When Congress passed the 21st Century Cures Act in December 2016, it created a new health plan for small employers—the qualified small employer health reimbursement arrangement (QSEHRA), or small business HRA.
Through a QSEHRA, small employers can reimburse their employees, tax-free, for qualifying medical expenses and insurance premiums, so long as they have 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!
In this article, we’ll walk you through what the 21st Century Cures Act says about QSEHRA participation and MEC requirements, how your uninsured employees can access the benefit, and how to compliantly administer the plan for both insured and uninsured employees.
How does a QSEHRA work?
Before we dive into the rules and regulations of a QSEHRA, let’s first cover the basics on what the benefit is and how it works.
Under a QSEHRA, organizations with fewer than 50 full-time employees can reimburse their staff for individual insurance premiums and qualified out-of-pocket medical expenses. The employer sets a monthly allowance for employees, verifies and approves employee expenses, and then reimburses them up to their allowance amount.
QSEHRAs are administered on a tax-free basis for small employers. Employees are also spared from income tax—provided they’re covered by an insurance policy that meets MEC requirements.
Thousands of small businesses across the country have already found relief through QSEHRAs, both from the savings in cost and administration time.
In fact, our PeopleKeep customer data shows that 40% of QSEHRA users in 2020 were in their third or fourth year of offering the benefit because it continued to prove itself a valuable benefit year after year.
What are the QSEHRA employee eligibility requirements?
Title 18 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, and employees won’t have to pay income or payroll tax on the reimbursements they receive.
Small businesses will receive these tax advantages regardless of the coverage status of their employees.
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 without 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 a variety of medical expenses. Physical exams, prescription and nonprescription drugs, and premiums for dental and vision policies are all 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 needs.
And, if employees do eventually enroll in a plan that meets MEC requirements, like being added to a spouse’s plan, 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 administering your QSEHRA to your employees without MEC versus the ones with MEC is that it’s your responsibility to educate them of the potential tax consequences of going uninsured.
Title 18, Section 4(A) of the 21st Century Cures Act requires small 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.
The notice must also explain that any reimbursements made through the QSEHRA while the employee isn’t covered under 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. Small employers are under no legal requirement to track employees’ tax liability for QSEHRA benefits.
The QSEHRA is the only formal small business health plan that offers an immediate benefit to uninsured employees. And, unlike simply increasing your employees’ wages, QSEHRAs give employers the peace of mind that comes with knowing 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 incentive for all employees to purchase full coverage.
This article was originally published on May 22, 2017. It was last updated June 14, 2021.