A new tool for small business owners: Meet the QSEHRA
Small Employers know all too well the pressure they have from employees to offer health benefits. But with too few employees, getting a good rate on a group plan is nearly impossible. This adds to another financial strain for employers from year to year — drastic premium increases. Small employers offering group plans saw an average premium increase of 30% over the last few years. While many small employers are opting to skip the benefits entirely, there is another way they can offer benefits and retain employees.
Qualified Small Employer Health Reimbursement Arrangement is the small business HRA designed specifically for employers with fewer than 50 full-time employees. It was created in December 2016 as part of the 21st Century Cures Act and has slowly been gaining momentum among small businesses and nonprofits.
Small employers love it for its flexibility. By using defined contribution, employers determine a fixed amount they are able to afford for health benefits each year up to the maximum amount set by the IRS. Once the amount is set, employers reimburse employees directly, tax-free, for premiums and medical expenses. The employer is no longer surprised each year by premium increases and they also save precious time by not having to find a group plan for employees. Instead, each employee has the power to choose a plan that will work best for their needs.
For 2018, the IRS has set the annual maximum reimbursement rates at $5,050 per single employee or $10,250 per family. Since there are no minimum contribution rates required to start a QSEHRA, employers really have the freedom to choose a budget that works for them. In addition, the IRS is expected to raise the maximum reimbursement rates each year in keeping with inflation, and employers have the option to adjust the rates as their budget allows.
Setting the budget: Employers have a few options for setting reimbursement rates. The key is that rates have to be offered fairly to all eligible employees. Keep in mind, as your company grows, the allowances you set will be the same for all future employees as well. The most common tried and true methods are as follows:
1. Reimburse all the same amount. This is pretty simple. Just pick a rate up to the individual maximum to give all employees. (Example: all employees get $300/mo.)
2. Reimburse all the maximum amount. Give all employees the maximum amount they are eligible for under the “single” or “family” categories. (Example: for 2018 all single employees would get $420/mo. and all employees with dependents would get $854/mo.)
3. Reimburse different amounts based on family size. Employers can set different rates based on an employee’s dependents. The IRS requires that employers choose a reference plan or offer a fair percentage of the maximum. (Example: Single employees get $200/mo., married employees get $300/mo., and employees with families get $400/mo.)
4. Reimburse different amounts based on employee age. Employers can vary rates by age but they must be tied to a reference plan on the individual market. To save you significant hassle though, most marketplace plans offer premiums in a 1:3 ratio for individuals ages 26 to 64. (Example: You could set reimbursement rates for a 26 year-old $100/mo. and a 64 year-old $300/mo. using the 1:3 ratio. A 37 year-old employee gets whatever amount on the linear line in between the 26 and 64 year-old — Get ready to dust off your old algebra skills! The answer for the 37 year-old in this example is $158/mo.).
While all full-time employees must be offered the QSEHRA benefit, employers can choose to exclude part-time or seasonal employees. Employers also have the option of reimbursing premiums only or premiums plus medical expenses through QSEHRA.
Tax benefits: With QSEHRA, employers can make reimbursements to employees without having to pay payroll taxes and employees don’t have to recognize income tax. In addition, reimbursements made by the company count as a tax deduction. For employers that are currently offering employees a health stipend, changing to QSEHRA will have a huge tax advantage for everyone. By removing the payroll and income tax from the equation (which can be upwards of 30%) the employee has more money to spend on health needs.
Employer Requirements: In order to qualify for QSEHRA, an employer must have fewer than 50 full-time employees and not offer a group health plan. If the employer is currently offering a group plan, it must be canceled before QSEHRA can begin.
Employee Requirements: In order to participate in QSEHRA, employees must have a health insurance plan that meets Minimum Essential Coverage. MEC plans can be purchased through the marketplace or directly from the insurers. Short term plans and sharing ministries do not meet MEC requirements and are not eligible for reimbursement. Once the employee has secured their insurance coverage, they can submit their premium for reimbursements. Eligible medical expenses include copays, prescriptions, and out-of-pocket costs for medical care, including the deductible.
With QSEHRA, in a few simple steps and by making a few decisions, employers of small businesses can offer a valued benefit to employees, without much hassle. When you consider the alternatives — paying high premiums or not offering coverage at all — QSEHRA comes out as a good option to meet employer and employee needs.