Your small business can help employees pay (tax-free) for medical expenses and insurance costs by setting up a qualified small Employer health reimbursement arrangement (QSEHRA). This arrangement is part of the 2016 law called the 21st Century Cures Act.
In the past, large companies have been able to set up health reimbursement arrangements (HRAs) for their employees. The new QSEHRA allows smaller companies to help employees set up similar accounts. Employees can get reimbursement to pay for their own health coverage, and the employer doesn't have to pay the cost of a group health plan.
What Is an HRA? What's a QSEHRA?
An HRA is a health reimbursement arrangement; it isn't a savings account that employees can put money into, nor is it health insurance. It's a specific type of employee benefit plan that reimburses employees for specific medical expenses. The plan is funded only by the employer, and employees can be reimbursed tax-free up to a maximum amount each year. HRAs can only be used for qualified medical expenses, such as those already covered by a medical plan, or for health care premiums.
QSEHRAs were set up to allow small employers the benefits of reimbursing employees for medical care expenses, including health insurance premiums, as an alternative to more expensive traditional group health plans. The difference between a QSEHRA and a traditional HRA is that with the QSEHRA, the small business setting up the plan does not provide health insurance for employees.
QSEHRA Benefits to Employers and Employees
An eligible employee's reimbursements are tax-free if the employee has coverage that provides minimum essential coverage.
Minimum essential coverage can be from a variety of providers, including coverage under a government-sponsored program and certain plans that employees buy in the individual market.
Employers don't have to pay payroll taxes (the employer portion of FICA taxes) on benefits paid to employees under this arrangement. In addition, the company can deduct the costs of the benefit payments and also the administrative fees of the HRA as a business deduction.
Is My Small Business Eligible to Set up a QSEHRA?
There are two qualifications for employers:
- Your business can't offer a group health plan to employees (including a Flexible Spending Arrangement (FSA)
- Your business can't be an applicable large employer (ALE) under the terms of the Affordable Care Act, which means you have fewer than 50 full-time equivalent employees (based on a formula for calculating the equivalent of part-time workers)
What Are the Requirements for a QSEHRA?
You (the employer) fund the arrangement; employees don't contribute through their paychecks. Here are some key requirements and restrictions:
- All eligible employees must have the same terms and benefits from this arrangement.
- Employees can get reimbursed for the payment of medical expenses for family members.
- You can have different levels of reimbursement, base on the age and number of individuals covered.
- The employee must show you proof of health care coverage.
- An employee who wants to participate must have health insurance that meets minimum requirements.
You can exclude employees from eligibility for this QSEHRA if:
- They haven't been employed by you for 90 days.
- They are under age 25 at the beginning of the plan year.
- They are part-time or seasonal employees.
- They are nonresident aliens with no earned income from sources within the U.S.
- Health benefits were part of good-faith bargaining.
You can reimburse employees for the monthly premiums of their plan or for their medical expenses, or both. Medical and insurance reimbursement expenses must be documented, within the limits of the annual maximum, and "qualified" as defined by the Affordable Care Act (ACA).
If the employee doesn't use all of their reimbursement for the year, they can roll over the unspent amount into the next year, but only if the employee is still employed. In other words, the employee can't take the money to a new employer.
There is an annual maximum reimbursement in qualified expenses for employee coverage and qualified expenses for family members.
The maximum dollar amounts for employer contributions to QSEHRAs are adjusted each year. The adjusted limits for 2020 and beyond are $5,250 for self-only coverage and $10,600 for family coverage. You don't have to give employees the maximum, but you must stay within the maximum to make sure the plan is qualified.
QSEHRAs for Self-Employed Business Owners
In addition to providing HRA benefits to employees, small business owners who work as employees in the business may be able to use a QSEHRA to give themselves a tax-deductible benefit (to the business). A 2% shareholder of an S corporation is not an employee for purposes of a QSEHRA.
QSEHRA Reporting Requirements
Employers are required to give employees written notice about this arrangement at least 90 days before the beginning of a year in which the arrangement is provided. Employees who are not eligible at the beginning of the year must receive notice when they become eligible.
You must report the amount of the benefit on the employee's W-2 form (Box 12, Code FF). The employer must report the amount the employee is eligible to receive from the QSEHRA (the "permitted benefit"), not the amounts actually received.
How to Set up and Run a QSEHRA
The best way to set up a QSEHRA to make sure it meets all the requirements is to hire a benefits administrator to administer the individual employee accounts, determine the eligibility of employees, and make payments to employees for qualified expenses. An internet search can give you some suggestions, or check with your bank to see if it offers this service. For more information and details on the QSEHRA, see IRS Notice 2017-67.