How to set up a qualified small employer HRA (QSEHRA)

As a small business owner, it can be challenging to offer competitive employee benefits that attract and retain top talent. The rising costs of traditional group health plans make it even more difficult.

If group health insurance coverage isn’t the right fit for your organization due to cost or another factor, the qualified small employer HRA (QSEHRA) is an excellent alternative. The QSEHRA provides an opportunity for small employers to provide tax-free reimbursements to employees for their health expenses without the high price tag that comes with traditional health insurance plans.

Setting up a QSEHRA on your own can be complicated, but with the right guidance, you can ensure that your employees have access to affordable care and essential health coverage.

In this article, we'll guide you through the process of establishing a QSEHRA.

Learn more about offering a QSEHRA with our complete guide

1. Make sure you're an eligible employer

To be eligible for a QSEHRA, your organization must have fewer than 50 full-time equivalent (FTE) employees. If an organization has 50 or more FTEs, it's considered an applicable large employer (ALE) under the Affordable Care Act. This means you can offer an individual coverage HRA (ICHRA) but not a QSEHRA.

In addition to meeting the company size requirement, an eligible employer can't offer a QSEHRA in conjunction with any other group plan. Employers who are currently providing a group health insurance policy can choose to cancel it if they want to become eligible for a QSEHRA. Otherwise, they can look into a group coverage HRA (GCHRA).

2. Choose how to administer your benefit

You can self-administer your QSEHRA or enlist the help of a third-party administrator like PeopleKeep.

PeopleKeep saves you the hassle of going it alone. Our HRA administration software automates the entire process. We create and update plan documents to ensure compliance with state and federal regulations. We ensure that employees receive all necessary notices, offer resources for insurance shopping, and provide support for employee communication.

With help from our award-winning customer support team, you can easily manage your QSEHRA in minutes each month.

3. Determine employee eligibility

Employers must offer a QSEHRA to all full-time employees, as well as their spouses and legal dependents. Employers may also choose to include part-time workers, but they must offer them the same monthly allowance as full-time employees. 1099 employees aren’t eligible for the QSEHRA.

The IRS¹ permits employers to exclude some employees, such as:

• Part-time employees
• Seasonal employees
• Employees who haven't been with the employer for at least 90 days of service
• Workers who are younger than 25 at the start of the plan year
• Union employees if health benefits were the subject of good faith bargaining
• Nonresident aliens with no income from U.S. sources

Even employees covered under a spouse's group policy can use QSEHRA funds for their medical expenses. Employees without minimum essential coverage (MEC) can also receive reimbursements for their eligible expenses, but these reimbursements are subject to income tax. You'll also have to pay payroll taxes.

4. Set your reimbursement amounts

Next, it's time to decide how much you'll offer your employees to reimburse their out-of-pocket medical costs and health insurance premiums.

The QSEHRA has no minimum employer contribution limits, so you can offer the benefit to your employees even on a small budget. But the IRS does set an annual contribution limit that changes every year. Additionally, any unused reimbursement amount can roll over monthly.

5. Decide what types of reimbursements are eligible

Employees can use QSEHRA dollars for more than 200 qualifying medical costs listed in IRS Publication 502. This includes medical bills, individual health insurance premiums, prescriptions, doctor visits, dental and vision care, etc. Employers can also offer a premium-only QSEHRA that only covers insurance premiums.

6. Pick a start date

With a QSEHRA, you don’t need to wait for an enrollment period to get started. If your company doesn't have any type of health plan in place, you can begin your QSEHRA as soon as you want. If you already have a plan, you'll need to cancel it before the date you want the QSEHRA to start.

Keep in mind starting your benefit plan year on the first of the month makes calculating monthly allowances for QSEHRA funds easier. If you offer a QSEHRA for less than 12 months, the contribution limit is prorated.

7. Establish your legal documents

It's critical to comply with both IRS and U.S. Department of Labor rules regarding legal plan documents for the QSEHRA.

QSEHRA plan documents must include detailed information about the benefit you're offering to comply with federal regulations. Your plan document package should explain your new plan and coverage details and instruct employees to inform their insurer of their QSEHRA allowance.

It's also important to note that reimbursements are only tax-free to your employees if they have an individual health insurance plan that meets MEC. If your employee loses MEC, their reimbursements will count as taxable income.

Companies that fail to follow the rules face significant penalties. An administrative software solution like PeopleKeep automates this for you and ensures your plan stays up to date with the latest regulations.

8. Tell your employees about their new benefit

If your employees don't know a new health benefit is available, they're far less likely to use it. Make sure your workers are aware of your QSEHRA, and give them the information they need to take advantage of it.

According to the IRS², employers must give eligible employees a written notice at least 90 days before the QSEHRA starts. Non-eligible employees must also receive the notice if they become eligible for the plan.

If you fail to provide the notice in a timely manner, you'll face a penalty¹ of $50 per employee up to a maximum of $2,500 for the calendar year.

9. Help your employees with their health insurance coverage

If your employees don't have qualified health plans already, you should help them with their coverage.

Even though you can't point them toward a particular insurance company, you can be a valuable source of information and support. You can direct employees to your state's health insurance exchange or the federal Health Insurance Marketplace to get started. From there, they can review their health insurance options and select the policy that works best for them.

Conclusion

A QSEHRA is a cost-effective alternative to traditional group health insurance. It's a tax-free employee benefit that helps cover qualified medical expenses in a way that's affordable to the employer.

Setting a QSEHRA up on your own is easier with this step-by-step guide. However, administering it yourself can be a tedious task. Administrative software like PeopleKeep can save you valuable time while keeping you compliant.

Ready to launch your own QSEHRA benefit? Schedule a call with a personalized benefits advisor now!

This post was originally published on March 9, 2017. It was last updated on August 2, 2023.

1. https://www.irs.gov/pub/irs-drop/n-17-67.pdf
2. https://www.irs.gov/pub/irs-drop/n-17-20.pdf