While some businesses may be adding health stipends to employee paychecks, this is not the most tax efficient way to offer health benefits.
The new benefit employers are asking about is the small business HRA known as a Qualified Small Employer Health Reimbursement Account (QSEHRA), created in December 2016 as part of the 21st Century Cures Act. QSEHRA allows employers to reimburse their employees tax-free for health insurance premiums and eligible medical expenses.
Employers love the ease of use and flexibility QSEHRA provides them and with no minimum contribution amounts, employers are able to offer a benefit that fits their budget. The IRS has set maximum contribution amounts for 2018 as $5,050 for single employees and $10,250 for employees with dependents and the rates are expected to rise each year to adjust for inflation.
Below are three key questions to ask your client before suggesting they adopt a QSEHRA plan:
1. How many full-time employees does the business have?
QSEHRA is available to small employers, including nonprofits and startups, with fewer than 50 full-time employees. The benefit needs to be offered to all full-time employees, but employers do have the option of excluding part-time and seasonal employees, employees under age 26, or employees on a spouse’s group plan. Depending on how the company is established the owner may or may not be able to participate in the plan. As a general rule of thumb, owners are eligible to participate in QSEHRA if they are considered a W-2 earning employee.
2. Is the employer already reimbursing through a health stipend?
If the employer is already reimbursing their employees through a health stipend by increasing salaries they will definitely want to consider switching over to QSEHRA. Reallocating the health stipend to QSEHRA saves both the employer and the employee money on taxes. In addition, QSEHRA is also tax deductible for employers.
Consider the following scenario: One client is currently providing a $300/month health stipend to 10 employees by increasing salaries. The total reimbursement each month is $3,000. By moving the health benefit to QSEHRA the employees have more money to spend on health insurance and medical expenses and the employer saves on payroll tax.
Since QSEHRA reimburses employees after expenses have been submitted, employers can rest assured that the benefit funds are being spent as intended on health insurance and medical expenses.
3. Do the employees qualify for tax credits?
QSEHRA is designed to work specifically with the individual plans purchased from the health insurance marketplace and any tax credits the employee may receive for their plan. Employers and employees need to be aware that any tax credit the employee receives will be reduced dollar for dollar by the offered QSEHRA benefit. That means depending on the size of the tax credit, the employer may be replacing the federal governments tax subsidy. It is important to note employees are not able to “opt out” of QSEHRA to avoid losing their tax credits. At the end of the year, the amount of the QSEHRA benefit offered to employees is reported on their W-2 (not as taxable income).
Employers wanting to adopt QSEHRA for their business will have to consider the number of employees receiving tax credits and the size of the tax credits. If tax credits are small or only for a few employees, pre-tax savings of QSEHRA will outweigh lost credits. However, if the tax credits are larger than the planned offered benefit from QSEHRA then the employer will want to seek a different avenue for benefits.
Example: Frank is an employee at an Orthodontist’s office and is eligible for $500/month premium tax credit from healthcare.gov. Frank’s company offers him $300/month through QSEHRA. Healthcare.gov will reduce Frank’s tax credit by $300, and offer him a $200 credit. He still has $500 to shop with ($300 from QSEHRA + $200 from tax credit). In this scenario the company may want to reconsider offering the QSEHRA benefit, especially if Frank is the only employee, or if other employees also have tax credits larger than the offered benefit.
If you have determined if QSEHRA is a good fit for your client, you can help guide them through the steps of determining the budget and establishing the plan. QSEHRA can be set up to start at any time of the year, especially if the small business is not currently offering a group plan. If they do have a group plan in place they will need to cancel the plan and give proper notice before QSEHRA can commence.