When Congress passed the 21st Century Cures Act, it created an alternative health benefit option to the traditional group health plan—the qualified small employer health reimbursement arrangement (QSEHRA), or small business HRA.
With a budget-friendly QSEHRA, eligible employers can reimburse individual employees, tax-free, for qualifying medical costs and individual insurance premiums, so long as they have individual coverage that meets minimum essential coverage (MEC). But can uninsured employees or those with a plan that doesn’t meet MEC still benefit from a QSEHRA?
Below we’ll go over QSEHRA participation and MEC requirements for employers, how employees without health insurance 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 how it works and its benefits.
Under a QSEHRA, organizations with 1–49 full-time employees can reimburse their staff for individual health insurance premiums and qualified out-of-pocket medical expenses. Unlike traditional group plans or other types of HRAs, employees choose the coverage that’s best for them via a health insurance exchange, like the individual marketplace or a private insurance company, and are reimbursed for the cost of their chosen insurance premium.
QSEHRAs don’t rely on employee contributions. Instead, they’re funded entirely through employer contributions with pre-tax dollars and only up to an annual maximum limit amount. The IRS updates annual limits for both individuals and families.
Through the QSEHRA, a small business owner establishes a set monthly allowance for individual employees, reducing the risk of costly budget surprises. Once an employee incurs a qualified medical expense and their proof of payment is verified and approved, they’re reimbursed up to their maximum allowance amount.
Unlike health savings accounts (HSAs) or flexible spending accounts (FSA), any unused employer contributions in the QSEHRA at the end of the year stay with the employer.
A QSEHRA is tax-deductible for small employers and is often a more affordable health plan coverage option than a traditional group health plan. Employees are also spared from income tax on reimbursements—provided they have individual coverage that meets MEC requirements.
The QSEHRA makes providing 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 didn’t offer a health benefit at all before they implemented a QSEHRA.
This highlights how empowering a QSEHRA can be for small employers who thought affordable health insurance options weren’t available.
What are the QSEHRA employee eligibility requirements?
Title 18 of the 21st Century Cures Act outlines QSEHRA participation 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, a small business owner can exclude the following classes of employees:
- Part-time employees
- 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. sources of household income
Beyond that, employees are eligible to receive an employer reimbursement through a QSEHRA after they provide “proof of coverage” for the payment of qualified medical services and other expenses.
In this context, “proof of coverage” means proof that the eligible employee incurred an expense covered by the QSEHRA. Acceptable forms of proof for eligible expenses could be medical bills, receipts, or an invoice.
Any employee who meets the above requirements and submits proof of an eligible health expense can get products and services reimbursed through the QSEHRA—even if they don’t have MEC.
However, the type of health insurance coverage matters in determining how the benefit will be taxed. This leads us to the next section on tax qualification.
Who qualifies for tax benefits?
One of the biggest advantages of a QSEHRA is its tax-free status for small employers and employees, as tax-free employee benefits are rare. Organizations administering a QSEHRA won’t be subject to payroll taxes for the reimbursements they issue employees. Additionally, in many cases employees won’t have to pay income tax or payroll tax on their reimbursements.
Small businesses will receive tax advantages regardless of their employees' health insurance policy status.
Employees, however, must have MEC if they want to receive tax-free reimbursement. For employees without health insurance or those without MEC, any reimbursements received through the QSEHRA may be considered taxable income and must be included as part of the employee’s gross household income.
If you need additional guidance with the tax implications of the QSEHRA, you should work with a tax professional to ensure you’ve done everything correctly.
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 employees with health insurance—or those on cost-sharing plans like Medi-Share—pay for various medical services and qualified expenses. Physical exams, prescription drugs, over-the-counter drugs, employee premiums for dental plans, and vision care 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 plan on the individual market that meets MEC requirements, like being added to a spouse’s health 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 employees without health insurance about the potential tax consequences.
Title 18, Section 4(A) of the 21st Century Cures Act requires small business employers to notify employees of the QSEHRA benefit yearly. In addition to informing employees of the amount of their benefit, you need to explain how QSEHRAs work with premium tax credits. With a QSEHRA, employees who qualify for premium tax credits must reduce their tax credit by their allowance amount.
The QSEHRA notice must also explain that employees could be subject to a tax penalty if they fail to maintain MEC during the year. Lastly, the notice must explain that any reimbursement amounts 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 that can work for employees that are uninsured. 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 maximum 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 health insurance 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 toward a comprehensive health benefit!
This article was originally published on May 22, 2017. It was last updated on December 16, 2022.