Client Resources
What Is a QSEHRA?
(Pronounced "Q-Sarah")
If you’re a small employer with 50 or fewer employees, the QSEHRA was made just for you.
The QSEHRA (qualified small employer health reimbursement arrangement) is a type of HRA that allows small businesses to reimburse their workers, tax-free, for their medical expenses. The following guide was designed to get you up to speed, pronto.
Introduction to HRAs
An HRA (Health Reimbursement Arrangement) is a health spending account for your employees.
The original HRA (now referred to as "integrated," "group," or "standard" HRA) was essentially created in 2002 when the IRS published Notice 2002-41. It is a tax-deductible health spending account an employer can use to reimburse employees for out-of-pocket medical expenses, like health insurance premiums, deductibles, co-pays, and coinsurance.
Compared to traditional group health insurance plans, HRAs are more flexible, more affordable and easier to administer. Plus, you can tailor plans to fit the specific needs of your employees.
In 2016, the Small Business Healthcare Relief Act was passed, widening HRAs and creating a new HRA -- the QSEHRA.
QSEHRAs enable small business owners offer quality, IRS-approved health benefits at a cost both employers and employees can afford. Employers are free to choose the allowance amount and employees are free to choose their own individual health insurance, making QSEHRAs a win-win.
So what's the difference between an HRA and a QSEHRA?
The short answer is that QSEHRAs don't require you to offer a Group Health Plan (GHP).
The longer answer is that there are really several types of HRAs -- standard (or integrated) HRAs, QSEHRAs, ICHRAs, and EBHRAs. Standard HRAs and EBHRAs require employers to offer GHPs, whereas QSEHRAs and ICHRAs do not.
Of course, understanding the different types of HRAs can be tricky. That's why we've put together a simple comparison table between GHPs and the relevant HRAs for small businesses: ICHRAs and QSEHRAs.
Are QSEHRAs better than group health plans?
For a small business, there are many advantages to a QSEHRA...
• Employers get to decide how much they spend
• Employees get to choose individualized insurance plans and can be reimbursed for premiums
• Many (sometimes all) employees may be eligible for premium tax credits (PTCs) from the Marketplace
• Employees get tax-free reimbursements, employers get to deduct them from taxes, so everybody gets tax breaks
• Employers have complete financial control over their benefits
• There is no pre-funding required, so employers can save on upfront costs
• Thanks to fixed dollar amounts, there are no more annual premium hikes
• There are no participation requirements, so even if employees don't use the benefit, it won’t affect the plan
Which is best for me, a QSEHRA or an ICHRA?
The short answer is, it depends.
If your business has 50 or more employees (or if you want to continue offering a traditional group health plan), then you cannot offer a QSEHRA (you'll need a standard HRA or an ICHRA). If your business employs fewer than 50 employees, then you would consider an ICHRA over a QSEHRA only if you want to:
• Offer employees more than $450/month for individuals and more than $920/month for families in the HRA (QSEHRAs are capped, ICHRAs are not)
• Offer different HRA amounts to different classes of employees (hourly, salaried, full-time, part-time, seasonal, remote, or a combination of the other two categories)
Note that QSEHRAs do allow employers to offer different QSEHRA amounts to employees based on age and family status and to exclude certain classes of employees (listed below under the question: "Which employees are eligible?").
Of course, figuring out which HRA fits your business best can be tricky. That's why we built a simple quiz to help you figure it out in less than 2 minutes, or you can click here for a deeper dive on ICHRAs vs QSEHRAs.
Which employees are eligible?
That's (somewhat) up to you.
As previously mentioned, if you decide to offer an HRA (including a QSEHRA), then it must be offered to all full-time employees. If you decide to offer it to your part-time employees, then you can choose whether to define “part-time employment” as averaging under 40 hours a week or as averaging under 30 hours a week, but you must offer the same amount.
You are free to exclude:
• Employees under age 25 at the beginning of the plan year
• Those who have worked for you for less than 90 days
• Part-time or seasonal employees
• Union employees (if health benefits were the subject of good faith bargaining)
• Nonresident aliens who don’t receive income from U.S. sources
You can offer the QSEHRA to the excludable classes of employees as long as you’re consistent. That means if you provide the QSEHRA to Joe the Part-Time Employee, you must also offer it to all part-time employees on the same terms.
Also note that all employees and family members (if they can receive permitted benefits) must have their own health insurance plans (or plans through a spouse) that meet minimum essential coverage (MEC) requirements as defined by the Affordable Care Act (ACA) in order to participate in the QSEHRA. Most plans purchased through the Marketplace (or obtained through a spouse) do meet MEC requirements, but employees should check to confirm.
Is my business eligible to set up a QSEHRA?
Businesses with fewer than 50 employees are eligible.
To qualify for a QSEHRA, a small employer must: (a) have fewer than 50 full-time employees; (b) provide the arrangement on the same terms to all full-time employees; (c) not offer a group health plan.
Important notes:
• (a) The "fewer than 50" number must be based on the previous calendar year.
• (b) All full-time employees are automatically eligible and must participate if the HRA is considered "affordable (affordability is covered below). The employer may choose to include part-time employees, but the same terms must be offered to them as to full-time employees. "Same terms" does allow for the employer to offer different terms based on type of coverage (individual or family).
• (c) The "group plan" exclusion does extend to SHOP plans, vision, dental, and FSAs.
Employers can offer an HSA with the QSEHRA, but employees who participate must be enrolled in a High Deductible Health Plan (HDHP) and only their premiums (not medical expenses) can be reimbursed through the QSEHRA.
What does "affordability" mean when it comes to my HRA?
"Affordability" primarily relates to premium tax credit availability from the Marketplace.
Put simply, if you offer an employee a high enough HRA amount, then the ACA is no longer willing to pay for coverage, since it now deems the HRA option "affordable coverage" (in fact, your employee will no longer be able to take advantage of premium tax credits whether they accept the HRA offer or not). If the QSEHRA amount that you provide is not considered affordable coverage, then the premium tax credit will be allowed (MINUS the QSEHRA amount).
Specifically, a premium tax credit will be denied if the cost to the employee to purchase the lowest cost silver plan for self-only coverage on the Marketplace MINUS the amount of the QSEHRA reimbursement does not exceed 9.61% of the employee’s household income.
Don't worry, you won't have to calculate any of these rates. We'll do it for you using our affordability calculators so that the rate you pay maximizes the premium tax credits allowed to your employees.
Are QSEHRAs tax-deductible?
Yes. Unlike stipends, QSEHRAs are tax-free.
Reimbursements are tax-free for employees and employers deduct them from taxes, so everybody gets tax breaks.
Can't I just reimburse my employees for healthcare expenses and "expense it?"
No. At least not "tax-free" (without serious tax consequences).
Those reimbursements are viewed by the IRS as income, meaning that you will have to pay payroll taxes on them and the employees must recognize them as taxable income.
Tax-free reimbursement used to be a fairly common practice for small business owners. But one of the unintended consequences of the ACA was to disallow tax-free reimbursement for small companies. Because employers that reimbursed for individual plans did not meet the preventive care requirements of the ACA, they would be subject to group plan penalties of up to $100 per employee per day. See IRS Notice 2013-54 for details.
Which expenses are eligible for a QSEHRA?
Qualified medical expenses are eligible.
HRAs cover qualified medical and dental expenses as determined by the IRS. These include costs to alleviate or prevent a physical or mental ailment, but not expenses for general health maintenance such as vitamins. Employers also have the right to exclude any qualified expense from their eligible reimbursable expenses.
The following types of medical expenses generally may be reimbursed through a QSEHRA:
• Insurance premiums (health, dental, vision, etc.)
• Coinsurance
• Deductibles
• Copays
• Prescription drugs
• Over-the-counter drugs
Can I contribute different QSEHRA amounts to different employees?
Yes (within certain limits).
While the IRS states that the QSEHRA must be offered on the "same terms to all eligible employees," it does allow for the employer to exclude certain types of employees (see "Which employees are eligible?" above). Additionally, employees can be offered greater amounts than others based on age and family status.
Note that the ICHRA does allow employers to offer different HRA amounts to different classes of employees. To learn more, see "Which is best for me, QSEHRA or ICHRA?" above, or check out our comparison table.
How should I determine my budget?
You can set the budget however you like.
The real question is how much do you want to spend? Some employers contribute a hundred dollars or less, while others offer $450 or more (in which case they would need to offer an ICHRA). There is no right or wrong amount, as every small business is unique.
What happens to unused funds?
That's up to you.
If employees don't use all of their QSEHRA allowance in a given month, the balance will roll over to the next month but the funds remain with you. At the end of the year, you can decide whether or not to roll year-end balances over to the next year or reset. You can choose a "use it or lose it" policy regarding funds not used by December 31st or you can allow employees to roll over a certain amount of money from one year to the next.
Who owns the money in an QSEHRA?
You do.
If your employee leaves the company or their job is terminated, the account funds remain with you. You can choose to offer a retirement account that allows former employees to utilize funds after leaving the company.
When can I start my QSEHRA?
You can start your QSEHRA any time you want.
Because QSEHRA triggers a Special Enrollment Period (SEP), you can offer your HRA as soon as next month rather than waiting for Open Enrollment to begin. If your employees already have qualifying health insurance, you can start your HRA as soon as today and your employees will be eligible for the entirety of this month’s allowance.
What's the next step?
Let our team run the numbers based on your business.
Our entire business model is centered around cutting down as much of the time and cost associated with providing affordable benefits to your employees as possible. Take just a few minutes to fill out a simple form and we'll do the rest. We'll provide you with a summary of what your options are (at zero charge or obligation to you), and we'll walk you through the process.
Your custom-fit plan summary will be delivered to you in the next 1-2 business days, and from there you can decide if a QSEHRA (or an ICHRA) makes sense for you.
Our Process
1) You tell us about your business
2) We send you a free benefits analysis
3) We set up your plan
4) We enroll employees
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