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Perks of offering a QSEHRA and an HSA together

Written by: Gabrielle Smith
May 24, 2021 at 8:56 AM

Opportunities to offer more flexible and personalized health benefits have grown a lot in recent years. With new tax-free vehicles emerging, including account-based health plans (ABHPs), small employers now have multiple ways to increase employees’ benefits.

Two of the most popular ABHPs are health savings accounts (HSAs) and health reimbursement arrangements (HRAs), including qualified small employer HRAs (QSEHRAs) made specifically for small businesses with fewer than 50 full-time employees.

According to a survey conducted by the Society for Human Resource Management, high-deductible health plans (HDHPs) linked with HSAs and HRAs continue to grow, with nearly 60% of organizations reporting at least one of these offerings.

While HSAs and QSEHRAs fulfill different functions, they’re both valuable, and—when arranged correctly—can even be used together to create a standout health benefits package for employees.

In this article, we’ll go over the differences between an HSA and a QSEHRA, how they can work together, and why small employers should consider offering both at the same time.

Get our HRA and HSA compatibility guide to see how to offer these two benefits together


What's the difference between an HSA and a QSEHRA?

One of the first questions small employers have when considering opening an HSA, a QSEHRA, or both together, is: How do HSAs and QSEHRAs compare?

While both HSAs and QSEHRAs allow employers to contribute tax-free money for their employees’ qualified medical expenses, there are some substantial differences in each when it comes to eligibility, ownership, and contribution requirements.

Let’s take a look at how each one works.

Health savings accounts

An HSA is a financial account established by an individual to pay for qualified medical expenses. While the account is owned by the employee, HSAs must be linked with a qualified HDHP either offered by their employer or taken out by the employee.

Both the employee and the organization can contribute to it, so funds are made up of employees’ own money and employer contributions. All contributions to HSAs are tax-free, however, there are annual limits that keep the account from growing beyond a certain point (more on that below).

Qualified small employer HRA

A QSEHRA is an arrangement—not an account—between small employers and their employees. The employer agrees to provide a set allowance each month, and employees use their allowance to purchase qualified medical expenses up to the allowance amount.

Rather than funds accumulating in an account, employers only pay their employees after an expense has been incurred and it’s submitted for reimbursement, reviewed and then approved for payment by the employer. Any used allowance amounts at the end of the year goes back to the employer.

A QSEHRA can’t work in conjunction with a group health insurance policy, and the organization is the only party that makes contributions. QSEHRA payments are tax-free to the organization and can also be tax-free to employees, as long as the employees have minimum essential coverage (MEC).

Learn more about how a QSEHRA can work for your small business

HSA vs. QSEHRA comparison chart

The following chart explores the main differences between an HSA and a QSEHRA:

 

HSA

QSEHRA

What are the eligibility requirements?

An individual must have coverage under an HSA-eligible HDHP.

A small employer must have fewer than 50 employees and can’t offer a group health insurance policy.

Who owns the arrangement?

The individual, or employee, establishes and owns the HSA account.

The small employer establishes and owns the QSEHRA.

Who can contribute?

The individual, the employer, and other third parties (such as a spouse) can contribute to the HSA.

Only the small employer offering the QSEHRA can make allowances available.

Can employers make different contributions to different employees?

All employees receive the same contribution from the employer based on comparable coverage.

Employers can contribute different amounts based on family status: self-only or family.

How much can be contributed?

In 2021, individuals and businesses can contribute up to $3,600 with self-only coverage and $7,200 with family coverage annually. An additional $1,000 can be contributed for those 55 and over.

In 2021, organizations can contribute up to $5,300 for single employees and $10,700 for employees with a family annually.

Are contributions tax-free?

HSA contributions aren't subject to tax for either individuals or the organization.

Payments made through a QSEHRA are always tax-free for employers. They're also tax-free for employees who have MEC.

How do employees receive contributions from the business?

Employees receive a set contribution tax-free through their paychecks.

Employees receive reimbursement for qualified medical expenses after submitting required documentation.

What can funds be used for?

HSA funds can be used for qualified medical expenses as described in Section 213(d) of the Internal Revenue Code. They can’t be used to pay for health insurance premiums except in limited, extenuating circumstances.

QSEHRA funds can be used for qualified medical expenses as described in Section 213(d) of the Internal Revenue Code, including health insurance premiums.

Can I offer an HSA and a QSEHRA at the same time?

After understanding the differences between an HSA and an QSEHRA, many small employers want to know if they can contribute to employees’ HSAs at the same time they offer employees a QSEHRA allowance.

The answer is yes—but employees must adapt the QSEHRA to use the HSA.

HSAs require that account holders receive no coverage before they meet the HDHP's annual deductible, except for five exempted categories of expenses (see below).

Because an HRA can reimburse employees (or “provide coverage”) for many expenses, it must be altered to conform to HSA requirements. The easiest way to do this is to alter the HRA into a limited-purpose HRA.

In the years employees or their spouses make or receive contributions to their HSAs, they can use their QSEHRA to reimburse only four types of expenses before they meet their HDHP deductible.

These four expenses are:

  • Health insurance premiums
  • Dental expenses
  • Vision expenses
  • Long-term care premiums

These adjustments are necessary only for employees who make or receive contributions to their own or their spouse’s HSA while participating in the QSEHRA. Other employees wouldn’t be affected.

Additionally, employees who just want to use existing HSA funds rather than contribute to an HSA don’t need to adapt their QSEHRA.

Why should I consider offering both an HSA and a QSEHRA?

As the cost of medical care in the United States grows, so does the value of tax-free money to employees. Unfortunately, the federal government puts limits on two of its most popular tax-free vehicles—in 2021, HSA has contribution limits of $3,600 and $7,200 for single employees and employees with families, respectively, and QSEHRAs have limits of $5,300 and $10,700.

Offering both an HSA and a QSEHRA is a great way to maximize tax-free compensation to employees. It also ensures that money goes toward one of employees’ heaviest financial burdens: healthcare.

With both an HSA and a QSEHRA, employees can use their QSEHRA allowance to purchase their own HDHP and use the money from their HSA to fund expenses their HDHP doesn’t cover.

Together, these two health benefits provide employees with the greatest possible assistance from their employer, helping you recruit new talent and retain your best employees.

Conclusion

Both a QSEHRA and an HSA are quality options for small employers looking to offer flexible and affordable health benefits to their employees. When combined, they allow employers to maximize employees’ tax-free compensation to the highest degree and offer the greatest possible value.

This article was originally published on January 2, 2018. It was last updated on May 24, 2021.

Topics: Health Savings Accounts, HSA, Health Reimbursement Arrangement, Qualified Small Employer HRA

Additional Resources

See what makes HRAs different from HSAs and FSAs in our comparison chart.
See what PeopleKeep is all about—watch our QSEHRA product demo.

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