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Most US employers offer health insurance to attract and keep talent, according to a 2022 Employee Benefits Survey by the Kaiser Family Foundation.
However, small employers are much less likely to do so, citing cost as the reason why they’re hesitant about adding health insurance to the mix. For those finding health insurance beyond their price range, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) could be worth exploring.
In this business owner’s guide, we’ll explain what a QSEHRA is, what goes into setting one up, some pros and cons, and how it compares to an Individual Coverage Health Reimbursement Arrangement (ICHRA).
Getting to know QSEHRA and ICHRA
What is QSEHRA?
Simply put, a QSEHRA is a Health Reimbursement Arrangement (HRA) tailored for small businesses with fewer than 50 full-time employees. A key point to remember is the word reimbursement. That’s because QSEHRA is not itself health insurance but a means for employers to reimburse employees for specific healthcare expenses. To find out more, we caught up with Paul Foery, OnPay’s Vice President of Insurance and benefits expert with over 30 years of experience helping business owners navigate the complexities of health coverage.
“Employers and employees should keep in mind that QSEHRA is an option that allows employees to shop for insurance on their own. Its not a healthcare plan. This sometimes can get lost in the shuffle,” he explains. “Instead, certain employers choose to reimburse a portion of costs associated with healthcare expenses and these reimbursements are tax-exempt for employees.” The employee does the legwork with QSEHRA. “Employees shop for coverage that fits their needs,” says Foery. “And employers avoid the heavy lifting of trying to find health care that pleases everyone.”
Next, let’s take a few minutes to find out what an ICHRA is.
“Employers and employees should keep in mind that QSEHRA is an option that allows employees to shop for insurance on their own. This is not a healthcare plan. This sometimes can get lost in the shuffle.”
— Paul Foery, OnPay's Vice President of Insurance
Like QSEHRA, ICHRA is also a tax-free, employer-funded HRA that gives employees the means to buy health insurance that best suits their individual needs (but is not a health care plan).
One of the biggest differences between QSEHRA and ICHRA is that employers of almost any size can offer their employees access to ICHRA options. Later in this article, we’ll compare QSEHRA and ICHRA side by side (and have a table to make it easy to understand).
Let’s take a brief look at how the QSEHRA came to be.
The Origins of QSEHRA
In 2002, the IRS issued Notice 2002-41, enabling employers to reimburse employees (tax-free) for eligible medical expenses via an HRA, provided these employees participated in the employer’s group health plan.
Along the way, the federal government has enacted various regulations, expanding the way employers deliver HRAs. The Qualified Small Employer Health Reimbursement Arrangement is one of the additions. Signed into law on December 13, 2016 via the 21st Century Cures Act, QSEHRA took effect on January 1, 2017.
Key requirements for employers to provide QSEHRA include:
- Having fewer than 50 full-time employees without offering them any group health plans.This means no group health insurance, dental or vision plans, or flexible spending accounts.
- Applying the same QSEHRA terms to all eligible employees.
- Adhering to the IRS’ annual reimbursement ceilings for QSEHRAs.
- Fully funding the QSEHRA without employee contributions.
- Offering QSEHRA reimbursements only to employees who provide proof of minimum essential coverage.
Next, let’s talk more about how employees can search for plans that could be a fit for their needs.
What is proof of minimum essential coverage?
Employees can obtain this coverage from sources such as the Health Insurance Marketplace, their spouse’s employment-based health insurance, or government-backed coverages like Medicaid and Medicare.
Employers can extend QSEHRA reimbursements to qualifying employee dependents, who also need to show proof of minimum essential coverage.
Employees must present
- An insurance card or similar evidence, plus the employee’s signed acknowledgment confirming minimum essential coverage.
- A signed statement (by the employee) with details of the coverage, including the insurance provider’s name and the coverage start date.
To receive QSEHRA reimbursements, the employee must submit proof of their eligible out-of-pocket medical expenses.
QSEHRA: Pros and Cons
Like many voluntary benefits, QSEHRAs have their pros and cons employers may want to consider before offering this as an option.
Potential pros for employers
- Cost Effective: For small employers on a budget that are unable to afford group health insurance, a QSEHRA can be a feasible option.
- Enhanced Talent Attraction and Retention: Offering a QSEHRA, instead of no health benefits at all, can boost the employer’s appeal in the talent market.
- Greater Financial Control: Employers can set their QSEHRA contribution, provided it’s within the IRS’ annual limit.
- Tax Exemptions: Typically, neither the employer nor the employee incurs taxes on QSEHRA reimbursements.
- Business Tax Deductions: QSEHRA reimbursements are tax-deductible for businesses.
- Compatibility with HSAs: Because HSAs are savings plans and not health plans, employees can maintain their existing HSA along with their QSEHRA.
- Integration with Other Health Plans: QSEHRAs can be integrated with spousal job-based health insurance and Tricare, which is a healthcare program for active-duty military personnel and their families.
Cons that could affect an employer’s decisions
- Group Health Plan Restrictions: The inability to offer a company-sponsored group health plan could compromise the quality of the employer’s healthcare offerings.
- Size-Based Limitations: Employers with 50 or more employees are ineligible for QSEHRAs. Instead, they’re considered applicable large employers under the Affordable Care Act.
- Potential Talent Attraction and Retention Issues: This can arise if health insurance isn’t provided.
- Fluctuating Health Insurance Market: The varying market conditions might affect the employee’s ability to secure affordable individual health coverage.
It can also be a good idea to do your homework when incorporating QSEHRA so you know what to expect.
Setting Up a QSEHRA
The process, while straightforward, requires precision. Here’s a step-by-step overview on how to get the ball rolling.
- Confirm your eligibility as an employer.
- Determine employee eligibility. You can exclude certain employees, such as part-time and seasonal workers.
- Decide on the inclusion of dependents. Be sure to examine what constitutes a dependent for QSEHRA purposes.
- Establish your monthly contribution amount. For 2023, employers can contribute up to $5,850 for individual employees and up to $11,800 for family coverage. – add 2024 info QSEHRA limits for 2024
- Choose the medical expenses to reimburse, as shown in IRS Publication 502.
- Prepare necessary documents, including a plan document and a written notice to your employees.
- Select a commencement date. While you can generally start a QSEHRA at any time, the best time is generally at the start of the month.
- Inform employees about the QSEHRA benefit.
- Direct employees to relevant resources like the Health Insurance Marketplace.
It’s also worth considering whether to manage the QSEHRA in-house or through a third party. Some employers work with a third-party administrator, or TPA, to spell out what the QSEHRA consists of and administer the plan.
If you opt to manage one or the other in-house, just be sure that your staff understands the intricacies that a QSEHRA brings to the table.
So, now that we have an understanding of what QSEHRA brings to the table, let’s find out how it compares to the new kid on the block, the ICHRA.
QSEHRA and ICHRA: Are these HRA options the same thing?
In a nutshell, a QSEHRA and an ICHRA are both health reimbursement arrangements; however, they operate differently.
ICHRA gets introduced
In 2019, the federal government issued regulations that introduced a new type of HRA called the “Individual Coverage Health Reimbursement Arrangement,” or ICHRA for short. These regulations became effective on January 1, 2020.
ICHRA allows employers of all sizes to reimburse employees for certain health-related expenses, as long as the employee has individual health coverage. Before the introduction of HRAs became available, employers were restricted from reimbursing employees for individual health coverage premiums. ICHRA eliminates this restriction. For a separate primer, read our in-depth guide on how ICHRA can help employees shop around for health care options.
Now let’s talk more about how these two HRAs shape up side by side.
QSEHRA vs ICHRA: Charting the differences
Understanding the distinctions between the various HRAs can be complex. For a clearer picture, here’s a chart detailing the similarities and differences between QSEHRA and ICHRA.
|Eligible Employers||A type of HRA that allows employers with fewer than 50 full-time employees to reimburse employees for qualifying medical expenses.||A type of HRA that allows employers of any size to reimburse employees for qualifying medical expenses.|
|Funding Source||The employer alone funds the QSEHRA.||The employer alone funds the ICHRA.|
|Group Health Plan Compatibility||Employers cannot offer a group health plan alongside a QSEHRA.||Employers can offer an ICHRA alongside a group health plan, but not to the same class of employees.|
|Employee Health Insurance Requirement||Employees must have health insurance from a qualifying source to participate in a QSEHRA.||Employees must have individual health insurance from a qualifying source to participate in an ICHRA.|
|Integration||Integrates with spousal employment-based health insurance and Tricare.||Does not integrate with spousal employment-based health insurance or Tricare.|
|Reimbursement Limits||Subject to IRS annual contribution limits.||Not subject to IRS contribution limits. Employers can reimburse as much as they want.|
|Allowance Terms||The same QSEHRA terms apply to all employees, including allowance amounts.||Employers can allocate different ICHRA amounts to different classes of employees.|
|Taxation||Reimbursements are generally tax-free for employees and employers.||Reimbursements are generally tax-free for employees and employers.|
|Premium Tax Credits||Employees can claim a premium tax credit for individual coverage purchased via the Marketplace if their monthly QSEHRA allowance does not qualify as affordable coverage.||Employees may qualify for a premium tax credit only if their ICHRA allowance qualifies as unaffordable coverage (and they decline it).|
|Allowance Usage||Employees can use their QSEHRA allowance only for qualifying expenses, as listed in IRS Publication 502.||Employees can use their ICHRA allowance only for qualifying expenses, as listed in IRS Publication 502.|
|Rollover||Month-to-month and year-to-year rollovers are allowed, with restrictions.||Month-to-month and year-to-year rollovers are allowed, without restrictions.|
|W-2 Reporting||Subject to W-2 reporting requirements.||Not subject to W-2 reporting requirements.|
Is a QSEHRA better than an ICHRA?
As neither option is necessarily better than the other, many will choose based on compliance. Choosing one or the other depends on the employer’s requirements and the legal criteria governing QSEHRA and ICHRA. For instance, an employer with fewer than 50 employees might find QSEHRA more advantageous. However, those seeking greater flexibility might lean toward an ICHRA.
We caught up with Paul Foery again for some final thoughts on what employers may want to think about when narrowing down the decision. “Because there’s no cap to an ICHRA, the money in a state where the cost of living is lower may go a long way toward health care expenses,” he explains. “Conversely, if the business is in a state where the costs of living are higher, the dollars may not go as far.”
In the end, there’s lots of different criteria to think about. It may make sense to review the chart above, consider any additional requirements, evaluate how these align with your company’s goals, and determine which one best meets your needs. If you are unsure about what type of health care coverage is best for your company, it is always a good idea to consult with a licensed agent.
Best of luck as you search for options that can be a fit for you and your employees!