The health insurance market has changed dramatically for small businesses in recent years due to provisions outlined in the Affordable Care Act (ACA). One recent health plan option — known as a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) — may be a good option for small employers to reimburse workers for the cost of individual insurance, and/or qualified medical expenses, on a pretax basis.
Employers can reimburse workers with individual coverage up to $5,150 in health costs in 2019, and those with family coverage up to $10,450. Those reimbursements are tax-free to employees, as long as they maintain minimum essential health insurance coverage (MEC) while they are receiving QSEHRA payments.
Here are answers to some common questions about QSEHRAs:
Who is eligible to offer a QSEHRA?
To offer a QSEHRA, employers may not be an Applicable Large Employer (ALE). This means they employ less than 50 full-time or full-time equivalent employees and are not subject to ACA coverage requirements. These eligible employers also do not offer group health insurance to any of their employees.
Who can contribute to QSEHRAs?
Like a regular health reimbursement arrangement (HRA), only employers can contribute to them. Employees cannot contribute. Contributions are tax-deductible to the employer.
What health expenses can QSEHRAs cover?
QSEHRAs can reimburse eligible medical expenses that employees incur, as defined by IRS code 213(d). This includes the premiums they pay for their health insurance policy bought in the individual market, out-of-pocket medical costs, prescription drugs, and more. However, employers can choose to limit the list of eligible expenses.
What's the advantage of a QSEHRA over a regular HRA?
Health reimbursement arrangements (HRAs) have been popular among small companies because they provide employers a tax break for reimbursing employees' health care costs and can help control overall health care spending. However, the ACA limited the use of those plans. It made "standalone" HRAs — those that reimburse costs for employees who are not covered by a group health plan — unlawful and assessed them an excise tax of $100 a day per employee.
The QSEHRA was created to allow small businesses with less than 50 employees to offer a standalone HRA again — reimbursing employees' health care costs on the individual market. Large companies are not eligible.
Do all employees have to be included in the QSEHRA?
Regular, full-time employees are eligible for a QSEHRA. Employers are allowed to, but not required to, exclude certain types of employees, including part-time and seasonal employees, those with less than 90 days of service, and those under age 25, among other factors.
What kind of notification requirements must employers follow?
When offering a new QSEHRA, employers must notify their employees at least 90 days in advance of the start of the year, or the start of a new employee's eligibility. It must also tell each employee:
- What the amount of the employee’s annual benefit is;
- That the employee must report their QSEHRA benefit to the marketplace where they apply for premium tax credits (PTC); and
- That they will have to pay taxes on the benefit for any month that they fail to maintain health coverage.
Small businesses have many options when it comes to providing their employees with health insurance or helping them pay for it. Paychex can help educate you, your management staff, and your employees on the health insurance options that best meet your company's specific needs.