The qualified small employer health reimbursement arrangement (QSEHRA), also called the small business HRA, comes with 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.
Every year, the IRS outlines these annual contribution limits through a revenue procedure.
In 2023, small businesses may offer up to $5,850 per self-only employee and up to $11,800 per employee with a family.
In this post, we'll go over:
- The new QSEHRA contribution limits are for 2023
- 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
Wondering how much a QSEHRA would cost your business? Get an instant estimate with our benefit designer tool
What are the QSEHRA contribution limits for 2023?
The IRS released the 2023 QSEHRA guidelines through Revenue Procedure IR-2022-38 on October 18, 2022.
For tax years beginning in 2023, small businesses can offer up to $5,850 for self-only employees ($487.50 per month) and $11,800 for employees with a family ($983.33 per month).
These contribution limits reflect a $400 annual increase (7%) for self-only employees and a $750 annual increase (6.6%) for employees with a family over 2022 limits. That's about $33.33 more per month for self-only employees and $62.50 for employees with a family.
For employees who become eligible for the QSEHRA midyear, the limits must be prorated 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 2023 could receive up to $3,900 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 (like beef) by substituting similar goods (like chicken).
The end result is smaller upward adjustments in inflation. For the QSEHRA, this means 2023 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 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—that has no maximum contribution limits.
Download our chart to see how the ICHRA and QSEHRA compare
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, and small businesses can change their monthly allowance amount at any point during the year.
To help you set your benefits budget for 2023, you can use several points of data, including average QSEHRA contributions. According to PeopleKeep customer data, small businesses offered an average of $307 per self-only employee and $449 per employee with a family in 2021.
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 health insurance premiums and well as over 200 out-of-pocket expenses.
A few popular expenses include:
- Doctor's visits
- Prescription and drugs
- Mental health counseling
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.
Interested in setting up a QSEHRA for your small business? Schedule a call with a personalized benefits advisor today to see how PeopleKeep can help!