A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a company funded health reimbursement plan offered by small businesses to their employees. It is advantageous to small businesses that want to offer a formal benefit to their employees and realize the benefits of a tax-free Section 105 plan but want to reduce the cost associated with a traditional group insurance plan.
QSEHRA’s enable a small business to contribute up to $5,150 for single employees per year or $10,450 per family towards qualified health care expenses. There are no minimum contribution requirements. The employee can, in turn, choose to purchase a health insurance plan that fits their needs through the health insurance marketplace. The contribution can also be used for other qualified medical expenses, such as physician co-payments or prescription medications. QSEHRA contributions are not taxable to the employee.
QSEHRA’s are flexible, and they can be used by any company with less than fifty full-time employees that does not offer any other option for a group insurance, dental or vision plan. The plan can also be offered to part-time employees at the company’s discretion, with the stipulation that the same benefit that is offered to full-time employees must be available to part-timers.
To set up a QSEHRA, a company should meet with a qualified plan administrator and a certified public accountant (CPA). The CPA can assist with any tax-related questions that the small business owner may have and assist in ensuring that the QSEHRA is the best option for the type of business that the owner has. The plan administrator can advise the business owner of plan options, rules, and filing requirements. The administrator can also set up the formal plan documents to ensure that the company complies with Department of Labor and IRS regulations.
Once the plan has been set up, the company can notify its employees of the new benefit. The owner can invite the plan administrator to explain the new benefits and answer any questions that the employees may have about choosing a health plan, qualified medical expenses, and how reimbursement of medical expenses occurs. It is crucial that employees understand that proper receipts must be submitted to the plan administrator to ensure that they receive reimbursement. Otherwise, expenses may be denied, and employees may not realize the full benefit available to them.
To the business owner, QSEHRA expenses for W-2 employees are fully deductible as a business expense up to the annual contribution limit. However, only owners of C-Corporation entities can fully deduct the cost of the plan as a tax-free benefit to themselves. Sole proprietorships and partnerships can realize the tax-free benefits of the plan, but only if they employ a spouse as a regular employee and offer the benefit to them. S-Corporations cannot realize a tax-free benefit of a QSEHRA plan to themselves at all.
QSEHRA’s are an excellent way to improve employee retention and morale. They allow an employee to choose their own insurance plan that fits their needs without having to pay for the plan with after-tax dollars.