In 2013, IRS Notice 2013-54 issued guidance on the Affordable Care Act that prohibited businesses from using HRAs to reimburse insurance premiums.
Congress recognized the importance of HRAs to small employers, though, and a bipartisan group of senators and representatives introduced legislation called the Small Business Healthcare Relief Act (SBHRA). The legislation created an exception to the IRS Notice by introducing a new HRA—the QSEHRA or qualified small employer HRA—specifically for employers with fewer than 50 full-time equivalent employees.
In December 2016, the SBHRA was repackaged and passed as part of the larger 21st Century Cures Act. The Cures Act allows small employers to offer Health Reimbursement Arrangements (HRAs) to their workforce to help cover the cost of medical expenses and health insurance premiums for themselves and their families. The QSEHRA provisions went into effect January 1, 2017.
How does the QSEHRA compare with other health benefits?
There are two primary benefits that the QSEHRA offers to small employers that group health insurance does not. They are time and cost savings. Simply put, group health insurance does not work for most small employers because the cost and eligibility requirements are out of reach.
In addition to the two primary benefits for the employer, employees covered under a QSEHRA also get to choose their insurance coverage—something not possible under a group health benefit.
Employers offering the QSEHRA have complete control over their costs. With it, they can set a monthly allowance that fits their budget, rather than having to choose a group health plan which has a price that is controlled by the insurance provider.
As for time savings, employers offering group health insurance spend an average of 13 hours each month administering the benefit. With a QSEHRA, however, employers spend an average of 15 minutes each month, depending on the number of employees participating in the benefit.
One way for employers to help employees cover health costs is to offer a health insurance stipend, which is simply extra money in an employee’s paycheck. This stipend is the equivalent of grossing up wages—it is a flat amount given to all employees, which they can spend however they choose.
While a health insurance stipend requires no administration, it is an informal solution to a formal problem.
Employees rarely consider the extra cash a “benefit,” and therefore rarely put the funds toward their health needs. Additionally, both employers and employees pay a combined 35 percent more in taxes on average than they would with a formal solution like the QSEHRA.
Small businesses with fewer than 50 employees often find a QSEHRA is an ideal way to provide health benefits. Key features include:
Tax savings. The employer and employee do not pay payroll tax on reimbursements. If employees have Minimum Essential Coverage, they also do not pay income tax.
Flexibility. Employers don’t need to force employees into one-size-fits-all plans. Instead, employees can get reimbursed for the medical expenses that make the most sense for their current circumstances.
Control. Instead of struggling with yearly hikes in premiums, employers can control how much they spend on their employees’ health—and can also ensure those funds are used for their medical expenses.
Visit the QSEHRA web page for detailed information about how the PeopleKeep QSEHRA works.
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