How to Start a QSEHRA in Colorado

In today’s competitive job market, retaining top talent is crucial for the success of any business. In this blog you can learn how to setup a QSEHRA to help.

Today’s quality workers expect employers to provide a health plan for all full-time employees. If they don’t get it, the best workers have options, and they tend to quickly move on.

But traditional group health insurance is prohibitively expensive for small employers. And even for those employers that can afford to pay high group insurance premiums, it’s almost impossible to decide on a plan that meets the needs of a diverse workforce.

With health insurance, one size doesn’t fit all.

However, for companies with fewer than 50 full-time employees or the equivalent, there’s a solution:

Offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).

This solution empowers your employees to choose the health insurance plan that suits them best and get reimbursed for premiums and other health expenditures tax-free.

In this guide, we will walk you through how QSEHRAs work, and the steps to start a QSEHRA for your employees.

How do QSEHRAs Work? 

QSEHRAs, or Qualified Small Employer Health Reimbursement Arrangements, are employer-sponsored health care plans that allow small businesses to help their employees pay for health insurance premiums and other qualified medical expenses.

With a QSEHRA, the employer sets up a health reimbursement account (HRA) and contributes money to it.

Employees can then use the money in the HRA to reimburse themselves for their qualified health care expenses. QSEHRAs are a great way for small businesses to provide their employees with access to affordable healthcare coverage on a tax advantaged basis.

Here’s a basic summary of the process:

1. The employer sets up a QSEHRA plan and defines the maximum monthly benefit for each employee. 
2. Rather than use an employee group health insurance plan, employees shop for their own health insurance on the individual and family market. 
3. Once coverage is in place, employees submit documentation of their health insurance premiums and other eligible expenditures to the QSEHRA plan administrator. 
4. Once documentation is verified, the company reimburses the employee in accordance with the QSEHRA plan documents. 
5. Employees use the money in the HRA to reimburse themselves for their qualified health care expenses.
6. Qualified health care expenses eligible for reimbursement can include:

• • Health insurance premiums
  • Copayments
  • Deductibles
  • Prescription drugs
  • Other medical expenses

When you establish a QSEHRA, you will decide what you are willing or able to contribute to your employee’s health care costs, up to an annual maximum that is set by the IRS. You will also decide whether to reimburse just health insurance costs, or to also include other medical expenses.

Your employees will pay their insurance premiums or other eligible health care costs, and then submit proof of payment to be reimbursed by the QSEHRA.

Typically, QSEHRA amounts claimed by employees are paid monthly by their employer.

Reimbursement is tax-free.

If your employee doesn’t submit a claim, then you keep the money, though some companies choose to roll the benefit over from year to year while the employee is still employed by the business. 

Tax Benefits of QSEHRAs

As an employer, everything you contribute to employee QSEHRAs is tax deductible. It’s also exempt from employer payroll taxes.

For employees, benefits under QSEHRAs are tax-free. This also includes payroll taxes.

QSEHRAs vs. Health Care Stipends

The payroll tax exemption makes QSEHRA a much more tax-efficient option than simply offering employees a healthcare stipend to offset their health insurance costs. These would also be tax deductible for the employer. However employers would have to pay payroll taxes on health care stipends.

And health care stipends would be fully taxable to the employee – to include Social Security taxes.

QSEHRA Eligibility

To offer a QSEHRA, your company must meet these three requirements:

• You must have fewer than 50 full-time employees
• You must provide the arrangement on the same terms to all full-time employees (reimbursement amounts may only vary based on age and the number of individuals covered). However, you may exclude seasonal or temporary employees, nonresident aliens, employees under age 25, and collectively bargained employees.
• You must not offer an employee group health plan, like SHOP coverage or a flexible spending account (FSA).

Also, QSEHRAs must be fully employer-funded. There are no employee contributions or payroll deductions to a QSEHRA plan.

Employees must have qualifying coverage to participate in your QSEHRA plan.

Generally, this means they must enroll in an ACA-qualified health plan with minimum essential coverage as defined by the Affordable Care Act.

How To Establish Your QSEHRA

The best way to manage an HRA is to use an HRA administrator. They will charge a small fee per employee, and in exchange will handle the set up and all reimbursements and other administrative procedures. These are the main steps in the process:

1. Decide what expenses you want your QSEHRA to reimburse employees for. In most cases, QSEHRA funds will primarily go to reimburse employees for health insurance premiums. However, employees covered under a spouse’s group policy can also participate in your QSEHRA and use these funds to help with deductibles, copays, and other qualified medical expenses
2. Decide whether you will self-administer your QSEHRA or have a third party administer your plan for you. 
3. Decide who in your organization will be eligible for QSEHRA benefits. At a minimum, you must extend benefits to all full-time W-2 employees. Spouses and children (up to age 26) are also eligible. 
4. Decide your budget. How much can your business afford to contribute monthly? As of 2024, the maximum you can contribute to an individual’s QSEHRA is $512.50 to cover the worker alone, or $1037.50 for a worker with a family. On an annual basis, the 2024 limits are $6,150 and $12,450, respectively. Many businesses drop traditional group health insurance in favor of a QSEHRA, which quickly provides the free cash flow needed to fund QSEHRA contributions.
5. Create your QSEHRA Plan Document. At a minimum, your plan document must include the following information:
   • Named fiduciaries
   • Plan administrators and their respective responsibilities
   • Eligibility requirements
   • Effective dates of participation. You can extend benefits to employees as of the first day of employment, or have a waiting period of up to 90 days. 
   • Benefits included and excluded from the plan. You can design your plan to reimburse employees for qualified health insurance premiums, as well as for any qualified healthcare expenses listed in IRS Publication 502. However, many employers list exemptions here. 
   • How the QSEHRA is funded, and procedures for making payments. Claims procedures must comply with the U.S. Department of Labor regulations
   • Identifications of HIPAA privacy officers 
   • Rules concerning protection and use of personally identifiable health Information
   • Details on how your plan deals with federal mandates, such as the Family Medical Leave Act, USERRA, etc. 
   • Procedures for making changes to the plan
   • Procedures for terminating the plan.
6. Establish a claims procedure. Your claim procedure rules should address each of these criteria:
   • Documentation. Specify acceptable forms of proof for reimbursement, such as receipts, bills, and insurance premium statements.
   • Reimbursement Methods. Decide whether reimbursements will be made via payroll, checks, or direct bank transfers.
   • Processing Timeline. Set a clear timeframe for claims processing and reimbursement, typically within 30 days of submission.
7. Implement a Record-Keeping System. At a minimum, your system should include these important elements:
   • Transaction Logs. Maintain logs of all reimbursement requests and the corresponding proofs of medical expenses.
   • Secure Storage. Use encrypted digital storage solutions to protect sensitive data and comply with privacy laws.
   • Periodic Audits.  Regularly audit the record-keeping system to verify accuracy and compliance with the plan terms and legal requirements.
8. Create a Summary Plan Description. This document is primarily for your employees, explaining the plan to them. If more than 10% of your employees don’t speak or read English, you must provide these documents for them in their own language.
9. Provide employees written notice as soon as they are eligible to participate. For current employees, you must provide this written notification at least 90 days prior to the start of the plan year. You can find information on what you need to include on your written notice here.
10. Ensure that employees know that they must have creditable coverage before they are eligible to receive benefits under your QSEHRA plan. To arrange coverage, they can make an appointment with a ColoHealth Personal Benefits Manager.

QSEHRAs and Affordable Care Act Subsidies

The availability of a QSEHRA can affect an employee’s eligibility for premium tax credit subsidies under the Affordable Care Act (ACA).

Here’s how:

• Reduction or Loss of Premium Tax Credits. If your employee receives a QSEHRA benefit, the amount of premium tax credit subsidies for which they are eligible can be reduced or even eliminated. The exact impact depends on the amount of the QSEHRA benefit compared to the cost of the insurance and the income level of the employee.
• Affordability and Minimum Value Standards. The effect of a QSEHRA on premium tax credits is tied to whether the health coverage purchased by the employee (with the help of QSEHRA funds) meets the ACA’s affordability and minimum value standards. If the health plan, supplemented by the QSEHRA, is considered “affordable” and provides “minimum value,” the employee would not be eligible for premium tax credits. These standards are based on the plan covering at least 60% of the total allowed costs of benefits and the employee’s share of the monthly premium not exceeding a specific percentage of their household income.
• Employee Choice. Employees offered a QSEHRA must choose between using the QSEHRA to reduce their insurance cost directly, or forgoing the QSEHRA entirely in order to claim any available premium tax credit.  An employee cannot use both the full value of the QSEHRA and receive a premium tax credit.

Employees receiving QSEHRA benefits need to carefully consider their options and the implications for their eligibility for other health insurance subsidies like the premium tax credits.

QSEHRAs, HIPAA, and Protecting Employees’ Privacy

When sponsoring a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), employers must ensure the protection of employee privacy and the confidentiality of personal health information (PHI).

Your HRA Administrator will handle all of this, as detailed below:

HIPAA Applicability

Determine HIPAA Status. Not all QSEHRAs are automatically subject to HIPAA. Typically, if the QSEHRA involves the employer receiving detailed medical information (beyond mere proof of premium payments), HIPAA rules may apply.

This is one reason why some employers limit their plans to reimbursing employees for health insurance premiums – it reduces exposure to HIPAA claims.

Employers should consult with legal counsel to determine the extent to which HIPAA applies to their QSEHRA setup.

Implementing Privacy Protections

• Privacy Officer Appointment. Designate a privacy officer responsible for developing and implementing privacy policies and procedures.
• Employee Training. Conduct regular training sessions for all employees who handle PHI. This training should cover the importance of protecting health information, the specific procedures for handling PHI, and the consequences of failing to comply with HIPAA rules.
• Minimum Necessary Standard. Implement policies that ensure employees access only the minimum amount of PHI necessary to perform their job duties.

Developing Secure Administrative Procedures

• Privacy Policies and Procedures. Develop and maintain privacy policies and procedures that comply with HIPAA standards. These should address how PHI is used, disclosed, and protected. Update these policies regularly to reflect changes in law or business operations.
• Secure Handling and Storage of PHI. Ensure that PHI is stored in secure systems with access controls. Use encryption for electronic PHI and secure physical storage for paper records.
• Access Controls. Limit access to PHI to only those employees who need it to perform their job functions. Use secure logins, passwords, and user authentication to control access to electronic information.

Ensuring Compliance with HIPAA Regulations

• Risk Assessment and Management. Regularly conduct risk assessments to identify vulnerabilities in the protection of PHI. Develop risk management policies to address any identified risks.
• Breach Notification Procedures. Establish and implement a breach notification procedure in compliance with HIPAA requirements. This includes notifying affected individuals, the Department of Health and Human Services (HHS), and in some cases, the media, within specific timeframes.
• Business Associate Agreements (BAAs). If third parties (business associates) handle PHI on behalf of the employer, execute BAAs that require these associates to protect the information and notify the employer of any breaches.

Regular Monitoring and Audits

• Compliance Audits. Conduct regular audits to ensure compliance with privacy policies and HIPAA regulations. These audits can help identify and mitigate non-compliance before issues escalate.
• Complaints and Resolution. Implement a process for employees to file complaints regarding the handling of their PHI without fear of retaliation. Ensure timely investigation and resolution of these complaints.
• Documentation of Policies and Training. Keep detailed records of all privacy policies, changes, training sessions, and audits. These documents may be required during compliance reviews or legal proceedings.

By rigorously implementing these measures, you can ensure that your QSEHRA complies with applicable privacy laws and regulations, protecting both your employees’ personal health information and your company from potential legal issues.

Note:

It is also advisable for employers to consult with legal and compliance experts specializing in employee benefits and HIPAA to tailor their privacy practices to their specific circumstances.

QSEHRA Carryover Provisions

If you choose, you can allow employees’ unused QSEHRA eligibility to be carried forward to the next plan year, up to certain limits.

Any carryover amounts will count toward the subsequent year’s annual limit.

If a worker loses his or her minimum essential coverage at any point (e.g., drops his or her health insurance plan), your QSEHRA cannot reimburse the employee’s medical expenses.

If your employee leaves the company, any unused QSEHRA balance goes back to you. The former employee has no claim on it.

Controlling Costs

One advantage to using a QSEHRA rather than a traditional health insurance plan is that it helps insulate employers from outsized health insurance premium increases.

This is because with a QSEHRA, you control how much your business will reimburse employees for health care expenses, including health insurance premiums.

This is important because health insurance in Colorado is expensive. Colorado carriers have a track record of imposing extremely high year-over-year premium increases as high as 19%.

This would impose a severe cash flow shock on many employers, who can’t just raise prices to cover the extra premium.

A QSEHRA allows you to decide how much of any premium increase you are willing to pay, if any.

Meanwhile, QSEHRAs don’t have to be funded in advance. Until you actually reimburse an employee for a qualified medical expense, that money stays in your business, where you can use it as working capital, or for any other purpose you desire.

Furthermore, if business declines or you experience a cash flow crunch, you can adjust your maximum expenditure at any time. Just amend or terminate the plan in accordance with your plan documents on file.

This funding flexibility and the lack of advance fiscal commitment is an important factor in the appeal of QSEHRAs to small business owners. 

Implementing Your Plan

Successful implementation of QSERHAs isn’t difficult. But it does require an ongoing effort to educate employees about the value of the plan, about what medical expenditures are eligible for reimbursement, and the procedures for getting reimbursed.

Your QSEHRA can’t just be a binder gathering dust on a shelf in the office. You should engage all levels of management in helping employees get the most out of their plan.

For example, you can conduct workshops and Q&A sessions to help employees understand how to use their QSEHRA benefits effectively.

You can also offer a dedicated support line or email for employees to address their questions and concerns regarding the arrangement.

For help setting up a QSEHRA plan, and to arrange for individualized help for your employees in purchasing their own qualified health insurance plans, contact a ColoHealth Personal Benefits Manager.

There is no charge for this assistance: Our fees are paid entirely by the insurance carriers your employees select.

For Further Reading: The Comprehensive Colorado Small Business Insurance Guide | Why Is Colorado Health Insurance So Expensive? | How to Shop for Health Insurance in Colorado

DISCLAIMER: This article is written for general informational purposes only, and should not be construed to provide legal, tax, or accounting advice.

Employers interested in setting up any kind of HRA, to include QSEHRAs, should additionally consult with legal and compliance experts specializing in employee benefits and HIPAA to tailor your plan documents, privacy procedures, and other compliance efforts to your specific circumstances.