When Congress passed the 21st Century Cures Act1 in December 2016, it created an alternative health benefit option to traditional group health insurance—the qualified small employer health reimbursement arrangement (QSEHRA), or small business HRA.
Through a budget-friendly QSEHRA, small employers can reimburse their employees, tax-free, for qualifying medical costs and insurance premiums, so long as they have an individual health insurance plan that meets minimum essential coverage (MEC).
So what about your employees who don’t have insurance, or don’t have a plan that meets MEC requirements? Can they still benefit from a QSEHRA? The short answer is—yes!
Below we’ll tell you everything you need to know about QSEHRA participation and MEC requirements, how your uninsured employees can access the benefit, and how to compliantly administer the plan for both your employees with health insurance and your uninsured workers.
How does a QSEHRA work?
Before diving into the rules and regulations of a QSEHRA, let’s first cover the basics of the benefit and how it works.
Under a QSEHRA, organizations with fewer than 50 full-time employees can reimburse their staff for individual health insurance premiums and qualified out-of-pocket health expenses. QSEHRAs don’t rely on employee contributions. Instead, the benefit is entirely funded through employer contributions that are made on a pre-tax basis and only up to a maximum annual limit amount.
Through the QSEHRA, a small business owner establishes a set monthly allowance for employees. Once an employee incurs a qualified medical expense and their proof of payment is verified and approved, they’re reimbursed up to their allowance amount. Unlike health savings accounts (HSAs), any unused amounts in the QSEHRA at the end of the year stay with the employer.
A QSEHRA is tax-deductible for small employers, often making it a more affordable coverage option than a traditional group health plan. Employees are also spared from income tax on reimbursements—provided they’re covered by an insurance policy that meets MEC requirements.
The QSEHRA makes providing a health benefits accessible for thousands of small businesses that wouldn’t be able to offer one without this type of plan.. In fact, our PeopleKeep customer data shows that 88% of employers weren't able to offer a health benefit at all before the QSEHRA became available. This highlights how empowering a QSEHRA can be for small employers who thought an affordable health benefit wasn’t possible.
What are the QSEHRA employee eligibility requirements?
Title 182 of the 21st Century Cures Act outlines QSEHRA eligibility requirements for individuals. Generally speaking, eligibility for the benefit is quite broad; a person simply needs to work for—or be the spouse or dependent of someone who works for—a qualified small business offering a QSEHRA.
However, small employers can exclude employees who fall into any of the following categories:
- Part-time and seasonal employees
- Employees who have not completed 90 days of service
- Employees younger than 25
- Union employees (unless the relevant collective bargaining agreement provides for eligibility)
- Nonresident aliens with no U.S. source income
Beyond that, employees are eligible to receive reimbursements through a QSEHRA after they provide “proof of coverage” for the payment of medical expenses.
In this context, “proof of coverage” means proof that the employee incurred an expense covered by the QSEHRA, like a receipt or an invoice. This means that any employee who meets the above requirements and submits proof of an eligible expense can get products and services reimbursed through the QSEHRA—regardless of whether or not they have MEC.
Where MEC does matter is in determining how the benefit will be taxed. Which leads us to the next section…
Who qualifies for tax benefits?
One of the advantages of a QSEHRA is its tax-free status for both small employers and their employees. Organizations administering a QSEHRA won’t be subject to payroll taxes for the reimbursements they issue employees. Additionally, employees won’t have to pay income or payroll tax on their reimbursements.
Small businesses will receive these tax advantages regardless of their employees' health insurance coverage status.
Employees, however, must have MEC if they want to receive tax-free reimbursement. Without MEC, any reimbursements received through the QSEHRA may be considered taxable and must be included in the employee’s gross income.
What about my employees without minimum essential coverage?
Even though they won’t reap some of the QSEHRA’s tax advantages, employees without MEC can still benefit from participating in your organization’s QSEHRA.
A monthly QSEHRA allowance helps uninsured employees—or those on cost-sharing plans like Medi-Share—pay for various medical expenses. Physical exams, prescription drugs, over-the-counter drugs, premiums for dental plans, and vision policies are eligible for reimbursement under a QSEHRA.
While employees without MEC must pay some taxes on these reimbursements, the up-front benefit from their employer significantly defrays the cost of their health expenses.
And, if employees eventually enroll in a health insurance marketplace plan that meets MEC requirements, like being added to a spouse’s health plan coverage, they’ll be able to slip seamlessly into the tax-advantaged benefit.
Do I need to do anything differently when administering the QSEHRA for employees without MEC?
The only difference between QSEHRA administration requirements for your staff members without MEC and those with MEC are the employee notice requirements. It’s your responsibility to provide comprehensive guidance and education to your uninsured employees about the potential tax consequences.
Title 18, Section 4(A)3 of the 21st Century Cures Act requires small business employers to notify employees of the QSEHRA benefit each year. In addition to informing employees of the amount of their benefit and explaining how it affects premium tax credits, the QSEHRA notice must explain that employees could be subject to a tax penalty if they fail to maintain MEC during the year.
An additional requirement is the notice must explain that any reimbursements made through the QSEHRA while the eligible employee doesn’t have MEC must be included in the employee’s gross income, according to QSEHRA W-2 requirements.
Once you’ve sent the notice, you’ve done all you need to do. A small business owner is under no legal requirement to track employees’ tax liability for QSEHRA benefits.
The QSEHRA is the only formal small business benefit solution that offers immediate aid to uninsured employees. And, unlike simply increasing your employees’ wages, QSEHRAs give employers the peace of mind to know their funds are being spent on employees’ health needs.
Employees without MEC can still access their allowance, and because of the tax advantages enjoyed by those with MEC, the QSEHRA provides an incentive for all employees to purchase health insurance policies on the federal marketplace, whether individual or family coverage.
Ready to get a QSEHRA set up at your organization? Simply schedule a call with us, and we’ll get you on your way towards a comprehensive health benefit!
This article was originally published on May 22, 2017. It was last updated on June 20, 2022.