Are you wondering about what a Qualified Small Employer HRA is and how it works? At a high level, a QSEHRA allows employers to reimburse their employees for health benefits tax-free. Here’s what you need to know about this new reimbursement model that’s changing the way small businesses offer benefits.
What is QSEHRA?
The Qualified Small Employer Health Reimbursement Arrangement (also known as a small business HRA) allows small employers 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.
How does QSEHRA work?
Employees pay for health expenses, you reimburse them tax-free. Simple as that.
The mechanics of a Qualified Small Employer HRA are surprisingly simple.
Here’s how it works in a nutshell:
- Employers design their plan and set reimbursement allowances (setting up a small business HRA is quick and painless)
- 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
- Employers outsource certain administrative functions like compliance and reporting (that's where Take Command Health comes in)
The key thing to understand is that payments are reimbursements, not accounts. Employees will pay the insurance company or doctor’s office directly and then submit a claim to get reimbursed for their expenses tax-free.
Unlike Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) that are accounts, the “HRA” in QSEHRA stands for Health Reimbursement Arrangement. We often get asked if business owners have to pre-fund their account or send money to our account so we can distribute it to their employees.
The answer is no to both questions—the money stays with the employer until an employee makes a claim that qualifies for reimbursement. If employees never make claims or don’t claim the full amount, the employer keeps it all!
What are the benefits of QSEHRA?
- Optimized Benefits: a tax-free reimbursement plan is much more optimized. By giving cash tax-free, employees can choose their own plan. If one employee wants Blue Cross because it has his doctor is in network, great! If another employee wants to move to Aetna because it handles her prescription better, no problem! Finally, if another employee already gets great coverage through his spouse, he can stay on that plan and use the reimbursements to help with medical bills.
- Tax Efficiency: With QSEHRA, employers can make reimbursements without having to pay payroll taxes and employees don’t have to recognize income tax. In addition, reimbursements made by the company count as a tax deduction. Pretty awesome!
- Flexible Design: in most states, group plans require employers to contribute at least 50% of the employee-only costs and require at least 75% of employees to participate. This approach can be extremely burdensome and “group savings” typically don’t kick in until an employer has over 100 employees. With a QSEHRA, there are no minimum contributions required or participation rates to maintain. What's more, you can scale benefits based on age and family size, helping business owners be more efficient in their healthcare spend.
- Budget Control: Employers can set how much they want to contribute (up to the maximum amounts, 2020 QSEHRA contribution limits are $5250/year for individuals, and $10,600/year for families) and there are never any increases unless the employer wants to increase the amount.
- Portability: A key benefit of QSEHRA for employees is that instead of the company "owning" the plan, the employee owns it and can take it with them if they leave. That means that if they lose their job, they will still have coverage and won't be scrambling for COBRA between jobs.
Pro-tip: Offering a QSEHRA (or losing a QSHERA) now serves as a qualifying event for a Special Enrollment Period, meaning your employees will have 60 days to shop for a marketplace plan instead of having to wait for open enrollment.
Does my business qualify for QSEHRA?
To use a QSEHRA, a small business or non-profit must meet two QSEHRA rules:
- 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
- Not have a group health plan: The small business or non-profit cannot have a traditional group health plan
Many business owners ask if they can participate in their own QSEHRA. The answer is it depends. Check out our post on owner eligibility for QSEHRA for help.
Are my employees eligible for QSEHRA?
Employees who are actual employees (99% of the time this means they have a W2) are eligible as long as they are covered by a qualified plan that provides Minimum Essential Coverage.
MEC plans include:
- Major medical plans
- Coverage through a spouse's plan
It does not include:
- Faith-based sharing ministries like Medi-Share
- Short-term plans
- Indemnity plans
Still have questions?
For more information on this awesome benefit, check out our comprehensive QSEHRA guide. Wondering how to get the most benefits out of QSEHRA? We wrote this guide about what can be reimbursed. Or maybe we’ve answered your questions in our QSEHRA FAQ page.
Our team is around to chat anytime on our site. We would be happy to help you.