QSEHRA, or the qualified small employer health reimbursement arrangement is a type of standalone HRA that was created in 2016. It's designed to help small business owners afford health insurance for their teams—often a major challenge due to rising premiums and participation rate concerns. Halfway through 2020, we are looking at what to expect for QSEHRA 2021. Here's what's on the horizon.
Quick refresher: Employees pay for health expenses, you reimburse them tax-free
Hopefully you’ve heard of it by now, but just in case you need a reminder...
The mechanics of a QSEHRA are surprisingly simple and have proven to be a valuable ally as businesses weather the storm of COVID-19. At a high-level, employees pay for their own health expenses and you reimburse them. Here’s how it works:
- Employers design their plan and set reimbursement allowances
- Employees pay for their own health insurance and medical bills
- Employees provide proof of their expenses
- Employers reimburse the employee up to the set limit
The key to note is payments are reimbursements. Employees will pay the insurance company or doctor’s office directly and then submit a claim to get reimbursed for their expenses tax-free. They can be reimbursed up to a set limit.
Which brings us to our next point. QSEHRA contribution limits are expected to rise.
QSEHRA 2021 contribution limits
All reimbursements are subject to annual maximums and become available to employees on a monthly basis. This means employees can’t take the full annual amount in January—instead, the funds become available to employees each month.
If an employee joins the company or becomes eligible to participate in the middle of the year, the employee is eligible for a prorated amount based on the month they became eligible.
A practical example to drive the point home: John joins ACME Corp in October and is immediately eligible for ACME’s QSEHRA (no waiting period). For math’s sake, let’s say ACME reimburses $200/mo ($2,400 annually). John is eligible for 3 months (October, November, December) and therefore can receive up $600 for that plan year.
In the law, these amounts are tied to inflation, so we expect them to go up a little bit every year.
In fact, since its inception, we’ve seen a steady increase annually of about $100 for individuals and $150-200 for families.
- Individual $5150 or $429.16/month
- Family $10,450 or $870.83/month
- Individual $5250 or $437.50/month
- Family $10,600 or $883.33/month
While 2021 limits haven’t been released, if we assume the same annual rate increases, we predict:
- Individual $5350 or $445/month
- Family $10,700 or $891.67/month
What else do we expect from QSEHRA 2021?
Compatibility with sharing ministries
The IRS has established that in order to receive the tax-free reimbursements of QSEHRA, the participants must enroll in a plan that meets MEC. Since the inception of QSEHRA in December of 2016, the IRS has failed to provide guidance on how sharing ministries work with QSEHRA. We explored this circular reference in detail in this blog post.
Due to the gray area that the IRS created, we've been encouraging employees of our clients to purchase an additional MEC supplement plan alongside their sharing ministry plan to participate in QSEHRA.
The proposed legislation, which would go into effect in 2021, gives the green light for QSEHRA reimbursements for sharing ministries.
While this was more of a 2020 update it still holds true for 2021 and we couldn’t be more excited about it. Employees who become eligible to participate in QSEHRA for the first time on or after January 1 will qualify for a special enrollment period to purchase individual health insurance for themselves and family members.
We’ll update this post when the IRS releases the contribution limits. Until then, you can reach out to our HRA experts with any questions you might have, and peruse our comprehensive QSEHRA guide. We’re here to help!