As a small business owner, finding the right health coverage offerings for your employees can be downright confusing. With ever-increasing healthcare costs, enrolling in group coverage is often cost prohibitive for small businesses with few employees. The good news is: You have options. At Benafica, our goal is to help you find and understand them.
One coverage option small business owners are increasingly gravitating toward is a qualified small employer health reimbursement arrangement (QSEHRA). In this blog, we explain everything you need to know about QSEHRAs and how they can benefit your business as a whole.
What Is a QSEHRA?
A QSEHRA, also known as a small business HRA, is a type of employer-funded, health coverage subsidy plan designed to help offset employees’ personal healthcare costs.
- With a QSEHRA plan in place, your company may reimburse employees tax free for qualified medical expenses up to a predetermined dollar amount.
- For the 2020 tax year, small businesses may reimburse up to $5,250 for single employees and up to $10,600 for employees with families.
- Reimbursement limits vary from year to year and are determined by the IRS.
Which Businesses Can Offer QSEHRAs?
This subsidy plan isn’t designed for every small business. To qualify, your business must meet certain IRS requirements, including:
- You employ fewer than 50 full-time employees.
- You do not offer any other type of health reimbursement arrangement.
- You do not provide a group coverage health insurance plan.
How Does a QSEHRA Work?
When you elect to offer a QSEHRA in lieu of a group coverage plan, not only do you (the employer) get more flexibility in terms of how you set up the plan, but your employees also have more freedom to choose what kind of healthcare plan they want.
With a QSEHRA, eligible employees select their desired independent health insurance plan or opt to forego health insurance altogether. They then pay for their own healthcare expenses upfront, and you reimburse them for those expenses that qualify.
Here’s how the process works in a bit more detail:
- You design your reimbursement plan.
The first thing you’ll do when setting up a QSEHRA is determine your per-employee reimbursement allowance. You can choose to reimburse the same amount for all employees or reimburse all employees up to the maximum amount they’re eligible for. Additionally, you can choose to offer different allowances based on marital status and dependents, or based on employee age.
Because you’re the sole owner of the plan, you also get to choose which expenses you’d like to reimburse for. You can choose to reimburse for employees’ individual health insurance premiums, their qualifying medical expenses, or a combination of both. But whatever you choose, you must apply it fairly across the board.
- Employees pay for their healthcare expenses.
Under a QSEHRA, staff members use their own money to purchase healthcare services and products according to their needs. This may include individual insurance premiums, copays, deductibles, and medications, among other expenses. For a comprehensive list of eligible expenses, refer to IRS Publication 502. Remember, you’re not obligated to reimburse for everything on that list; however, if you choose to exclude certain expenses, you must exclude them for everyone.
- Team members submit proof of payment for healthcare expenses.
Employees must submit formal documentation of payment for all healthcare expenses they wish to be reimbursed for. In terms of documentation, you’ll typically need either payment receipts or an explanation of benefits from the employee’s insurance company.
- Your business reviews payment documentation and issues reimbursements.
Once you have proof of payment, if all the documentation checks out, you reimburse employees up to their maximum monthly allowance. Reimbursements are tax free for the employer and are also tax free for employees, provided they’re covered under an insurance policy that meets minimum essential coverage requirements.
Which Employees Are Eligible to Take Part in a QSEHRA?
Because everyone must be treated fairly under a QSEHRA, if you choose to offer this plan, all full-time, W-2 employees must have the option of participating. Although you have the option of including all W-2 employees, you are not obligated to extend QSEHRA benefits to:
- Employees who are under the age of 25 at the start of the plan year
- Seasonal employees
- Part-time employees
- Employees who have not yet completed 90 days of service
One thing to note: Because employees must be treated fairly under a QSEHRA, if you choose to extend benefits to part-time employees, you must offer them the same allowance as your full-time employees. If your business employs workers who receive a 1099, they cannot be included in a QSEHRA plan.
Providing a QSEHRA Plan: Key Benefits for Employers
For many small business owners, purchasing group coverage health insurance simply isn’t an affordable option. That’s why QSEHRA plans continue to increase in popularity year over year. Employers who elect to offer benefits through such a plan enjoy a variety of benefits, including:
- Coverage flexibility. As the sole owner of a QSEHRA, the employer has control over the plan’s design, which allows for greater alignment with employees’ healthcare needs.
- Cost control. Because the employer chooses a maximum allowance for each employee, a QSEHRA plan allows small businesses more control over their annual budgets.
- Talent recruitment. Health benefits are a primary consideration for applicants seeking new employment. By offering a QSEHRA, employers can more easily attract and retain talented employees.
- Fraud control. Employers issue reimbursements after employees have already paid for qualifying medical expenses, thereby reducing the risk of benefit fraud.
- Employee empowerment. Employers who provide a QSEHRA plan empower their employees to make healthcare decisions based around their unique needs. Because employees can choose how they want to use their allowance, they have more flexibility to address their healthcare needs as they see fit.
Is a QSEHRA Right for Your Small Business? Learn More With Benafica
If you’re a small business owner interested in learning more about QSEHRAs, get in touch with our team at Benafica! It’s our goal to educate individuals and companies of all sizes about the health benefits options available to them, so they can make informed decisions that meet their unique needs. For more information about our services or to request a quote, give our team a call today at 651-287-3253 or connect with us online, and we’ll be in touch.
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