QSEHRA rules your small-business clients need to know
QSEHRA, the small-business HRA, created in December 2016 as part of the 21st Century Cures Act, allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want. And while QSEHRA may have had a slow start being passed under the radar, they are now gaining momentum. Small employers nationwide are eager to learn how this tax benefit can work for them and their employees.
The IRS outlines the rules for QSEHRA (which stands for Qualfied Small Employer Health Reimbursement Arrangement) and everyone from non-profits to start-ups are eligible to participate. So take a moment to learn the quick facts of QSEHRA for your clients.
1. The employer must have fewer than 50 full-time employees.
2. The employer cannot offer a group health plan to any of its employees. If a group health plan is provided, the employer will have to cancel it before QSEHRA can start.
3. Employees must have a health insurance plan that meets minimum essential coverage in order to participate -- short-term plans, indemnity and faith-based sharing plans do not qualify as MEC. Also, QSEHRA is designed to work with tax credits employees may have received from the marketplace to purchase their insurance. Any tax credits the employee receives on their premiums will be reduced dollar for dollar by the QSEHRA.
4. There are no minimum contribution limits. The IRS sets the maximum contribution limits each year for QSEHRA. For 2018 the maximum contribution limits are $420 per month per single or $854 per month per family. QSEHRA is funded solely by the employer and the employee cannot contribute to the fund. The reimbursement amounts must be offered fairly to all employees- the rates can vary by family size, or all employees can be offered the same rate, but you cannot offer more to an employee just because they are your favorite. Employers can exclude the following employees from QSEHRA: part-time, seasonal employees under 26 years, and employees on a spouse’s group plan.
5. Employers can choose to reimburse premiums only or premiums + medical expenses.
Can owners participate in QSEHRA?
A lot of small business owners look at QSEHRA and wonder if they are eligible to receive the tax-free reimbursements as well. If the owner is considered an employee of the business, then they would be eligible to participate. The employee status of the owner is often determined by the corporate structure of the business.
Can employers administer their own QSEHRA?
It is strongly advised that employers do not try to administer their own QSEHRA. While the legal documents are easy to draft to create the QSEHRA, the newness of QSEHRA makes it difficult for a small business to keep up with the changing regulations as they occur. Since its inception, the IRS has issued two major guidance changes and has promised more in the future. Small-business owners do not have the time or resources to research and stay current on law changes insuring they are compliant.
In addition, the IRS requires small businesses to keep records up to seven years. That means the owner would need a secure way to keep employee medical receipts and their personal health information secure and safe for up to seven years.
And lastly, another important item for employers to consider is employee privacy. For reimbursements to be tax-free, you have to substantiate that employees are using it to pay for health insurance and medical expenses. Information about employees’ medical expenses (including individual insurance premiums) is considered Protected Health Information (PHI) under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). As an employer, asking for employee medical records is a HIPAA privacy violation. Plus, it can get awkward for employees to disclose personal medical information to their boss.