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Small Business

QSEHRA qualifications: what you should know

The QSEHRA is a more efficient way for small businesses and nonprofits to offer health insurance to their employees. The reimbursement model is changing the way small businesses offer insurance. It’s a game-changer that many are just now discovering. If you're a small business owner and are considering offering your growing team small business health insurance, a QSEHRA might be just what you are looking for. Here's a look at this new model of health benefits, and the QSEHRA qualifications you need to know.

What is a QSEHRA?

The Qualified Small Employer HRA, sometimes called a Small Business HRA or a defined contribution model or 401(K) style benefits, is a type of standalone HRA that was created in 2016 as a provision of the bipartisan 21st Century Cures Act and signed into law by President Obama. It is designed to help small business owners afford health insurance for their teams—often a major challenge due to rising premiums and participation rates.

As a health reimbursement arrangement, the QSEHRA allows employers (with 50 employees or less) to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer small business health insurance benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want.

The general idea is this: employers simply reimburse employees when a health expense occurs. There is no pre-funding of accounts. If employees don't submit receipts for reimbursement or do not need medical care, the leftover funds stay in the employer's pocket.

How a QSEHRA works

The mechanics of a Qualified Small Employer HRA are surprisingly simple.

  1. Employers design their plan and set reimbursement allowances (setting up a small business HRA is quick and painless)
  2. Employees pay for their own health insurance and medical bills
  3. Employees provide proof of their expenses
  4. Employers reimburse the employee up to the set limit
  5. Employers outsource certain administrative functions like compliance and reporting (that's where Take Command comes in)

QSEHRA qualifications for the employer

To use a QSEHRA, a small business or non-profit must meet two primary requirements:

  1. Be “small”: The business or non-profit must be a “small employer” in the eyes of the IRS with less than 50 full-time employees (defined in IRS section 4980H(c)2).
  2. Not have a group health plan: The small business or non-profit cannot have a traditional group health plan (defined in IRS section 5000(b)). This makes sense—the purpose of a QSEHRA is to reimburse for individual health insurance, so a business cannot have a group health plan at the same time. This restriction does not apply to non-health group benefits like life insurance or disability insurance.

QSEHRA qualifications for the employee

To receive tax-free reimbursements from a QSEHRA, an employee must:

  • Be covered by an insurance plan: Employees can be covered by their spouse’s plan, their parent’s plan or purchase their own individual insurance plan. Plans must provide Minimum Essential Coverage (MEC) as defined by the IRS in Section 106(g). MEC plans include major medical plans, Medicare, Medicaid, etc. Faith-based sharing ministries, short-term plans, and indemnity plans are not MEC but may be able to be supplemented with a MEC offering in order to qualify.  

*Employees offered QSEHRA for the first time on or after January 1, 2021 will qualify for a Special Enrollment Period (SEP) which will allow them 60 days to purchase qualifying plans from the individual marketplace outside of Open Enrollment. This makes finding a plan easier for employees!*

  • Submit a claim for reimbursement: This may seem obvious but often gets overlooked! Employees have to prove they spent money on an eligible health expense before they can be reimbursed.

In addition, it’s worth noting that an eligible employee must also actually be an employee of the sponsoring employer. In 99% of cases, this means someone that receives a W-2 from the company. Retirees of the company, friends of the company, contractors, and owners that are not actually employees cannot participate.

Do owners qualify?

In order for small business owners to be able to participate in a QSEHRA, the owner must also be an employee of the business. Employee status for owners is often determined by the corporate structure of the business. In other words, your eligibility depends on how the plan and business are set up.

Partnerships: Partners are directly taxed, making them self-employed and not eligible for participation in QSEHRA. There is a loophole: if the partner’s spouse is a W-2 employee (and not a partner spouse) then the owner can participate in the QSEHRA as a dependent of the spouse.

Corporations: (Including C-Corps, B-Corps, Non-Profits, and LLCs taxed as C-Corps - anything where the entity is separate from ownership.) Corporations are the easiest entity type to handle when it comes to health insurance because owners are considered employees and can benefit from the company’s QSEHRA. Their dependents and any W2 employees can benefit as well.

S-Corps: An S-Corp owner that owns more than 2% of the company is considered self-employed and not an employee, therefore typically cannot participate in the HRA. However, self-employed individuals can already deduct some health insurance expenses without an HRA.

Sole proprietors: These unincorporated businesses are owned and operated by one individual with no distinction between the business and owner. In a nutshell: The sole proprietor is not an employee and will not qualify for an HRA.

Pro-Tip: A good rule-of-thumb when determining owner eligibility is if an owner receives a W-2, he or she is likely also an employee and can participate.

Even if an owner can’t participate and receive tax-free distributions from a QSEHRA, there may still be some benefit in tracking his or her expenses because some owners will qualify as self-employed and can deduct health insurance on their personal tax returns.

How Take Command can help with QSEHRA qualifications

While we always advise our clients to speak with their CPA before jumping in, we are ready to chat on our website if you have any specific questions about your business and how HRAs could help. Setting up a QSEHRA is simple and quick, and our team is here to help if you need it. We’ve also created a Small Business health insurance guide to walk you through all of your options in more detail.

Small Business