Are you having difficulty finding a good, affordable health care benefit plan for your small business? If so, have you considered using a QSEHRA as an alternative?
Congress created the QSEHRA, or Qualified Small Employer Health Reimbursement Arrangement, in 2016 as part of the 21st Century Cures Act. A QSEHRA allows small employers, including nonprofits, to set aside a fixed amount of money each month for employees to purchase their own individual health insurance. Employees choose plans that work best for them and also have the option to use the funds on documented medical expenses.
A QSEHRA is basically a Health Reimbursement Arrangement (HRA) employees can use for individual premiums. This type of arrangement was prohibited by the Affordable Care Act, but Congress reversed that regulation with the Cures Act.
Best of all, with QSEHRA, employers can make reimbursements to employees without incurring payroll taxes, and employees don’t have to recognize income tax. In addition, reimbursements made by the employer count as a tax deduction.
Another advantage of a QSEHRA is it allows employers to choose how much money they want to deposit in employees’ accounts, which eliminates the burden of skyrocketing annual premium rate increases.
Kiplinger, a business forecast publisher, predicts that employer health coverage costs will rise five percent in 2019. That would be the sixth consecutive year employers have seen a five percent increase. With a QSEHRA, the employer determines what they are able to afford for health benefits each year up to the maximum amount set by the Internal Revenue Service (IRS).
Interested? Here are a few things to consider before making a commitment.
- An employer must have fewer than 50 full time equivalent employees. A full-time employee is considered anyone who works 130 hours per month or 30 or more hours per week for 120 consecutive days.
- An employer already offering a group health plan to employees must cancel the plan before starting a QSEHRA.
- Owners can only participate in a QSEHRA if they are considered an employee of the business. The employee status of the owner often is determined by the corporate structure of the business.
- There is no minimum contribution amount, but there is a maximum. 2019 rates have not been set, but usually are increased for inflation. Take Command Health predicts it will be $5,150 annually for employees or $10,500 annually for employees with families.
- Employers may or may not choose to offer reimbursements to part-time, seasonal employees younger than 26 years old and employees on a spouse’s group plan, although group premiums reimbursed become taxable income to the employee. [While the IRS does not allow for employer group plan premiums to be reimbursed through QSEHRA, they have made an exception (See Q48) that allows for employers to reimburse group plan premiums on a taxable basis. This reimbursement would be added to the employees taxable wages and reported as income on the employees W-2.]
- To access money from a QSEHRA, employees must purchase a health insurance plan that meets minimum essential coverage. Short-term plans, indemnity and faith-based sharing plans do not qualify. If an employee purchases coverage from a state or federal Marketplace and receives tax credits, any tax credits they receive on their premiums will be reduced dollar for dollar by the QSEHRA.
- Employees cannot contribute to a QSEHRA.
- All employees who qualify for the QSEHRA will receive the same reimbursement amount, although the rates may vary by family size.
- You may start your plan anytime, unless you already have a health plan. If you have a plan, cancel it first before starting your QSEHRA. To avoid a gap in coverage, set your cancellation date one day before your QSEHRA begins.
- You must offer reimbursement to all full-time W-2 employees, but you must decide if you also want to offer it to part-time workers. If you decide to do that, you’ll need to reimburse them at the same rate as full-time employees.
- Decide how much you’ll give employees to reimburse their medical expenses and premium costs.
- Work with an administrator to complete the proper documents to comply with IRS and Department of Labor rules. The IRS requires small businesses to keep records up to seven years.
- Inform your employees about the allowance and give them information about how and where to go for individual health insurance. They also will need a copy of the QSEHRA Summary Plan Description.