Will the QSEHRA work for my church?

With increasing healthcare costs, finding affordable health benefit options for your church staff can be a challenge. As a church leader working with a tight budget, you may be wondering if the qualified small employer health reimbursement arrangement (QSEHRA) is the right choice for your organization.

Congress created the QSEHRA in 2016 as a way to help small businesses and nonprofits, including churches, offer affordable health coverage to their employees. It's a tax-advantaged health benefit that allows small employers to reimburse employees for their eligible healthcare expenses, including health insurance premiums.

In this article, we'll explain how the QSEHRA works, the benefits and limitations for churches, and how to determine if it's the right choice for your organization.

Takeaways from this blog post:

• The QSEHRA is an employer-funded health benefit that works well for churches. It allows them to control costs, provide flexibility for employees with varying situations, and reduce administrative burdens associated with traditional health insurance options.
• Churches providing a QSEHRA must offer the benefit to all full-time employees. However, they can include part-time employees and offer them the same allowance as full-time employees.
• Church employees who receive federal premium tax credits must coordinate the credit with their monthly QSEHRA allowance.

How the QSEHRA works

A QSEHRA is an employer-funded health benefit. With a QSEHRA, organizations with fewer than 50 full-time equivalent employees (FTEs) can reimburse their W-2 employees tax-free for their individual health insurance premiums and other qualifying medical expenses.

Here's a quick breakdown of how the QSEHRA works:

• Employers offer employees a monthly allowance.
• Employees choose and pay for their own medical services and health insurance plans.
• Employees submit proof of their eligible out-of-pocket expenses for reimbursement.
• Employers approve expenses and reimburse employees up to their allowance amounts.

Eligible employees need qualified health plans that provide minimum essential coverage (MEC) to participate. This includes individual health insurance plans from the federal Health Insurance Marketplace or state-based exchanges or coverage through a parent’s or spouse’s group plan.

Employees’ QSEHRA allowances won't count as part of their taxable income. However, suppose you mistakenly reimburse an employee for an expense when they don’t have MEC. In that case, you must report that amount as taxable income.

There are annual contribution limits with a QSEHRA. In 2024, employers can offer up to $12,450 annually for employees with family and $6,150 for single employees. This works out to monthly allowance limits of $1,037.50 for employees with families and $512.50 for single employees.

Why the QSEHRA works well for churches

When it comes to health benefits, churches face many of the same challenges as other small businesses.

First, traditional group health insurance is too expensive for many religious organizations. According to KFF¹, the national average annual premium for employer-sponsored health insurance in 2023 was $8,435 for single coverage and $23,968 for family coverage.

Second, traditional group health plans are too complex. Time is precious for many churches—especially those with a small staff. There are better ways to use that time than administering benefits. Ongoing regulatory changes, annual policy renewals, and the general back-and-forth between a health insurance carrier and the church add up to significant time costs.

Finally, traditional group health plans are too one-size-fits-all. Most churches employ people who are in a variety of situations, including those who work unpredictable hours and those who receive benefits from a spouse's company policy. A group policy provides limited value to employees in those situations.

Offering a QSEHRA minimizes these problems. With a QSEHRA, church leaders can control costs by defining exactly how much they want to pay toward benefits. The QSEHRA also allows the church to extract itself from the relationship between its employees and their healthcare providers. A QSEHRA also offers tax advantages for employers and employees. Finally, because allowances are available to all full-time (and potentially part-time) W-2 employees with MEC—and can reimburse a variety of expenses—a QSEHRA provides value to church employees no matter their unique needs.

There are some things churches should consider before choosing a QSEHRA, though. Let's walk through some common concerns churches have about the QSEHRA and explain how the benefit works in these cases.

QSEHRA eligibility for church employees

Many churches have small staffs working variable hours. Because of this, some churches want to provide benefits only to a pastor, for example, while others would like to include employees who may not work full-time. With a QSEHRA, all full-time W-2 employees are automatically eligible for the benefit. You can also choose to include part-time employees if you'd like.

This means the church must offer the benefit to all full-time employees. It can't single out one employee, like a pastor, for the benefit if there are other full-time employees. Churches don't have to include part-time employees, but they can. If the church chooses to do this, it must offer the same monthly allowance amounts to part-time employees as it does to full-time employees.

If you want to differ benefit eligibility and allowances by employee class, such as salaried or hourly, an individual coverage HRA (ICHRA) might be a better choice.

The QSEHRA and premium tax credits

Many people who work for churches and have individual health insurance policies qualify for federal premium tax credits. The government calculates these credits based on income and healthcare costs, and they help many individuals afford health insurance coverage.

Church employees with a QSEHRA may still claim these credits if their QSEHRA allowance is unaffordable. This means that they pay more than 8.39% of their household income for health insurance in 2024 after factoring in the QSEHRA allowance. The law requires them to coordinate the credit with their monthly QSEHRA allowance. Specifically, they must reduce any premium tax credit by the amount of the monthly QSEHRA allowance. For example, if a church employee is eligible for a $400 premium tax credit but receives the $250 allowance from the church's QSEHRA, they would be able to use only $150 of the tax credit. It's possible that the QSEHRA allowance may reduce an employee's tax credit to zero.

If an employee’s QSEHRA allowance is affordable, meaning they pay no more than 8.39% of their household income for health coverage, they can’t collect any premium tax credits.

The QSEHRA and healthcare sharing ministries

Healthcare sharing ministries, such as Medi-Share or Samaritan Ministries, are an increasingly popular alternative to insurance policies.

These ministries are faith-based groups that allow members to share medical costs in exchange for membership fees. The ministries don't qualify as insurance, but the Affordable Care Act (ACA) exempts members from the individual mandate.

However, since healthcare sharing ministries aren't insurance, members of a ministry don't have MEC. IRS Bulletin 2017-67 explains that individuals participating in a healthcare sharing ministry can’t participate in a QSEHRA². Additionally, employees enrolled in a healthcare sharing ministry and a qualifying plan with MEC can't receive reimbursement for ministry membership fees.

Evaluating the QSEHRA for your church

The QSEHRA is an excellent option for small churches that want to offer a health benefits to their employees. It saves the church time and money while offering value to all employees.

Nevertheless, there are some potential drawbacks that may change a church's feelings about the QSEHRA. Churches that want to restrict benefit eligibility or that have a high number of employees with premium tax credits may not be happy with the benefit. For churches open to the QSEHRA's possibilities, though, the benefit provides an alternative to traditional group health plans that's affordable, efficient, and personalized.

The HRA that works for larger churches

While the QSEHRA is a cost-effective solution for small churches, this type of HRA won't work for larger churches that have 50 or more FTEs and need to satisfy the ACA's employer mandate.

Like the QSEHRA, the ICHRA allows employers to reimburse their employees tax-free for individual health insurance premiums and other qualifying out-of-pocket medical expenses. But the ICHRA offers greater flexibility than the QSEHRA. It's for organizations of all sizes and doesn't have annual limits on contributions. This means you can offer your church employees as much as you'd like as an allowance.

However, your employees must have coverage through an individual health insurance policy to participate in an ICHRA. Eligible individual health plans include on-exchange or off-exchange coverage, Medicare Parts A and B, or Medicare Part C.

Conclusion

While many employers go the traditional route when it comes to health insurance coverage, a group policy isn't the only viable option for churches. By offering a QSEHRA, you can provide valuable healthcare coverage to your employees while also saving money and supporting your organization's mission.

If you're considering implementing a QSEHRA or ICHRA for your church, PeopleKeep can help. Our HRA administration software makes it easy to set up and manage HRAs in minutes. We take care of the heavy lifting, like reviewing your employees’ reimbursement requests. Our personalized benefits advisors can help you determine if this type of health coverage is the best fit for your organization.

This blog article was originally published on January 8, 2018. It was last updated on June 27, 2024.

1. https://www.kff.org/report-section/ehbs-2023-summary-of-findings/
2. https://www.irs.gov/irb/2017-47_IRB#NOT-2017-67