Opportunities to offer more flexible and personalized health benefits have grown significantly in recent years. Increased awareness of newer tax-free benefits like account-based health plans (ABHPs) have enabled small employers to increase employees' benefits.
Two popular ABHPs are health savings accounts (HSAs) and health reimbursement arrangements (HRAs), including qualified small employer HRAs (QSEHRAs) made specifically for small businesses and nonprofits with fewer than 50 full-time equivalent employees (FTEs).
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.
Download our HRA and HSA compatibility guide to learn how you can 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 offering an HSA, a QSEHRA, or both is: How do HSAs and QSEHRAs compare?
While there are tax benefits to both HSAs and QSEHRAs, 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 (HSAs)
An HSA is a financial account established by an individual to pay for qualified medical costs. While the employee owns the account, both the employee and the organization can contribute to it, so funds are made up of employees' own money and employer contributions.
It’s important to note that contributions can only be made to HSAs when the employee is covered by a qualified high-deductible health plan (HDHP) either offered by their employer or taken out by the employee.
B All employer and employee contributions to HSAs are tax-free. However, there are annual limits that keep the account from growing beyond a certain point.
Qualified small employer HRA (QSEHRA)
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 can use their allowance to purchase qualified medical expenses or pay for their individual health insurance premiums up to the allowance amount.
Rather than funds accumulating in an account, eligible employers only pay their employees after an eligible expense has been incurred and it's submitted for reimbursement, reviewed, and then approved for payment by the employer. Any unused allowance amounts at the end of the year will go back to the employer.
A QSEHRA can't work in conjunction with group health insurance coverage, 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 they have minimum essential coverage (MEC).
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 in order to make contributions. |
A small employer must have fewer than 50 FTEs and can't offer a traditional group health plan. |
|
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 2023, individuals and businesses can contribute up to a maximum allowance of $3,850 with self-only coverage and $7,750 with family coverage annually. An additional $1,000 can be contributed for those 55 and over. |
In 2023, organizations can contribute up to a maximum allowance of $5,850 for single employees and $11,800 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 submit the required documentation of their qualified healthcare expenses for reimbursement. |
|
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 plan 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 a QSEHRA, many small employers want to know if they can contribute to employees' HSAs while offering 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 four exempted categories of expenses.
Because an HRA can reimburse employees (or “provide coverage”) for many medical 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 when 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, eligible 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 2023, HSA has contribution limits of $3,850 for single employees and $7,750 for employees with families. QSEHRAs have limits of $5,850 and $11,800.
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 the heaviest financial burdens for employees: 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 forms of health coverage 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 March 23, 2023.
