Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

For small businesses in America looking to provide healthcare benefits to their employees without the burden of offering traditional group health insurance plans, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers a viable alternative. QSEHRA allows small employers to reimburse employees for qualified medical expenses, including health insurance premiums, on a tax-free basis. Though QSEHRA is unavailable in the UK, Best Insurance is committed to furthering insurance education on a global scale, which is why we will delve into the features, benefits, and implementation of QSEHRA in this article, empowering small businesses to make informed decisions about offering healthcare benefits to their employees.

QSEHRA was established under the 21st Century Cures Act in December 2016 and designed to provide small employers with a tax-advantaged mechanism to assist employees with healthcare expenses. QSEHRA is available exclusively to small employers who are not subject to the Affordable Care Act’s (ACA) employer mandate; typically defined as those with fewer than 50 full-time equivalent employees. Unlike traditional group health insurance plans, which require employers to select and sponsor specific healthcare coverage options, QSEHRA allows employers to provide financial assistance to employees for purchasing individual health insurance plans or covering out-of-pocket medical expenses.

Employee Eligibility: Under QSEHRA, all full-time employees of the employer are eligible to participate in the arrangement, regardless of their tenure with the company. Part-time employees, seasonal employees, and employees under the age of 25 are also eligible for QSEHRA benefits, provided they meet the criteria established by the employer. However, QSEHRA benefits cannot be offered exclusively to certain classes of employees, such as executives or highly-compensated employees, to maintain compliance with federal regulations.

Employer Contributions: Employers that offer QSEHRA are responsible for funding the arrangement by making tax-free contributions to employee accounts. QSEHRA contributions are subject to annual limits, which are indexed for inflation and adjusted annually by the Internal Revenue Service (IRS). For the 2022 tax year, the maximum annual contribution limits for QSEHRA were $5,450 for self-only coverage and £11,050 for family coverage. Employers have the flexibility to determine the amount of QSEHRA contributions based on their budgetary constraints and employee needs.

Qualified Medical Expenses: QSEHRA funds can be used to reimburse employees for a wide range of qualified medical expenses, including health insurance premiums, deductibles, co-payments, coinsurance, and certain out-of-pocket costs. Qualified medical expenses are defined by the IRS under Section 213(d) of the Internal Revenue Code and encompass various healthcare services and treatments deemed medically necessary. QSEHRA funds cannot be used to reimburse employees for non-medical expenses or expenses that are not considered qualified medical expenses under IRS guidelines.

Tax Treatment: One of the primary benefits of QSEHRA is its tax-advantaged status for both employers and employees. Employer contributions to QSEHRA are tax-deductible as business expenses, allowing small businesses to reduce their taxable income and offset the cost of providing healthcare benefits to employees. Additionally, QSEHRA reimbursements received by employees for qualified medical expenses are excluded from gross income and are not subject to federal income tax, Social Security tax, or Medicare tax, thereby providing employees with tax-free assistance for healthcare costs.

Notice and Reporting Requirements: Employers that offer QSEHRA are required to provide employees with written notice of the arrangement’s terms and conditions, including the maximum reimbursement amount available, eligible expenses, and other relevant details. The notice must be provided to employees at least 90 days before the beginning of the plan year or upon an employee’s initial eligibility for QSEHRA benefits. Additionally, employers must report QSEHRA contributions on employees’ Form W-2s at the end of the tax year to ensure compliance with IRS reporting requirements.

Cost-Effective Healthcare Solution: QSEHRA offers small employers a cost-effective alternative to traditional group health insurance plans by allowing them to provide employees with financial assistance for healthcare expenses without incurring the high costs associated with sponsoring comprehensive coverage options. By offering QSEHRA, small businesses can control their healthcare spending, tailor benefits to meet employee needs, and attract and retain top talent in a competitive job market.

Flexibility and Choice: QSEHRA provides employees with greater flexibility and choice in selecting their healthcare coverage, thereby empowering them to choose individual health insurance plans that best meet their healthcare needs and preferences. Unlike group health insurance plans, which may limit coverage options and provider networks, QSEHRA allows employees to shop for coverage on the Health Insurance Marketplace or in the private insurance market, giving them access to a broader range of plans and providers.

Tax Advantages: QSEHRA offers tax advantages for both employers and employees, making it an attractive option for small businesses and their workforce. Employer contributions to QSEHRA are tax-deductible as business expenses, reducing the employer’s taxable income and lowering their overall tax liability. Additionally, QSEHRA reimbursements received by employees for qualified medical expenses are excluded from gross income and are not subject to federal income tax, Social Security tax, or Medicare tax, thereby providing employees with tax-free assistance for healthcare costs.

Compliance with ACA Requirements: QSEHRA allows small employers to comply with certain provisions of the Affordable Care Act (ACA), including the requirement to offer minimum essential coverage to employees. While QSEHRA does not constitute group health insurance coverage, it satisfies the ACA’s requirement for small employers to offer a healthcare benefit to employees without incurring penalties for non-compliance with the employer mandate. By offering QSEHRA, small employers can avoid the administrative burdens and costs associated with sponsoring traditional group health insurance plans while still fulfilling their legal obligations.

Implementing QSEHRA requires careful planning and adherence to federal regulations governing the arrangement. Small employers considering offering QSEHRA to their employees should take the following steps:

Determine Eligibility: Evaluate whether your business meets the eligibility criteria for offering QSEHRA, including having fewer than 50 full-time equivalent employees and not offering group health insurance coverage to employees.

Establish Plan Terms: Define the terms and conditions of your QSEHRA plan, including the maximum reimbursement amount, eligible expenses, and employee eligibility criteria. Consider consulting with legal and tax advisors to ensure compliance with IRS regulations and guidelines.

Provide Employee Notice: Provide employees with written notice of the QSEHRA plan terms and conditions, including the maximum reimbursement amount, eligible expenses, and other relevant details. Ensure that the notice is provided to employees in a timely manner and meets IRS notice requirements.

Set Up Reimbursement Process: Establish a process for reimbursing employees for qualified medical expenses under the QSEHRA plan. Implement systems and procedures for verifying and documenting expenses, processing reimbursement requests, and distributing funds to employees in a timely manner.

Maintain Compliance: Maintain compliance with IRS regulations and reporting requirements for QSEHRA, including providing annual notice to employees, reporting contributions on Form W-2s, and adhering to contribution limits and eligible expense guidelines. Monitor changes in federal regulations and guidelines related to QSEHRA and adjust plan terms and procedures accordingly.

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers small businesses a flexible and cost-effective solution for providing healthcare benefits to employees. By reimbursing employees for qualified medical expenses on a tax-free basis, QSEHRA empowers small employers to offer competitive benefits while controlling healthcare costs and complying with federal regulations. With careful planning and implementation, small businesses can leverage QSEHRA to attract and retain top talent, enhance employee satisfaction, and promote financial wellness in the workplace.