Every small-business owner knows how difficult and confusing it is to deal with their employees’ health care. We don’t need to tell you that health care costs are increasing every year at an average rate of 5.5%.1 You feel it. So, what’s a small-business owner to do if they want to provide health coverage but don’t have enough employees to make it cost-effective to enroll in group coverage? Well, one option is to set up a Qualified Small Employers Health Reimbursement Arrangement (QSEHRA).2
What is a QSEHRA?
A QSEHRA (pronounced Q-Sarah) is one way that small-business owners can help offset their employees’ health care costs. But your business will have to meet some strict IRS requirements before you can offer a QSEHRA.3 You qualify to offer a QSEHRA if your business:
- Employs less than 50 full-time employees
- Does not offer a group health plan
- Does not offer any other type of health reimbursement arrangement
With a QSEHRA, your company reimburses your employees up to $4,950 per year for an individual and up to $10,000 for a family for qualified medical expenses.4 Tax-free. That’s pretty great!
How does a QSEHRA work?
One of the advantages of choosing a QSEHRA instead of purchasing a group health plan like an HMO is that you have some flexibility in how you set up the plan, and your employees then have some flexibility in what kind of health care plan they choose. With a traditional group health plan, if the employer chooses to offer an HMO, then everyone in the company who’s eligible gets an HMO. If they want a PPO or HDHP, they’re out of luck.
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When you set up a QSEHRA, your eligible team members basically pay for their own health care expenses, they get to pick their desired independent plan, and you reimburse them. Simple, right? Well, it gets complicated very fast. Let’s break down how a QSEHRA works in detail.
1. Design your plan.
First things first: You can choose a limit on how much you’ll reimburse your employees. Just make sure your plan meets the IRS “same terms requirement,” which means you can’t give some employees more money than others—with a couple of exceptions that we’ll get to.5
In the easiest, but possibly most expensive option, you can choose to reimburse everyone up to the maximum allowed. Boom. Done.
Or, you can select a flat rate for everyone. Let’s say you set this at $300 a month. Everyone can expense up to $300.
You can offer different rates based on marital status or dependents. In this example, single employees get $300 per month, married employees get $600, and families get $900.
The last way you can break it down is by age. This one is a little more complicated because the amounts have to be tied to a reference plan on the individual market. Basically, your reimbursement amounts are on a sliding scale based on the employee’s age. The older they are, the more you pay.
You can also choose what kinds of health expenses to reimburse. For example, you can limit it to paying for premiums. Or you can reimburse for premiums and qualified medical expenses such as co-pays, prescriptions, dental visits or vision care. You can also exclude categories of expenses, but you have to exclude them for everyone. Again, just make sure to apply it fairly.
2. Team members pay for their own health care.
With a QSEHRA, your team members pay for their own health insurance and medical bills. Employees can submit receipts for reimbursement of anything listed in IRS Publication 502, which contains an extensive list of qualified medical expenses.6 This includes things like:
- Insurance premiums
- Prescription medications
- Chiropractic treatments
- Diagnostic studies
- Dental and orthodontic care
- Eye exams and corrective lenses
- Hearing aids
- Emergency services
- Caring for a disabled dependent
- Non-cosmetic surgery
Again, you can limit what you reimburse for, just as long the limits apply to everyone.
3. Your team members give you proof of payment.
This part sounds simple at first. And it is mostly, except for one thing: the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA requires health plans and most health care providers to make sure that a patient’s protected health information (PHI) is, well, protected.7 Some examples of PHI include:
- A bill from a hospital visit
- Lab results
- Surgery reports
- Explanation of benefits (EOB) from an insurance company
- Social Security numbers, health plan group numbers, medical report numbers and patient ID numbers
The main ways to show proof of payment for services are receipts from the point of service and explanation of benefits forms. But receipts and EOBs are considered to be protected health information. Since you would be, in effect, administering a health plan by reimbursing medical expenses under a QSEHRA, you’d need to be HIPAA compliant.
This is where the needle scratches the record. Getting HIPAA compliant requires undergoing some certification and training and involves the four main HIPAA Rules.8 These rules include:
1. HIPAA Privacy Rule: This rule is designed to ensure that patient health information is properly protected while allowing the flow of health information needed to provide and promote high-quality care and to protect the public’s health and well-being.9
2. HIPAA Security Rule: This rule is designed to ensure sure that any electronic transmission of health records meets the standards established by the Department of Health and Human Services (HHS) and the Office of Civil Rights (OCR) within HHS.10
3. HIPAA Compliance and Enforcement Rule: This rule establishes provisions relating to compliance, investigations and enforcement of the privacy and security rules.11 It also establishes civil money penalties and procedures for hearings.
4. Breach Notification Rule: This rule states that the HHS must be notified of any breach of unsecured protected health information. There are different rules depending on if the breach affected more or less than 500 patients.12
Obviously, this is super complicated and serious because if you don’t do things right, it can cost you a lot of money in fines and penalties. Also, because there’s a ton of sensitive information in a person’s medical records, some employees may be reluctant to share it with their boss. That’s just something to consider.
4. You reimburse your team members up to the limit you set.
This is the easy part. You have the proof, now you pay them. There are different ways to do it, but it’s usually done through payroll. In the vast majority of cases, reimbursements are tax-free. The main exception is if the employee wants to be reimbursed for their spouse’s contribution to their health plan.
If your employee has a regular reimbursement, you can automate that to come out of their check at the same time each month. Just make sure to get that proof of payment!
You may want to compare the costs of implementing a QSEHRA to see how much it would cost to offer a traditional group health insurance plan. Or, you could offer your employees a point of contact in the insurance industry to help them pick the plan that’s right for their health care needs. In that case, definitely talk to one of our independent insurance agent Endorsed Local Providers (ELPs).
Which employees can take advantage of a QSEHRA?
So, the general rule is that all employees are treated fairly under a QSEHRA. This means you must include all of your full-time employees in the QSEHRA. But you can choose whether or not to include:
- Part-time employees
- Seasonal employees
- Employees under 25 at the start of the plan year
Basically, anyone who gets a W-2 must or can be included, depending on full-time or part-time status. Contractors or workers who get a 1099 cannot be included in a QSEHRA.
How does a QSEHRA affect my business taxes?
When it’s time to file your small-business taxes, reimbursements under a QSEHRA are counted as deductions. So that’s awesome. But there’s a lot of paperwork. You need to account for all reimbursements and make sure you’re in compliance.
Small-business taxes can already be a hassle, and adding a QSEHRA on top of that just makes it even more complicated. So, get some help from a professional tax advisor. Our tax ELPs can make your life easier and save you some money.