Employer-provided benefits can help attract and retain employees, but group health insurance plans can be too expensive for some small businesses. The good news is that there are alternatives. A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is an option for some employers who want to provide health care benefits to employees without breaking their budget.
What is a Qualified Small Employer HRA (QSEHRA)?
A QSEHRA allows eligible small businesses that do not sponsor group health insurance or excluded benefits, such as dental or vision care, to reimburse their employees for qualified medical expenses. These reimbursements are tax-free as long as employees are enrolled in health plans that meet the Minimum Essential Coverage (MEC) requirements of the Affordable Care Act (ACA). The company should also not be considered an applicable large employer (ALE), for example, it has less than 50 full-time employees.
How do QSEHRAs work for a small employer?
Under the basic terms of a QSEHRA, employees with minimum essential medical coverage submit qualified medical expenses and supporting documentation to their employer, who then reimburses them with tax-free money up to a maximum amount. annual. However, to be fully compliant with federal guidelines, certain requirements must be met before costs are covered.
Because QSEHRA is not a group health plan, it is governed by a different set of rules. Some of the requirements for employers and employees are:
- Reimbursement amounts are fixed
Employers have some leeway in deciding how much they will contribute to a QSEHRA. There is no reimbursement minimum, but the IRS enforces annual maximums per employee – one for individual health insurance coverage and another for family coverage. If employees don’t use their entire QSEHRA balance, employers keep the remaining money and can roll it over to the next year.
- Terms are applied uniformly to all eligible employees
Uniformity does not mean that one employee cannot receive more reimbursements than another employee (up to the annual maximum). The IRS allows payment differences based on age and individual versus family coverage. What uniformity means is that employers cannot reimburse all eligible medical expenses for one category of employees and reimburse only a portion of eligible medical expenses for another category of employees.
- Written opinions are provided
Employers offering a QSEHRA must provide written notice to eligible employees at least 90 days before each new year. If employees are not eligible at that time, they must be notified in writing on the day they become eligible. Failure to provide written notices may result in monetary penalties.
- Minimum essential coverage is checked
Employees and anyone else covered by their plan can only be reimbursed through a QSEHRA after providing proof that their health insurance meets MEC standards. There are two acceptable forms of evidence:
- Official documents from an insurance company, such as an insurance card or explanation of benefits/proof of coverage
- Certificate from the employee confirming the existence of the MEC, as well as the start date of the coverage and the name of the insurer
Each reimbursement request subsequent to the initial certification must include proof of MEC. If an employee is mistakenly reimbursed for medical expenses during a period when he did not have a CEM, the reimbursement amount is added to his gross income and, therefore, subject to tax.
- Medical expenses are justified
In addition to verifying MEC, employees are required to substantiate all medical expenses for which they are claiming reimbursement. Substantiation can be satisfied in the same way as Flexible Spending Accounts (FSA), which means that employees must provide their employer with written documentation from a third party that details the nature of the medical expenses and the total cost. They must also declare, in writing, that the expenses incurred have not already been paid by their insurance company. Any refund processed without justification may be taxed.
- Refunds are reported
The IRS requires employers to report QSEHRA on each eligible employee’s Form W-2, Wage and Tax Return. This disclosure pertains to the total reimbursement to which the employee is entitled throughout the year, not the amount actually received.
Who can participate in a QSEHRA?
The IRS defines QSEHRA eligibility differently for employers and employees.
A small business can generally offer a QSEHRA as long as it does not:
- Have 50 or more full-time employees
- Sponsor a group health plan, FSA, or any other benefit except
- Approve a particular policy or health insurance company
Any employee of an eligible employer may be eligible to participate in a QSEHRA. However, the IRS allows businesses to exclude part-time and seasonal workers, employees under age 25, and those who have not been with the employer for at least 90 days. Additional exclusions may apply to non-resident aliens and employees covered by a collective agreement.
Frequently asked questions about QSEHRA
What is the difference between an HRA and a QSEHRA?
QSEHRAs are limited to small businesses that have fewer than 50 employees and do not offer group health coverage. Health Reimbursement Schemes (HRAs), on the other hand, are available to businesses of all sizes and must be accompanied by a group health plan in accordance with the ACA.
What can be reimbursed with QSEHRA?
The following types of medical expenses can generally be reimbursed through a QSEHRA:
- Insurance premiums (health, dental, vision, etc.)
- Prescription drugs
- Over-the-counter medications
Does QSEHRA use it or lose it?
Employees eligible for a QSEHRA cannot receive cash payments. If his medical expenses for the plan year do not reach the reimbursement limit, the employer keeps the remaining balance and can carry it forward to the following year.
This article is intended to be used as a starting point in analyzing QSEHRA and is not a comprehensive requirements resource. It offers practical information on the subject and is provided with the understanding that ADP does not provide legal or tax advice or other professional services.