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Oftentimes, startups and scaling business owners struggle with choosing which benefits to offer to their employees.  Most business owners would offer every benefit if they could afford it, but there are often financial constraints.

Over the past decade, health insurance costs have soared while certain states now have mandates requiring health insurance.  Further, for the smallest companies, the cost of insurance that could be offered to employees often is not attractive.  

However, one alternative we have found beneficial is the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) which came into law back in 2017.

In this article, we will explore the benefits, eligibility criteria, and setup process of QSEHRA, providing you with the knowledge to enhance employee benefits and also maximize tax efficiency within your business.

What is a QSEHRA?

A QSEHRA is a health reimbursement plan designed specifically for small businesses and non-profit organizations with fewer than 50 full-time employees. It allows employers to set aside a fixed, pre-tax amount of money each month for employees to use towards purchasing individual health insurance or covering medical expenses.  

Annually, the IRS publishes the QSEHRA caps for single taxpayers and families.  The current reimbursement caps are $513 and $1038 per month respectively.  

Given the flexibility of the plan design, this strategy offers an efficient and flexible alternative to traditional group health insurance plans, enabling employees to choose the coverage that best suits their needs.

What are the benefits of QSEHRA?

QSEHRA for tax optimization

By offering a QSEHRA, employers can benefit from tax advantages since contributions made to the arrangement are deductible and reimbursements are also excluded from payroll taxes. On the employee side, the cash they receive towards their health insurance (or out-of-pocket costs) is 100% tax-free.  

HSEHRA for flexibility & customizable allowances

Employers can tailor monthly reimbursement allowances based on factors like employee status (full-time/part-time) and family size. 

For instance, a small business owner can offer higher reimbursement allowances to full-time employees with dependents, ensuring a personalized approach to providing health benefits within the organization's budget.

Employers can also choose whether they’d like to reimburse employees for premiums only or add in a clause to reimburse employees for out-of-pocket medical expenses.  For example, if an employee purchases individual health insurance for $200 but also has $300 in monthly out-of-pocket medical expenses, the plan may or may not allow for the $300 to be reimbursed (up to the IRS limit).  This allows for some cost control measures for the employer. 

Lastly, small businesses can also select a flat amount for all employees and reimburse that.  If an employer had a tight budget but still wanted to help their team, they could reimburse a flat $200/mo (as an example) to their team under a QSEHRA.   

In all circumstances, the reimbursements must go towards eligible expenses and employees are responsible for providing documentation as this is an accountable plan arrangement. 

QSEHRA for employee satisfaction

QSEHRA plan gives employees the freedom to choose individual health insurance plans that suit them best, rather than being restricted to a single group plan.  Most small businesses cannot afford “cadillac” plans and employees are often frustrated with the insurance that can be offered.

With the QSEHRA, this flexibility can boost employee satisfaction and retention rates.  This plan is still too “new” to examine raw data, but anecdotally many of our clients have received positive feedback from their employees.   

What are the eligibility criteria for QSEHRA?

QSEHRA eligibility for employers

Small businesses and non-profit organizations with fewer than 50 full-time employees can offer a QSEHRA if they do not currently provide a group health insurance plan, flexible spending account (FSA), or similar benefits like dental or vision coverage.  

We always recommend that employers receive a few quotes for group health and then compare them to the maximum exposure if all employees were to join a QSEHRA up to the cap.  

QSEHRA eligibility for employees

All full-time employees are automatically eligible for QSEHRA benefits, while part-time employees may be included at the employer's discretion. Some exclusions may apply to seasonal workers, employees under 25 years old, and those with less than 90 days of employment.

Remember, QSEHRA plans by design are flexible.  We always recommend an employer works with a plan specialist, CPA or attorney to design the plan to their specific needs.  

How do you set up a QSEHRA?

  1. Determine reimbursement allowances: Employers should decide on monthly reimbursement amounts for employees (or use the IRS max), ensuring consistency among employees with similar status and family size. 
  2. Establish legal plan documents: Create legal plan documents outlining QSEHRA terms and conditions, including reimbursement allowances, eligible expenses, and employee eligibility criteria. The written plan is required by the IRS but also ensures clarity and compliance with regulatory requirements.  There are services that exist now to monitor your compliance with the plan, including assisting employees with reimbursements.  
  3. Select a start date: Choose a start date for QSEHRA within open enrollment to facilitate smooth transitions to individual health insurance plans for employees. some text. For instance, starting QSEHRA during open enrollment allows employees time and flexibility to shop for an individual plan that suits their needs, without the pressure of having a gap in coverage. 
  1. Annual maintenance and team onboarding: Inform all eligible employees about QSEHRA and provide enrollment information within the required timeframe to avoid penalties.  When new employees are hired, it is important to onboard them to the QSEHRA plan immediately to avoid violating IRS regulations and the plan specifications.  Generally, the plan administrator can assist with qualification questions. 

Benefits of a QSEHRA: Putting it together

QSEHRA plans provide small businesses with a valuable tool for offering tax-free health benefits, possibly enhancing satisfaction and retention, and ease the burden of rising group insurance costs.  

At Anomaly, we have found several of our small business clients have preferred these plans over group insurance, given the design flexibility with today’s ever-changing workforce. We do urge all interested companies to work with a QSEHRA specialist to design the plan and work with your accountant to run the numbers on potential cost savings vs group insurance.

Ramp: a comprehensive expense management platform

Ramp integrates expense tracking, automatic card issuance, and advanced reporting in one intuitive interface.

Ramp simplifies expense approvals and accounting processes, reducing the administrative burden and allowing teams to focus on core business activities. With Ramp, businesses can expect to not only manage but also significantly reduce operational costs, delivering modernized financial management for your organization.

The information provided in this article does not constitute accounting, legal or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.Also needs disclaimer

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Co-CEO, Anomaly
Greg co-founded Anomaly CPA with John Malone, JD to specialize in working with entrepreneurial clients who own startups, high growth small businesses, and real estate investors growing into more complex tax and financial issues. His experience includes advanced tax planning and business advisory for a wide array of individuals, start ups and real estate investors. In 2020, Greg was named a Top 5 National Finalist for the Tax Planner of the Year by the AICTC, from a pool of over 850 qualified Tax Planners from across the US and Greg was named the #1 Tax Strategist in the United States by the AICTC in 2023. Greg was a 2023 and 2022 40 Under 40 and has helped lead Anomaly to the #1186 ranking on Inc5000 list.
Ramp is dedicated to helping businesses of all sizes make informed decisions. We adhere to strict editorial guidelines to ensure that our content meets and maintains our high standards.


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