5 steps to a successful QSEHRA launch

A qualified small employer health reimbursement arrangement (QSEHRA) is a great way for small business owners to offer health benefits to their employees without breaking the bank. Many employers who otherwise wouldn’t be able to offer a health benefit turn to the QSEHRA to care for their teams. In fact, according to our 2024 QSEHRA Report, nearly 77% of employers didn't offer a health benefit before they discovered the QSEHRA.

The QSEHRA is a more affordable and reasonable option for small businesses than group health insurance. However, to get the most out of a QSEHRA, there are some important tips to keep in mind.

In this article, we'll go over five ways you can successfully launch a QSEHRA.

In this blog post, you'll learn the following:

• How to reimburse employees for health insurance coverage with a QSEHRA.
• IRS rules and regulations for the QSEHRA.
• How to get the most out of a QSEHRA and improve employee participation.

What is a QSEHRA?

The QSEHRA, also known as the small business HRA, is growing in popularity as an affordable alternative to traditional group health insurance. It's an IRS-approved, employer-funded health benefit for organizations with fewer than 50 full-time equivalent employees (FTEs).

With a QSEHRA, you can reimburse your eligible employees tax-free for their individual health insurance premiums and other qualifying medical expenses. This way, you can reimburse your employees for the health insurance coverage they choose instead of buying it for them.

Here's how the entire process works:

• You set a monthly allowance for your employees. This is the maximum you’ll spend per employee in terms of tax-free reimbursements throughout the plan year.
• Employees get qualified health plans if they don't aleady have them. Your workers need a health plan that meets minimum essential coverage (MEC) to participate in a QSEHRA. Thanks to a 60-day special enrollment period the offer of a QSEHRA creates, they can enroll in a new plan if they don’t have MEC.
• Employees make healthcare purchases using their own money. This includes individual health insurance plans, copays, deductibles, and so on. They can even shop for individual dental and vision policies.
• Employees submit proof of their eligible expenses for reimbursement. After buying an eligible item or service, your employees submit proof of purchase to you or your HRA administrator, like PeopleKeep.
• You review and reimburse employees for their medical costs. Employee reimbursements are free of income taxes and payroll taxes.

How to get the most out of a QSEHRA

If your employees don't utilize their health benefit, it goes to waste. To make the most of your time and money, it's important to make sure you and your employees use the QSEHRA to its fullest potential.

Here are five tips to help you maximize the benefits of a QSEHRA:

1. Understand the rules and regulations

Understanding the rules and regulations that govern this type of benefit is crucial before implementing a QSEHRA.

The IRS has specific guidelines in place regarding:

• Contribution limits. While the QSEHRA has no minimum contribution limits, the IRS sets maximum contribution limits and updates these annually.
• Eligible expenses. With a QSERHA, you can reimburse your employees for more than 200 types of out-of-pocket medical costs. These include health, vision, dental, and vision premiums. Employees covered by a spouse's employer-sponsored policy can even get those premiums reimbursed.
• Reporting requirements and legal documents. Employers need to understand how to report the benefit on employee W-2s to comply with IRS rules. They also need to know what legal documents the federal government requires, like plan documents and a summary plan description.
• Premium tax credit coordination. If you have employees who receive premium tax credits, they can only collect them if their QSEHRA allowance isn't considered affordable. If their allowance is unaffordable, they have to reduce the amount of their premium tax credit by their QSEHRA allowance.

Make sure you familiarize yourself with these rules to avoid any compliance issues down the line. Working with QSEHRA administration software can help you understand and follow these rules.

2. Communicate clearly with employees

One key component of a successful QSEHRA is clear communication with employees. Make sure to explain the benefit, how it works, and what expenses it covers. Provide employees with the necessary information they need to submit expenses and receive reimbursements in a timely manner.

You should communicate about the benefit early, such as in an all-hands meeting. Let your employees know when you plan to offer the benefit, how they’ll enroll, and which type of health insurance they’ll need to participate.

You can also help your employees understand where to go to purchase qualifying health insurance. If you offer a QSEHRA through PeopleKeep, our software helps your employees find and enroll in health coverage.

3. Encourage participation

To get the most out of a QSEHRA, it’s important to encourage participation from employees. Clearly outline the QSEHRA’s benefits and how it can help them save money on healthcare expenses. Implementing a QSEHRA can be a valuable perk for employees, so make sure to promote it effectively.

If you have employees who aren’t using the benefit, be sure to remind them about it throughout the year.

4. Keep detailed records

Maintaining accurate and detailed records is essential when it comes to a QSEHRA. Keep track of all contributions, reimbursements, and eligible expenses to ensure compliance with IRS regulations. Having thorough records will also make it easier to report on the benefit and make any necessary adjustments.

5. Review and improve regularly

Lastly, don’t just set up a QSEHRA and forget about it. Regularly review the plan to see how it’s working and if you need to make any improvements. Consider feedback from employees and adjust the benefit as needed to ensure it continues to meet the needs of your workforce.

For example, if you offer a premium-only QSEHRA, you might switch to a QSEHRA that reimburses employees for premiums and out-of-pocket medical expenses. This creates more value for your employees since they can get reimbursed for items and services like prescriptions, contact lenses, and more.

What are the benefits of a QSEHRA?

There are several benefits to offering a QSEHRA instead of a traditional group health plan.

For employers, the advantages are:

• A more affordable health benefit. You set the allowance amount, and employer contributions are tax-free. You don't have to worry about annual rate hikes or steep participation requirements either.
• You can customize it to your needs. You can set your own allowance amount and customize monthly allowances based on employee age and family status.
• A personalized health benefit for employees. A QSEHRA can help you with recruitment and retention. According to our 2024 Employee Benefits Survey, 92% of employees rated health benefits as important.

For employees, the advantages are:

• Freedom to choose their health insurance. When you offer a QSEHRA, your employees can choose any health insurance policy they want. This way, they're not stuck with a group plan that may not meet their needs.
• Tax-free reimbursement for medical bills. QSEHRA allowances don't count as taxable income on W-2s. Instead, eligible employees receive tax-free reimbursements when they incur eligible out-of-pocket expenses.

Is the ICHRA a better option?

If the QSEHRA doesn't sound right for you and your team, you may want to consider another type of HRA. The individual coverage HRA (ICHRA) functions very similarly to a QSEHRA but offers greater flexibility.

For example, if you have a big budget and want to provide your staff with more money than a QSEHRA allows, you can offer an ICHRA. ICHRAs have no annual contribution limits, which means you can offer as much as you’d like in allowances.

The ICHRA also allows you to differ allowances and benefit eligibility with 11 employee classes, such as full-time employees, part-time employees, and seasonal workers.

However, if you do want to offer an ICHRA, your employees need their own qualifying individual health insurance coverage. Employees without individual health insurance policies or those covered by a spouse's group policy can't participate in the ICHRA. If you have many employees on spouses’ or parents’ plans, a QSEHRA might be a better fit.

Conclusion

Eligible employers are increasingly turning to qualified small employer HRAs (QSEHRAs) as a flexible and cost-effective way to provide health benefits to their employees. However, the complexity of healthcare regulations and the specifics of the QSEHRA program can sometimes make it challenging to fully leverage its advantages.

Whether you are just starting with a QSEHRA or looking to enhance your current plan, these tips will help you make the most out of this valuable, tax-free employee benefit.

If you’re ready to offer a QSEHRA, PeopleKeep can help. Our QSEHRA administration software and award-winning customer support make it easy to set up and manage your benefits in minutes.