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 10 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. An employee can’t have access to FSA money that would’ve rolled over either.
- Employers can offer a Health Savings Account (HSA) with a QSEHRA. However, this is only possible under specific conditions:
- Employees who participate in both must be enrolled in a High Deductible Health Plan (HDHP), which is already an HSA requirement.
- Only premiums and not medical expenses can be reimbursed through the QSEHRA.
- Provide a QSEHRA for all employees. They all must participate. It’s an important distinction that employers must provide and not only offer a QSEHRA to all eligible employees (i.e., not including the few groups who can be excluded).
Note: Offering a group health plan to former employees, such as retirees, does not impact an employer’s ability to provide a QSEHRA to current employees. However, former employees can’t participate in a QSEHRA.
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
- Union employees (if health benefits were the subject of good faith bargaining)
- Nonresident aliens who don’t receive income from U.S. sources
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 and family members (if they can receive permitted benefits) 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.
How to evaluate affordability: This HealthCare.gov worksheet provides a 5-step approach to determining if an employer is providing an “affordable” QSEHRA offer. Employees can use it to determine if they should use the employer-provided QSEHRA or receive the premium tax credit (PTC). It can also be useful to employers, who can use it as a tool to help determine what their QSEHRA offer should be.
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 instance, 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.
2021 maximums are $5,300 (or $441.67 per month) for individual (self-only) coverage and $10,700 (or $891.67 per month) for family coverage.
Here are examples illustrating how those maximums would be applied:
If a company’s maximum reimbursement is $5,000 for individuals and $10,000 for families, then an employee with self-only coverage submits reimbursement for a total of $4,500 for the year, will have that amount entirely repaid.
If an employee with family coverage submits reimbursement for a total of $9,000 during the year, he or she will have that full amount repaid.
If an employee with self-only or family coverage seeks reimbursement for $11,000 during the year, that employee will be reimbursed the difference between the maximum limit for employee contribution and the total amount of expenses. In this case, if the employee has self-only coverage, the reimbursement will be $5,000; if the employee has family coverage, the reimbursement will be $10,000.
Guidelines to follow for setting reimbursement amounts:
- 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’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.)
- If an employer chooses for its QSEHRA to allow for an unused reimbursement amount to roll over from a prior plan year, the total reimbursement for the employee can’t exceed the maximum limits set by the IRS for the new plan year.
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.
What you can provide: A QSEHRA can be used to reimburse medical premiums or IRS-permitted medical expenses.
The impact: Employers can’t give employees a choice between these two options, and must make the reimbursement for premiums or medical expenses available to all eligible employees to satisfy the QSEHRA’s same terms requirement.
What you can provide: 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).
The impact: With this choice, you can offer a QSEHRA with an HSA for employees with HDHPs, but medical expenses can’t be reimbursed through the QSEHRA.
What you can provide:
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 4.
The impact: With this choice, employers can’t also offer an HSA.
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 offer a QSEHRA for less than 12 months, the contribution limit will have to be prorated to the amount of time the QSEHRA is available.
If you cancel a group health insurance plan you’re currently offering to set up a QSEHRA, you can either align the start of the QSEHRA with the start of the new year, so your employees can participate in open enrollment for individual health insurance. Or, if you cancel the QSEHRA at another point of the year, that action will trigger a special enrollment period for your employees to enroll in an individual plan through the Health Insurance Marketplace.
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 PTC payment 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 7? You’ll need to get that written notice to your employees at least 90 days before the start of the QSEHRA plan year. For employees that become eligible after the plan year starts, you’ll need to provide them with the written notice on the day they become eligible.
If an employer fails to provide the written notice, the fine is $50 per employee, up to a $2,500 maximum for the calendar year.
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.
Gusto offers full-service support to employers by helping to select and provide the right benefits package. This can include administering small group health insurance or a QSEHRA, when combined with Gusto’s payroll services.