QSEHRA 101: The Small Employer's New Best Friend

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Benjamin Matheson is the 46 year-old owner and operator of DC Coffee Roasters in Tacoma, WA.  He has 17 employees, most of whom are full time.  He recently had an employee leave for another opportunity and needs to fill the vacant position.  Matheson knows that to attract and retain a good staff, he needs to provide them with not only a good work environment and all the coffee they can drink, but with competitive health benefits, as well.  However, the cost of a group health plan for his team puts too much stress on his bottom line as healthcare costs continue to rise.  How is he supposed to remain a competitive employer, retain a great staff and still make a profit?  Enter QSEHRA.

“Who Sarah?” you may be asking.  QSEHRA is a benefit structure available to small employers that provides them with flexibility and budget control while still offering health coverage to their staff. While a QSEHRA isn’t a brand new concept, many are unaware of how this benefit works and it’s advantages to small employers. Let’s cover some of the basics to give you a better understanding.

What is a QSEHRA?

QSEHRA stands for Qualified Small Employer Health Reimbursement Arrangement.  It is a newer way for small businesses and non-profit organizations to offer healthcare coverage to their staff.  A QSEHRA allows employers to set aside a certain amount of money each month to reimburse employees for healthcare expenses, whether insurance premiums or other medical expenses, and the reimbursements are available tax-free for everyone.  This means employers can offer benefits without having to administer or pay the hefty costs associated with a traditional group health plan, and employees can choose a health plan that works best for their needs.

A QSEHRA is a great option for several reasons.  Not only does it allow an employer like Ben Matheson to control and specifically budget how much money is allocated to healthcare coverage each year, it also gives employees the freedom to choose what works for them.  Many traditional group plans can feel like a one-size-fits-all solution that doesn’t adequately or appropriately meet everyone’s needs.  With a QSEHRA, employees can choose their own health plan or use the reimbursement funds to cover premiums for coverage on a spouse’s health plan.  QSEHRAs are also available tax free, so they make much more money available to employees than what would be available through a health stipend or a salary increase, since both of those options would be subject to taxation.

How Does It Work?

Many are unsure about the mechanics of a QSEHRA, but they are actually pretty simple and straightforward.

Step 1: Employers provide a monthly amount to their employees, like an allowance, that can be used to cover healthcare costs.  Employers can set their own budget for this monthly allowance, but it must fall within the maximum set by the IRS.  This amount changes annually; in 2019 it was $5,150/year for self-only employees and $10,450/year for employees with dependents.  

Step 2: Employees pay for health insurance or other medical expenses with their own money.  These medical expenses can include monthly premiums, deductibles, copays, prescriptions and non-prescription medications, among other things.  

Step 3: Employees will submit proof of purchase for reimbursement.  This proof of purchase can be a receipt, an explanation of benefits or similar documentation detailing the medical expense.  

Step 4: Employers will review the reimbursement request and provide the funds to cover the expense, up to the annual maximum.  These reimbursements are tax-free, so neither income tax nor payroll tax apply to them.

It is important to note that a QSEHRA is not a bank account. Funds are not loaded into an account or onto a card for employees to use.  Employers keep the money until an employee has a qualifying reimbursement claim.  Employers can reimburse their team in a variety of ways, such as through payroll, checks, cash or even PayPal.  If an employee does not use any or all of the annual allowance, the remaining money stays with the employer.  

 

Employer Requirements

There are really only two requirements an employer must meet in order to offer a QSEHRA to employees:

1. The business or non-profit organization must be small in the eyes of the IRS, which means they have less than 50 full-time employees.

2. The employer must not be offering a group health plan option.  Since the point of a QSEHRA is to reimburse individual medical insurance or expenses, both a QSEHRA and a group plan option cannot be offered at the same time.  This restriction does not apply, however to other group benefits like life insurance. 

If you currently offer a group plan and would like to switch to a QSEHRA instead, you can cancel your group plan at any time.  You don’t have to wait until the end of the year or open enrollment to make the change.  

 

Employee Participation and Requirements

Employers are required to treat everyone fairly, and if offering a QSEHRA to their team, they must offer it to all full-time employees.  However, they can choose whether or not to include employees who are  part-time, seasonal, or under age 25, but they must offer it to everyone in that group.

Employees also have a short list of requirements to meet in order to qualify for QSEHRA participation:

1. Must be covered by a health insurance plan – An employee can purchase their own individual plan, be enrolled in a spouse’s plan or a parent’s plan, but they must have health insurance, and it must provide Minimum Essential Coverage (MEC).  Plans providing MEC include major medical plans, Medicare and Medicaid.  It is important to note that enrollment in a faith-sharing ministry does not provide MEC but can possibly be coupled with supplemental MEC coverage to qualify.

2. Submit claims for reimbursement – Employees are required to prove that they spent money on medical expenses before they receive reimbursement.  If they do not have proof of an eligible purchase, they cannot receive the funds.

How Does QSEHRA Impact the Premium Tax Credit?

Employees who have a QSEHRA should know that it will affect their eligibility for the Premium Tax Credit, whether they can receive one at all or how much it will be.  If they use all of the premium tax credit and it is later determined that they were not eligible for the amount used, it will have to be paid back.  It is best not to use the tax credit at all while purchasing coverage under a QSEHRA.  Later, when filing Federal Income Taxes, if it is determined that they are eligible for some of the premium tax credit, they will be able to claim any amount they haven’t used or are eligible for at that time.

QSEHRA Administration

While starting a QSEHRA is fairly simple, maintaining it can create lots of extra work for small businesses who don’t have the time or resources to track all the details.  Let RedQuote handle it for you. From verifying eligibility and handling reimbursement claims to providing notices and keeping records, we will manage the details, so you don’t have to. With Open Enrollment just a few days away, let RedQuote help you set up and manage your QSEHRA in time for employees to seamlessly choose their own health plans.  

A QSEHRA may be the perfect solution for your company, offering flexible and affordable healthcare coverage to your employees. Not only do we offer QSEHRA administration, but we also provide Commuter, HRA, FSA, and COBRA benefits administration and COBRA outreach services.  Whatever you're looking for, we've got you covered.  Contact the RedQuote team today to get the ball rolling before Open Enrollment begins!  
 

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Published Oct 22, 2019.