Guide to the qualified small employer HRA (QSEHRA)

A QSEHRA benefits your workers, too. Instead of choosing a one-size-fits-all health policy that hopefully fits the needs of most of your workers, a QSEHRA allows your employees to choose the health policy that works best for them. This gives them more choice over their doctors, coverage, and premiums.

With a QSEHRA, you can offer a flexible health benefit at an affordable price while empowering your employees to take control of their healthcare.

Step 1: Design your benefit to fit your needs

First, you design your QSEHRA benefit so it’s suited to the needs of your team and your budget. When setting up your QSEHRA, you’ll decide how much tax-free money you want to offer to employees each month for expense reimbursements. You can also decide whether you’d like to limit eligible expenses to premiums only or expand the benefit to cover all eligible expenses defined by the IRS in Publication 502.

You’ll also decide if you want to include your W-2 part-time employees. All full-time W-2 employees are automatically eligible. You can exclude seasonal employees, but if you choose to include them, you must offer them the same allowance as your full-time employees. You can also customize monthly allowances based on employee age and family status.

You can customize your QSEHRA allowances as follows:

1. Offer everyone the same amount: This is the simplest way to establish a QSEHRA for your organization. Simply choose an allowance up to the IRS-established annual maximum.
2. Offer everyone the maximum allowance for the year: You can give your employees the maximum the IRS allows for the year for single and family allowances.
3. Vary allowances by family status: You can customize allowances based on your employees’ family statuses, such as single employees, single with dependents, married, and married with dependents.
4. Vary allowances based on employee age: Employers can vary allowances by age, but the IRS requires a reference plan on the individual market. This is typically a 1:3 ratio between your youngest and oldest employees. If you offer a QSEHRA through PeopleKeep, we don’t support age-based allowances. You can accomplish this with an individual coverage HRA (ICHRA).

Once you design your benefit, you’ll need to create formal paperwork. The federal government requires formal plan documents. If you administer your QSEHRA with PeopleKeep, we generate these documents for you.

Step 2: Employees make healthcare purchases

Once you set your benefit up, eligible employees can use their own money to purchase individual health insurance coverage, copays, prescriptions, medical services, and healthcare items. This can include anything listed in IRS Publication 502.

If your employees don’t have health insurance with minimum essential coverage (MEC), they can enroll during the annual open enrollment period or during a 60-day special enrollment period (SEP) after you offer the benefit for the first time.

Step 3: Employees submit proof of incurred expenses

After incurring an expense, eligible employees can request reimbursement. They’ll need to submit documentation showing proof of purchase.

IRS regulations require the following information for you to reimburse your employees:

• The name of the item or service
• The cost of the item or service
• The name of the vendor or service provider
• The date of purchase
• If a service, documentation must include the date of the procedure or service

Invoices, receipts, or an explanation of benefits from an insurance company or healthcare provider typically satisfy the IRS requirements. Regulations may require a doctor’s note or prescription depending on the items your employees want you to reimburse. Keep in mind that this information is subject to HIPAA privacy rules. You must handle this information carefully if you’re self-administering a QSEHRA.

Employees must also provide proof of coverage (MEC) to establish their eligibility for their first reimbursement of the plan year. They must attest that they have qualifying health coverage with MEC every time they submit a reimbursement request. According to IRS Notice 2017-67, eligible employers can rely on these attestations as evidence of MEC unless they know an employee doesn’t have MEC. Your employees must have MEC for you to reimburse them income tax-free.

Step 4: Review and reimburse expenses

Finally, you’ll review the expense and either approve or reject the request based on IRS regulations and your plan design. If you’re offering a QSEHRA with PeopleKeep, our experts will review your employees’ submissions for you so you can be sure they qualify. Once we verify the submitted expenses, you can reimburse them up to their available allowance amount.

Employers typically reimburse their employees through payroll by adding a non-taxable line item to their paychecks. But you can also pay out QSEHRA reimbursements with a separate check, cash, or bank transfer.

Can S-corporation owners participate in a QSEHRA?

IRS regulations dictate that S-corporation owners, their spouses, and their dependents who own more than 2% of the business can’t participate in a QSEHRA. This is because owners can write off their medical expenses through other means. The IRS also doesn’t consider S-corp shareholders as employees. Fortunately, this rule only applies to owners, and employees can still participate.

Can C-corporation owners participate in a QSEHRA?

C-corporations are legal entities separate from the owner. This means the IRS considers owners common-law employees of the corporation. C-corp owners can participate in a QSEHRA. 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 as long as they have MEC.

Can sole proprietors participate in a QSEHRA?

A sole proprietorship is an unincorporated business owned and run by one person. There’s no distinction between the business and the owner, so the owner isn’t an employee. This means sole proprietors can’t participate.

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 the sole proprietorship and the owner’s spouse as long as they have MEC.

Can partners participate in a QSEHRA?

A partnership is a pass-through entity, meaning the company isn’t subject to income tax. Instead, the partners are directly taxed individually. Partners in a partnership are self-employed rather than company employees, so they’re not eligible to participate in a QSEHRA.

Similar to sole proprietors, partners can access the benefit if they’re married to a W-2 employee of the business, as long as the partner’s spouse isn’t also a business partner.