What is a Qualified Small Employer HRA (QSEHRA)?
A qualified small employer health reimbursement arrangement (QSEHRA) is a health coverage subsidy plan designed for small businesses and non-profit organizations with fewer than 50 employees. QSEHRAs allow small organizations to provide quality employee health benefits through an HRA when they may not be able to afford traditional health insurance coverage. QSEHRAs give employees a tax-advantaged way to pay for healthcare, while helping small businesses control healthcare costs.
How does a QSEHRA work?
Employers design their own plans and set reimbursement allowances for their employees. Employees pay for their own health insurance and medical bills. The employee then must provide proof of their qualified expenses for the employer to reimburse them using the pre-tax QSEHRA funds. Eligible employees may sign up for a QSEHRA during the enrollment period or after a qualifying life event like marriage or divorce.
For a business to qualify for a QSEHRA, the company must have fewer than 50 full-time employees. Companies offering a QSEHRA cannot offer a group health plan like a flexible spending account (FSA). The reimbursement packages must be provided on the same terms to all full-time employees as described by the IRS in Section C of IRS Notice 2017-67. These amounts may only vary based on age and the number of individuals covered. For example, an employer can set one limit for those employees who need individual coverage and one limit for those who need family coverage.
QSEHRAs are funded solely by the employers. All reimbursements have annual maximums, which are available to employees on a monthly basis. This means employees have a set amount each month that they may be reimbursed for tax-free. Any unclaimed funds at the end of the year stay with the employer.
Benefits of a QSEHRA
QSEHRAs have multiple benefits for employees and employers. QSEHRAs give employees a tax-free way to pay for their healthcare when traditional coverage isn’t an option. These accounts also allow employees to select and pay for health coverage that’s right for their unique needs, rather than joining a pre-determined employer plan.
QSEHRAs give small employers an option for providing a health benefit to their employees when they otherwise may not be able to afford it. Offering a benefit like this can make them more competitive and attractive from a recruitment perspective. Employers also opt for these plans because they allow for better cost control. They know up front how much they will have to spend on their employees’ healthcare coverage each year. Additionally, funds that are unused are given back to the employers.
2021 QSEHRA Contribution Limits
For tax year beginning in 2021, small business may offer up to $5,300 for individual employees and up to $10,700 for families. (The IRS increased these limits by $50 for individual employees and $100 for families from 2020.)