As a small business owner, you may be looking for ways to offer your employees health care options, but perhaps you aren’t sure if a small group health plan is the right fit—or you’re worried about what your business can afford.
An option worth exploring is the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which provides small businesses the ability to help their employees access health care through tax-free reimbursements.
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What is a QSEHRA?
If you don’t already know what it is, read this QSEHRA overview to understand the program. In short: QSEHRA is a Health Reimbursement Arrangement (HRA) that allows you to reimburse your employees for eligible health insurance premiums and/or medical expenses. In order to participate, employees must have health insurance plans that meet Minimum Essential Coverage (MEC) as defined by the Affordable Care Act and they must submit claims to their employer for reimbursements. Funded entirely by the employer, QSEHRA reimbursements are tax-free for the employer and employee.
Is my business eligible to offer employees QSEHRA?
In general, setting up and managing a QSEHRA is pretty simple, but there are exceptions and it’s important to understand these requirements before you move ahead.
QSEHRA requires that you have fewer than 50 full-time equivalent (FTE) employees
This means that if you have part time employees, you must take into account the number of hours they work in order to calculate whether you qualify for QSEHRA. Use these step-by-step instructions to determine your FTE number.
You cannot offer a QSEHRA if you currently offer a group health plan
If you want to offer a QSEHRA instead of a group health plan you must wait for your current group health plan to run out, or cancel it. You also cannot provide vision, dental, other HRAs, or health Flexible Spending Accounts (FSAs). (However, QSEHRA requirements don’t treat former employees the same as current employees, so if you provide a group plan to, say, retirees, you may continue to do so.)
You cannot offer a QSEHRA to employees who are not covered by a qualifying health insurance plan.
As mentioned above, in order to be eligible for QSEHRA an employee must be covered by a health insurance plan that meets MEC requirements. This means that the employee has purchased health insurance through the state or federal marketplace. (Note that if an employee has coverage through a parent or spouse, reimbursements work a bit differently.)
You may not qualify for QSEHRA if your business is part of a group of employers
You may not be eligible for QSEHRA if you participate in a group—even if your specific business employs less than 50 full-time equivalent (FTE) workers. An example of this would be if you’re part of a controlled group, which is two or more companies with the same owner. If any company within the group of employers offers a group health plan to its employees, your company does not qualify for QSEHRA. See the Q&A portion of this bulletin from the IRS to find details on what qualifies as a group of employers according to QSEHRA requirements. You can find detailed definitions here. Be sure to consult your tax advisor for more information.
You are not eligible to start a QSEHRA if you’re an Applicable Large Employer (ALE).
An ALE is a business with more than 50 FTE workers, so it may seem obvious that an ALE can’t qualify for QSEHRA, but there is some nuance here you should understand: there is an exception for seasonal workers. If you have employees who are hired on a seasonal basis (perhaps for retail work during the holidays) for less than 120 calendar days a year, those employees do not count toward the 50 FTE workers.
Remember that companies that share an owner may be defined as an ALE, even if those companies are small as individual businesses. For example, Company A employs 24 FTE workers and Company B employs 27 FTE workers; if these companies share an owner, they are an ALE and therefore not eligible for QSEHRA because their combined workforce is 51. You can read more about the definition of an ALE here.
Another thing to note: if you are a small business at the start of the year, but throughout the year you acquire enough employees to become an ALE, you will no longer be eligible to offer QSEHRA starting on January 1 of the following year.