QSEHRA: The Small Business Alternative to Group Health Insurance

Small business owners face many challenges in today’s economy, and one of the most significant is how to provide affordable and comprehensive health insurance coverage to their employees. While group health insurance plans have traditionally been the go-to solution for employers, they can be expensive and difficult to manage for small businesses. Fortunately, there is a viable alternative: the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).

QUALIFIED SMALL EMPLOYER HEALTH REIMBURSEMENT ARRANGEMENT (QSEHRA)

A QSEHRA is an HRA (Health Reimbursement Arrangement) designed specifically for small businesses. It allows employers to reimburse their employees for qualified medical expenses, including health insurance premiums, up to a certain dollar amount each year.

QSEHRAs are an excellent option for small business owners who want to offer their employees a valuable health benefit without breaking the bank.

What is QSEHRA?

QSEHRA is a type of health reimbursement arrangement (HRA) — designed specifically for small businesses — that allows small businesses offer health benefits to their employees without the high costs associated with traditional group health insurance plans.

Under QSEHRA, employers set aside predetermined amounts of funds each month for employee reimbursements, which employees can use this money to pay for health insurance premiums, deductibles, copays, and other qualified medical expenses.

→ Deep dive into QSEHRA with our exciting QSEHRA guide! 

Benefits of QSEHRA

One of the key benefits of a QSEHRA is that it allows employees to choose their own health insurance plan. Unlike traditional group health insurance plans, which often limit employees to a specific network of providers, a QSEHRA allows employees to choose the plan that works best for their individual needs. 

Other QSEHRA benefits include:

Tax-free for both employers and employees. Employers can deduct the cost of the reimbursements on their business taxes, and employees don’t pay income tax on the reimbursements they receive.
QSEHRA is a viable alternative to group health insurance for small businesses and has many benefits. Here’s a list of some of the benefits of QSEHRA.
Flexibility: Employers can choose the amount they want to contribute to their employees’ health care expenses, and employees can use the funds to pay for various medical expenses, including individual health insurance premiums, deductibles, copays, and more. This flexibility enables employees to choose the healthcare plan that best fits their needs, and it allows employers to tailor their health care benefits to the specific needs of their workforce.
Cost Savings: QSEHRA allows employers to provide health care benefits to their employees without the high costs associated with traditional group health insurance. Employers set a budget for their healthcare contributions, which can help small businesses save money on healthcare costs while still providing valuable benefits to their employees.
Employees can also save money with QSEHRA since they can use the funds to pay for a variety of medical expenses. And they may be able to find a more affordable healthcare plan on the healthcare exchange that better suits their needs. This helps them save money on monthly premiums and out-of-pocket expenses.

How Does QSEHRA Work?

Here’s how QSEHRA works so employers can offer employees health benefits in a tax-advantaged way:

The employer sets a monthly allowance for each employee, which the employee can use to pay for eligible health care expenses.
The employee pays for the expenses out of pocket and then submits proof of payment to the employer.
The employer reimburses the employee up to the amount of their monthly allowance.
The employee can use the reimbursement to pay for eligible health care expenses, including health insurance premiums, deductibles, copays, and coinsurance.

Here are some highlights of how QSEHRA works:

QSEHRA is available to small businesses with fewer than 50 full-time employees.
Employers can set a monthly allowance of up to $445.83 for single employees and $903.33 for employees with a family.
Employees can use the QSEHRA allowance to pay for eligible healthcare expenses, including health insurance premiums, deductibles, copays, and coinsurance.
Employees must have minimum essential coverage to be eligible for QSEHRA.
Employers can choose which expenses are eligible for reimbursement under the QSEHRA plan.
Employers must provide written notice to employees about the QSEHRA plan at least 90 days before the start of the plan year.
Employers must report QSEHRA contributions on their employees’ W-2 forms.

Eligibility for QSEHRA

Small businesses looking for an alternative to group health insurance may consider a QSEHRA. To be eligible for a QSEHRA, both the employer and the employee must meet certain requirements. This section outlines the eligibility criteria for both employers and employees.

Employee QSEHRA Eligibility

Any employee of an eligible employer may qualify to participate in a QSEHRA. However, there are a few requirements that the employee must meet:

The employee must be covered by a health insurance plan that meets the Minimum Essential Coverage (MEC) requirements.
The employee cannot be enrolled in Medicare.
The employee cannot be claimed as a dependent on someone else’s tax return.

It’s important to note that if an employee has coverage through a parent or spouse, reimbursements work a bit differently.

Employer QSEHRA Eligibility

To qualify for a QSEHRA, a small employer generally must:

Have fewer than 50 full-time employees.
Provide the arrangement on the same terms to all full-time employees (reimbursement amounts may only vary based on age and the number of individuals covered).
Not offer a group health plan, like SHOP coverage or a flexible spending account (FSA).
It’s important to note that employers cannot offer both a QSEHRA and a group health plan. Additionally, employers must provide the QSEHRA on the same terms to all full-time employees.

By meeting these eligibility requirements, small businesses can offer their employees a QSEHRA as a way to help them pay for medical expenses.

Setting Up a QSEHRA Plan

Setting up a QSEHRA plan can be easy when you work with a trusted QSEHRA administrator partner like Take Command. Here’s what to expect when it’s time to set up your QSEHRA. 

QSEHRA Plan Design

First, employers decide the annual maximum contribution amount — as determined by the IRS — available to employees through the QSEHRA. The maximum contribution amount for 2023 is $5,450 for individuals and $10,900 for families. The employer decides which employees are eligible for the QSEHRA plan. Eligible employees include those who have completed 90 days of service, are not covered by a group health plan, and are not part-time or seasonal employees.

QSEHRA Documentation and Reporting

QSEHRA Administration

Employers must ensure that the QSEHRA plan complies with all applicable laws and regulations, including the Affordable Care Act (ACA). This is the part of QSEHRA set-up that can be cumbersome and why many employers choose to work with a QSEHRA administrator. 

The basics of QSEHRA administration, documentation and reporting are:

The employer must provide written notice to all eligible employees at least 90 days before the start of the plan year. 
The notice must include the annual maximum contribution amount, eligibility requirements, and how to submit a claim for reimbursement.
Employees submit proof of payment to be reimbursed by the QSEHRA. Reimbursement is tax-free for both the employer and the employee. 

Pros and Cons of QSEHRA

There are advantages and drawbacks to every HRA plan, depending on your specific needs and situation. So what are the pros and cons of QSEHRA? 

QSEHRA Pros

Tax-advantaged: QSEHRA is a cost-effective alternative to traditional group health insurance that provides both employer and employee a tax-advantaged health benefits option. 

Flexible:  Employees get to choose their own health insurance plan. This means that employees can choose a plan that best fits their needs and budget.
Easy to administer: QSEHRA is easy to administer and doesn’t require a lot of paperwork or administrative work. The employer simply sets up the plan, determines the reimbursement amount, and the employees submit their expenses for reimbursement via their HRA administration software portal.
Attractive to employees: QSEHRA is attractive to employees because it provides them with tax-free funds to pay for health insurance premiums and medical expenses. This can be a valuable benefit for employees, especially those who can’t afford health insurance on their own.

QSEHRA potential cons

Not suitable for all businesses: Since the reimbursement amount is limited, it may not be enough to cover the health insurance premiums and medical expenses of all employees in a large business. In that case, a business should explore ICHRA. 
Administrative burden: While QSEHRA is easy to administer, it still requires some administrative work. The employer must set up the plan, determine the reimbursement amount, and keep track of the employees’ expenses.
Complex rules: QSEHRA has complex rules that must be followed to ensure compliance with the law. This includes rules regarding the maximum reimbursement amount, eligible expenses, and employee eligibility.

All that being said, these potential cons are easily managed when you partner with an HRA expert like Take Command. We’ll guide you to the HRA plan that best fits your business, shoulder the administrative burden, clarify complex rules, and help you navigate any uncertainties. 

QSEHRA vs Other Health Plans

In addition to QSEHRA, there are other alternatives that small employers can consider. Here are some of the most common options and how they stack up to QSEHRA.

QSEHRA vs. Group Health Insurance

Group health insurance is a traditional option that many small businesses offer employees. Unlike QSEHRA, group health insurance requires the employer to purchase a policy and cover a portion of the premium costs for their employees. Group health insurance can be more expensive for employers and many small employers may find the available options not suitable for their business.

QSEHRA vs. Health Savings Accounts (HSAs)

HSAs are individual accounts that employees can use to pay for qualified medical expenses. Employers can contribute to their employees’ HSAs, but employees have to be enrolled in a high-deductible health plan (HDHP) to be eligible. HSAs offer tax advantages, but they may not be as flexible as QSEHRA.

QSEHRA vs. Flexible Spending Accounts (FSAs)

FSAs are similar to HSAs in that they are individual accounts that employees can use to pay for qualified medical expenses. However, FSAs are funded solely by the employee and do not offer the same tax advantages as HSAs. FSAs may be a good option for employees who have predictable healthcare expenses, but they may not be as flexible as QSEHRA.

QSEHRA vs. Individual Coverage Health Reimbursement Arrangements (ICHRAs) 

ICHRAs are similar to QSEHRA, but they are designed for larger employers. Employers can use ICHRAs to reimburse their employees for individual health insurance premiums or other medical expenses. ICHRAs are more flexible than QSEHRA, but they may be more expensive for employers to administer.

QSEHRA Plan Highlights at a Glance

For small business owners looking for an alternative to traditional group health insurance, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a viable option. Here are some highlights of the QSEHRA plan:

Employers with fewer than 50 employees can offer QSEHRA to their employees.
QSEHRA funds are tax-free for both employers and employees.
Employees can use QSEHRA funds to pay for eligible medical expenses, including health insurance premiums, deductibles, copays, and more.
Employers can set a maximum annual reimbursement amount for their employees, up to $5,450 for single coverage and $10,900 for family coverage (as of 2023).
Employees must have minimum essential coverage (MEC) to be eligible for QSEHRA.
Employers must offer QSEHRA to all eligible employees on the same terms.
Employers must provide employees with a notice of the QSEHRA at least 90 days before the start of the plan year or before the employee becomes eligible for the QSEHRA.
Employers must report QSEHRA contributions on employees’ W-2 forms.

Getting Started With QSEHRA

For small businesses that are looking to offer health benefits to their employees, but can’t afford or don’t want group health insurance, QSEHRA is a great alternative. It allows employers to reimburse their employees for medical expenses and health-related costs without offering a group health insurance plan.

QSEHRA is easy to set up and administer, and it offers flexibility in terms of how much employers can reimburse their employees.

Overall, QSEHRA is a great option for small businesses that want to provide health benefits to their employees without breaking the bank. It offers flexibility, affordability, and accessibility, making it a popular choice among small business owners across the country.

It’s time to think outside of the box. Consider an alternative. Talk to the Take Command team about QSEHRA.