Qualified Small Employer HRA (QSEHRA)

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.

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

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   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.

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

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

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