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 individual health insurance policies and healthcare services they need, and the organization reimburses them up to their available 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 organization, though.
In this post, we’ll give a brief overview of how the benefit works and discuss the QSEHRA pros and cons you’ll want to consider as you evaluate it for your business.
Learn more about offering a QSEHRA with our complete guide!
How the QSEHRA works
The QSEHRA is a formal, employer-funded health benefit that small businesses and nonprofits with fewer than 50 full-time equivalent employees (FTEs) can use to reimburse employees for their qualifying medical expenses.
With the QSEHRA, the employer sets a monthly allowance of tax-free money to offer eligible employees. There are no minimum contribution requirements, but the IRS imposes maximum contribution limits.
For 2024 organizations can offer up to $6,150 for self-only employees and $12,450 for employees with a family.
Employees then make healthcare purchases, potentially including an individual health insurance policy, and the employer reimburses the employee up to their allowance amount.
QSEHRA pros
Here are some pros of the QSEHRA:
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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% in taxes compared to informal wage increases or health stipends.
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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 coverage HRA (GCHRA), 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.
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It doesn’t come with minimum participation requirements. Small businesses can offer the QSEHRA with as few as one eligible employee. However, you must offer the QSEHRA to all full-time W-2 employees. You can choose to offer the benefit to part-time employees as well.
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You can reduce administrative complexity with QSEHRA administration software. With a QSEHRA, you must create legal plan documents, review and approve employee reimbursement requests, and update the structure of the benefit according to any regulatory changes. By using administration software like PeopleKeep, you can reduce your health benefits administration time to less than 15 minutes per month.
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It allows for complete employee personalization. With a QSEHRA, employees are in complete control of which healthcare products and services they purchase. Their company is no longer involved in their relationship with their healthcare provider, and their choices aren’t limited by what’s covered under a traditional policy.
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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 healthcare products and services. Employee's family members and spouses also benefit from the QSEHRA.
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It works across state lines. Employees who work out-of-state can participate in the QSEHRA without any administrative or financial concerns.
QSEHRA cons
While the QSEHRA is an excellent health benefit option for small organizations, it may not meet every organization's needs.
Some potential downsides to a QSEHRA include the following:
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There are maximum contribution caps. In 2024, employers are limited to offering $6,150 for self-only employees and $12,450 for employees with a family annually. Thankfully, the individual coverage HRA (ICHRA) has no maximum limits. It works similarly to a QSEHRA, where you can reimburse employees tax-free for their qualifying medical expenses.
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Businesses are limited in offering different allowance amounts to different employees. While businesses can offer different allowance amounts based on family status, such as married or single, they can’t offer different amounts based on job criteria. This limits businesses’ ability to maximize the benefit to hire and keep talented employees. Thankfully, the ICHRA does allow you to customize allowances and eligibility by class.
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Employees may not be able to use their premium tax credits. Employees who qualify for a premium tax credit may not be able to use them with a QSEHRA. If their QSEHRA allowance is affordable, they can't use their credits. If their QSEHRA allowance is unaffordable, they 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.
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Health care sharing ministry fees aren’t reimbursable. Employees belonging to a health care sharing ministry, such as Medi-Share, can participate in the QSEHRA, but they can't 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.
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The administration is complex without a QSEHRA administrator or software. Without a QSEHRA administrator or software, 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 errors, subjecting the business to fines.
Conclusion
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. In that case, a health stipend may be a better option.
