QSEHRA: The Small Business Health Plan Nobody Knows About

Small practices often have a lot of trouble competing for employees with large corporate entities, often because employee benefits are so expensive. Group health insurance can be especially expensive if you have even one employee in bad health or over a certain age in an otherwise young and healthy group of employees. Then, you have the problem that some employees are covered by their spouse’s plan and don’t even get to participate in that particular benefit. Sure, you can offer them a higher wage to make up for it, but then if another employee with more experience finds out, you’re likely to have a problem. So, what can you do?

Congress added a new tool to the business owner’s toolbox in 2017. While there were some knots to unravel in the beginning, I can report that, after almost two years, Qualified Small Employer Health Reimbursement Arrangements (or QSEHRAs) are gaining ground and have proved to be very valuable for both small business owners and employees.

What is a QSEHRA? A QSEHRA is a reimbursement arrangement under which employers with less than 50 full-time employees can reimburse employees for healthcare costs on a tax-free basis. There are very few restrictions to reimbursements, either. Employers can reimburse primary health insurance premiums, insurance costs to be on their spouses’ plans, and even Medicare premiums.

What are the requirements? The design of QSEHRAs is really quite simple. They can be used by employers who do not maintain a group health insurance plan and have at least 3 and fewer than 50 employees. Employees must be covered by an outside insurance plan providing Minimum Essential Coverage (“MEC”) as defined by IRS Section 106(g). The plan can be individual or through a spouse or parent. MEC plans include Medicare and Medicaid plans but not faith-based ministry cost-sharing plans.

Eligible health expenses include

  • Insurance premiums, including the premiums of employees on their spouses’ or parents’ group plans and Medicare and
  • Any eligible medical expenses listed in IRS Publication 502.

Employees must submit claims for eligible health expenses for reimbursement. The employer can contract through an outside service for administration or DIY. Of course, you’ll have to navigate privacy requirements if you DIY. If you choose to reimburse insurance premiums only, that shouldn’t be a problem. So, you may be thinking – I have a choice?

Yes, the requirements for these plans are quite flexible (refreshing, isn’t it?) You can choose:

  • How much to reimburse per employee annually. In 2019, employers can reimburse $5,050 for singles and $10,250 for families. There are no minimum reimbursement limits.
  • The structure of your reimbursement plan. This can be on a per-employee basis (same for every employee or a maximum based upon “single” or “family”), per family size basis (different rates based upon employee’s dependents) or based on employee age.
  • What to reimburse. In other words, you can reimburse health insurance premiums only (including vision and dental) or insurance premiums and medical expenses. Note that if you reimburse employees for the withholding for coverage on spousal plans, the reimbursement will be taxable if the spouse’s withholding is made on a pre-tax basis.

If the owners are employees of the business, they can also participate in the QSEHRA. Essentially, this means that your business would have to be incorporated.

Advisors strongly recommend that you do not try to administer a QSEHRA in house. Not only can it be a logistical nightmare to track and report employees’ health insurance and medical costs it would violate privacy rules. Nobody knows this better than healthcare professionals! If you’re interested in setting up a QSEHRA, the next step is to contact your payroll provider and CPA for help in starting. If you do not already have these resources, Take Command Health is the only business I’ve found so far that appears to specialize in this area. (This is not an endorsement nor do I have any financial relationship with this company.)

Should You Buy Long-Term Care Insurance (LTCI)?

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