If you’re a small employer offering health benefits to your employees for the first time, the qualified small employer health reimbursement arrangement (QSEHRA) is an excellent first step.
However, administering it entirely on your own can be challenging, especially if you’re new to HRAs and IRS requirements.
This article covers the steps you need to take to set up your QSEHRA, administer it compliantly, and give you more information about how PeopleKeep can empower you to offer a QSEHRA without the hassle.
Create a legal plan document
Before you can begin administering your QSEHRA, you’ll need to draft a legal plan document that outlines the details of your plan and follows Employee Retirement Income Security Act (ERISA) requirements.
Your document must include these items in order to be compliant with ERISA standards:
- A list of named fiduciaries and plan administrators and their responsibilities
- A description of how your QSEHRA is funded and how reimbursements are made
- Information on federal mandates
- The procedure for amending the plan
These items aren’t required by ERISA, but we recommend them to make an even more useful document:
- Eligibility requirements for your QSEHRA
- Effective dates of participation
- A description of benefits provided and excluded
- Claims procedures
- HIPAA privacy officers and rules relating to the use of protected health information (PHI)
- The procedure for plan termination
Create a summary plan description
In addition to the legal plan document, ERISA also requires a summary plan description (SPD).
As the name suggests, the SPD is a summary of your plan document for your employees to easily read and learn more about their new health benefit—so no fancy legal language is necessary here.
In general, it should inform participants of their benefits, rights, and obligations under the plan. Once it’s all drafted, be sure and administer it to your employees at least 120 days before your plan starts, or 90 days before a newly eligible employee gets coverage.
Notify your employees about your QSEHRA
This next one’s easy—tell your employees about their new health benefit. The IRC requires your organization to send employees a notice regarding your QSEHRA every year informing them of certain details and rules applicable to the benefit.
Each notice must:
- Inform the employee of their benefit amount for the year
- Instruct the employee to share that amount with any exchange if they apply for a premium tax credit
- Explain to the employee that they may be subject to a tax penalty under IRC Section 5000A if they fail to maintain minimum essential coverage (MEC) during the year
While it’s not a strict rule, it’s recommended that you send your employees the notice at least 90 days before the start of each calendar year in which you’ll offer your QSEHRA. For example, if you plan to offer a QSEHRA in the beginning of 2025, you must notify your employees by October 3, 2024. You must do the same in 2025 if you plan to continue the benefit into 2026.
Help employees buy individual health insurance
Once your employees know about the benefit, they can start shopping for an individual insurance plan that they’ll get reimbursed through their QSEHRA allowance. And depending on what you choose to reimburse, they can start shopping for out-of-pocket items as well.
This may be a new process for some of your employees. After all, nearly half of Americans get coverage under an employer-sponsored group plan, so a lot of your employees may never have had individual coverage before.
Your organization should invest in your employees’ success with your QSEHRA by providing them with resources to understand and shop for individual insurance.
This doesn’t involve advising your employees on which policies to buy. Instead, your organization should make it as easy as possible for employees to purchase policies. You can do this either by coordinating with a benefits advisor to help your employees choose and purchase a policy, or by directing them to an online service that does the same thing.
Establish compliant administration procedures
By this point, you’re done with all of the prep work and you’re officially ready to administer your QSEHRA! Unlike a group health insurance plan, you don’t have an insurance carrier to take on the responsibilities of administering your QSEHRA.
That’s why we’ve rounded up eight key components of compliant QSEHRA administration procedures you’ll need to keep in mind to avoid penalties.
1. Updating your plan with staff changes
After an employee leaves or you gain a new one, you’ll need to end or extend your QSEHRA benefit appropriately.
When you lose an employee, either through termination or because they leave voluntarily, you must handle any of their outstanding reimbursement requests and end eligibility according to your plan documents.
When you gain a new employee, you’ll want to give them proper notice of their eligibility for your QSEHRA benefit as soon as you can so they have time to review their coverage options and enroll in a plan.
2. Receiving and processing reimbursement requests
Your employees will need to submit proof of any qualified medical expenses they want reimbursed—your job will be to approve and process them.
The document they provide as proof, such as a receipt or invoice, must include the following:
- The service or product
- The date of the service or sale
- The amount incurred
Some recurring expenses, like a monthly insurance premium, only need to be submitted and approved once. This applies as long as the recurring expense matches previously approved expenses with the same amount, service provider, and date.
Your organization must review your employees’ submissions and either approve or decline the reimbursement request.
You’ll check to see if the charge represents:
- A qualified medical expense under IRS Code Section 213(d)
- The employees’ verifying documents reflect the service or product
- The date of the service or sale, and the amount incurred
If everything’s in order, you’ll approve the request. If not, you’ll decline it and follow the process for adverse claims decisions outlined in your plan documents. This leads us to our next section…
3. Handling declined reimbursement requests and appeals
In order to be ERISA compliant, your organization must have a specified procedure in place for declining reimbursement requests and appeals.
If you’re declining one of your employee’s reimbursement requests, you must notify them within 30 days of you receiving their request. If you declined it because your employee didn’t provide enough information for you to process their request, your employee has 45 days from the day you notified them to get you the missing information.
If the new information has everything you need, you can approve the reimbursement request. If not, your employee has the right to appeal the declined request under ERISA. During the appeals process, you must follow regulations issued by ERISA and the Department of Labor as well as the procedures outlined in your plan documents. If the result is in the participant’s favor, you can move forward with the reimbursement request.
4. Paying reimbursements
Once a reimbursement request has been approved, you’re ready to pay it according to the timeline and processes set out in your plan documents.
When making a payment, you can use the following:
- Direct deposit
If the reimbursement request was larger than the employee’s accrued allowance, you should pay the employee the full amount of their accrued allowance and continue to make monthly payments toward the balance until it’s paid in full or the employee’s annual allowance is exhausted.
5. Record keeping and storing documentation
According to federal government regulations, you must keep an ongoing record of what has been disbursed through your QSEHRA and why. This should include all reimbursement requests, the supporting documentation, and whether those requests were approved or declined.
The IRS has a statute of limitations of seven years, so it’s best practice to store this information for at least that long.
6. Sending required notices
Other than notifying your employees about the QSEHRA itself, you’ll need to keep them informed about how you’re handling their personal health information.
The plan sponsor must certify that employees’ health information will be protected and not used for employment-related actions. If you have a HIPAA privacy officer, only this individual should see this information.
7. Evaluating allowance amounts
As part of your company’s annual budget review, you may want to revisit the monthly allowances you give employees through your QSEHRA. If you’re making any changes, you should let your employees know before the start of the plan year.
With the QSEHRA, you can also change monthly allowance amounts in the middle of the plan year. If you do this, you need to give employees as much notice as possible. What’s more, if you’re cutting allowance amounts to the point that it would “materially reduce” the plan’s benefits or services, you must notify participants within 60 days.
8. Fulfilling tax reporting requirements
Your organization makes QSEHRA payments on a tax-free basis for both the organization and the employees. During tax time, use box 12, code FF on each employee’s W-2 to report the total permitted benefit available to the employee through the QSEHRA.
It’s the employees’ responsibility to track any reimbursements for incurred expenses while they didn’t have minimum essential coverage (MEC). They may need to include these amounts as part of their gross income.
Consider the costs of self-administering your QSEHRA
It might seem like administering your QSEHRA entirely on your own would be a cost effective choice, however, it ends up costing a lot more than you’d think.
For example, it’s unlikely that you’ll be able to draft a plan document without the help of an attorney—that cost alone can exceed $3,000. What’s worse, if your plan documents operate outside of the strict QSEHRA definition in Section 9831 of the IRS Code, you face fines of up to $100 per day per employee.
The cost of your time spent reviewing employees’ reimbursements, submitting payments, record keeping, and sending out annual QSEHRA notices is also a huge drain on productivity from your organization. The average HR representative’s salary, just 400 hours—or 7 hours a week in a full-time schedule—dedicated to QSEHRA responsibilities could cost $10,000 a year.
Want help administering your QSEHRA?
If you’re attracted to the benefits of self-administration but wary of the time costs and compliance concerns, PeopleKeep’s combined software and customer support solution is a great choice.
Our #1-rated software and award-winning customer service provides a simple platform for administering employee benefits like a QSEHRA. It gives your organization a legal plan document, verifies employee expenses for approval by the plan administrator, and automatically sends required notices.
Here’s the best part—unlike working with a third-party administrator, our software simply acts as a support system for self administrators, so you’re always the one calling the shots.
Administering your first QSEHRA can seem like a daunting task, but we’re here to help you through it. Whether it’s your first time offering a health benefit, or you’d just like to make sure you’re staying compliant, PeopleKeep’s software and support team help thousands of organizations administer HRAs everyday, and we’d love to help you, too.