For those unfamiliar with health reimbursement arrangements (HRAs), the endless acronyms can be confusing. This is especially true when considering different types of HRAs, such as the qualified small employer HRA (QSEHRA).
The QSEHRA is merely one type of HRA, just like the New York Yankees are one type of Major League Baseball team. But for those who are just learning about reimbursement-based health benefits, that distinction can be difficult to understand.
In this post, we’ll define the HRA and the QSEHRA, explore their relationship, and learn about other types of HRAs.
Let’s get started.
What is the HRA?
A health reimbursement arrangement (HRA) is an employer-sponsored benefit that allows businesses to reimburse employees tax-free for health insurance and other out-of-pocket medical expenses.
With an HRA, businesses offer employees a monthly allowance of tax-free money. Employees then purchase health care, potentially including individual insurance policies, and the business reimburses employees up to their allowance amount.
Though the HRA has been around since the 1970s, it was first defined and officially sanctioned in 2002. In Notice 2002-45, the IRS stated that businesses would be permitted to offer the HRA as a formal, tax-free health benefit to employees.
There are several kinds of HRAs the IRS allows businesses to offer. While all HRAs have the same basic structure, they differ in some important ways. Common differences between HRAs include:
- Which businesses can offer them
- Which employees can participate
- Whether businesses can offer the HRA alongside group health insurance
- How much tax-free money businesses can offer employees
- How the HRA benefit interacts with employees’ premium tax credits
Depending on the goals you have for your business, one type of HRA may be better for you than another.
What is the QSEHRA?
A qualified small employer HRA (QSEHRA) is a specific type of HRA. A good way to think about the relationship between the QSEHRA and the HRA is to think of the relationship between yourself and your family; you are a part of your family, but you’re also an individual.
In the same way, the QSEHRA fits into the HRA family by following the same basic structure of all HRAs. At the same time, it comes with unique features.
The QSEHRA was created through congressional legislation in December 2016. It’s available specifically to small businesses with fewer than 50 full-time employees, and it allows businesses to offer up to $5,150 a year to single employees and $10,450 a year to employees with a family.
With a QSEHRA, businesses can reimburse employees for any medical expense covered in IRS Publication 502, including individual health insurance premiums. The QSEHRA is automatically available to all full-time employees, and businesses can choose to extend eligibility to part-time employees provided they offer them the same allowance amounts.
All eligible employees receive value from the QSEHRA. Whether they’re covered by individual insurance, a spouse’s group plan, or an alternative program like Medi-Share, they can participate in the QSEHRA and receive reimbursements free of payroll tax. Employees who have minimum essential coverage (MEC) can receive their reimbursements free of income tax, too.
Since its introduction, the QSEHRA has helped thousands of small businesses offer health benefits—many of them for the first time.
What other types of HRAs are there?
The QSEHRA is just one type of HRA. In 2020, five HRAs will be available to businesses:
- The QSEHRA. As discussed above, the QSEHRA is available exclusively to small businesses and works for all employees, regardless of their circumstances.
- The individual coverage HRA (ICHRA). Brand new in 2020, the ICHRA is available to businesses of all sizes and allows reimbursement of premiums and medical expenses to employees covered by individual health insurance.
- The group coverage HRA. Offered alongside group health insurance, the group coverage HRA allows businesses to supplement the policy with an allowance amount—one that’s often equal to the plan’s deductible. Employees must be covered by the group policy to participate.
- The excepted benefit HRA. Also new in 2020, the excepted benefit HRA allows businesses with a group health insurance plan to reimburse employees for excepted benefits, up to $1,800 a year. Employees don’t need to be covered by the group policy to participate.
- The one-person stand-alone HRA. Available exclusively to businesses with one full-time W-2 employee, the one-person stand-alone HRA can reimburse the employee for any eligible medical expense and comes without allowance caps.
To learn more about these HRAs and how they compare with each other, download our free 2019 and 2020 HRA Comparison Chart. We cover the most vital details on each HRA to help you decide what’s best for your business.
The QSEHRA is just one type of HRA. Whether it’s the right choice for your business depends on several factors, including your size, your employees’ needs, and how much you’d like to offer each employee.
To learn more about the QSEHRA, check out PeopleKeep’s comprehensive QSEHRA guide. You can also ask us questions about the QSEHRA or any other HRA in the comments section below.