QSEHRA: A comprehensive guide to qualified small employer HRAs

How does the QSEHRA work?

The QSEHRA is a company-funded, tax-free health benefit used to reimburse employees for personal health care expenses.

With a QSEHRA, businesses offer employees a monthly allowance. Employees then choose and pay for health care, potentially including insurance policies, and the business reimburses them up to their allowance amount.

With the QSEHRA, all reimbursements are free of payroll tax for the business and its employees. Reimbursements can be free of income tax for employees, too, if the employee is covered by a policy providing minimum essential coverage (MEC).

1. Businesses set an allowance

A small business offering a QSEHRA must choose a monthly, per-employee allowance of tax-free money to make available.

There are no minimum contribution requirements, and small businesses may offer different allowance amounts to employees based on whether they’re single or have a family.

For 2020, QSEHRA contribution limits are:

$437.50 a month for single employees
$883.33 a month for employees with a family

2. Employees make purchases

With a QSEHRA, employees buy what fits their personal needs. There are a large number of expenses eligible for reimbursement through the QSEHRA, including:

Individual health insurance premiums
Individual dental, vision, or long-term care insurance premiums
Copays
Deductibles
Prescription and nonprescription drugs (with a note from a doctor)

3. Employees submit proof of expenses

After incurring a qualified expense, employees submit proof to their company through documents that include:

a description of the product or service,
the cost of the expense, and
the date the employee incurred the expense.

Invoices or receipts typically satisfy this requirement, but so does an explanation of benefits from the employee’s insurance company.

4. Employee expenses are reviewed

After an employee submits an expense, the business should review the documentation and, if the expense is qualified, reimburse the employee from their monthly allowance.

These reimbursements are free of payroll tax for both the small business and its employees, and free of income tax for employees as long as they have insurance.

Employees who don’t have insurance must report reimbursements as taxable income at the end of the year.

Feature	QSEHRA	ICHRA	Group Coverage HRA
Business size restrictions	Limited to businesses with fewer than 50 FTE employees	None	None
Allowance amount restrictions	Limited to $5,150 for self-only employees and $10,450 for employees with a family in 2019. Businesses cannot give different employees different allowance amounts based on criteria other than family status.	None	No minimum or maximum contribution requirements. Businesses can give different employees different allowance amounts based on job-based criteria.
Group health policy requirements	Can’t be offered with a group health policy	Can be offered with a group health policy, but employees cannot have a choice between the group policy and the HRA.	Must be offered with a group health policy
Individual health policies permitted	Yes	Yes; in fact, they're required for participation in the HRA.	No
Premium tax credit coordination requirements	Employees must reduce their premium tax credit by the amount of their HRA allowance.	Employees cannot collect premium tax credits and participate in the ICHRA. However, if the ICHRA allowance is considered unaffordable, employees may waive the HRA and collect the credits.	N/A. These HRAs can’t reimburse employees for individual premiums.
Annual rollover permitted	Yes	Yes	Yes
Medical expenses available for reimbursement	Any or all items listed in IRS Publication 502	Any or all items listed in IRS Publication 502	Any or all items listed in IRS Publication 502 with the exception of individual insurance premiums
Employee eligibility guidelines	All full-time employees are eligible. Businesses can decide on part-time employee eligibility.	Businesses can decide on eligibility based on 11 different employee classes.	None

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Which businesses can offer a QSEHRA?

The QSEHRA was designed specifically for small businesses looking for an alternative to traditional group health insurance.

A small business is considered a qualified small employer, and therefore eligible for the QSEHRA, if it:

employs fewer than 50 full-time-equivalent (FTE) employees, and
doesn’t offer a group health policy to any of its employees.

Businesses that are interested in the QSEHRA but are currently offering a group policy can cancel it and become eligible.

Determining employee eligibility under a QSEHRA

When a business offers a QSEHRA, all full-time employees and their families are automatically eligible. The business can opt to include part-time employees in the benefit as well, but they must offer part-time employees the same allowance they offer full-time employees.

Unlike traditional group policies, the QSEHRA provides value to all employees, regardless of their situation.

Employees covered under a spouse’s group policy, for example, can still use QSEHRA funds toward their deductible, copay, and other medical expenses. And employees without MEC can still receive reimbursements for their expenses, though the reimbursements are subject to income tax.

The QSEHRA also provides value to spouses and other family members, too, regardless of their situation.

How to set up a QSEHRA

Small businesses that want to get started with a QSEHRA should follow an eight-step process:

1. Pick a start date.

This is the date the QSEHRA benefit will begin.

2. If necessary, cancel the business’s group policy.

If the business offers a group health insurance policy, the business must cancel it before the QSEHRA begins.

3. Confirm QSEHRA eligibility.

Though the business is required to offer the benefit to full-time employees, it can extend eligibility to part-time workers as well.

4. Determine a budget and set allowances.

The business can offer any amount, up to $429.17 a month for single employees and $870.83 a month for employees with a family in 2019.

5. Establish legal plan documents and compliant administration policies and procedures.

The business must establish legal QSEHRA plan documents, including a summary plan description (SPD), to comply with IRS and Department of Labor requirements.

6. Communicate the new benefit to employees.

The business must comply with QSEHRA notice requirements (see “FAQs about the QSEHRA” below), but it’s also a good idea to work with employees as they learn about and use the QSEHRA for the first time.

7. Provide resources to help employees buy individual health insurance.

The business should be prepared to support employees as they use the QSEHRA. Part of this includes helping them purchase personal health policies, either during open enrollment or during the special enrollment period offered to employees who are offered a new QSEHRA mid-year.

8. Follow all stated QSEHRA deadlines.

In managing the benefit, the business must meet all QSEHRA deadlines outlined in its plan documents, including notice requirements and paying out approved reimbursement requests.

How to manage a QSEHRA

Once a business has set up the benefit, it must manage and administer the QSEHRA appropriately.

There are three key points to keep in mind:

1. Keep the benefit up to date.

As employees move on and new workers come on board, QSEHRA administrators must update the benefit to reflect staffing changes.

2. Process reimbursements and store documentation.

The business must properly review reimbursement requests, record them, and store the supporting documentation in accordance with IRS and Department of Labor regulations.

3. Evaluate allowances, track regulatory changes, and update plan documents.

Whenever it needs, the business can change allowance amounts. To do so, they must update their plan documents and send employees appropriate notice. They may also need to update their plan documents in response to any regulatory changes that occur during the life of the benefit.

While these steps may look simple, there are a number of very complicated laws and regulations guiding each. If a business missteps, it could be subject to hefty fines from the federal government.

Due to this concern, as well as personal time constraints, most businesses turn to an administration tool like PeopleKeep to help.

PeopleKeep generates real-time QSEHRA plan documents, automates expense verification, provides employee shopping assistance, and answers any and all employee questions.

The QSEHRA vs. group health insurance

One of the primary reasons small businesses choose to offer a QSEHRA is cost. They’re often unable to afford traditional group health insurance, so they look for an option that helps them keep control over their budget.

Kaiser Family Foundation data shows that small businesses that offered a group health insurance policy spent an average $455 per employee per month in 2017 for single coverage and $900 per employee per month for family coverage.

Small businesses that offered a QSEHRA, though, committed to an average $297 per month per self-only employee and $445 per month per employee with a family. That’s a cost reduction of 38 percent and 47 percent, respectively, assuming all employees use 100 percent of their allowance.

Additionally, small businesses using a QSEHRA provided employees value outside of an insurance policy.

While a group policy only provides insurance coverage, the QSEHRA provided reimbursement for non-premium expenses to more than a quarter (27 percent) of employees who accessed at least part of their benefit.

Employees covered under a QSEHRA also chose their own insurance coverage—something not possible under a group health benefit.

Finally, businesses who choose a QSEHRA administration tool like PeopleKeep to help them offer the benefit spend an average 15 minutes per month administering health benefits, compared with the average 13 hours businesses spend administering group health insurance.

For more information, check out “Is group health insurance the best choice for small business?” and "The QSEHRA: pros and cons."

The QSEHRA vs. health insurance stipends

One way for small businesses to help employees cover health costs is to offer a health insurance stipend, which is simply extra money in an employee’s paycheck. This stipend is the equivalent of grossing up wages—it is a flat amount given to all employees, which they can spend however they choose.

While a health insurance stipend requires no administration, it is an informal solution to a formal problem.

Employees rarely consider the extra cash a “benefit,” and therefore rarely put the funds toward their health needs. Additionally, both businesses and employees are paying a combined 35 percent more in taxes on average than they would with a formal solution like the QSEHRA.

History of the QSEHRA

In 2013, IRS Notice 2013-54 issued guidance on the Affordable Care Act that seriously limited businesses’ ability to use health reimbursement arrangements (HRAs).

Congress recognized the importance of HRAs to small businesses, though. A bipartisan group of senators and representatives introduced legislation called the Small Business Healthcare Relief Act (SBHRA), which created an exception to the IRS Notice by introducing a new HRA—the QSEHRA—specifically for small businesses.

In December 2016, the SBHRA was repackaged and passed as part of the larger 21st Century Cures Act.

The QSEHRA provisions went into effect January 1, 2017.

Other FAQs on the QSEHRA

Because the QSEHRA is a relatively new benefit, most small businesses have a lot of questions.

Here are some of the most frequently asked questions regarding the QSEHRA.

What can a QSEHRA be used for?

Employees, their spouses, and their dependents are all eligible to have medical, dental, and vision expenses reimbursed with the QSEHRA. They do not need to be on the same insurance policy, and they do not need to have individual health insurance.

There are many acceptable coverage combinations, including being on a spouse's or parent's insurance. In order to receive the reimbursements as tax-free, employees and their families must have minimum essential coverage (MEC) at the time they incur the expense. Reimbursements for expenses incurred during a month not covered by MEC must be included in the employee’s gross income.

There are two categories of expenses employees and their families can have reimbursed: insurance premiums and medical expenses. Insurance premiums can only be reimbursed if they are for an individual medical, dental, or vision policy. Pretax contributions to a group insurance policy are not eligible. Copays, deductibles, and many other medical expenses can be reimbursed regardless of association with a group or individual insurance policy.

For a full list of eligible expenses, check out our Small Business Health Reimbursement Arrangement Eligible Expenses tool.

Can business owners participate in the QSEHRA?

Depending on the business’s corporate filing status, the business owner may be able to participate in the QSEHRA.

Generally, if the business owner is considered a W-2 employee, he or she is eligible for the benefit.

For a quick overview of who is and isn’t eligible, check out our Business Owner Eligibility Under a QSEHRA infographic.

Can a QSEHRA be used in conjunction with a health savings account (HSA)?

Yes. In fact, it’s desirable.

However, the HRA must be adjusted to accommodate for the HSA. HSAs require that account holders receive no coverage before they meet the HSA’s annual deductible except for five exempted categories of expenses.

In years when QSEHRA participants or their spouses make or receive HSA contributions, they can use the QSEHRA to reimburse only these five types of expenses before they meet their HSA deductible.

These expenses include:

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 QSEHRA participants who make or receive contributions to their or their spouses’ HSAs. Other employees wouldn’t be affected.

For more information, see “How to Use an HSA with a QSEHRA.”

How does the QSEHRA interact with premium tax credits?

QSEHRA participants can access premium tax credits, but they must coordinate their credit with their monthly HRA allowance.

Generally, if the employee’s QSEHRA allowance doesn’t qualify as “affordable coverage” under federal standards, the employee must reduce the amount of their credit dollar-for-dollar by the amount of the monthly HRA allowance.

For example, an employee with a $200 HRA allowance who is eligible for a $500 premium tax credit would be able to access only $300 of that credit.

For more information, see How to Calculate Your Premium Tax Credit with a Small Business HRA.

How does the QSEHRA interact with health care sharing ministries?

Employees enrolled in a health care sharing ministry, such as Medi-Share, can have eligible expenses reimbursed through the QSEHRA.

However, because health care sharing ministries don’t qualify as MEC, all reimbursements they receive will be subject to income tax. Reimbursements are still free of payroll tax for the business and the employee.

Membership fees associated with a health care sharing ministry don’t qualify for reimbursement.

For more information, see HRAs and Health Care Sharing Ministry Programs.

Are there any notice requirements associated with the QSEHRA?

Yes. Small businesses that intend to offer a QSEHRA must send employees a notice detailing the benefit at least 90 days before the start of each calendar year in which the business will offer the HRA.

For new QSEHRAs, businesses must send the notice at any point up to and including the day the QSEHRA goes into effect.

For more information, including what the notice must include, see The QSEHRA’s Notice Requirements.

How does the QSEHRA help small businesses control their benefits budget?

As a personalized health benefit, a QSEHRA is well suited for small businesses that want to cap their benefits costs.

Because the employer can decide how much they want to offer as a benefits allowance to their employees, they know they won't suddenly be faced with a rate hike or unexpected expense. What's more, the company retains control of allowance funds unless and until an employee submits a reimbursable expense. If an employee leaves the company with unused funds, that money stays with the company.

What is the average monthly allowance set by small businesses using a QSEHRA?

In 2018, small businesses offered an average monthly allowance of $297 per month per self-only employee and $445 per month per employee with a family.

For more information, including average allowance amounts by state and industry, see our latest report.

Qualified Small Employer HRA (QSEHRA)

See how much you can save on taxes with our QSEHRA plan designer

What is the QSEHRA?

The Importance of Health Benefits

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