The Small Business HRA

As some readers know, I’m a market researcher doing a transition to a second life in health insurance. It’s not the most profitable line of insurance, but I really enjoy helping people. That’s what makes me feel  good. And as my grandfather said, do something well or don’t do it.

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For most purposes, a “small business” is anything with 50 or fewer full time employees or FTEs.  If you have one of those, you have a great opportunity to offer health insurance benefits without breaking the bank. The HRA is one option; the hybrid self-insured approach is another. Either can be significantly less costly than traditional group insurance, although neither is a universal solution.

I’m not wedded to a particular type of insurance. A good advisor should listen to you, research the options that are best solutions for your needs, and present the options to you with both their pros and cons. Nothing’s perfect, and one-size-fits-all is a myth.

What’s essential is that you know the choices available to you. Both the costs and benefits of some of the options may be quite different than what you expect.

I found the following blog article from Zane Benefits. It’s a good review of the HRA and how it works. Some of the terminology is arcane (thank you, Congress!).  If you find things you don’t understand, talk with me.

A big thank you to Caitlin for permission to repost this.

How the QSEHRA Works for Employees Without Minimum Essential Coverage

When Congress passed the 21st Century Cures Act in December 2016, it created a new health plan for small businesses—the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), or Small Business HRA.How the QSEHRA Works for Employees Without Minimum Essential Coverage

Under a QSEHRA, businesses with fewer than 50 full-time employees can reimburse their staff for individual insurance premiums and qualified out-of-pocket medical expenses. The business sets a monthly allowance for employees, verifies and approves employee expenses, and then reimburses them from that allowance.

QSEHRAs are administered on a tax-free basis for small businesses. Employees are also spared from income tax—provided they’re covered by an insurance policy with minimum essential coverage (MEC).

Hundreds of small businesses across the country have already found relief through the QSEHRA, both from the cost and administration time associated with group health insurance and from the damage of not offering health benefits at all.

However, what businesses may not realize is that even employees without MEC can benefit from the QSEHRA.

In this article, we’ll walk you through what the 21st Century Cures Act says about QSEHRA participation and MEC requirements, how your uninsured employees can access the benefit, and how to compliantly administer the plan for both insured and uninsured employees.

QSEHRA Employee Eligibility Requirements

Title 18 of the 21st Century Cures Act outlines QSEHRA eligibility requirements for individuals. Generally, eligibility for the benefit is quite broad; a person simply needs to work for—or be the spouse or dependent of someone who works for—a qualified small business offering a QSEHRA.

However, small businesses can exclude employees who fall into any of the following categories:

  • Part-time and seasonal employees
  • Employees who have not completed 90 days of service
  • Employees younger than 25
  • Union employees (unless the relevant collective bargaining agreement provides for eligibility)
  • Nonresident aliens with no U.S. source income

Beyond that, employees are eligible for the QSEHRA “after the employee provides proof of coverage for the payment of, or reimbursement of … expenses for medical care.”

In this context, “proof of coverage” means proof that the employee incurred an expense covered by the QSEHRA. This means that any employee who meets the above requirements and submits proof of an eligible expense qualifies for the QSEHRA benefit—regardless of whether they have MEC.

Where MEC does matter is in determining how the benefit will be taxed.

Accessing Tax-Free Benefits

One of the advantages of a QSEHRA is its tax-free status for both small businesses and employees. Businesses administering a QSEHRA won’t be subject to payroll taxes for the reimbursements they issue employees, and employees won’t have to pay income or payroll tax on the reimbursements they receive.

Small businesses will receive these tax advantages regardless of the coverage status of their employees.

Employees, however, must have MEC if they want to receive tax-free reimbursement. Without MEC, any reimbursements received through the QSEHRA may be considered taxable and includable in the employee’s gross income.

Receiving Value from the QSEHRA Without MEC

Even without some of the QSEHRA’s tax advantages, employees without MEC can receive value from the benefit.

The QSEHRA allowance helps uninsured employees or those on cost-sharing plans like Medi-Share pay for a variety of medical expenses. Physical exams, prescription and nonprescription drugs, and premiums for dental and vision policies are all eligible for reimbursement under the QSEHRA, along with many other expenses.

While employees without MEC must pay some tax on these reimbursements, the up-front benefit from their employer significantly defrays the cost of their health needs.

And, when employees do gain MEC, they’ll be able to slip seamlessly into the tax-advantaged benefit.

Administering the QSEHRA for Employees Without MEC

Small businesses offering a QSEHRA must make employees aware of the potential tax consequences of going uninsured.

Title 18, Section 4(A) of the 21st Century Cures Act requires small businesses to notify employees of the QSEHRA benefit each year. In addition to informing employees of the amount of their benefit and explaining how it affects premium tax credits, the notice must explain that employees could be subject to a tax penalty if they fail to maintain MEC during the year.

The notice must also explain that any reimbursements made through the QSEHRA while the employee isn’t covered under MEC may be includable in the employee’s gross income.

Small businesses are under no legal requirement to track employees’ tax liability for QSEHRA benefits.

Conclusion

The QSEHRA is the only formal small business health plan that offers an immediate benefit to uninsured employees. And, unlike simply grossing up employee wages, the QSEHRA gives businesses the peace of mind that comes with knowing their funds are being spent on employees’ health needs.

Employees without MEC can still access their allowance, and, because of the tax advantages enjoyed by those with MEC, the QSEHRA provides incentive for all employees to purchase full coverage.


Sources:  https://www.zanebenefits.com/blog/how-the-qsehra-works-for-employees-without-minimum-essential-coverage#0001.0001.0000.0000.0000.0000.0000.0000.0000.0000