QSEHRA, which stands for Qualified Small Employer Health Reimbursement Arrangement, is a type of health benefit that small businesses can offer their employees.
Eligible employers can reimburse their employees for eligible health-related expenses, like health insurance premiums and medical expenses. The reimbursements are usually tax-free, and the employer sets an allowance for how much each employee will be reimbursed annually (up to a maximum set by the IRS). To understand exactly how it works, see this QSEHRA guide.
QSEHRAs can be administered by a third party (like Gusto) or you can choose to self-administer your QSEHRA. Keep in mind: different administrators will offer different configuration options for your QSEHRA based on IRS limits, including limiting who is eligible and what types of reimbursements are eligible. Make sure you understand all of the requirements and limitations of your QSEHRA plan before choosing what’s right for your business.
Now, you may be wondering if you can afford to offer QSEHRA to your employees. Well, we’re answering all your QSEHRA budgeting questions right here.
How much does QSEHRA cost?
One reason a QSEHRA is an attractive option for small businesses is that you don’t incur expenses until your employee submits a reimbursement request. This is different from a Flexible Savings Account (FSA), which you have to pre-fund.
With a QSEHRA, you keep the money until your employee submits an eligible expense. Until then, any unclaimed funds stay with your business. Once an employee’s claim is reviewed and approved, then the funds are transferred. Employers also aren’t required to rollover their employees’ unused QSEHRA allowance to the next year. You can choose to have the remaining balance rollover or reset your employee’s QSEHRA balance to zero.
So how much does a QSEHRA cost? That depends on the allowances you set and your budget, which is why a QSEHRA is excellent for small businesses on a budget. You have the flexibility to create a health reimbursement arrangement that works within your budget.
How do I know if I can afford to offer a QSEHRA plan?
To understand if you can afford a QSEHRA, you first must understand the QSEHRA rules and the variables you’ll need to consider. (Don’t worry; later, we’ll crunch some sample numbers to determine how much the plan will cost you.)
Maximum contribution limits
Every year the IRS sets QSEHRA contribution limits, which is the maximum amount you can reimburse each employee. For 2020 and 2021, the contributions limits are:
|Coverage Type||2020 annual reimbursement amount||2020 monthly reimbursement amount||2021 annual reimbursement amount||2021 monthly reimbursement amount|
If you hire an employee mid-year, the contribution limit is prorated. For example, if you are offering single employees an annual allowance amount of $5250 (and your plan year starts on January 1), if you hire an employee with individual coverage on October 1, the prorated annual limit for that employee is $1,312.50. (On October 1, there are three months left in the QSEHRA plan year; $437.50 x 3 = $1,312.50.)
Now that you know the QSEHRA limits, you’ll need to consider how you plan to set your reimbursement allowance. Here are the different methods you can use:
Each employee gets the same reimbursement amount. Using this method, all employees receive the same monthly reimbursement amount—just make sure the amount is under the IRS limit for individual coverage. For example, all employees receive up to $400 per month.
A reimbursement amount is offered for individuals and another reimbursement amount is offered for families. Using this method, you offer two possible reimbursement amounts: a reimbursement amount for all single employees and a larger reimbursement amount for all employees with families—again, make sure these reimbursement amounts are under the IRS limits. For example all single employees will get a reimbursement amount of $400 per month, and all employees with families will get $800 per month.
Amounts vary based on family size. Using this method, you set reimbursement limits based on the employee’s family size. To determine the reimbursement rate based on family size, the IRS requires that you use a reference plan or a percentage of the maximum contribution limits.
Don’t stress! This simply means that you calculate the reimbursement amount based on what an employee’s premiums would be for their family size based on open market plans. (Open market plans are plans that are available on the Health Insurance Marketplace, which is a place where people without employer-sponsored health insurance can purchase health care coverage. You’ll have to research insurance marketplace plans in your area.)
Want an easier way to nail down reimbursement amounts? Determine your employees’ allowances by calculating a percentage of the maximum contribution limits. Here’s an example of how that would work:
|Coverage type||Maximum annual allowance||Percentage of maximum||Annual||Monthly|
Amount varies by age. The IRS allows you to offer reimbursements on a sliding scale based on age, but you must tie it back to a reference plan. The age method is the most complicated and requires significantly more math and research. Also, this method must meet a specific ratio between younger and older employees in order to not be considered discriminatory. If you choose to go this route, we recommend you consult with an accounting or benefits professional who can help you set your allowance.
Treat employees fairly
A QSEHRA plan requires that you treat all eligible employees equally. This means you can’t base employee allowances on seniority, position, or how long you’ve employed someone.
For example, if you have employed Lourdes for five years and Keith for two years (and both are eligible for the QSEHRA), you can’t offer Lourdes a higher reimbursement allowance than Keith.
The exceptions to this rule are when:
- The reimbursement allowance is based on family size.
- The reimbursement allowance is based on age.
Who to reimburse
If you offer a QSEHRA plan, then it must be made available to all full-time employees; employees can then choose to participate or not. But, you can decide if you want to cover part-time employees or seasonal employees, or employees under the age of 25. For example, some employers exclude employees under the age of 25, because the ACA requires dependents up until age 26 to be offered coverage under their parents’ plans. Depending on your staff, who you do and don’t include in the QSEHRA will have a significant impact on your budget.
How funds become available
The last thing to understand about a QSEHRA is how funds become available. Even though you set an annual contribution limit, funds are available to employees monthly.
That means an employee can’t submit a reimbursement request for their entire annual allowance in January. Instead, they can only request the monthly amount of money available to them. For example, in January, the maximum reimbursement an individual coverage employee can claim is $437.50.
What happens if an employee doesn’t submit a request in January? Then the money rolls over to the next month. So, in February, an individual-coverage employee can request up to $875. It’s important to keep in mind that while unused reimbursement allowances roll over from month to month, they do not roll over at the end of the calendar year.
From a cash flow standpoint, this is good news because it means you don’t have to have each employee’s maximum allowance immediately available. But, keep in mind that as you move towards the end of the year, you need to have the cash to cover your employees’ roll-over balances. Also, each eligible employee does have access to their maximum allowance each month and cannot be limited from being reimbursed for approved, eligible expenses.
Keep in mind that the way QSEHRA is structured and QSEHRA plan details vary depending on the administrator.
Developing your QSEHRA budget and contribution limits
Now that you’re up to speed with QSEHRA rules and requirements, it’s time to calculate your employee contribution limits and project your QSEHRA costs. We’ve created a QSEHRA budget calculator to guide you through this process. To use this QSEHRA budget calculator, go to File > Make a Copy. This will add an editable copy to your own Google Drive.
Step 1: Set your total annual budget
The very first step is to determine how much you want to spend annually on your QSEHRA plan and fill in your total budget for the year.
Don’t get stuck choosing the “perfect” number. As you work through the remaining steps, you’ll likely finesse your annual budget. For now, choose a target number that sounds reasonable.
Step 2: List of your current employees
First, for each person you currently employ, list their name, type of employee they are (full time, part-time, seasonal, or under 25), and what kind of coverage you expect they’ll need (individual or family).
Under your current employee list, you’ll see a summary of your employees. The Total Covered column will update once you determine your QSEHRA plan details.
Step 3: List of your projected new hires
Now that we’ve accounted for all your current employees, it’s time to think about your future hires. If you’re planning to grow your team, you’ll list each future hire’s expected position, type (full or part-time), and month you plan to hire them.
Step 4: Determine your QSEHRA details
Now it’s time to start making decisions about the details of your QSEHRA. Here are the decisions you’ll need to make:
Reimbursement method: From the drop-down, select which reimbursement method you’ll use. To keep things simple, we haven’t included reimbursement by age. If you choose to use this method, we recommend you speak with an accounting or benefits specialist.
Who will be covered: Full-time employees are automatically included in your QSEHRA plan, but you’ll need to determine if you’ll cover part-time and seasonal employees and employees under the age of 25.
Step 5: Set your maximum allowances
Now it’s time to set your maximum allowances. Based on the reimbursement method you choose, you’ll enter in the corresponding allowances. If you choose:
All employees receive the same amount: Enter the annual maximum that all employees will receive.
Maximum per category: Enter the annual IRS contribution limit for individuals and families.
By family size: First, enter the IRS contribution limit for individuals and families. Next, enter the percentage of the contribution limit that you’ll offer each coverage category.
Step 6: Review the results and adjust your plan
Now it’s time to review the results of the parameters you set. For a quick summary of how much your QSEHRA will cost, review the annual summary section.
For a month by month overview, review the monthly breakdown section. Both sections account for your future hires’ cost and add that cost to the month that you plan to hire them.
At the top of the calculator, you can see if your total annual QSEHRA is over or under the budget that you set.
So, what happens if your QSEHRA is more than you can afford? Then it’s time to adjust the parameters and allowances.
Here are some ways to reduce the cost of your QSEHRA plan:
- Who you plan to cover: See what happens if you limit your QSEHRA to only full-time employees.
- Reimbursement method: Experiment with how different reimbursement methods affect your budget. There’s no “right way” to reimburse your employees. The most cost-effective method will depend on the unique makeup of your workforce.
- Maximum allowances: Adjust the amounts that you’ve entered. Don’t be surprised if you have to adjust it several times before you get the budget just right. Take a Goldilocks approach and keep changing the numbers until they’re just right.
The last thing you should review is the monthly breakdown to ensure that you’ll have enough cash flow to cover your reimbursements. Remember, the unused balance rolls over month to month. You need to make sure that if an employee’s balance rolls over, you’ll have enough money in the bank for reimbursements towards the end of the year.
Your hiring decisions could come into play here. If you plan to hire three full-time employees in September, see how this will affect your monthly QSEHRA budget. Can you afford to cover these new employees, your current employee’s monthly allowances, and potential employee rollovers?
Of course, we can’t predict how often your employees will submit reimbursements. Each month you should plan to transfer the maximum reimbursement amount into a separate account and hold it there until it’s time to reimburse your employees.
Ultimately, the best way to determine your QSEHRA budget is to experiment with the numbers. It may take some time, but you’ll eventually land on the perfect budget for you and your employees. Now, you’re ready to set up your QSEHRA; learn how here.