The opportunity to offer personalized health benefits is growing. Over the years, new tax-free vehicles have emerged, and small businesses now have multiple ways to increase employees’ benefits.
Two of the most popular personalized health benefits are health savings accounts (HSAs) and qualified small employer health reimbursement arrangements (QSEHRAs). These two benefits fulfill different functions, but they’re both valuable, and—arranged correctly—they can be used together to create a standout health benefits package for employees.
Many small businesses are confused over their options, though. Questions on HSAs and QSEHRAs are common, particularly on how the two compare and whether businesses should offer them together.
In this post, we’ll go over the differences between an HSA and a QSEHRA, how they can work together, and why a small business should consider offering both at the same time.
What's the difference between an HSA and a QSEHRA?
One of the first questions small businesses have is how the HSA and the QSEHRA compare.
Let’s start with a basic explanation of each.
A health savings account (HSA) is a financial account established by an individual to pay for qualified medical expenses. HSAs must be linked with a qualified high-deductible health insurance plan (HDHP), and while the HSA is owned solely by the employee, both the employee and the business can contribute to it. Contributions to HSAs are tax-free.
A qualified small employer health reimbursement arrangement (QSEHRA), meanwhile, is an arrangement that small businesses use to reimburse employees’ qualified medical expenses. Funds don’t accumulate in a separate account; instead, businesses pay only after their employees incur expenses and submit documentation. The QSEHRA can’t work in conjunction with a group health insurance policy, and the business is the only party that makes payments. QSEHRA payments are tax-free to the business and can also be tax-free to employees, as long as the employees have minimum essential coverage (MEC).
Both the HSA and the QSEHRA allow businesses to contribute tax-free money to employees for qualified medical expenses. However, there are large points of difference between the two relating to eligibility, ownership, and contribution requirements.
The following chart explores those differences.
|What are the eligibility requirements?||An individual must have coverage under an HSA-eligible HDHP.||A small business must have fewer than 50 employees and cannot offer a group health insurance policy.|
|Who owns the arrangement?||The individual, or employee, establishes and owns the HSA account.||The small business establishes and owns the QSEHRA.|
|Who can contribute?||The individual, the business, and other third parties can contribute to the HSA.||Only the small business offering the QSEHRA can make allowances available.|
|Can businesses make different contributions to different employees?||All employees receive the same contribution from the business, based on comparable coverage.||Businesses can contribute different amounts based on family status: self-only or family.|
|How much can be contributed?||In 2019, individuals and businesses can contribute up to $3,500 with self-only coverage and $7,000 with family coverage annually. An additional $1,000 can be contributed for those 55 and over.||In 2019, businesses can contribute up to $5,150 for single employees and $10,450 for employees with a family annually.|
|Are contributions tax-free?||HSA contributions aren't subject to tax for either individuals or businesses.||Payments made through the QSEHRA are always tax-free for businesses. They're also tax-free for employees who have MEC.|
|How do employees receive contributions from the business?||Employees receive a set contribution tax-free through their paychecks.||Employees receive reimbursement for qualified medical expenses after submitting required documentation.|
|What can funds be used for?||HSA funds can be used for qualified medical expenses as described in Section 213(d) of the Internal Revenue Code. They cannot be used to pay for health insurance premiums except in limited, extenuating circumstances.||QSEHRA funds can be used for qualified medical expenses as described in Section 213(d) of the Internal Revenue Code, including health insurance premiums.|
Can a business offer an HSA and a QSEHRA at the same time?
After understanding the differences between an HSA and an HRA, many small businesses want to know if they can contribute to employees’ HSAs at the same time they offer employees a QSEHRA allowance.
The answer is yes—but employees must adapt the QSEHRA to use the HSA.
HSAs require that account holders receive no coverage before they meet the HDHP's annual deductible, except for five exempted categories of expenses (see below).
Because an HRA can reimburse employees—or “provide coverage”—for many expenses, it must be altered to conform to HSA requirements. The easiest way to do this is to alter the HRA into a limited-purpose HRA.
In years employees or their spouses make or receive contributions to their HSAs, they can use the QSEHRA to reimburse only five types of expenses before they meet their HDHP deductible.
Those expenses are:
- Health insurance premiums
- Wellness or preventive care (e.g., checkups, mammograms, smoking cessation, weight loss)
- Dental expenses
- Vision expenses
- Long-term care premiums
These adjustments are necessary only for employees who make or receive contributions to their or their spouse’s HSAs while participating in the HRA. Other employees wouldn’t be affected.
Additionally, employees who just want to use existing HSA funds rather than contribute to an HSA don’t need to adapt their QSEHRA.
Why should a business consider offering both an HSA and a QSEHRA?
Small businesses not only can offer both HSA contributions and a QSEHRA, but they should.
As the cost of medical care in the United States grows, so does the value of tax-free money to employees. Unfortunately, the federal government puts limits on two of its most popular tax-free vehicles—in 2019, the HSA has limits of $3,500 and $7,000 for single employees and employees with families, respectively, and the QSEHRA has limits of $5,150 and $10,450.
Offering both an HSA and a QSEHRA is a great way to maximize tax-free compensation to employees. It also ensures that money goes toward one of employees’ heaviest financial burdens.
With both an HSA and a QSEHRA, employees can use their QSEHRA allowance to purchase a quality HDHP and use money from their HSA—contributed by the company—to fund expenses their HDHP doesn’t cover.
Together, these two personalized benefits provide employees with the greatest possible assistance from the business.
Both the QSEHRA and the HSA are quality options for small businesses looking to offer personalized health benefits to their employees.
However, when combined, they allow businesses to maximize employees’ tax-free compensation to the highest degree and offer the greatest possible value.