The qualified small employer health reimbursement arrangement (QSEHRA), also called the small business HRA, comes with maximum annual contribution limits. In practical terms, that means small businesses are limited in how much tax-free money they can offer their employees through the benefit.
The IRS outlines these annual contribution limits annually through a revenue procedure.
In 2024, small businesses may offer up to $6,150 per self-only employee and up to $12,450 per employee with a family.
In this post, we'll go over:
- What the new QSEHRA contribution limits are for 2024
- How tax reform affects how QSEHRA limits are calculated
- What to do if you want to offer more than the QSEHRA limits allow
- Tips for setting your QSEHRA budget
- How employees can use their QSEHRA allowance
Ready to offer a QSEHRA in 2024? Get our complete guide to the QSEHRA
What is a QSEHRA?
A QSEHRA is an employer-funded health benefit that allows organizations to reimburse their employees for their individual health insurance premiums and qualifying out-of-pocket medical expenses. Reimbursements are tax-free for the employer. As long as employees have qualifying minimum essential coverage (MEC), their reimbursements are also tax-free.
With a QSEHRA, employees can purchase the individual health insurance coverage that best fits their needs. At the same time, employers get complete budget control by setting custom allowances up the maximum contribution limit.
Any organization with fewer than 50 full-time equivalent employees (FTEs) can offer a QSEHRA to their W-2 employees. You must offer the benefit to all W-2 full-time employees, but you can choose to include part-time employees as well.
What are the QSEHRA contribution limits for 2024?
The IRS released the 2024 QSEHRA guidelines through Revenue Procedure IR-2023-34 on November 9, 2023.
For tax years beginning in 2024, small businesses can offer up to $6,150 for self-only employees ($512.50 per month) and $12,450 for employees with a family ($1,037.50 per month).
These contribution limits reflect a $300 annual increase (5.13%) for self-only employees and a $650 annual increase (5.5%) for employees with a family over 2022 limits. That's $25 more per month for self-only employees and $54.17 for employees with a family.
|
2022 QSEHRA limits |
2023 QSEHRA limits |
2024 QSEHRA limits |
|
|
Self-only coverage (annual) |
$5,450 |
$5,850 |
$6,150 |
|
Self-only coverage (monthly) |
$454.16 |
$487.50 |
$512.50 |
|
Family coverage (annual) |
$11,050 |
$11,800 |
$12,450 |
|
Family coverage (monthly) |
$920.83 |
$983.33 |
$1,037.50 |
For employees who become eligible for the QSEHRA midyear, you must prorate the limits to reflect the total amount of time the employee is eligible. For example, a self-only employee who is eligible for the QSEHRA for eight months in 2024 could receive up to $4,100 through the benefit that year.
How has tax reform affected how QSEHRA limits are calculated?
The IRS relies on cost of living adjustments to calculate QSEHRA limits every year. Certain changes implemented through the 2017 tax reform laws also affect this process.
Tax reform incorporated the chained CPI—an alternative way to measure inflation in the Consumer Price Index (CPI). With the chained CPI, adjustments incorporate the economic phenomenon known as substation bias, whereby consumers react to rising prices in one good (for example, beef) by substituting similar goods (like chicken).
The result is smaller upward adjustments in inflation. For the QSEHRA, this means 2024 contribution limits are lower than they would have been with the old calculation method. This will continue to affect QSEHRA limits, as the chained CPI will result in slower incremental increases through the years.
What if I want to offer more than the annual QSEHRA contribution limit?
Depending on where you and your employees live, the QSEHRA allowance caps may not be enough to purchase a comprehensive form of minimum essential coverage (MEC).
If this is the case, your organization may benefit from another type of HRA—the individual coverage HRA (ICHRA)—that has no maximum contribution limits. An ICHRA also allows you to customize allowances and eligibility with different classes of employees.
With an ICHRA, eligible employees must have individual health insurance coverage that meets MEC.
What else can I use to set a QSEHRA budget?
The QSEHRA contribution limits are the only restriction small businesses face when creating their QSEHRA budget. There are no minimum contribution requirements.
To help you set your benefits budget for 2024, you can use several points of data, including average QSEHRA contributions. According to PeopleKeep customer data, small businesses offered an average of $319 per self-only employee and $457 per married employee with a family in 2022.
You can also use our resource, "Seven strategies to set a QSEHRA budget." In this post, we walk you through different strategies to help you choose allowance amounts that benefit both your company and your employees.
How can employees spend their QSEHRA allowance?
Depending on which QSEHRA plan you choose to set up, employees can spend their QSEHRA allowance on their individual market coverage premiums, such as health, vision, and dental insurance premiums and more than 200 out-of-pocket expenses.
A few popular expenses include:
- Doctor's visits
- Eyeglasses
- Prescription and drugs
- Mental health counseling
Conclusion
The QSEHRA is an excellent way to provide a health benefit to your employees as a small business. With it, your employees can choose the health coverage that fits their needs.
Keeping a close eye on the adjusting QSEHRA allowance caps is important to ensure you're offering a compliant QSEHRA and helping your employees use their benefit to the fullest.
