What are the benefits of the QSEHRA?

  1. A QSEHRA enables employers to set allowance caps, effectively giving them complete control over their costs. Once the caps are set, they cannot be exceeded.
  2. It allows employers to avoid having to qualify for group health insurance and the headaches involved with re-enrollment and premium increases.
  3. It helps attract and retain employees. Aside from salary, health benefits are the top consideration applicants make before accepting a job offer.
  4. It gives employees the power to choose how they want to use their allowance. It can be used for individual health insurance premiums, and even out-of-pocket expenses.

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QSEHRA vs.
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How does the QSEHRA work?

The QSEHRA is an employer-funded, tax-free health benefit used to reimburse employees for personal health care expenses. Although commonly mistaken as an account, it is actually an arrangement between an employer and employee. Many employers ask where the money goes, and how the reimbursement process works. Using PeopleKeep, employers keep the money the whole time; though this is often not the case with third party administrators (TPAs). When the money is paid to employees it is recorded as a tax-free reimbursement, and the plan documents are what enable the employer to retain that status.

Essentially, employers set a monthly allowance that employees are able to use toward qualified health expenses and the employer reimburses them up to their allowance amount. A separate account is not necessary for the QSEHRA to exist, although some employers prefer to separate health benefits money for accounting and tracking purposes.

With the QSEHRA, all reimbursements are free of payroll tax for the organization 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).

Let’s take a closer look at how the process works:

  1. The employer sets allowances

    An employer offering a QSEHRA chooses a monthly, per-employee allowance of tax-free money to make available. There are no minimum contribution requirements, and employers may offer different allowance amounts to employees based on family status.

    For 2020, QSEHRA contribution limits are $5,250 per year ($437.50 per month) for self-only employees and $10,600 per year ($883.33 per month) for employees with a family.

  2. Employees make purchases

    With a QSEHRA, employees buy what fits their personal needs. In addition, employees can purchase individual health insurance either through open enrollment or, if they become newly eligible midyear, through a 60-day special enrollment period (SEP)

    There are more than 200 expenses that are eligible for reimbursement through the QSEHRA, including:

    • Individual health insurance premiums
    • Individual dental, vision, or long-term care insurance premiums
    • Copays
    • Deductibles
    • Prescription and over the counter (OTC) drugs
    • Chiropractor visits

    Use our interactive expense tool which includes the full list of reimbursable expenses under IRS Publication 502.

  3. Employees submit proof of expenses

    After incurring a qualified expense, employees submit proof of the incurred expense to the HRA administrator. Employers can choose to self-administer the QSEHRA, outsource the administration to a TPA, or enlist the help of a software provider like PeopleKeep to perform documentation reviews, have a team of customer support representatives available, and generate plan documents. 

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

    The documents must include:

    • A description of the product or service
    • The total cost of the expense
    • The date the employee incurred the expense
    • Some expenses require a doctor’s note or prescription
  4. Submitted expenses are reviewed and reimbursed

    After an employee submits an expense, the assigned HRA administrator reviews the documentation and, if the expense is qualified, the employee is reimbursed up to their accrued monthly allowance1. If the purchase is not an eligible expense, it will be rejected.

    These reimbursements are free of payroll tax for both the organization and its employees. They are also free of income tax for employees as long as the employee has a qualifying health insurance plan. Employees who don’t have insurance, or who have insurance that doesn’t qualify as MEC, must report reimbursements as taxable income at the end of the year.

    Read our 2020 report on the QSEHRA


    1Employees are given a monthly allowance to use on eligible expenses. Unused funds roll over each month until the end of the year when the allowance restarts. All unused funds stay with the employer.

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The QSEHRA vs. 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 group coverage HRA (GCHRA).


See if a QSEHRA is right for your organization: take the quiz

HRA Comparison Chart

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 $5,250 for self-only employees and $10,600 for employees with a family in 2020. 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

Who can offer a QSEHRA?

The QSEHRA was designed specifically for organizations with fewer than 50 full-time equivalent employees looking for an alternative to traditional group health insurance.

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

  1. Employs fewer than 50 full-time-equivalent (FTE) employees
  2. Doesn’t offer a group insurance policy to any of its employees

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

Learn how to cancel your group health insurance policy

Who can participate in a QSEHRA?

When an organization offers a QSEHRA, all full-time employees and their families are automatically eligible and must be allowed to participate. The employer 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, copays, 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.

Learn how the QSEHRA works with Medicare

S Corporation Owners

IRS regulations for the QSEHRA dictate that S Corporation owners and their spouses who own more than 2% of a business cannot participate in a QSEHRA. This is because owners are able to write off their medical expenses through other means and are not considered employees of the business by the IRS. Fortunately, however, this rule only applies to owners, and employees are still able to participate.

Learn more about which types of business owners can participate in the QSEHRA

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How to set up a QSEHRA

Employers 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. Cancel the employer’s group policy

    If the employer offers a group health insurance policy, it must be canceled before the QSEHRA can begin.

  3. Confirm employee eligibility

    Though the employer 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.

    In 2020, Employers can offer any amount up to $5,250 ($429.17 per month) for single employees and $10,600 ($870.83 per month) for employees with a family.

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

    Employers 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 employer must comply with QSEHRA notice requirements, but it’s also a good idea to communicate the benefit as they learn about the QSEHRA for the first time.

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

    Employers should be prepared to help employees purchase individual health insurance during open enrollment or an SEP. Enrolling in a QSEHRA qualifies your employees for an SEP.

  8. Follow all stated QSEHRA deadlines.

    The employer must meet all QSEHRA deadlines outlined in its plan documents, including notice requirements and paying out approved reimbursement requests.

    Sign up for a QSEHRA with PeopleKeep

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How to manage a QSEHRA

Once an organization sets up a QSEHRA, it must manage and administer the QSEHRA appropriately.

There are three key points to keep in mind when managing a QSEHRA:

  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 employer 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 employer 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 the HRA administrator is found out of compliance, the organization could be fined up to $100 per employee per day until corrections are made.

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

    PeopleKeep instantly generates QSEHRA plan documents when you sign up, automates expense verification, provides employee insurance shopping assistance, and answers any and all employee questions regarding their QSEHRA benefit.

    Learn about self-administering the QSEHRA

Interested in signing up for a QSEHRA?

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Frequently asked questions about the QSEHRA

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Can business owners participate in the QSEHRA?

Almost all business owners can participate in a QSEHRA, except for S Corporation owners with more than 2% ownership in the organization. See our chart on owner eligibility with a QSEHRA.


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

Yes, and in fact, offering an HSA alongside a QSEHRA can be a great way to further expand your benefit. 

Read our article on why your organization should offer both an HSA and a QSEHRA


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.


How does the QSEHRA help employers control their benefits budget?

Using a QSEHRA, employers are able to set allowance caps for employees that cannot be exceeded. Once a monthly allowance cap is reached, the employee must wait until the beginning of the next month to receive another reimbursement.

Learn about QSEHRA contribution limits


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

Last year, small businesses offered an average monthly allowance of $5,250 per year, per self-only employee and $10,600 per year, per employee with a family.

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