One advantage of the qualified small employer health reimbursement arrangement (QSEHRA) is that employee spouses can receive value from the benefit, regardless of their situation.
Though spouses don’t receive their own monthly allowance amount, they can submit their personal expenses for reimbursement through the employee’s allowance. Spouses premiums qualify for the QSEHRA’s tax benefits if they have a major medical plan.
There are rules that apply to spousal reimbursement, though. In this post, we’ll explore how the QSEHRA works for spouses and how businesses, their employees, and employee spouses can stay in compliance when using the benefit.
Which expenses can spouses have reimbursed through the QSEHRA?
Spouses are entitled to receive reimbursement for all the same expenses that employees are. In addition, if a spouse is enrolled in their employer’s group plan, premiums paid toward that plan can also be reimbursed through the QSEHRA.
If your spouse has a group plan, their employer will deduct the cost of your spouse's premium directly from their paycheck on a pre-tax basis. Because income taxes have already been withheld on these costs, your spouse must claim reimbursements for premiums as income. The IRS offers guidelines to help your employer include these taxes on your W-2. PeopleKeep software can add these taxes into your reimbursement amounts automatically, so you will have no additional taxes to worry about at the end of the year.
Expenses associated with the policy, such as copays or cost-sharing for services (like emergency room visits), are eligible and can be reimbursed 100% tax free.
How can spouses receive QSEHRA reimbursements tax-free?
Spouses are entitled to the same tax advantages as employees. As long as the spouse has minimum essential coverage (MEC), they can receive all reimbursements tax-free.
MEC may come from many sources, including the employee’s personal family health insurance policy, the spouse’s own individual insurance policy, or the spouse’s employer’s group health insurance policy.
If spouses don’t have MEC, any reimbursements made for their medical expenses will be considered taxable income to the employee.*
*Alternatives to major medical policies, such as health care sharing ministries and most short-term health policies, do not constitute minimum essential coverage. Spouses participating in these programs without MEC may not have their expenses reimbursed tax-free.
Are there special rules for spouses who each have a separate QSEHRA allowance?
Married individuals who are both eligible for a QSEHRA should be cautious in how they submit reimbursement requests. Specifically, spouses need to ensure they aren’t being reimbursed twice for the same payment. While both spouses can submit premium reimbursement requests for an expense, the total amount reimbursed shouldn’t exceed the original cost.
For example, suppose a married couple—Kelly and Andy—are both eligible for separate QSEHRA allowances. Kelly receives $300 from their employer and Andy receives $350. They share a family health insurance policy with a premium of $1,000 a month. In this case, both Kelly and Andy can submit the premium for full reimbursement because their combined reimbursement would be $650 (less than the total cost of $1,000). If they were to switch to a policy costing $600, they would need to coordinate their reimbursement requests so they only receive $600 every month.
To do otherwise would lead to improper reimbursement. As such, it’s very important that married couples communicate with each other on how they’ll handle QSEHRA reimbursement requests.
Spousal benefit is a significant feature of the QSEHRA.
Unlike with group health insurance, spouses can receive value from the QSEHRA regardless of their personal situation. To ensure all reimbursements are tax advantaged or tax free, spouses should follow the rules outlined in this post.
For detailed information about these rules, see IRS n-17-67.