The qualified small employer health reimbursement arrangement (QSEHRA), also called a small business HRA, comes with annual contribution limits. In practical terms, that means small businesses are limited in how much tax-free money they can offer their employees through the benefit.
Every year, the IRS outlines these annual contribution limits through a revenue procedure.
In 2021, small businesses may offer up to $5,300 per self-only employee and up to $10,700 per employee with a family.
In this post, we'll go over the new limits and what they mean for small businesses offering the QSEHRA.
What are the QSEHRA contribution limits for 2021?
The IRS released the 2021 QSEHRA guidelines through Revenue Procedure 2020-45 on November 4, 2020.
For tax years beginning in 2021, small businesses can offer up to $5,300 for self-only employees ($441.67 per month) and $10,700 for employees with a family ($891.67 per month). These contribution limits reflect a $50 annual increase for self-only employees and a $100 annual increase for employees with a family over 2020 limits. That's about $4.16 more per month for self-only employees and $8.33 for employees with a family.
For employees who become eligible for the QSEHRA midyear, the limits must be prorated to reflect the total amount of time the employee is eligible. For example, a self-only employee who is eligible for the QSEHRA for eight months in 2021 could receive up to $3,533.36 through the benefit that year.
How has tax reform affected how QSEHRA limits are calculated?
The IRS relies on cost of living adjustments to calculate QSEHRA limits every year. This year, certain changes implemented through the 2017 tax reform laws affected this process.
Tax reform incorporated the chained CPI—an alternative way to measure inflation in the Consumer Price Index (CPI). With the chained CPI, adjustments incorporate the economic phenomenon known as substation bias, whereby consumers react to rising prices in one good (like beef) by substituting similar goods (like chicken).
The end result is smaller upward adjustments in inflation. For the QSEHRA, this means 2021 contribution limits are lower than they would have been with the old calculation method. This will continue to affect QSEHRA limits, as the chained CPI will result in slower incremental increases through the years.
What else can I use to set a QSEHRA budget?
The QSEHRA contribution limits are the only restriction small businesses face when creating their QSEHRA budget. There are no minimum contribution requirements, and small businesses can change their monthly allowance amount at any point during the year.
To help you set your benefits budget for 2021, you can use several points of data, including average QSEHRA contributions. In 2019, small businesses offered an average of $297 per self-only employee and $445 per employee with a family.
You can also use our resource "How to Set a QSEHRA Budget." In this post, we walk you through different strategies to help you choose allowance amounts that benefit both your company and your employees.
Any questions? Let us know in the comment section below!