If you’ve been searching for health benefit options to offer your employees, you’ve likely come across QSEHRA (Qualified Small Employer Health Reimbursement Arrangement). Also known as a small business HRA, a QSEHRA allows small employers to contribute tax-free to their employees’ qualified medical expenses without offering group health insurance.
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If you’re not sure whether QSEHRA or small group health insurance is better for your business, read this comparison to make an informed decision.
But, if you are ready to offer a QSEHRA, we’ve broken down the key steps to setting up a QSEHRA to help you get the ball rolling.
Step 1: Make sure you’re an eligible employer
You can only offer a QSEHRA if you:
- Have fewer than 50 full-time equivalent employees in the previous calendar year, and
- Do not offer any group health plans to your employees. That includes other Health Reimbursement Arrangements (HRAs), Flexible Spending Arrangements (FSAs), and vision and dental plans.
This QSEHRA eligibility guide gives you all the details.
Step 2: Decide how you want to administer your QSEHRA
QSEHRAs can be administered by a third party (like Gusto) or you can choose to self-administer your QSEHRA.
Keep in mind:
- Different third-party administrators will offer different configuration options for your QSEHRA; these variations may include limiting who is eligible and what types of reimbursements are eligible. Make sure you understand all of the requirements and limitations of your third-party QSEHRA plan before moving forward.
- Whether you self-administer QSEHRA or choose to administer through a third party, you as the business owner, are responsible for QSEHRA reimbursements. QSEHRA is entirely funded by the employer.
Step 3: Decide who is eligible for a QSEHRA
If you choose to provide a QSEHRA, you must technically offer it to all “eligible employees.”
In practice, this means you generally have to make the QSEHRA available to all your full-time employees but can exclude certain other employees, such as:
- Employees under age 25 at the beginning of the plan year
- Those who have worked for you for less than 90 days
- Part-time or seasonal employees
Of course, you can offer the QSEHRA to the excludable classes of employees—as long as you’re consistent about whom you offer it to. That means if you provide the QSEHRA to Joe the Part-Time Employee, you must also offer it to all part-time employees on the same terms.
One more important thing to know: all employees must have their own health insurance plans that meet minimum essential coverage (MEC) requirements in order to participate in the QSEHRA you offer. Most plans purchased through the individual insurance Marketplace or obtained through an employee’s spouse’s employer meet MEC requirements, but employees should check with their carriers to confirm.
Step 4: Determine how much each employee can be reimbursed
With QSEHRAs, there are no minimum contribution or participation requirements, so you have control over your costs.
For example, you could choose to reimburse each eligible employee $200 per month. The amount is up to you as long as the annual total is within IRS-set maximums.
2020 maximums are $5,250 for individual (self-only) coverage and $10,600 for family coverage.
You want to create a consistent reimbursement policy that applies equally to all eligible employees. You can reimburse all employees the same amount, or the maximum amount allowed by the IRS. However, you may vary the reimbursement amount by family size or by employee age (again, as long as it’s within the IRS limits). There are different ways to vary reimbursement amounts, including:
- Pick a baseline policy that has MEC and use the premium amounts to set your maximums. For example, if a silver-tier Kaiser plan in your area is $400 for self-only coverage and $800 for family coverage, you could set your limits to $400 and $800, respectively.
- Provide a percentage of the IRS limits. For example, you could set the maximum for employees with individual coverage to 50% of the IRS individual limit and the maximum for employees with family coverage to 50% of the IRS family limit.
- Distinguish contributions between ages, based on a 1:3 ratio. You may set a reimbursement rate for employees at age 26 at $50 a month and employees at age 64 for $150. An employee between those ages would get the amount that is between age 26 and 64.
You may not want to vary the reimbursement rate and simply pick a maximum amount to reimburse all employees.
When determining how much you want to reimburse each employee each year, keep in mind that you’ll have to offer QSEHRA benefits to all eligible new hires as well. So make sure to pencil in those costs when planning your QSEHRA budget—this free QSEHRA budget calculator will show you how to break down the numbers.
Quick note: Since QSEHRA benefits are generally pre-tax, there are tax savings and additional filings related to offering one. Make sure to talk with your tax accountant about the implications for you and your employees.
Step 5: Determine which expenses you want to reimburse
You can choose what employee health care expenses you’ll reimburse as long as they’re within legal limits. A QSEHRA can be used to reimburse medical premiums and IRS-permitted medical expenses.
Reimbursing only medical premiums can give you more predictability in costs as your employees’ premiums will likely be the same each month (unless they change plans mid-year).
Choosing to reimburse medical expenses means your costs would depend on how much medical care your employees and their families receive, capped at the maximum allowable amount you set in Step 3.
Step 6: Pick a start date
If you’re not currently offering any group health plans to your employees, you can start your QSEHRA as soon as you want. While you can choose any start date, starting your plan year on the first of a month can make your monthly allowances easier to calculate.
If you are currently offering a group health insurance option, you’ll have to wait until your group plans terminate before you can start the QSEHRA plan year.
Step 7: Create your legal documents
Once you’ve decided on all of the above, you’ll need to document everything.
A QSEHRA requires a written notice to your employees that includes:
- Information about permitted benefit amounts;
- A statement that employees who are buying health insurance in the individual marketplace and are applying for advance payment of the premium assistance tax credit should let their health insurance exchange know about their QSEHRA benefit amount; and
- A note that reimbursements may be taxable if employees do not maintain their MEC health insurance.
It also requires a plan document, which includes how the QSEHRA is funded and operated, how reimbursements are paid, and other details.
A third-party administrator can help you draft these legal documents.
Step 8: Set up a process to run your QSEHRA
Quick reminder: your employee’s health insurance plan must meet MEC requirements for them to be eligible to participate in the QSEHRA.
You’ll need to verify that your employee has MEC for the plan year before making any QSEHRA reimbursements. See Appendix B for a model verification form you can use.
Then you’ll need to set up a method to process and distribute reimbursements (say, through your payroll provider).
Whatever your reimbursement process is like, your employees will need to include documentation verifying that their expenses are eligible for reimbursement. Sound tedious? A third-party administrator can help you review and approve expenses.
One more thing: QSEHRA benefits are generally pre-tax. That is, unless your employee’s MEC coverage is on a pre-tax basis (like if they’re on their spouse’s employer-sponsored plan). In that case, their QSEHRA benefits will be taxable, and you’ll need to withhold payroll taxes from their QSEHRA reimbursements.
Step 9: Let your employees know about their new benefit
Once you’re ready to roll, let your team know about their new QSEHRA benefit.
Those legal documents that you prepared in Step 6? You’ll need to get that written notice to your employees at the start of the QSEHRA plan year. (For employees that become eligible after the plan year starts, you’ll need to provide them the written notice on the day they become eligible.)
Step 10: Provide information so your employees can obtain health coverage
Remember that employees can only take advantage of QSEHRA benefits if they already have health insurance that meets minimum essential coverage requirements.
While you’re not allowed to endorse particular plans for your employees to obtain for QSEHRA reimbursement, you can provide information and tools to help them make their own informed decisions. Your state’s individual marketplace is a great place to start.
Setting up a QSEHRA can be a lot less daunting when you break it down step by step, and working with a third-party administrator can make it even easier.