As a small business owner or HR professional, navigating the world of health benefits can be both challenging and rewarding. One option that has been gaining traction is the Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA. This innovative plan option may provide an alternative solution to traditional group health plans. But you may wonder, what’s QSEHRA? And is it good or bad for your business?
What is QSEHRA?
QSEHRA is a health benefit designed specifically for small businesses with fewer than 50 employees. It allows employers to reimburse their staff for medical expenses, including health insurance premiums, on a tax-free basis. Unlike conventional health insurance plans, QSEHRAs offer flexibility and can be a more affordable solution to combat the rising expense of employee health coverage.
Pros of QSEHRA for Small Business Owners
Cost Savings for Employers
QSEHRAs can be more budget-friendly than more traditional options. Unlike group health insurance plans where employers typically pay a portion of the premiums, QSEHRAs don’t involve any premium payments. Instead, employers reimburse employees for qualified medical expenses up to the specified annual allowance. This can lead to significant savings compared to the cost of providing group health insurance coverage.
With QSEHRAs, employers also have control over how much they contribute to each employee’s healthcare expenses. Unlike traditional group health insurance plans where premiums can fluctuate based on factors like age, location, and plan coverage, employers can set a fixed amount for reimbursement under QSEHRAs. This allows for more predictable and manageable healthcare costs.
Finally, businesses can also adjust the contribution amounts to QSEHRAs based on their budget and financial circumstances. So if your company’s financial situation changes, you have the flexibility to modify the reimbursement amounts without being locked into fixed premiums.
Flexibility for Employees
Unlike traditional group health insurance plans, employees have the freedom to choose how to spend their healthcare dollars, whether it’s on premiums or other qualifying medical expenses. This level of autonomy can lead to increased satisfaction with their health benefits.
QSEHRAs are also portable, meaning employees can take their reimbursement funds with them if they leave the company. This feature can be attractive to employees who value flexibility and may be hesitant to commit to a job with a traditional group health insurance plan.
Tax Advantages
Employers can deduct reimbursements made under QSEHRAs as business expenses. This helps reduce the employer’s taxable income, resulting in lower overall tax liability.
The tax benefits also extend to employees as they can receive reimbursements tax-free for qualified medical expenses.This means the amount they receive through the QSEHRA is not included in their taxable income, reducing their overall tax burden.
Another bonus—unused funds in the QSEHRA at the end of the plan year can roll over to the next year. This feature allows employees to accumulate funds for future medical expenses without losing them, and it doesn’t trigger taxes on the unused amounts.
Attracting and Retaining Talent
Offering a QSEHRA can make a small business more competitive by enhancing its benefits package, which is key to attracting and retaining high-quality talent. Employees have the freedom to select the healthcare options that best suit their needs, which can be appealing for those who value choice. Plus, knowing they have access to tax-free funds for healthcare expenses gives employees a sense of security and loyalty to their employer.
Cons of QSEHRA for Small Business Owners
Administrative Burden
Running a QSEHRA involves some administrative responsibilities which can be burdensome for smaller businesses without dedicated HR resources. The day-to-day operations of the QSEHRA, including processing reimbursement requests, managing funds, and addressing employee inquiries or concerns related to the plan can certainly become time consuming.
Employers or HR managers must also monitor ongoing compliance with plan rules and regulations as detailed record-keeping is essential for IRS reporting and audit purposes. Businesses are required to report QSEHRA contributions and reimbursements on employees’ W-2 forms at the end of the year. This involves accurately calculating and reporting the amount of contributions made for each employee, as well as any reimbursements received by them throughout the year.
Limited Contribution Amounts
Every year, the IRS sets some rules on how much you can put into QSEHRAs. The limited contribution amounts may pose challenges for employers who wish to provide more generous healthcare benefits to their employees.
Limits in 2023 were $487.50 per month for employee-only contributions and $983.33 per month for contributions towards employees with families/dependents.
Employees can use the reimbursements from QSEHRAs to cover out-of-pocket medical costs, including deductibles, copayments, and qualified healthcare expenses. But, the contribution limits restrict how much help employees get with their healthcare costs.
Complexity for Employees
Employees might find QSEHRA rules complex, particularly when it comes to understanding what is or isn’t eligible for reimbursement and how it affects their tax status.
Once an employee is in the QSEHRA plan, they need to understand what kind of expenses are covered. It’s not a free-for-all where they can use the money for anything health-related. There’s a list of qualified expenses set by the IRS, like doctor visits, prescriptions, and other medical services.
Your team will also need to stay organized and hold onto records and receipts. Plan administrators can ask for documentation to prove that plan members actually spent the money on eligible healthcare costs.
Potential Impact on Other Benefits
Participation in a QSEHRA could affect an employee’s eligibility for premium tax credits for marketplace insurance coverage. If an employee is offered a QSEHRA by their employer, they may still be eligible to enroll in a health insurance plan through the Marketplace. However, participation in the QSEHRA could affect their eligibility for premium tax credits based on the following factors:
- Affordability: The ACA considers employer-sponsored health coverage affordable if the employee’s share of the premium for self-only coverage does not exceed a certain percentage of their household income. If the employer offers a QSEHRA that is considered affordable under ACA guidelines, the employee may not be eligible for premium tax credits through the Marketplace, even if the cost of the employer’s plan is high compared to their income.
- Minimum Value: The ACA also requires employer-sponsored health plans to provide minimum value, meaning they must cover at least 60% of the total allowed costs of benefits. If the QSEHRA meets the minimum value requirement, the employee won’t be eligible for premium tax credits through the Marketplace.
- Impact on Income: The reimbursements received through a QSEHRA is considered part of the employee’s income. This means that the amount of reimbursement they receive could affect their total household income, potentially reducing or eliminating their eligibility for premium tax credits.
QSEHRA Pricing
Pricing for administering a QSEHRA plan varies depending on the provider, but businesses can expect basic administrative fees to range from $15 to $30 per employee per month. According to a 2023 report by PeopleKeep, small businesses offered a median monthly benefit of $319 for self-only employees and $457 for employees that were married with a family.
Conclusion
QSEHRA plans offer a unique health benefit option for small businesses that certainly deserves consideration. The potential to manage costs, combined with tax advantages and benefit flexibility, are attractive features for both employers and employees. However, the administrative burden and limitations inherent in the structure of QSEHRAs are considerable factors to evaluate as well.
For small businesses looking to provide healthcare benefits without the price tag of traditional group plans, QSEHRA presents an opportunity. With the pros and cons in mind, it’s essential to stay informed. Consider whether QSEHRA aligns with your business goals and your employees’ needs.
If you’re ready to explore options and compare both QSEHRA and group health insurance plans, we can help. Call or enter your zip code in the box above to get started.
