling on these so that the maximum allowance set by the employer cannot exceed a certain amount.

According the IRS, the 2020 QSEHRA limits can reimburse employees for:

• Up to $5,250 of qualified medical expenses per year (or $437.50 per month) for employee-only coverage, or
• Up to $10,600 per year (or $833.33 per month) for family coverage. 

QSEHRA benefits are completely funded by employers (meaning employers are responsible for covering the approved reimbursement costs up to the max allowance for each employee). 

WHAT’S THE DIFFERENCE BETWEEN A QSEHRA AND A BANK ACCOUNT?

A QSEHRA is very different from an Health Savings Account (HSA) and Flexible Spending Account (FSA) because a QSEHRA is not an account (the A in QSEHRA stands for arrangement). This means that business owners keep the money they use to reimburse employees until an employee makes a reimbursement claim. If you’re not sure if you should offer your employees QSEHRA or small group health insurance, read this article from Gusto to understand the difference.

Some employers set up separate bank accounts specifically for QSEHRA reimbursements, but this is not required. Most QSEHRA reimbursements are made through payroll, like how you would reimburse for travel expenses or office equipment. 

Once again, it’s up to you to set up a system to reimburse your employees. 

ELIGIBLE BUSINESSES AND EMPLOYEES

ARE QSEHRAS ONLY FOR SMALL BUSINESSES? 

Yes, they are only applicable to small businesses with less than 50 full-time equivalent employees, as defined by the IRS. An eligible business also must not have a group health plan or FSA. 

Medium and large employers (those who employ 50 or more people) can’t offer QSEHRAs; they can only offer traditional HRAs in addition to HMO and PPO health plans.

Tip: If you want to participate in a QSEHRA and currently have a group health plan, you don’t have to wait until the end of the enrollment period or year to switch; you can change at any time. 

WHICH EMPLOYEES QUALIFY FOR QSEHRA?

Full-time employees who have minimum essential health coverage (MEC) defined by the Affordable Care Act (ACA) are eligible for QSEHRA. The MEC benefits must be covered by a health insurance plan, such as buying their own plan, enrolling in a parent’s or spouse’s plan, or selecting a state health exchange plan. MEC also includes Medicare Part A, Medicare Advantage, most Medicaid coverage, and most major medical plans. 

It’s up to the employer whether to offer QSEHRA to part-time or seasonal employees, employees with less than 90 days of employment, and employees under the age of 25. Former employees who are retired, company friends, and contractors cannot participate. To qualify, the individual must be considered an employee of the business. In short: that typically means the employee receives a W-2. 

To get reimbursed, employees must submit a claim to their employers with evidence they paid for an eligible health expense. 

Keep in mind that before you start QSEHRA, you are required to notify your employees about the health reimbursement.

REIMBURSEMENT RULES

WHAT IS THE QSEHRA LIMIT FOR REIMBURSEMENTS?

The annual maximum set by the IRS varies for single versus family coverage, and employers reimburse employees every month. In 2020, a single household can reimburse up to $5,250 of qualified medical expenses per year ($437 of medical expenses per month); a family household can reimburse up to $10,600 per year ($883 per month). But remember it’s up to you, the employer, to set the maximum allowance (which cannot exceed the limits dedicated by the IRS). To understand the allowances you offer your employees and what you can afford to reimburse, try this free QSEHRA budgeting tool from Gusto.

WHAT HAPPENS IF AN EMPLOYEE DOESN’T CLAIM THE MAXIMUM AMOUNT?

The monthly amount rolls over from month to month within the year; this means if an employee doesn’t use up the max allowance you set within a month, that employee can roll the remaining amount over to the next month. 

However, if the employee has not used up the available allowance by the end of the plan year, they lose it. In this case, the employer keeps any unclaimed funds. If an employee doesn’t file a reimbursement claim—or is not approved for a claim—the company keeps the funds. 

Your Takeaway: unused balances roll over from one month to the next for employees. Once the plan year ends, the employer is no longer responsible for paying out any unused reimbursements.

HOW DOES AN EMPLOYER DETERMINE THE RATES FOR REIMBURSEMENT?

QSEHRAs and the rate of reimbursement must be properly documented, disclosed, and administered by the employer. Small businesses must offer them to all full-time, regular employees on the same terms. Put simply, employees must be treated fairly and equitably.

Employers contribute the full amount for the approved reimbursement expense; employees cannot contribute (this would be equivalent to them paying from their own pocket). 

While employers must offer reimbursements on the same terms, there’s flexibility as to how you determine the design of your QSEHRA program. Here are a few common types:

• Reimburse the same amount and have a standard individual maximum for all employees 
• Reimburse the same amount for all individuals and another amount for all families across your business (i.e. singles receive $400 per month and families receive $800 per month in 2020)
• Reimburse based on family size, with an established reference plan (i.e. singles get $250 per month, couples get $500 per month, and families get an additional $150 per child per month—up to the IRS max)
• Reimburse based on employee age, with an established reference plan (i.e. set a 1:3 ratio, so a 26-year-old receives $100 per month and a 64-year-old receives $300 per month)

WHAT CAN QSEHRA FUNDS BE USED FOR?

Eligible expenses are based on guidelines by the IRS. Employers can choose if they want to reimburse the following:

• Insurance premiums only. This typically includes individual health insurance premiums; some also include dental or vision premiums. 
• Insurance premiums and medical expenses. This includes not only insurance premiums but also eligible medical expenses such as copays, prescriptions, and doctor visits. 
• Premiums of employees’ spouse group plans. Since many employees have access to their spouse’s traditional group health plan, some employers allow claims for these group plan premiums. It’s important to note that employees will be taxed on reimbursements for health insurance premiums that are paid by a spouse’s or parent’s plan. This is because health insurance premiums are paid using pre-tax dollars, so the reimbursement for that payment will be taxed. 

HOW CAN A SMALL BUSINESS HELP EMPLOYEE COVER INSURANCE PREMIUM COSTS?

Since employees are paying for their own health insurance and the premium can be costly, some employers structure their payment schedule to align with the timing of insurance payments. 

THE BENEFITS OF USING QSEHRA

CAN QSEHRAS BE PERSONALIZED TO FIT THE EMPLOYEES’ MEDICAL NEEDS?

With usually tax-free reimbursements, employees can pick their own health plan. Rather than providing a one-size-fits-all group health plan, employees can choose the plan that best suits their needs—if it meets MEC. 

For instance, if one employee prefers Blue Cross because her doctor is in-network and another employee wants Kaiser because he likes the all-in-one approach, they can both get the benefits as they please. To obtain health insurance, employees can:

• Participate in a spouse or parent’s plan,
• Purchase health insurance through the Health Insurance Marketplace or through their state, or
• Participate in another employer-sponsored health insurance plan 

When employees are choosing a plan, it’s important for them to balance coverage and price with flexibility. There are four common types of health insurance plans:

• Health Maintenance Organization (HMO)
• Preferred Provider Organization (PPO)
• Exclusive Provider Organization (EPO)
• Point of Service Plan (POS) 

QSEHRA reimbursements meet employees where they are by allowing employees to spend on medical services and products they need, whether that’s a prescription copay, a medical appointment copay, glasses or contacts, or a retainer. 

WHAT ARE THE TAX BENEFITS FOR EMPLOYERS AND EMPLOYEES?

QSEHRA reimbursements are generally free of payroll tax for employers and are typically paid pre-tax into employee paychecks, which means they are free of income tax for employees.

This is important, so we’ll say it again: these reimbursements will only be free of income tax for employees who are covered by a health insurance plan that meets MEC. 

Also, employees who are covered by a spouse’s or parent’s healthcare plan and are making claims to get reimbursed for those health insurance premiums with QSEHRA funds will be taxed on those reimbursements. This is because health insurance premiums are paid using pre-tax dollars, so the reimbursement will be taxed. Ultimately, an employee can’t get a tax-free reimbursement for a tax-free payment. 

WHAT FLEXIBILITY DOES A QSEHRA OFFER EMPLOYERS?

Many states and carriers have a minimum contribution and participation requirements for group health plans, which can be up to $400 per month per employee. With QSEHRA, there are no minimum contributions required to participate. 

Employers control the amount they contribute and can increase, decrease, or cancel the program at any time. This makes it much more budget friendly for small businesses. 

READY TO GET STARTED WITH QSEHRA?

Read this guide on how to set up your small business with QSEHRA and learn how you can get started.

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