QSEHRAs Help Small Employers Solve the Health Care Coverage Puzzle

​As a small marketing agency, Elkhart, Ind.-based Brand Activate carefully considers spending on employee benefits. When the firm wanted to offer its 10 employees health insurance, it found that a group health plan was a nonstarter. The premiums "would have blown employees away because they were so high," said Bhakti Fiori, Brand Activate's controller.

Then Fiori learned about qualified small-employer health reimbursement arrangements (QSEHRAs).

With QSEHRAs, small employers—those with fewer than 50 full-time or equivalent employees—can give their workers money tax-free to purchase individual health policies, which is not allowed with a traditional HRA or health savings account (HSA). The coverage can be purchased on an Affordable Care Act (ACA) exchange or through an insurance broker. As with a regular HRA or an HSA, QSEHRA funds can be used for out-of-pocket medical costs, and they can also be used to pay all or part of the plan premiums.

"Our employee population is on the younger side, and they like having the flexibility of purchasing their own insurance," said Fiori. "And they can get it at a better price than what we could have provided as a small business."

How They Work

QSEHRAs first became available in 2017 after the enactment of the 21st Century Cures Act. The arrangements must:

• Be funded entirely by the employer. For 2020, tax-free reimbursements are capped at $5,250 for an individual and $10,600 for family coverage. [Update: For 2021, reimbursements are capped at $5,300 for individual and $10,700 for family coverage.]
  

• Offer equal contributions and terms for all eligible employees.
  

• Reimburse allowable medical expenses as defined by the IRS for employees and eligible family members.

Like traditional HRAs and unlike HSAs, QSEHRA funds are not set aside in a specific account for employees, and unused amounts do not roll over for future use. Instead, a QSEHRA represents a promise by the employer to provide a specific amount of tax-free funds to reimburse the employee for eligible health care expenses incurred during a calendar year. Any unused QSEHRA funds revert to the employer.

As employees accrue QSEHRA funds throughout the year, they can choose to request reimbursement at regular intervals—for example, after they pay their monthly health insurance premium. They can also request reimbursement all at once from their accrued funds.

Employees have three months after the end of the calendar year to submit expenses for reimbursement, so they can submit the prior year's expenses for reimbursement until March 31, 2020.

Small-Employer Support

For many small employers, QSEHRAs are a welcomed alternative to group coverage, which can present many compliance challenges, or to not providing health care assistance at all. While 98 percent of large firms offer health benefits to their employees, only 56 percent of smaller firms do so, according to the Kaiser Family Foundation's 2018 Employer Health Benefits Survey, conducted last year among 4,070 randomly selected employers.

Because smaller employers often have difficulty finding affordable group health plans, premiums for group coverage may be more expensive than the plans employees can find on their own through the ACA's marketplace exchanges. Also, those using a QSEHRA to buy an exchange policy may be eligible for a government tax credit or subsidy, although it would be reduced by the amount of the QSEHRA benefit.

QSEHRAs can help smaller employers overcome employee resistance to paying for a health plan selected by the employer. Seattle-based Sugar Plum, a salon with 37 employees throughout its corporate office and five studios, received a decidedly mixed response when it began exploring whether to offer health insurance. "Employees' need for coverage varies based on their circumstances," said Jessica Muller, the company's corporate office director. "No one option worked for everyone, so the company faced the prospect of spending money for a benefit some employees would never use."

[SHRM members-only toolkit: Managing Health Care Costs]

Managing Cash Flow

Employers choose how much to contribute to a QSEHRA, and employees choose individual coverage based, in part, on how much of the premium they'll have to pay themselves.

QSEHRA provider PeopleKeep reports that among its clients—1,387 businesses that collectively employ 8,290 eligible employees—average monthly contributions last year were as follows:

These contribution levels fall below the annual reimbursement cap, which would be a considerable outlay for many small employers. While average contributions are less than the typical monthly premiums for coverage through an ACA exchange, they can help employees buy previously unaffordable plans, especially if employees qualify for a tax credit or subsidy.

Employees use an average of 78 percent of their total contributions each year, while one-third of employees spend all of their QSEHRA dollars, according to PeopleKeep's data. Not all eligible employees use their QSEHRA funds for health insurance premiums, as they may have coverage elsewhere, such as through a spouse's plan. Instead, they may use available funds for out-of-pocket costs such as deductibles and co-pays, and for services not covered by their health insurance, such as vision and dental care.

"We have to pay claims as they come in, so it is important to keep track of potential outlay," Muller said. Employers with irregular cash flows may want to establish a separate bank account for the funds necessary to meet their QSEHRA obligations in case multiple claims come in at the same time, she suggested.

Even employers with robust cash flows should carefully budget and manage these obligations to avoid any problems or a potential cash flow crunch. This is especially true for those employers, like Brand Activate, that make 100 percent of QSEHRA funds available to employees at the beginning of the year. Sugar Plum, like many other employers, makes its QSEHRA contributions available in equal monthly amounts of $200 per employee.

Large Employers Wait Their Turn

Last fall, federal agencies issued proposed regulations that would allow employers with 50 or more full-time employees or equivalents to offer health coverage through a new premium-reimbursement HRA. If finalized, the regulations would be effective for plan years beginning Jan. 1, 2020.

"HRA expansion is the spark that could ignite a 401(k)-like defined contribution model for employer-based health coverage in the U.S.," said Shandon Fowler, founder and principal of benefits consultancy Four8 Insights in Charleston, S.C. "There are thousands of employers with hourly workforces that would gladly exchange administering an HRA for all of the work that goes into administering a health plan for their employees."

[Update: In June 2019, federal agencies issued a final rule allowing employers of all sizes that do not offer a group coverage plan to fund individual coverage HRA (ICHRA)s for their employees. The rules for QSEHRAs and ICHRAs differ. For example, while QSEHRAs participants can qualify for both their employer's subsidy and the difference between that amount and any premium tax credit for which they're eligible through an ACA exchange, ICHRA participants can't receive any premium tax credit/subsidy for exchange-based coverage if ICHRA funding meets the ACA's affordability threshold.]

Joanne Sammer is a New Jersey-based business and financial writer.

Related SHRM Articles:

Employers' Interest in Individual Coverage HRAs Is Rising, SHRM Online, November 2020

New Final Rule Lets Employees Use HRAs to Buy Health Insurance, SHRM Online, June 2019

Will Allowing HRAs for Plan Premiums Be a Game-Changer?, SHRM Online, June 2019

Health Care Consumerism: HSAs and HRAs, SHRM Online, updated September 2018

Small Employers Cut Health Care Costs Using Stand-Alone HRAs, SHRM Online, April 2018