Unlock the Power of Employee Healthcare with Qualified Small-Employer Health Reimbursement Arrangement (QSEHRA)

As a small employer (fewer than 50 employees), you are exempt from the requirements of the Affordable Care Act and need not offer your employees medical coverage.

But if you desire to give your employees medical coverage, consider the Qualified Small-Employer Health Reimbursement Arrangement (QSEHRA) as one of four good ways to help your employees with their medical expenses.

In this first article of four on small-business health plans, you will learn how the QSEHRA medical plan benefits both the employer and employees, as well as who qualifies and who doesn’t.

Key Point: The QSEHRA enables an employer to reimburse individually purchased insurance without suffering the $100-a-day-per-employee penalty. This makes the QSEHRA an attractive plan (no penalties and employees buy their own insurance).

Benefits for You, the Business Owner

When deciding on health plans for yourself and your employees, you have a variety of considerations depending on how you conduct your business.

Sole Proprietors and Single-Member LLCs

Schedule C Taxpayers With No Employees: If you operate as a self-employed individual or as a single-member LLC, you file your business income and expenses on Schedule C of your Form 1040.

You, the owner, are not an employee of your Schedule C business. But you, the owner, might qualify to deduct self-employed health insurance on your Form 1040. Your other medical expenses are itemized deductions.

Schedule C Business, Spouse is the Only Employee: If you operate a Schedule C business and your spouse is your only employee, your best and a really good choice for a medical plan is the 105-HRA that we describe in Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement).

Schedule C Business With Employees: The QSEHRA described in this article is a good choice for the Schedule C business with employees because the law limits your exposure to high medical costs.

Key Point: If you employ your spouse and other employees, your spouse could enroll in a family-coverage QSEHRA and use that to cover you and your family. But since the law limits the benefits, you are likely better off claiming your health insurance as a self-employed health insurance deduction.

S Corporation

Shareholder-employees who own more than 2 percent of the S corporation are not employees for purposes of the QSEHRA. The same applies to spouses and family members. But the QSEHRA works well for rank-and-file employees.

For the treatment of the S corporation owner apart from the treatment of employees, see 2023 Health Insurance for S Corporation Owners: An Update.

Partnership

Spouse is the Only Employee of the Partnership. With the spouse as the sole employee of the partnership, your best and a really good choice is the 105-HRA.

Partners. For the partner, the self-employed health insurance deduction on page 1 of your Form 1040 is the only choice for your health insurance deduction. Your other medical expenses are itemized deductions.

To make this Form 1040 deduction a possibility, you need the partnership to pay for or reimburse the cost of the partner’s health insurance and then you can treat the cost of the health insurance as a guaranteed payment. The guaranteed payment treatment for the health insurance of the partner models that of the S corporation, so follow the basics as you see them in 2023 Health Insurance for S Corporation Owners: An Update.

C Corporation

  • If you operate your business as a C corporation and you, the owner, are the only employee, use the 105-HRA for maximum benefits. For how you benefit with this plan.
  • If you operate your business as a C corporation and you are an owner-employee with other employees, the QSEHRA is a good plan for your employees. But with an employee plan, your
    benefits will match only what you give your employees.

QSEHRA Basics

Eligible Employer. To be an eligible employer, you must have fewer than 50 eligible employees and not offer group health or a flexible spending arrangement to any employee. For the QSEHRA, group health includes excepted benefit plans such as vision and dental, so don’t offer them either.

Key Point: If you want the QSEHRA, group health is out.

Eligible Employees. All employees are eligible employees, but the QSEHRA may exclude

  • Employees who have not completed 90 days of service with the employer,
  • Employees who have not attained age 25 before the beginning of the plan year,
  • Part-time or seasonal employees,
  • Employees covered by a collective bargaining agreement if health benefits were the subject of good-faith bargaining, and
  • Employees who are non-resident aliens with no earned income from sources within the United
    States.

Dollar Limits. Tax law indexes the dollar limits for inflation. The 2023 limits are $5,850 for self-only coverage and $11,800 for family coverage. For part-year coverage, you prorate the limit to reflect the number of months the QSEHRA covers the individual.

In the case of an individual who is not covered by a QSEHRA for the entire year, IRC Section 9831(d)(2)(D)(i) requires the employer to prorate the statutory dollar limits to reflect the number of months that the individual is covered by the QSEHRA.

Written Notice. The tax code requires the eligible employer to furnish written notice to each eligible employee at least 90 days before the beginning of each year or, for an employee who is not eligible to participate at the beginning of the year, the date on which the employee is first eligible to participate in the QSEHRA.

Minimum Essential Coverage. The QSEHRA may reimburse the employee for qualified medical expenses only after the eligible employee provides proof of minimum essential coverage.

W-2 Rule. You report the amount that the eligible employee is entitled to receive from the QSEHRA for the calendar year in box 12 of Form W-2 using code FF, without regard to the amount of the payments or reimbursements actually received. (Weird, but true—you report the “entitled” amount, not the amount paid.)

Penalties

If you fail to provide the written notice as required above, your penalty is not severe. It’s $50 per employee up to a maximum of $2,500 per calendar year, per eligible employee.

But Hereʼs a Whopper. If an arrangement fails to qualify as a QSEHRA because one or more of the requirements to be a QSEHRA are not satisfied, the arrangement is a group health plan where violations such as reimbursing individually purchased insurance are subject to the Section 4980D excise tax of $100 a day per employee.

Warning. If you fail to adhere to the QSEHRA rules, you will face the $100-a-day penalty because your QSEHRA follows the legislative design to require individually purchased insurance as a condition for reimbursement.

The QSEHRA fails and becomes a group health plan if

  • It is not provided by an eligible employer (such as an employer that offers another group health plan to its employees),
  • It is not provided on the same terms to all eligible employees,
  • It reimburses medical expenses without first requiring proof of minimum essential coverage, or
  • It provides a permitted benefit in excess of the statutory dollar limits.

The QSEHRA failures above do not trigger taxable income to the employee for properly substantiated medical expenses.

But if the arrangement reimburses employees for expenses that (a) have not been substantiated, (b) are reimbursed in advance of substantiation, or (c) are not medical expenses, then the arrangement is neither a QSEHRA nor a group health plan, and all amounts paid under the arrangement are included in every employee’s gross income and wages.

And, of course, this arrangement triggers exposure to the $100-a-day penalty for reimbursing individually purchased insurance.

Mistakes

Don’t make mistakes.

If your QSEHRA mistakenly reimburses an eligible employee for a medical expense that has not been substantiated, the arrangement fails to satisfy the requirements for the payments to be excluded from the employee’s income, and all payments to all employees under the arrangement, substantiated and unsubstantiated, on or after the date the mistaken reimbursement was made, become taxable.

But if an employee timely substantiates or repays an unsubstantiated amount with after-tax funds, the QSEHRA will not be treated as failing to satisfy the substantiation requirements.

Pay the Patient-Centered Outcomes Research Institute (PCORI)

Your 2023 calendar-year QSEHRA is subject to the Patient-Centered Outcomes Research Institute fee.

Takeaways

If you want to help your employees with their medical insurance costs, the QSEHRA is a good option because it gives you control over your costs, and allows you to reimburse individually purchased health insurance without fear of the $100-a-day penalty.

To keep your life easy, use the 2023 dollar limits as your maximums. If you want lower maximums, simply apply the same percentage to both the individual and the family limits, such as 70 percent, 80 percent, or any other percentage.


The Qualified Small-Employer Health Reimbursement Arrangement (QSEHRA) presents an exciting opportunity for small employers to provide excellent medical coverage for their employees while navigating the complexities of the Affordable Care Act with ease.

At Morris + D’Angelo, we believe in empowering businesses to thrive financially while complying with tax regulations. You now have the start of some knowledge and tools to make an informed decision that will enhance your employees’ lives and bolster your business.

Don’t let complex tax laws hold you back from providing top-notch medical coverage and prioritizing your team’s health. Embrace QSEHRA and unlock a brighter future for your business today! – contact us at Morris + D’Angelo to learn how we can support your financial success! This is our Expertise!


Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo


Daniel Morris
Daniel frequently provides Media Content via Workshops, Podcasts, and Printed Articles on topics like Bitcoin and Cryptocurrency, Wealth Preservation and Planning, Global Banking, and many other high-level financial topics that serve and demonstrate the Value of our Global Network that should be of interest to those who need Private High-Wealth Services.

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