Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a health benefit for small businesses, which was established under the 21st Century Cures Act in December 2016. It allows eligible small employers to reimburse employees for qualified medical expenses, including monthly insurance premiums. This arrangement provides a more flexible and cost-effective way for small businesses to offer health benefits without the complexity and administrative burden of traditional group health insurance plans.

Eligibility Criteria

To qualify for a QSEHRA, a small employer must meet specific criteria:

1. Size of the Employer: The employer must have fewer than 50 full-time equivalent employees (FTEs). This threshold aligns with the Affordable Care Act’s (ACA) requirement that businesses with 50 or more FTEs must provide health insurance to their employees.

2. Health Insurance Coverage: The employer cannot offer a group health plan, which means any form of health insurance that covers two or more employees (traditional group health insurance plans, Health Maintenance Organizations (HMOs), or self-insured health plans).

Key Features of QSEHRA

Reimbursement Allowance

The amount that an employer can reimburse employees for medical expenses is capped annually. For 2021, the maximum annual reimbursement limits were $5,300 for self-only coverage and $10,700 for family coverage. These limits are subject to annual adjustments for inflation.

Qualified Medical Expenses

Under QSEHRA, employees can be reimbursed for the following types of expenses:

• Insurance Premiums: Monthly premiums for individual health insurance policies.
• Out-of-Pocket Medical Expenses: Deductibles, co-pays, prescriptions, and other medical expenses defined under IRS §213(d).

Tax Treatment

• Employer: Contributions to a QSEHRA are tax-deductible as a business expense.
• Employee: Reimbursements received by employees for qualified medical expenses are not considered taxable income, provided they have Minimum Essential Coverage (MEC).

Reporting Requirements

Employers are required to report the amount of the permitted benefit for each employee on the employee’s Form W-2. Additionally, employees must be informed about the QSEHRA in writing, specifying the maximum annual reimbursement, the need to maintain MEC, and the possibility that reimbursements could affect their eligibility for premium tax credits under ACA.

Advantages of QSEHRA

1. Cost Control: Employers have a predictable and controlled budget since they define the maximum reimbursement limit each year.
2. Flexibility: Employees can choose health coverage that best suits their needs, enhancing their satisfaction and retention.
3. Simplified Administration: Unlike traditional group health insurance, QSEHRA does not require dealing with insurance carriers or managing complex plan renewal processes.
4. Employee Retention: Offering a health benefit can make small businesses more competitive in attracting and retaining top talent.

Steps to Set Up a QSEHRA

1. Design the QSEHRA Plan: Determine the maximum annual reimbursement limits and which expenses will be reimbursable.
2. Provide Written Notice: Employers must provide employees with a written notice at least 90 days before the start of the plan year.
3. Set Up a Reimbursement Process: Establish a method for employees to submit claims and for reimbursements to be processed.
4. Maintain Records: Keep detailed records of all reimbursements made, as well as the employee’s proof of insurance coverage.

Impact on Employees

For employees, a QSEHRA offers financial support in managing healthcare costs. Employees have the freedom to buy insurance policies that suit their personal or family needs rather than being restricted to a one-size-fits-all group plan offered by the employer. This flexibility can result in better satisfaction and potentially better health outcomes.

However, employees must ensure they have Minimum Essential Coverage to receive tax-free reimbursements. If an employee purchases a policy from the ACA marketplace, the QSEHRA benefits may affect their eligibility for premium tax credits.

Regulatory Compliance

Employers must stay compliant with several regulations and reporting requirements:

• Written Notice: In addition to the annual notice, a QSEHRA written notice must be provided to new hires.
• Form W-2 Reporting: The total amount of permitted QSEHRA benefits must be reported in Box 12, using code FF.
• Employee Documentation: Employers should collect and retain documentation demonstrating that the employee incurred a reimbursable medical expense, such as receipts or invoices.

Case Study: Implementing QSEHRA in a Small Business

Background

XYZ Tech Solutions, a small technology startup with 30 employees, realized the burden of offering a traditional group health insurance plan. Costs were unpredictably rising, and administrative tasks were consuming valuable resources.

Solution

XYZ Tech Solutions decided to implement a QSEHRA. They set the annual reimbursement limits to $4,500 for singles and $9,000 for families.

Implementation

XYZ Tech Solutions provided the required written notice to all employees and set up a simple reimbursement process using a third-party administrator to handle claims. Employees were educated about how to submit claims and the importance of maintaining Minimum Essential Coverage.

Outcome

Employees appreciated the increased flexibility in choosing their health plans, and XYZ Tech Solutions experienced a smoother administrative process and predictable costs. Employee satisfaction and retention improved, benefiting the overall company culture and productivity.

Challenges and Considerations

While QSEHRA offers significant benefits, there are some challenges and considerations:

• Employee Education: Employees must understand how to use the QSEHRA, the need to maintain MEC, and how reimbursements may affect their taxes or other health subsidies.
• Regulatory Changes: Employers must stay updated with IRS guidelines and annual adjustments to reimbursement limits.
• Administrative Burden: Although simpler than traditional group insurance, administering QSEHRA still requires managing claims, ensuring compliance, and proper record-keeping.

Conclusion

The QSEHRA presents a viable alternative to traditional group health insurance for small businesses, offering flexibility, cost control, and potential tax benefits. By carefully implementing and managing a QSEHRA, small employers can provide meaningful health benefits to their employees, contributing to improved job satisfaction and retention.

For more detailed information and assistance, please visit the official IRS guidance: IRS.gov.