If you’re a small business owner who is looking for an alternative to group health insurance plans for your employees, look no further; a QSEHRA may be precisely what you need to implement at your organization.
What is a QSEHRA?
QSEHRA, which stands for Qualified Small Employer Health Reimbursement Arrangement, is a type of HRA. It’s a way for small businesses—that don’t offer a group health insurance plan—to reimburse employees for health-related and medical costs. It doesn’t replace health insurance, but rather allows eligible employees to be reimbursed for qualified medical expenses.
This guide walks you through everything small businesses owners need to know about QSEHRA.
How does a QSEHRA work?
A QSEHRA is quite simple: Employees pay for their health expenses (either health insurance premiums, medical services, or eligible medical product expenses) and employers reimburse them after approval. Employees pay the insurance company or medical bill directly and then submit eligible claims to get reimbursed by their employer. These are considered reimbursements and as such are (almost always) tax-free for employees and employers.
QSEHRA doesn’t replace health insurance. Employees must get qualifying health insurance coverage through the health insurance marketplace, or another employer-sponsored plan (like through a spouse’s or parent’s coverage), in order to participate in a QSEHRA.
The employer sets a maximum allowance; this is the maximum amount per year that can be reimbursed for each employee. The IRS has dictated a ceiling on these so that the maximum allowance set by the employer cannot exceed a certain amount.
According the IRS, the 2022 QSEHRA limits can reimburse employees for:
- Up to $5,450 of qualified medical expenses per year (or $454.16 per month) for employee-only coverage, or
- Up to $11,050 per year (or $920.83 per month) for family coverage.
QSEHRA benefits are completely funded by employers (meaning: employers are responsible for covering the approved reimbursement costs up to the max allowance for each employee).
What’s the difference between a QSEHRA and a bank account?
A QSEHRA is very different from an Health Savings Account (HSA) and Flexible Spending Account (FSA) because a QSEHRA is not an account (the A in QSEHRA stands for arrangement). This means that business owners keep the money they use to reimburse employees until an employee makes a reimbursement claim. If you’re not sure if you should offer your employees QSEHRA or small group health insurance, read this to understand the difference.
Some employers set up separate bank accounts specifically for QSEHRA reimbursements, but this is not required. Most QSEHRA reimbursements are made through payroll, similar to how you would reimburse for travel expenses or office equipment.
Once again, it’s up to you to set up a system to reimburse your employees.
Eligible businesses and employees
Are QSEHRAs only for small businesses?
Yes, they are only applicable to small businesses with less than 50 full-time equivalent employees, as defined by the IRS. An eligible business also must not have a group health plan or FSA.
Medium and large employers (those who employ 50 or more people) can’t offer QSEHRAs; they can only offer traditional HRAs in addition to HMO and PPO health plans.
Tip: If you want to participate in a QSEHRA and currently have a group health plan, you don’t have to wait until the end of the enrollment period or year to switch; you can change at any time.
Which employees qualify for QSEHRA?
Full-time employees who have minimum essential health coverage (MEC) defined by the Affordable Care Act (ACA) are eligible for QSEHRA. The MEC benefits must be covered by a health insurance plan, such as buying their own plan, enrolling in a parent’s or spouse’s plan, or selecting a state health exchange plan. MEC also includes Medicare Part A, Medicare Advantage, most Medicaid coverage, and most major medical plans.
It’s up to the employer whether to offer QSEHRA to part-time or seasonal employees, employees with less than 90 days of employment, and employees under the age of 25. Former employees who are retired, company friends, and contractors cannot participate. To qualify, the individual must be considered an employee of the business. In short: that typically means the employee receives a W-2.
To get reimbursed, employees must submit a claim to their employers with evidence they paid for an eligible health expense.
Keep in mind that before you start QSEHRA, you are required to notify your employees about the health reimbursement.
What is the QSEHRA limit for reimbursements?
The annual maximum set by the IRS varies for single versus family coverage, and employers reimburse employees every month. In 2022, a single household can be reimbursed up to $5,450 of qualified medical expenses per year ($454.16 of medical expenses per month); a family household can reimburse up to $11,050 per year ($920.83 per month). But remember: it’s up to you, the employer, to set the maximum allowance (which cannot exceed the limits dedicated by the IRS). To understand the allowances you offer your employees and what you can afford to reimburse, try this free QSEHRA budgeting tool.
What happens if an employee doesn’t claim the maximum amount?
The monthly amount rolls over from month to month within the year; this means if an employee doesn’t use up the max allowance you set within a month, that employee can roll the remaining amount over to the next month.
However, if the employee has not used up the available allowance by the end of the plan year, they lose it. In this case, the employer keeps any unclaimed funds. If an employee doesn’t file a reimbursement claim—or is not approved for a claim—the company keeps the funds.
Your Takeaway: unused balances roll over from one month to the next for employees. Once the plan year ends, the employer is no longer responsible for paying out any unused reimbursements.
How does an employer determine the rates for reimbursement?
QSEHRAs and the rate of reimbursement must be properly documented, disclosed, and administered by the employer. Small businesses must offer them to all full-time, regular employees on the same terms. Put simply, employees must be treated fairly and equitably.
Employers contribute the full amount for the approved reimbursement expense; employees cannot contribute (this would be equivalent to them paying from their own pocket).
While employers must offer reimbursements on the same terms, there’s flexibility as to how you determine the design of your QSEHRA program. Here are a few common types:
- Reimburse the same amount and have a standard individual maximum for all employees
- Reimburse the same amount for all individuals and another amount for all families across your business (i.e. singles receive $400 per month and families receive $800 per month in 2022)
- Reimburse based on family size, with an established reference plan (i.e. singles get $250 per month, couples get $500 per month, and families get an additional $150 per child per month—up to the IRS max)
- Reimburse based on employee age, with an established reference plan (i.e. set a 1:3 ratio, so a 26-year-old receives $100 per month and a 64-year-old receives $300 per month)
What can QSEHRA funds be used for?
Eligible expenses are based on guidelines by the IRS. Employers can choose if they want to reimburse the following:
- Insurance premiums only. This typically includes individual health insurance premiums; some also include dental or vision premiums.
- Insurance premiums and medical expenses. This includes not only insurance premiums but also eligible medical expenses such as copays, prescriptions, and doctor visits.
- Premiums of employees’ spouse group plans. Since many employees have access to their spouse’s traditional group health plan, some employers allow claims for these group plan premiums. It’s important to note that employees will be taxed on reimbursements for health insurance premiums that are paid by a spouse’s or parent’s plan. This is because health insurance premiums are paid using pre-tax dollars, so the reimbursement for that payment will be taxed.
How can a small business help employees cover insurance premium costs?
Since employees are paying for their own health insurance and the premium can be costly, some employers structure their payment schedule to align with the timing of insurance payments.
The benefits of using QSEHRA
Can QSEHRAs be personalized to fit the employees’ medical needs?
With usually tax-free reimbursements, employees can pick their own health plan. Rather than providing a one-size-fits-all group health plan, employees can choose the plan that best suits their needs—as long as it meets MEC.
For instance, if one employee prefers Blue Cross because her doctor is in-network and another employee wants Kaiser because he likes the all-in-one approach, they can both get the benefits as they please.
In order to obtain health insurance, employees can:
- Participate in a spouse or parent’s plan,
- Purchase health insurance through the Health Insurance Marketplace or through their state, or
- Participate in another employer-sponsored health insurance plan.
When employees are choosing a plan, it’s important for them to balance coverage and price with flexibility. There are four common types of health insurance plans:
- Health Maintenance Organization (HMO)
- Preferred Provider Organization (PPO)
- Exclusive Provider Organization (EPO)
- Point-of-Service Plan (POS)
Here’s a chart to easily compare these plan types:
|What is it?||Price of premium||Flexibility||Primary care doctor needed?||Referral needed?||Covers costs for out-of-network providers?|
|HMO||Health maintenance organization||Low||Low||Yes||Yes||No, except for emergency care|
|PPO||Preferred provider organization||High||Highest||No||No||Yes, but the plan will cover a smaller percentage of the costs|
|EPO||Exclusive-provider plan||Medium||High||For some plans||For some plans||No, except for emergency care|
|POS||Point-of-service plan||Medium||Medium||Yes||Yes||Yes, but the plan will cover a smaller percentage of the costs|
QSEHRA reimbursements meet employees where they are by allowing employees to spend on medical services and products they need, whether that’s a prescription copay, a medical appointment copay, glasses or contacts, or a retainer.
What are the tax benefits for employers and employees?
QSEHRA reimbursements are generally free of payroll tax for employers and are typically paid pre-tax into employee paychecks, which means they are free of income tax for employees.
This is important, so we’ll say it again: these reimbursements will only be free of income tax for employees who are covered by a health insurance plan that meets MEC.
Also, employees who are covered by a spouse’s or parent’s healthcare plan and are making claims to get reimbursed for those health insurance premiums with QSEHRA funds will be taxed on those reimbursements. This is because health insurance premiums are paid using pre-tax dollars, so the reimbursement will be taxed. Ultimately, an employee can’t get a tax-free reimbursement for a tax-free payment.
What flexibility does a QSEHRA offer employers?
Many states and carriers have a minimum contribution and participation requirements for group health plans, which can be up to $400 per month per employee. With QSEHRA, there are no minimum contributions required to participate.
Employers control the amount they contribute and can increase, decrease, or cancel the program at any time. This makes it much more budget friendly for small businesses.
Easily compare health insurance to HRAs
To help employers determine if they want to offer small group health insurance, a QSEHRA, or another HRA to employees, this chart breaks down the basics of what to consider.
|Small group health insurance||QSEHRA||ICHRA||GCHRA||EBHRA|
|Eligibility||Businesses must have 2–50 full-time employees (some states allow small group up to 100 employees).||Businesses must have 1–49 full-time employees.||Businesses must have at least 1 employee who isn't an owner or spouse.||Only offered with a group health plan, regardless of company size.||Only offered with a group health plan, regardless of company size.|
|Cost to Employer|
Requires minimum employer contribution, in most cases at least 50% of premiums.
Employer can choose how much to contribute, up to the maximum amount set by the IRS ($5,850 for individual employees and $11,800 for families in 2023; up from last year: $5,450 and $11,050, respectively).
Employer chooses how much to contribute.
Requires minimum employer contribution, in most cases at least 50% of premiums; for the HRA, employers choose how much to contribute.
Employer chooses how much to contribute, up to the maximum amount set by the IRS ($1,950 in 2023, up from $1,800 in 2022).
|Scope of coverage|
Can include medical, vision, and dental coverage.
Both employees and their dependents can enroll, but enrollment may not be required.
Cannot be offered in conjunction with any group health plan, including vision and dental plans.
QSEHRA must be available to all eligible employees, but employees may choose not to seek reimbursements.
Depending on the QSEHRA administrator, employers may have the option to reimburse all eligible health expenses, or premiums only.
Cannot be offered in conjunction with any group health plan. Employees must be enrolled in individual health insurance on or off an exchange to participate in this HRA.
Employers can offer an ICHRA or a traditional group health plan to different classes of employees, based on specific job-based criteria.
When this happens, there are class minimum size requirements for the number of employees that should be offered ICHRAs.
|Only offered with a group health insurance plan, and cannot be used to reimburse premiums. Used to reimburse out-of-pocket medical expenses associated with a high-deductible health plan.|| |
Cannot be used to reimburse health insurance premiums, but it can be used for medical expenses for premiums for dental and vision plans.
Employees can be reimbursed for medical expenses (including deductibles, copays, etc.) not covered by a primary health plan.
Employers must offer a traditional group health plan if they offer an Excepted Benefit HRA, though the employee doesn’t have to be enrolled in the health plan to participate in the Excepted Benefit HRA.
|Who pays and how much||The employer generally pays 50% or more of the employee premium; the employee covers the rest pre-tax.||Only the employer can make QSEHRA contributions. The employer decides how much money to set aside for each employee, up to the annual maximum set by the IRS.||Only the employer can make ICHRA contributions. The employer decides how much money to set aside for each employee. There are no maximum or minimum annual requirements; however, when determining minimum contributions, employers should calculate ICHRAaffordability, since it impacts whether or not an employee would participate in an ICHRA and the premium tax credits (PTC) they can or can't claim as a result if they get a plan through the health insurance marketplace.||The employer generally pays 50% or more of the employee premium for the health insurance; the employee covers the rest pre-tax. The employer decides how much money to contribute to the HRA, sets the deductible, and determines if the employees need to pay a portion of the reimbursable expenses.||Only the employer can make EBHRA contributions. The employer decides how much money to set aside for each employee, up to the annual maximum set by the IRS.|
|Tax benefits||Employer and employee contributions are free of payroll taxes. Employee contributions are free of income tax. Employer contributions are deductible as a business expense.||Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in minimum essential coverage (MEC). Employer contributions are deductible, as well.|
However, if employees purchase individual coverage, premiums are paid with after-tax dollars (unlike SGHI where premiums are paid pre-tax). If an employee receives a premium tax credit (PTC) for a Marketplace Exchange plan, the offering of a QSEHRA could affect the PTC.
Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in MEC. Employer contributions are deductible, as well.
With individual coverage, employees pay premiums with after-tax dollars (unlike SGHI where premiums are paid pre-tax). By participating in an ICHRA, employees waive PTC.
|Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in MEC. Employer contributions are deductible, as well.||Employer contributions up to the maximum amount are free of payroll tax, and employees don’t pay income tax on contributions. Employer contributions are deductible, as well.|
|Time cost to employers|
Plan selection and plan renewal require employer oversight. Employers must also provide an open enrollment period each year so employees can make changes to their benefits.
Employees find their own coverage either through the individual marketplace or their spouse’s group coverage.
Employers select the reimbursement amounts, and a third-party administrator can handle the rest.
Employees find their own coverage on or off an exchange.
Employers select the reimbursement amounts, and a third-party administrator can handle the rest.
Plan selection and plan renewal require employer oversight. Employers must also provide an open enrollment period each year so employees can make changes to their health benefits.
Group plan selection and plan renewal require employer oversight.
Employers must also provide an open enrollment period each year so employees can make changes to their benefits.
|Ease for employees|
Employees choose between plan options provided by their employer.
Employees have to find the right plan that meets MEC requirements.
Employees have to find their own health insurance plan.
Employees choose between plan options provided by their employer.
Employees can choose between plan options provided by their employer, and can participate in the EBHRA even if they don't choose the group health plan.
*This is only if the employee has individual insurance not purchased through an exchange, and the ICHRA needs to be reimbursing only premiums and not medical expenses, though employees can fund the HSA simultaneously.
Otherwise, if employees want to use the ICHRA and HSA for premium and medical-expense reimbursements at the same time, the employee needs to be on a high-deductible health plan, the employer can't offer a group health plan to other employees, and the ICHRA needs to be set up in a way where additional conditions are met and restrictions apply.
**But if medical expenses are reimbursed through the EBHRA, they can't also be reimbursed through a FSA or HSA.
|Participation requirements||Generally at least 60% of your team must enroll, but this varies by state and carrier.||0% (but all eligible employees must be offered a QSEHRA).||0% if offering only ICHRA; if offering ICHRA and a group health plan to different employee classes, then minimum class sizes apply.||Generally at least 60% of your team must enroll in a small group health plan, but this varies by state and carrier.||0% for the EBHRA, but generally at least 60% of your team must enroll in a small group health plan, though this varies by state and carrier.|
Ready to get started with QSEHRA?
Once a small employer chooses to offer a QSEHRA, this is what follows:
1. Select a start date. While a QSEHRA can be set up at any time, choosing when it can most benefit employees is ideal. Considering that employees require a 90-day notice from the beginning of the calendar year in which a QSEHRA is offered, you could select January 1 for when it begins, giving employees enough time to participate in open enrollment for individual health plans.
2. Take action. Cancel your group health plan, if one is currently offered, since a QSEHRA can’t be offered with an employer-sponsored health plan. If you do, it will trigger a special enrollment period for your employees to choose an individual health plan outside of the typical open enrollment period at the end of each calendar year.
From how to administer a QSEHRA to determining how much and which expenses to reimburse, read this 10-step guide on how to set up your small business with QSEHRA. Or, learn how you can get started with a QSEHRA now.
3. Communicate the news. Tell your employees in writing when the QSEHRA begins and what it provides. This communication needs to be shared once employees are eligible and 90 days before the start of the year for QSEHRA participation. This free template for how to notify employees about QSEHRA shows what is required.