Will the QSEHRA work for your small-business clients?
It’s been more than a year since Congress created the Qualified Small Employer Health Reimbursement Arrangement, a new health benefits option available to businesses with fewer than 50 employees.
The QSEHRA benefit, passed as part of the 21st Century Cures Act in December, allows businesses to reimburse employees tax-free for individual medical expenses.
Unsurprisingly for a new and somewhat obscure benefit, the QSEHRA has flown under the media’s radar since its inception. With small businesses, though, it’s proven popular—in 2017, thousands of businesses across the country offered the QSEHRA.
Many of these early adopters have found success with the benefit, data from PeopleKeep’s 2018 QSEHRA annual report finds. A significant majority of businesses that offered a QSEHRA in 2017 did so to offer employee health benefits for the first time, and employees used nearly 80 percent of the tax-free money available to them.
The advent of the QSEHRA has also benefited CPAs and other financial professionals, who have been seeking ways to assist small business clients with health benefits when traditional options aren’t possible.
Like any benefit, however, the QSEHRA is better suited to certain companies.
Based on the first year of QSEHRA data, there are four questions CPAs should answer when evaluating the benefit for their small-business clients.
Can this business afford traditional group benefits?
For many small businesses, traditional benefits like group health insurance satisfy their needs. These businesses can afford the premiums and have the resources to administer the policy, while employees remain satisfied with the offering.
For these groups, canceling an existing policy in favor of an unfamiliar option like the QSEHRA is difficult and unlikely to be helpful.
The QSEHRA is a better fit for businesses that cannot offer a group health policy, whether due to expense, time cost or employee needs. Because of the benefit’s structure, these businesses can offer as much or as little in tax-free money as they choose.
More than 90 percent of businesses that implemented a QSEHRA in 2017 previously either offered no health benefits or gave employees a taxable stipend for health care.
Just 6 percent offered traditional group health benefits.
How big is this business?
The Internal Revenue Code allows all businesses with fewer than 50 employees to offer a QSEHRA. However, businesses that find the most success with the benefit are much smaller.
In 2017, the average size of a business offering a QSEHRA was six employees. These businesses are among the least able to afford traditional group benefits and also most adept at helping their employees succeed with the QSEHRA.
While just 31 percent of employees who were offered a QSEHRA submitted a premium expense for reimbursement, nearly half (48 percent) of employees in one-person businesses and 39 percent of employees in two- to five-person businesses made a submission.
Does this business have employees that qualify for premium tax credits?
The Internal Revenue Code specifies that employees, their spouses and their dependents must coordinate their premium tax credits with their QSEHRA allowance.
This means employees must reduce their premium tax credit dollar for dollar by the monthly allowance they get from their company if the allowance doesn’t satisfy the Affordable Care Act’s definition of “affordable coverage.”
In practice, this provision significantly reduces the value employees who qualify for premium tax credits receive from the QSEHRA. Businesses with employees in this situation may have reservations about offering the benefit.
In contrast, businesses that pay their employees higher salaries won’t hit this roadblock.
Can this business afford to offer at least $200 in monthly allowances?
The size of an employee’s monthly allowance under the QSEHRA significantly affects how they use it—and the relative value they receive from it. In general, employees who received at least $200 were more likely to submit both premium and non-premium expenses and to purchase more comprehensive policies.
In fact, just 25 percent of employees who received $100 or less submitted a premium. Among employees who received $200 or more, however, the premium submission rate was 40 percent.
Additionally, employees who received $200 or more purchased policies with premiums of between $300 and $400, signifying more comprehensive coverage. Employees who received $100 or less, though, submitted premiums totaling an average $190.
Finding success with the QSEHRA
When small businesses fit the profile for the QSEHRA, they generally have positive results.
Employees who participated in a QSEHRA in 2017 not only used their allowances, but claimed an average 77 percent of their annual allowance on both premium and non-premium expenses. These employees received value regardless of whether they were covered by their spouse’s insurance, lived out of state, or had unique health needs.
As important financial partners to small businesses, CPAs can help their clients find similar success. With the right budget, business and employee profile, the QSEHRA can function as a high-value benefit that helps small businesses hire and keep talented employees for years to come.