QSEHRA, which stands for qualified small employer health reimbursement arrangement, is a type of health benefit offering that small employers can set up for their employees.
Employers can reimburse their employees for eligible health-related expenses, such as health insurance premiums and medical expenses. The reimbursements are usually tax-free, and employer’s set allowances for how much they’ll reimburse each employee every year, up to a maximum set by the IRS. To understand exactly how it works, see this QSEHRA guide.
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.
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How much does QSEHRA cost?
One reason a QSEHRA is an attractive option for employers 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 and unclaimed funds stay with the employer. 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 need first to understand the QSEHRA rules and the different 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 you can reimburse an employee. For 2020, the contributions limits are:
If you hire an employee mid-year, the contribution limit is pro-rated. For example, if you hire an employee with individual coverage in October, their annual limit would be $1,312.50.
Now that you know the QSEHRA limits, next, you’ll need to consider how you plan to set your reimbursement allowance. Here are the different methods you can use:
Everyone receives the same amount. Using this method, all employees receive the same monthly reimbursement allowance. For example, all employees receive up to $400 per month.
Everyone gets the maximum amount based on coverage type. If you use this method, you’ll base your employee’s reimbursement on the annual IRS contribution limits and if your employee is requesting coverage for themselves (individual) or their family.
Amounts vary based on family size. You can also set reimbursement limits based on your 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.
A reference plan means that you base the reimbursement on what an employee’s premiums would for their family size based on open market plans. You’ll have to research insurance marketplace plans in your area.
A percentage is a far easier way to determine an employee’s allowance. Here’s an example of how that would work.
|Maximum Annual Allowance||Percentage of maximum||Annual||Monthly|
Amount varies by age. The IRS does allow you to offer 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. It has to 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 that you consult with an accounting or benefits professional who can help you set your allowance.
Treat employees fairly
One of the rules of a QSEHRA plan is that you must treat all eligible employees equally. That 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. But, you can decide if you want to cover part-time employees or seasonal employees, or employees under the age of 25 (at the start of the QSEHRA year). Keep in mind: these are groups of employees you can choose to exclude, but you are not required to. (Some employers choose to exclude employees who are 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 will have a significant impact on your budget.
How funds become available
The last thing to understand about a QSEHRA plan is how funds become available. Even though you set an annual contribution limit, funds are available to employees monthly; in some instances you may be able to make the full annual amount available at the beginning of the year.
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.
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 from it for approved, eligible expenses.
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 tries 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 rollovers, 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.