Guide to the qualified small employer health reimbursement arrangement (QSEHRA)
A simple, controlled-cost alternative to group health insurance for small businesses.
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Employees are more demanding than ever when it comes to their health insurance options. What used to be a differentiator is now the norm—employees expect to get health insurance coverage through their employer. And with the Great Resignation causing employees to quit by the millions, even small employers have to offer a comprehensive health benefit to recruit and retain top talent.
However, the cost of healthcare is reaching unprecedented heights. Even the majority of large employers agree that the high costs of offering healthcare to their employees is excessive.
So, how do small business employers choose between recruiting the people who will take their organization to the next level and staying within budget? With a qualified small employer HRA, they don’t have to.
Topics covered in this guide include
What is a QSEHRA?
A qualified small employer HRA (QSEHRA), also known as the small business HRA, is a formal, IRS-approved health benefit. It allows small businesses with fewer than 50 full-time equivalent employees to offer a tax-free reimbursement to their employees for their health insurance premium and other qualifying health expenses.
Using a QSEHRA instead of a traditional group health plan allows you to set your own allowance and avoid budget surprises when it comes to annual renewals. It’ll also allow you to skip the complicated quoting process and participation requirements that come with a traditional group health plan.
A QSEHRA is more optimized for employees as well. Instead of trying to choose a health policy that hopefully matches the needs of most of your employees, a QSEHRA benefit lets employees choose the health policy that they feel is best for them.
With a QSEHRA, you get to offer a flexible health benefit at an affordable price, while your employees get to choose the individual insurance premiums that work for them. Everyone wins!
What are the benefits of a QSEHRA?
With a QSEHRA, employees aren’t required to participate in any specific kind of insurance health policy in order to be eligible, giving them freedom to choose any individual insurance plan they choose.
If an employer chooses to enable employer-sponsored premium reimbursement (ESPR), employees can even be reimbursed for premiums paid toward a spouse's employer-provided health coverage. However, there will be taxes on reimbursements for spouses because the spouse is likely already saving in payroll taxes through their payroll deduction.
All QSEHRA reimbursements are free of payroll taxes for the organization and its employees. Reimbursements can be free of income tax for employees with health insurance that provides minimum essential coverage (MEC). These tax-free reimbursements mean employees don’t need to report their QSEHRA as income at the end of the year.
No minimum contribution requirements or participation limits
Unlike with a traditional group health insurance company, the QSEHRA has no minimum employer contribution limits, so you can offer the benefit to your employees even on a small budget. However, there are maximum contribution requirements that cap how much you can offer.
What’s more, there are no participation requirements in order to offer a QSEHRA, so you don’t need to have a certain number of employees enrolled in the benefit in order to offer it.
A QSEHRA enables employers to set monthly allowance caps, giving them complete control over their costs. Once the caps are set, they cannot be exceeded. What’s more, because a QSEHRA doesn’t need to be pre-funded, expenses are only paid out when an employee makes a qualifying expense—any unused amounts stay with you.
How does a QSEHRA work?
If you’re new to offering a QSEHRA, we can help. At PeopleKeep, we’re experts on HRA administration and help thousands of employers reimburse their employees through our hassle-free software solution every day.
Regardless of how you choose to administer your QSEHRA, the following steps will apply.
Here’s a four-step breakdown of the process:
Step 1: Design your benefit
First, the employer designs their QSEHRA benefit so it’s suited to the needs of their employees. When setting up your QSEHRA, you’ll decide how much tax-free money you want to offer to employees each month in a set allowance and whether you limit expenses to covering premiums only or expand the benefit to cover all eligible expenses as defined by the IRS.
You’ll also decide if you'd like to include your part-time employees in addition to your full-time employees who are automatically eligible. You can also choose to offer a different monthly allowance to employees based on their age and family status.
Step 2: Employees make healthcare purchases
Once your benefit is set up, eligible employees are opted in and can spend their allowance. Eligible expenses can include everything listed under IRS Publication 502. However, if you want to offer a premium-only QSEHRA that only reimburses employees for their individual health insurance premiums, not out-of-pocket costs, you can do so.
Step 3: Employees submit proof of incurred expenses
Next, after the eligible employee has made their purchases, they’ll submit documentation showing proof of coverage or proof of payment for the incurred expenses they’re submitting for reimbursement.
Due to IRS regulations, this documentation must include:
- The name of the item or service
- The cost of the item or service
- The name of the vendor
- The date of purchase
Invoices, receipts, or an explanation of benefits from an insurer or healthcare provider typically satisfy this requirement. Depending on the item that’s being requested for reimbursement, a doctor’s note or prescription may also be necessary under the regulations. Keep in mind that this information is subject to HIPAA’s privacy rules and must be handled carefully if you are self-administering a QSEHRA.
Step 4: Review and reimburse expenses
Finally, the employer will review the expense and either approve or reject the request. If you’re offering a QSEHRA with PeopleKeep, our experts will review your employees’ submissions for you so you can be sure it qualifies. If it’s a qualified expense, you will reimburse your employee up to their accrued monthly allowance.
Typically, employers choose to reimburse employees through payroll by adding a non-taxable line item to employees’ paychecks, although you can also pay out QSEHRA funds through a separate check, cash, or a bank transfer.
Who can offer a QSEHRA?
In order to be considered an eligible employer for the QSEHRA benefit, organizations must employ fewer than 50 full-time employees. If you have 50 or more full-time employees, your organization qualifies as an applicable large employer according to the Affordable Care Act and can offer an individual coverage HRA (ICHRA) but cannot offer a QSEHRA.
In addition to the company size requirement, an eligible employer cannot offer a QSEHRA alongside any other group plan. Employers interested in a QSEHRA that are currently offering a group health insurance policy can cancel it and become eligible.
Learn how a QSEHRA and an ICHRA compare
Download our free comparison chart.
Which employees are eligible to participate in a QSEHRA?
All full-time employees, their spouses, and legal dependents are automatically eligible to participate in the QSEHRA benefit. The employer can choose to include part-time workers in the benefit as well, but they must offer part-timers the same monthly allowance they offer full-time employees.
If an organization chooses to offer a QSEHRA to its employees, it must offer the benefit to all W-2 full-time employees.
Unlike traditional group policies, the QSEHRA provides value to all employees, regardless of their insurance situation. Employees covered under a spouse’s group policy, for example, can still use QSEHRA funds toward their deductible, copays, and other medical expenses. Employees without minimum essential coverage can still receive reimbursements for their expenses, though the reimbursements are subject to income tax.
What is the difference between the QSEHRA and other HRAs?
The QSEHRA isn’t the first or only health reimbursement benefit. In fact, employers currently have the option to choose between multiple types of HRAs including: the QSEHRA, the individual coverage HRA (ICHRA), and the integrated HRA, also known as the group coverage HRA (GCHRA).
Individual coverage HRA (ICHRA)
The individual coverage HRA (ICHRA) works for employers of all sizes. Employers may offer an ICHRA as a standalone benefit or as an alternative health benefit to employees who don’t qualify for your current group health insurance plan. An ICHRA can reimburse employees for qualifying individual health insurance premiums, out-of-pocket costs, or both.
Group coverage HRA (GCHRA)
The integrated HRA, also known as a group coverage HRA (GCHRA), works as a supplement to group health insurance to cover out-of-pocket expenses that aren’t fully paid for by the group health plan coverage.
Not sure which HRA is right for your organization? Take our quiz to find out!
Frequently asked questions about QSEHRAs
Which expenses are covered by a QSEHRA?
Employees can use their QSEHRA dollars to help cover any of the qualifying medical cost outlined in IRS Publication 502, including a health insurance premium, prescription and non-prescription drugs, doctor visits, dental and vision care, and more. However, employers can choose to offer a premium-only QSEHRA that only reimburses employees for insurance premiums.
What are the QSEHRA reimbursement limits?
The QSEHRA comes with annual maximum contribution requirements, which means small businesses are limited in how much tax-free money they can offer their employees through the benefit. Every year, the IRS outlines these annual dollar limits through a revenue procedure.
In 2023, the annual limit small businesses may offer up to $5,850 for single employees and up to $11,800 for employees with families.
If you're looking for an HRA benefit that doesn't have allowance caps, the individual coverage HRA is another option that covers employee medical expenses and insurance premiums with no limits on reimbursement amounts.
Can QSEHRA funds be rolled over?
Under the rules set forth by the Internal Revenue Service, employers can legally allow for unused amounts of a QSEHRA allowance to roll over from month-to-month and year-to-year. However, if you’re offering a QSEHRA with PeopleKeep, only month-to-month carryover amounts are permitted.
What if my employee qualifies for an advance premium tax credit?
If an employee qualifies for a premium tax credit, giving them a discount on an individual health insurance plan purchased on the health insurance exchange, the employee must reduce their tax credit amount, dollar-for-dollar, by their QSEHRA allowance amount.
For additional guidance on premium tax credit coordination, read our article
What is the difference between a QSEHRA and an HSA?
A QSEHRA is an arrangement between an employer and an employee giving employees a monthly allowance to get reimbursed for their health expenses, while health savings accounts (HSAs) are portable accounts that the employee owns and keeps with them even after they leave the organization.
With a QSEHRA, the employee only gets paid when they incur an eligible expense, while an HSA is pre-funded each month regardless of whether or not they spend the money.
When can I sign up for a QSEHRA?
There aren’t any special enrollment periods required to sign up for a QSEHRA—employers can enroll at any point during the year. In addition, offering your employees a QSEHRA qualifies them for a 60-day special enrollment period to shop for an individual health insurance policy on the individual market outside of the annual open enrollment period.
Can business owners participate in a QSEHRA?
Depending on how they file, some business owners can participate in a QSEHRA.
C-corporation owners: C-corporations are legal entities separate from the owner. This means owners are considered common-law employees of the corporation and are eligible to participate in this benefit. As with all employees, this eligibility extends to the C-corp owner’s family as well. All reimbursements paid to the C-corp owner and the owner’s family are tax-free to the company and the owner.
Sole proprietors: A sole proprietorship is an unincorporated business owned and run by one person. There’s no distinction between the business and owner, so the owner isn't an employee. This means sole proprietors can’t participate.
But, if the owner is married to a W-2 employee of the business, the owner could gain access through their spouse’s allowance as a dependent. All reimbursements would be tax-free to both the sole proprietorship and the owner’s spouse.
Partners: A partnership is a pass-through entity, which means the company isn't subject to income tax. Instead, the partners are directly taxed individually. Partners in a partnership are considered self-employed, rather than employees of the company, so they’re not eligible to participate in a reimbursement benefit.
Similar to sole proprietors, partners can access the benefit if they are married to a W-2 employee of the business, as long as the partner’s spouse isn’t also a business partner.
S-corporation owners: An S-corporation is a pass-through entity, meaning the company isn’t subject to income tax. Instead, shareholders (i.e., owners who own 2 percent or more of the company’s shares) are directly taxed individually. This means shareholders aren’t considered employees and aren’t eligible to participate in a reimbursement benefit.
What makes a QSEHRA with PeopleKeep different?
PeopleKeep’s qualified small employer health reimbursement arrangement administration software makes offering a QSEHRA hassle-free. Learn more about our QSEHRA software or book a call with a personalized benefits advisor.