The qualified small employer health reimbursement arrangement (QSEHRA) is among the best options for small businesses that want to offer a formal health benefit but can’t afford traditional group health insurance.
With the QSEHRA, small businesses set a monthly allowance of tax-free money for employees. Employees purchase health care, and the business reimburses them up to their allowance amount.
This approach helps businesses control costs and frees employees to purchase the products and services they want most. The QSEHRA may not be the best fit for every small business, though.
In this post, we’ll give a brief overview of how the benefit works and then discuss QSEHRA pros and cons you’ll want to consider as you evaluate it for your business.
How the QSEHRA works
The QSEHRA is a formal, company-funded health benefit small businesses use to reimburse employees for personal health care expenses.
With the QSEHRA, the business sets a monthly allowance of tax-free money to offer eligible employees. There are no minimum contribution requirements, and small businesses can offer annual amounts of up to $5,150 for self-only employees and $10,450 for employees with a family in 2019.
Employees then make health care purchases, potentially including an individual health insurance policy, and the business reimburses the employee up to their allowance amount.
It’s tax-free. The QSEHRA is a formal benefit and as such, its reimbursements are free of payroll tax for both the business and its employees. Reimbursements can be free of income tax as well, provided employees have minimum essential coverage (MEC). Altogether, businesses and employees can save between 35 and 50 percent in taxes compared to informal wage increases.
It gives small businesses complete control over their health benefits budget. There are no minimum contribution requirements associated with the QSEHRA, and, unlike the group-integrated HRA, it’s not attached to a group health policy. That means businesses can dictate how much they’re willing to spend on health benefits and won’t be surprised by any hidden or unexpected costs.
It doesn’t come with minimum participation requirements. Small businesses can offer the QSEHRA with as few as one eligible employee, and they won’t lose eligibility based on how many employees use their benefit.
With a QSEHRA administrator, it reduces administrative complexity. With a QSEHRA, plan documents must created, reimbursement requests must be reviewed and approved, and the structure of the benefit must be updated with regulatory changes. By outsourcing these tasks to a QSEHRA administrator like PeopleKeep, small businesses can reduce health benefits administration time to less than 15 minutes a month.
It allows for complete employee personalization. With a QSEHRA, employees are in complete control of which health care products and services they purchase. Their company is no longer involved in their relationship with their health care provider, and their choices aren’t limited by what’s covered under a traditional policy.
It provides value to all employees, regardless of their insurance status. All employees can receive value from the QSEHRA, including employees covered by a family member’s policy. There are some special rules on how these employees access the benefit, but everyone can receive reimbursements for at least some health care products and services—even if those reimbursements are taxable. Employee's family members and spouses also benefit from the QSEHRA.
It works across state lines. Employees who work out-of-state can participate in the QSEHRA without any administrative or financial concerns.
There are maximum contribution caps. In 2019, small businesses are limited to offering $5,150 for self-only employees and $10,450 for employees with a family annually.
Businesses are limited in offering different allowance amounts to different employees. While businesses can offer different allowance amounts based on family status, they can’t offer different amounts based on job criteria. This limits businesses’ ability to maximize the benefit to hire and keep talented employees.
It may be unfamiliar to employees. The QSEHRA is a relatively new benefit, and small businesses that offer it will need to invest the time necessary to educate employees on the benefit and ensure they’ll be successful.
Employees must coordinate their premium tax credits with the benefit. Employees who qualify for a premium tax credit must coordinate their credit with the QSEHRA. In general, the amount of the premium tax credit is reduced dollar-for-dollar by the amount of the monthly QSEHRA allowance.
Health care sharing ministry fees aren’t reimbursable. Employees belonging to a health care sharing ministry, such as Medi-Share or Samaritan Ministry, can participate in the QSEHRA but they cannot have membership fees reimbursed. Additionally, all QSEHRA reimbursements will be subject to income tax since health care sharing ministries aren’t considered minimum essential coverage.
Administration is complex without a QSEHRA administrator. Without a QSEHRA administrator, small businesses must formulate their own plan documents; review, approve, and store employee reimbursement requests; and keep up with regulatory changes on their own. This is quite complex and can result in error, subjecting the business to fines.
Since its creation in 2016, the QSEHRA has helped thousands of small businesses offer health benefits while controlling their budgets. It’s a formal, tax-free solution that gives small businesses cost control while allowing employees to make the choices that work for themselves and their families.
But it’s not a good fit for everyone. If your small business has a high number of employees using premium tax credits or health care sharing ministries, you may not get the value you’re looking for.
To learn more about QSEHRA pros and cons as well as how to evaluate other small business health benefits options, check out our latest eBook: The Small Business’s Guide to Health Benefits in 2019.
In the eBook, we review five popular health benefits options, including how they work, how much they cost, their pros and cons, and how you can implement them. We also discuss various considerations you should make when evaluating each benefit and how to compare them against one another.
You can get the eBook here, or learn more about the QSEHRA here.