Tax-Free Health Benefits: A Closer Look at QSEHRA for Small Businesses

For some small businesses, offering competitive health insurance coverage is too costly, yet they want to give their employees health benefits that are effective. A Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA, is a valuable option to help with small business health benefits, and it provides tax savings and greater healthcare control for both employers and employees. Here’s a closer look at how these tax-free health benefits work.

Tax-Free Health Benefits A Closer Look at QSEHRA for Small Businesses

What is a QSEHRA?

When small businesses choose not to sponsor a group health insurance plan, or if they do offer insurance but exclude some benefits like vision or dental coverage, they can use a QSEHRA to reimburse employees for qualified medical expenses. This benefits the employee because it provides reimbursement for these expensive healthcare services, and it benefits the employer because the reimbursements are tax-free. It also benefits the employer by making their company look more appealing with a more robust benefits package.

How Does a QSEHRA Work?

To use a QSEHRA, a small business must offer minimum essential coverage to its employees as defined by the Affordable Care Act. Also, the company must have less than 50 full-time employees. If those two qualifications are met, then the employer can set up the QSEHRA.

Under this structure, the employee will submit qualified medical expenses with the correct documentation to their employer. The employer uses tax-free money to reimburse up to a set annual limit. Thus, the employee can get these medical procedures done, and the employer can get a tax break without the high cost of a full coverage plan.

Advantages of a QSEHRA

For small businesses, the cost of full coverage insurance may be unattainable. Yet they need to give a solid benefits package to their team members in order to attract good talent; QSEHRA plans allow this.

These plans also empower employees to choose the health policy that best fits their needs. They also have better access to healthcare coverage because they can get reimbursement for services that normally wouldn’t be covered under a basic plan. Employers can pair QSEHRA with employer-sponsored premium reimbursement to pay some or all of their premiums for the plan they select.

Since QSEHRA reimbursements are tax-free, both the employer and the employee benefit from tax breaks under this structure.

QSEHRA plans have no minimum contribution requirements or participation limits, so this means employers can offer these benefits to their employees even if they have small budgets. In addition, having a small number of employees doesn’t matter since there are no participation limits or requirements. The only rule is that the employer cannot exceed the maximum contribution requirements.

Finally, employers have the option to set monthly caps on the reimbursement. This gives them control over their healthcare benefit costs. It also allows employers to only pay when the employee has an expense, keeping more money in the employer’s control.

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QSEHRA Compliance and Regulations

In order to use the tax benefits of a QSEHRA, employers must comply with all regulations surrounding these plans, which include:

  • Employers set reimbursement amounts but must follow IRS maximums. There are no IRS minimum amounts. Any money in the QSEHRA that is not used for qualified medical expenses rolls over to the next tax year.
  • All eligible employees receive the same terms and conditions, which means all qualified medical expenses are reimbursed in the same way for all categories of employees.
  • Employers must provide written notices at least 90 days prior to each new year to ensure employees understand how to use the QSEHRA program.
  • Minimum health insurance coverage is properly verified.
  • All reimbursements are reported under the employee’s W-2.

How to Implement a QSEHRA

If a QSEHRA seems like a good fit for your business and employees, here are the steps to get started:

1. Define the Benefit

You get to design the QSEHRA so that it fits your employees. Decide how much money you want to offer for your monthly allowance and what types of services you wish to offer under this plan. Determine if full-time and part-time employees will get it or just the full-time employees.

2. Let Employees Make Healthcare Purchases

Allow the employees to purchase healthcare services and premiums based on how you set up the benefit. Check IRS Publication 502 to see what can be included.

3. Collect Proof of Expenses

Employees must submit documentation showing proof of their health insurance coverage and proof of payment for the service they had. The invoice or receipt from the healthcare provider or an explanation of benefits from an insurance provider usually fulfills this requirement.

4. Reimburse the Expenses

Employers review the expenses and, if it qualifies under the terms of their QSEHRA, they approve the request. They can also reject it if it does not fulfill the requirements. This reimbursement typically comes through payroll.

This process can be confusing for employees, so take time to educate them about the program and how to use it. Consider choosing a third-party administrator to handle the paperwork and compliance issues, such as Workforce PayHub. Finally, make sure you document everything in accordance with IRS regulations so you are fully legally compliant.

A QSEHRA is a great option for small business owners and their employees for tax-free employee healthcare benefits with flexibility. If you’re interested in learning more, reach out to Workforce PayHub for our benefits administration expertise.


Eric Jones
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