The budget-friendly qualified small employer health reimbursement arrangement (QSEHRA) has made offering health benefits possible for small employers. A QSEHRA is a formal health benefit that allows employers to reimburse their employees for their individual health insurance plans and qualified medical expenses.
In this post, we'll discuss the benefits of a QSEHRA, the requirements associated with plan documents, and what information those documents should include.
What is QSEHRA, and how does it work?
A QSEHRA is a health reimbursement arrangement (HRA) that makes it possible for small business owners with fewer than 50 full-time equivalent employees (FTEs) to offer tax-free reimbursements for medical expenses. Unlike reimbursements done through an employee stipend, QSEHRA reimbursements for qualified expenses are completely tax-free for employers and to employees with minimum essential coverage (MEC). With a QSEHRA, there are maximum limits on your contributions, but no minimum requirements. Plus, you can offer different allowances based on family status.
If your organization has more than 50 employees, you’ll want to consider an individual coverage HRA (ICHRA).
With a QSEHRA, you can offer a flexible health benefit at an affordable price while your employees can choose the health insurance coverage and individual premiums that work best for them. Unlike traditional group policies, the QSEHRA can provide value to all employees, regardless of their insurance situation. Single coverage and family coverage plans work with QSEHRA. Additionally, employees covered under a spouse’s group policy can still use the plan’s funds toward a deductible, copay, or a different medical expense altogether.
Even though the QSEHRA isn't a traditional group health plan, it's still subject to federal regulations. QSEHRAs require legal documents, which include details like how you fund the QSEHRA and how reimbursements are paid.
Why does your organization need a QSEHRA plan document?
Once you’ve decided that a QSEHRA is right for you, it’s time for the legal legwork. All QSEHRA health plans must comply with the Affordable Care Act (ACA) and the Employer Retirement Income Security Act1(ERISA). ERISA Section 4012 requires that a plan be established and administered according to a legal plan document. ERISA also requires organizations to share plan materials with the benefit's eligible employees.
There are no penalties for failing to create and share a QSEHRA plan document. Still, a company can be subject to fines if an eligible employee requests to see the document and the employer doesn't produce it.
For example, if an employer doesn't share the document within 30 days, they could be subject to an IRS penalty of up to $110 per day.
What does your QSEHRA plan document need to include?
QSEHRA plan documents must include specific information describing the benefit you're offering in detail to comply with federal regulations.
In general, your documentation should explain your new plan, what it covers, and inform employees to notify their insurer of their QSEHRA allowance amount.
It should also explain that reimbursements are only tax-free if they have a health insurance plan that meets MEC. If they lose their MEC, their reimbursements will be considered taxable income.
There are ten requirements you'll need to include in your QSEHRA plan documents:
- Named fiduciaries and plan administrators and their responsibilities
- Eligibility requirements for the QSEHRA
- Effective dates of participation
- Description of benefits provided and excluded
- How the QSEHRA is funded, and how it makes payments
- Claims procedures that comply with the U.S. Department of Labor regulations
- HIPAA privacy officers and rules relating to the use of protected health information (PHI)
- Information on federal mandates
- The procedure for amending the plan
- The procedure for plan termination
We’ll dive into these requirements in more detail in the sections below.
1. Named fiduciaries and plan administrators and their responsibilities
The QSEHRA plan document must specify one or more named fiduciaries who have the authority to control and manage how the QSEHRA is operated and administered.
Named fiduciaries agree to accept fiduciary duty for QSEHRA participants, meaning they'll act solely in the participants' best interest and that participants will pay only reasonable expenses.
The document should also specify a plan administrator for the QSEHRA and clearly outline the administrator's duties. Typically, employers will designate the company as fiduciary and plan administrator.
A plan administrator's duties might include:
- Plan design
- Creating QSEHRA participant forms
- Communicating the QSEHRA to participants
- Signing plan administration documents
- Maintaining plan data
- Appointing individuals to assist in plan administration
2. Eligibility requirements for the QSEHRA
The plan document should outline eligibility requirements for QSEHRA participation. Under IRS requirements, the organization must extend eligibility to all full-time W-2 employees. Each full-time employee's spouses and dependents (including children up to age 26) are also automatically eligible.
The organization can decide whether to extend the benefit to part-time and seasonal employees. If they choose to extend the benefit to these employees, part-time employees must be offered the same allowance amount as full-time employees.
3. Effective dates of participation
The plan document should clearly define the QSEHRA's participation dates for all eligible employees. The organization can have an effective date as early as the employee's first day with the company or require a waiting period of up to 90 days after the employee's hire date.
4. Description of benefits provided and excluded
The plan document should define which medical and healthcare expenses are eligible for reimbursement and which expenses aren't.
The QSEHRA can reimburse participants for all individual health insurance premiums and other medical costs listed in IRS Publication 502. If an employer wants to make reimbursement exclusions, the plan document should include an itemized list.
The document should also include the maximum monthly reimbursement amount available to employees. With the QSEHRA, employers can offer different allowance amounts to certain employees based on family status and age.
5. How the QSEHRA is funded and how it makes payments
The plan document must specify how the company will be making its employer contributions to the QSEHRA benefit. Standard payment methods include payroll additions, cash, or ACH, also known as direct deposit.
6. Claims procedures
Under ERISA, plan documents must create and follow reasonable procedures throughout the claims process. For a QSEHRA, a claim is when an eligible employee submits a request for reimbursement.
QSEHRA plan documents must establish and maintain reasonable procedures governing:
- Claims filing
- Notification of claims decisions
- Appeals for declined claims
Although employers have some freedom in crafting these procedures, ERISA offers specific guidelines for handling adverse claims decisions.
7. HIPAA privacy officers and rules relating to the use of protected health information (PHI)
Only small businesses with fewer than 50 FTE employees can offer a QSEHRA benefit. However, HIPPA privacy rules3 still apply to these employers. These privacy rules determine the conditions under which the plan can share protected health information (PHI) with the employer. Employees expect employers will respect their privacy and comply with HIPAA standards.
Penalties for HIPAA non-compliance are severe. Civil penalties can range from $100 to $50,000 per incident with no jail time to more serious offenses resulting in up to $250,000 in fines and ten years in prison, especially if the information was taken under false pretenses or disclosed on purpose.
Employers should designate HIPAA privacy officers in the plan document to avoid these penalties when implementing their QSEHRA. HIPAA privacy officers, usually the plan administrator, are the individuals or groups who will be exposed to the participants' PHI when reviewing medical expense receipts and processing reimbursements.
The plan document should also specify rules regarding the use and disclosure of PHI and PHI protection per HIPAA privacy rules.
8. Information on federal mandates
QSEHRA plan documents must discuss how the QSEHRA behaves concerning the Family and Medical Leave Act4 (FMLA), the Uniformed Services Employment and Reemployment Rights Act5 (USERRA), and other federal mandates.
9. The procedure for amending the plan
The plan document must specify the steps an employer will take to amend the plan, including identifying the individuals with the authority to amend the plan.
The document must also outline an employer's process to notify eligible employees of a material amendment to the plan.
ERISA requires that organizations notify participants no later than 210 days after the close of the plan year for which the amendment was adopted. However, if the amendment “materially reduces” the plan's benefits or services, the employer must notify participants within 60 days.
10. The procedure for plan termination
ERISA requires employers to describe both the organization’s and the employees’ rights if the company decides to terminate the QSEHRA health benefit for its participants. This includes explaining how the company will handle notification and plan assets.
Are there any other QSEHRA plan document requirements?
In addition to establishing a legal plan document, ERISA requires organizations to create a summary plan description (SPD). An SPD is a summary of your QSEHRA legal plan document information.
While the plan document is detailed and legalistic, the SPD should be written in plain language so your QSEHRA participants can understand their health benefits without confusion.
ERISA Section 1026 outlines all the required information your SPD should contain. In general, it should inform your QSEHRA participants of their benefits, rights, and obligations under the plan.
As the business owner, you must promptly distribute the SPD to your eligible employees. If you've set up a new QSEHRA, you must deliver the SPD to your eligible employees within 120 days after the plan is established.
For a newly added eligible employee to an existing QSEHRA, you must provide the SPD to your employee within 90 days of them gaining coverage. HRA administration software providers typically automate this process, delivering and keeping these documents available electronically.
What are your options for creating QSEHRA plan documents?
Self-administering your QSEHRA and drafting your own plan documents isn't an easy task. If your documents are found to be non-compliant, your company could face legal trouble and potentially steep penalties.
Some organizations opt to work with an attorney to draft their plan documents. However, the cost of this service can easily exceed $2,000. Even purchasing prewritten plan documents costs at least $200—and a fee is often assessed whenever you need to change your plan documents.
PeopleKeep makes administering a health benefit easier for employers of all sizes by providing customized plan documents and quick plan amendments. PeopleKeep also helps employers manage their HRA online using user-friendly dashboards, storing documents according to IRS regulations, and keeping their HRAs in compliance so they can have greater control over their time and money. We even review your employees’ expenses, helping you avoid HIPAA privacy violations.
Implementing a QSEHRA for your organization is a great way to offer comprehensive health benefits to your employees. Because ERISA and IRS requirements are complex, most organizations offering a QSEHRA should work with an HRA administrator to create their plan documents and handle HRA administration so they don't run into any future legal trouble.
This article was originally published on January 4, 2018. It was last updated on February 28, 2023.