QSEHRA

QSEHRA Plan

What is a QSEHRA

QSEHRA (Qualified Small Employer Health Reimbursement Arrangement), is a new and more efficient type of HRA.

It’s tailored for small businesses without a group health insurance plan—to set a monthly fixed amount of money that employees can use to purchase individual health insurance or other health-related costs.

It’s not a replacement for health insurance, but rather a means to issue tax-free reimbursements to eligible employees for their qualified medical expenses.

How does a QSEHRAs work

The mechanics of QSEHRA are quite simple: Employees are expected to take care of their health-related expenses (Premiums and other medical expenses), and the small employer then issues them a tax-free reimbursement.

Here’s how QSEHRA works:

1. Employers design the plan- this includes setting up the limits for reimbursements.
2. Employees will then pay for their own health-related expenses(insurance or doctor’s office)
3. Employees are expected to provide proof of medical-related expenses incurred
4. Employers will issue a tax-free reimbursement to the employee up to the earlier set limit

QSEHRA Eligibility

Small businesses or non-profits will be eligible if:

1. They fall under “small” business: As per IRS any business on nonprofit with less than 50 full-time employees is considered small.
2. Currently Not having a group health plan or FSA: IRS section 5000(b) dictates that The small business or non-profit should not be offering any traditional group health plan (defined in IRS section 5000(b). This restriction does not apply to non-health group benefits like life insurance or disability insurance. However, they can cancel the policy and become eligible.

Employees will only be eligible for QSEHRAs if:

1. Currently covered by a valid insurance plan: They must be covered by a plan that provides Minimum Essential Coverage (MEC). This can be their spouse’s plan, parent’s plan, or individual insurance plan.
2. Submit a valid claim: Employees have to provide documentation to show the money was spent on eligible health expenses to qualify for reimbursement.

Owners will be eligible to Participate in QSEHRA if:

1. He or she is also an employee of the business.
2. Employee status is clearly stated by the corporate structure of the business.

Even if they don’t qualify they can still make a deduction on their tax returns as self-employed individuals.

QSEHRA Administration

Setting up a QSEHRA is rather straightforward. A small employer needs to:

1. Design the reimbursement plan
2. Ensure legal plan documents have been created to support the plan
3. Set the start date. At this time, the employer will need to transition from any group health policies that were already in place.
4. Send the required notices to eligible employees
5. Start the new plan

Self-administered QSEHRA

It’s not advisable to administer your own QSEHRA. Most employers seek a third party to help in administration. The major reason for this is due to:

1. Privacy – tax-free reimbursement to employees have to be supported and substantiate to ensure they were strictly for health insurance and medical expenses. Apart from requesting awkward information, The employer may technically be violating employee rights as this information is considered protected Health Information (PHI) and falls under the Health Insurance Portability and Accountability Act of 1996 (HIPAA).
2. Records – IRS requires small businesses to keep records for at least 7 years. It’s technically impossible for a small business to keep scraps and bits of small medical receipts securely and at the same time comply with provisions of HIPAA.
3. Changing Regulations– Healthcare policies like QSEHRA are operating in a dynamic environment. It’s hard for a small outfit to keep up. IRS has already issued two major guidance (Notice 2017-20 and Notice 2017-67) with more on the horizon.

The administrator needs to ensure the plan remains compliant. This includes:

• Minimum Essential Coverage(MEC) maintenance  and employee eligibility
• Process and Reimburse tax-free claims submitted by employees
• Compliance: Process form 720 and Patient-Centered Outcomes Research Trust Fund (PCORTF) fees before the planned deadline
• Issue plan renewal notice at least 90 days before the end of the year
• QSEHRA plan records are kept for a minimum of 7 years

QSEHRA Rules

Reimbursement rules

Reimbursement limits

IRS varies the annual maximum that an employer can set to reimburse for single and family coverage. Employees can be reimbursed every month.

 Table 1: QSEHRA Reimbursement Rates for 2022, and 2021.

IRS makes yearly adjustments to these amounts in response to inflation.

Please note;

• Any unused funds in a month can be rolled to the next month within the year. Please note that the full amount is also not accessible in January.
• You use the benefit or you lose it. Any unused amount at the end of the year is lost. The employer keeps the funds.
• Some employers do structure their reimbursement schedule to align with the timing of employee insurance payments hence relieving the cash flow burden associated with these payments.

Rules on Treatment of employees

QSEHRAs plan documents must disclose and document the rate of reimbursement.

Also, it’s a requirement for the employer to offer the same terms to all full-time, regular employees. They must be treated fairly and equitably (fair treatment is a must).

Employers must contribute up to the full approved reimbursement expense; there shall be no contribution from the employees out of their own pocket.

While the small business is tied to offering the same terms to all employees, there’s the ability to design the plan such that it differentiates employees with different needs. This can be done by either:

• Having a standard individual maximum across all employees
• Reimburse single individuals a certain amount and vary for families and across the business (example: $300 per month for singles and 600 for families receive $800 per month in a specific year)
• Peg reimbursement on family size with an established reference plan (example: $300 for singles per month, $600 per month for couples, and families offered an additional $150 for each child per month to the IRS maximum)
• Use employee age as the basis of reimbursement, with an established reference plan (example: set Ratios such that, an employee qualifies for more coverage per month as they age)

Rules on Usage of QSEHRA funds

Only Eligible expenses as per IRS guidelines are allowed.

Employers have the option of reimbursing the following:

• Insurance premiums only (individual health insurance premiums and may include dental or vision premiums).
• Insurance premiums and eligible medical expenses (copays, prescriptions, and doctor charges).
• Premiums that have been paid to an employee’s spouse group plans. Since many employees have access to their spouse’s traditional group health plan (The insurance premiums are procured using pre-tax dollars hence the reimbursements attract tax).

QSEHRA pros and cons

Pros of QSEHRA

Freedom

Employees have the freedom to choose most types of health insurance and still remain eligible.

The biggest score is that employees qualify for reimbursement on premiums paid towards a spouse’s employer-sponsored health plan. (However, it may attract taxes if the spouse is getting a pretax payroll deduction).

Tax Efficient

QSEHRA tax savings to both the employer and employee. Reimbursements to employees are free of payroll tax can be free of payroll tax (as long as it MEC requirements).

Secondly, IRS does not require this tax-free reimbursement to be reported on the return end of the year.

Lastly, employers can claim this reimbursement as a business expense for taxation purposes

No participation limits

IRS only prescribes maximum limits only (No minimum employer limits). This means any employer, however small the budget can participate in the QSEHRA. In total contrast, it only makes sense for big businesses (with a certain number of employees) to engage with traditional group health insurance companies.

Budget control

With a QSEHRA, employers have the ability to control usage via setting monthly allowance caps. This gives the employer total over their costs as once the limits are set, they can’t be exceeded.

Secondly, it’s not necessary to pre-fund a QSEHRA. Expenses are only paid to members when they submit a qualifying expense—any unused amounts at the end of the year are saved to the employer.

Optimized Benefits

QSEHRA plan is greatly optimized, unlike traditional plans which offer one-size-fits-all solutions.
In total contrast, employees are allowed to take ownership by choosing their own plans. It even allows employees to get coverage through their spouse’s plan.

Cons of QSEHRA

Biased against big business

IRS only allows QSEHRA to businesses that have less than 50 full-time equivalent employees. Also, employers who already offer group health plans or FSA are not eligible.

Biased against individuals with huge tax credits

Employees who would otherwise qualify for large tax credits on the individual market may not benefit as much when QSEHRA because:

• IRS does not allow for QSEHRA reimbursements to stack, rather they do offset. The taxman limits an individual’s tax credit by the reimbursement offered by the employer. As a rule of thumb, QSEHRA will not be a good fit if the average tax credit is more than 30% of the reimbursable amount.
• Non-marketplace alternative plans are not eligible.

Contribution caps. 

IRS caps annual employer contributions at $5,450 in 2022($5,300 in 2021) for individuals and $11,050($10,700 in 2021) for employees with a family.

Limited in design. 

IRS allows the design to offer different allowance amounts based on family status but not on the basis of job criteria. This reduces a small firm’s to use this benefit as bait for hiring and maintaining talented employees.

New to the market.

QSEHRA is relatively young in the market, small employers and their employees are yet to fully appreciate the product. It will take a bit of investment and time to educate both parties on the benefits of its success.

Biased against Health care sharing ministry

Employees belonging to a health care sharing ministry are eligible for QSEHRA but cannot claim reimbursement on membership. Also, any reimbursements made are taxable since IRS does not consider health care sharing ministries under Minimum Essential Coverage (MEC).

Complexity

• Compliance is a challenge without a dedicated QSEHRA administrator. There are certain requirements relating to formulating; reviewing and approving plan documents.
• IRS requires employers to store employee reimbursement requests
• It’s not easy to keep up with constantly changing regulatory changes.

This is quite complex, any small error subjects a small business to unnecessary fines.

QSEHRA tax credit

The amount of QSEHRA provided by the employer determines the tax credit available to the employee. The employee will be eligible for some or no tax credit at all, depending on other related factors.

It’s never wise to use all the tax credit received (best not to use any at all) from Marketplace eligibility notice when applying for individual coverage. This is because it hasn’t factored in any help provided by QSEHRA.

IR will determine the Eligibility for a Premium Tax Credit(PTC) based on your QSEHRA amount, only determined when you file the federal income tax return for the year.

IRS determines Eligibility by;

• QSEHRA amount offered (not your usage).
• Changes in your income, or
• Other life changes in that year.

IRS compares the amount of QSEHRA offered vs. the amount of tax credit used. You cannot use more credits than you are eligible for. Ensure you pay back excess credits when filing your taxes.

If the Marketplace coverage deems you not eligible for the Premium Tax Credit(PTC), use the QSEHRA to pay for your Marketplace plan.  Depending on your final household income for that year and other factors, the IRS may find you still eligible for the Premium Tax Credit(PTC) when filing your federal income tax return.

Bottom line

If limited in terms of budget and time QSEHRA can be a quick step to offer a health benefits package to employees. This is so because QSEHRA has participation and employer contribution requirements, it’s all left to the employer to decide how much to reimburse.