What Is a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)?

A qualified small employer health reimbursement arrangement (QSEHRA), also known as a small business HRA, is a health coverage subsidy plan designed for employees of businesses with fewer than 50 full-time employees. Any money reimbursed is tax-free for employees and tax-deductible by employers.

Key Takeaways

  • A QSEHRA is a health cost reimbursement plan that can be offered by small business employers.
  • The costs reimbursed are tax-deductible by businesses and tax-free for employees.
  • The plan can be used to offset health insurance coverage or repay uncovered medical expenses.

How a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Works

A company that decides to offer a QSEHRA agrees to reimburse employees for healthcare-related costs up to a maximum amount each year. Eligible employees may enroll during open enrollment season or after experiencing a qualifying life event, such as a marriage or divorce.

The IRS has released new guidance that allows employers more flexibility for benefit plans during the 2020 economic crisis. Among other things, Notice 2020-29 allows employees who initially declined employer-sponsored health coverage an opportunity to enroll in, switch, or drop health coverage or employer-sponsored health coverage. However, these provisions are entirely at the discretion of the employer. If you're not sure about your options, check with your HR or benefits person.

Reimbursements can be used to pay the premiums for health insurance purchased on the market and to pay for qualified medical expenses, including copayments for doctor’s office visits, prescriptions, and lab work. Employers may narrow the list of eligible expenses but not expand it and employees must provide proof of their actual medical costs to receive reimbursement.

Employees must have qualifying health coverage in order to use their QSEHRA.

In the 2021 tax year, a company with a QSEHRA may reimburse single employees up to $5,300 per year and employees with families up to $10,700 per year. These figures represent an increase from the 2020 tax year maximums of $5,250 for individual coverage and $10,650 for family coverage.

The limits are set by the Internal Revenue Service (IRS) because the employer is eligible to take a business tax deduction for its costs and the benefit to employees is tax-free.

Employees not covered by a QSEHRA for a full year (e.g., mid-year hires) receive a prorated amount of the full-year maximum reimbursement sum.

History of the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

Former President Barack Obama signed the QSEHRA into law on Dec. 13, 2016, as part of the 21st Century Cures Act, and the plans became available to employees on March 13, 2017.

The act corrected a problem for small businesses offering health reimbursement arrangements (HRAs) between 2014 and 2016. During this period, small businesses could be hit with penalties of $100 per employee per day for being out of compliance with the requirements of the Affordable Care Act (ACA).

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Eligibility

To qualify to use a QSEHRA, a business must have fewer than 50 full-time employees, provide the QSEHRA on the same terms to all full-time workers, and not have a group health plan or a flexible spending arrangement (FSA)—A QSEHRA is not a group health plan.

Medium and large companies may offer HRAs only as an option alongside group health insurance coverage such as a preferred provider organization (PPO) or health maintenance organization (HMO) plan. Sole proprietors, partners in partnerships, and self-employed employers are not eligible for HMO and PPO plans.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Compliance

To comply with the law, all employees covered by a QSEHRA must benefit from it equally. Employer contributions to each employee's account must be equal.

Employers are not required to include new, part-time, or seasonal workers in the benefits they provide. However, if they offer a QSEHRA to full-time employees, they must cover all of them. Because the ACA governs these arrangements, participating employees must provide proof that they carry the minimum essential health coverage required by the ACA.

QSEHRA plans also receive oversight from the Employee Retirement Income Security Act (ERISA). Following ERISA regulation means employers must give employees a summary plan description that describes their plan benefits.

Finally, should an employer make another form of group health insurance available, they are no longer permitted to offer a QSEHRA plan.