In today’s cost-conscious healthcare environment, small businesses have several tools they can use to manage the cost of providing employees with a healthcare plan. One of the most effective is a Health Reimbursement Arrangement, or HRA.
Not only do HRAs enable employers to use tax-deductible funding to help employees pay for healthcare expenses, they also encourage employees to use their medical benefits in a more judicious manner by making them more aware of the true cost of medical services. With a finite amount of healthcare dollars available, employees have to consider their spending in order to maximize this benefit.
Along with the HRA is the QSEHRA, or Qualified Small Employer HRA. In December 2016, the passage of the 21st Century Cures Act lifted restrictions on certain small employers to offer HRAs. Now the time is better than ever for small businesses to consider adopting these types of accounts.
How QSEHRAs Work
At the beginning of the year, the employer sets aside money in a special account for each employee. Employees then draw upon the money (tax-free) throughout the year to pay for documented medical expenses – including healthcare premiums. By law, only the employer may deposit money into the account; the maximum annual contribution is $4,950 for employees with individual coverage, and $10,000 for those with family coverage.
Multiple Benefits to Employers
To offer a QSEHRA, the business must employ fewer than 50 full-time-equivalent (FTE) employees, and cannot provide a group health plan for any of its workers. For employers who qualify, QSEHRAs offer a cost-effective tool for controlling healthcare plan costs while providing a valuable employee benefit. Employer benefits include:
- QSEHRAs can reduce premiums for high deductible medical plans
- All reimbursed funds are exempt from payroll and Social Security taxes
- Employers have full control over plan setup, including eligible medical expenses, and funding and reimbursement options
- QSEHRAs encourage employees to use their benefit funds conservatively, potentially reducing the company’s future medical trend and claims experience
- These accounts offer an attractive recruiting and employee retention tool
- Due to QSEHRA requirements, employers are exempt from offering COBRA coverage and complying with some ERISA rules
Benefits to Employees
Employees have a lot to gain from participating in a QSEHRA. In addition to traditional medical expenses like copays and deductibles, QSEHRA funds can be used to pay for allowable Internal Revenue Code (IRC) Section 213 expenses such as chiropractic care, laser eye surgery, fertility drugs, and other qualified benefits.
Best of all, as with a traditional HRA, a QSEHRA costs the employee nothing; the account is fully funded by the employer, who may not deduct any money from an employee’s salary. And if the employer includes it in the plan, employees can roll over any unused funds at the end of each year.
A Win-Win for All
A QSEHRA makes it easier for small employers and their employees to manage healthcare costs. If you have less than 50 FTE employees and don’t offer a group health plan, you owe it to yourself and your employees to look into this tax-advantaged tool.