QSEHRAs and what they mean for your small business

If you’re a small business owner, the qualified small employer health reimbursement arrangement (QSEHRA) might be the benefits plan you’re looking for. Offering a QSEHRA lets you deliver healthcare savings for your employees, which could pay off as a retention and recruitment tool as you grow your business.

What is a QSEHRA?

A QSEHRA is a tax-advantaged benefits plan funded by the employer that employees can tap into to pay for eligible expenses. You and your employees both save money because your reimbursements of their expenses are tax-free.

What are the challenges small businesses face with benefits?

Small businesses are considered the “United States’ economic engine.” They drive job growth and innovation. Their success is vital to all of us, so it’s important to understand the unique challenges that small businesses face. 

Nearly a quarter of them say providing healthcare to their employees is their biggest concern. QSEHRAs were rolled out in 2017 as a benefits plan that was specifically designed to help small businesses meet their employees’ needs. 

What employers are eligible to offer one?

QSEHRA rules state that, in order to offer this plan to your employees, you must:

• Employ fewer than 50 employees.
• Not be subject to Affordable Care Act coverage requirements.
• Not offer a group health plan – which is defined as group health, dental or vision – to any of your employees.

What expenses are eligible?

QSEHRA eligible expenses are determined by IRS Code Section 213(d) and, in the case of QSEHRAs, includes individual health insurance premiums paid by the employee. 

How does a QSEHRA compare with other HRAs? 

There are 4 common types of HRA’s. 

• Integrated HRA’s- Must be integrated with group health insurance to help employees cover out-of-pocket healthcare costs.
• ICHRA– provides a way for employers to fund employees’ individual health coverage rather than providing group health insurance.
• EBHRA– allows employers who offer a group health plan to set aside funds to reimburse employees for out-of-pocket medical expenses and premiums for benefit coverage.
• QSEHRA- employers provide tax-free funds to employees to cover eligible expenses, but must employ fewer than 50 people and other criteria. 

The big difference between a QSEHRA and the others is that a QSEHRA is available only for small businesses. This enables eligible businesses to take advantage of an affordable way to offer healthcare benefits to their workers. This also allows more flexibility in how employers can design their plan and the amount of money they can contribute towards an employees’ healthcare.

Another difference is that a QSEHRA is much more flexible than the other HRA’s. It does not require as many rules or regulations around the contributions and eligibility. A QSEHRA does not need to be integrated with an individual health insurance policy which makes it easier and more cost effective for small businesses to administer compared to the other HRA’s.

Integrated HRAs are sponsored by the employer and consist of a health plan provided to employees with a reimbursement of their medical expenses. These plans are often used to provide a more comprehensive benefit package to employees. Unlike a QSEHRA, they are more complex and require the employer to manage both health benefits and reimbursements for employees. 

How do I offer a QSEHRA?

There are a few simple – but important – steps to follow when offering a QSEHRA. Make sure to determine:

• What your contribution amounts will be. In 2023, the IRS allows you to contribute $5,850 per year to an employee and $11,800 per year to an employee plus family. The contribution amount must be within the annual IRS limits.
• Which employees are eligible. By law, all full-time employees are required to be eligible and participate, but you may exclude other employees (including those who are part-time or seasonal).  
• What your written notice will include. You must provide a written notice to your employees 90 days before the start of the plan year informing them of the QSEHRA. That notice must also be provided to new employees on their first day of work.
• How you will reimburse your employees. You must decide what expenses are eligible for reimbursement, when employees will be reimbursed, and whether you will reimburse the employee or the provider. 
• How it complies with federal regulations. You must ensure your QSEHRA complies with federal requirements, including those outlined in the Affordable Care Act (ACA) and the Employee Retirement Income Security Act (ERISA). 

How does it work for my employees?

The process varies based on the administrator, but generally, a few facts about the participant experience:

• To be eligible, the employee must be covered and provide you with proof of minimum essential coverage (MEC). Failure to do so may result in tax consequences, including employer reimbursements being included in their taxed income. 
• All employee expenses must be substantiated in order to be reimbursed. The IRS sets requirements for what is needed on documentation of Section 213(d) claims. 

Would you like to learn more about HRAs with WEX? Check out our HRA product page. 

The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own counsel.