Small Businesses and Employee Health Insurance

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    Erin Alderson, EA
    Client Service Manager

    We get a lot of questions from small business owners about paying for their employees’ health insurance premiums. Many believe they can pay for employees’ health insurance premiums tax free. The reality is that as of July 1, 2015, employers are no longer allowed to reimburse employees for health insurance or pay for individual health insurance premiums. All healthcare premium payments must be paid through a group healthcare plan. Violations could result in a penalty of $100 per day per employee.

    QSEHRA – Qualified Small Employer Health Reimbursement Arrangement

    For business owners unable to afford a group health insurance plan, a QSEHRA (pronounced Q-Sarah) might be a good option. With a QSEHRA, each employee is free to pick their own health insurance plan, and the employer can reimburse the employee for a certain dollar amount each month.

    In businesses with fewer than 50 full-time employees, the business owner can set up a QSEHRA to pay for employees’ health insurance with tax-free money to the employee. The QSEHRA is fully funded by the employer and is paid to employees on a tax-free basis, as long as the money is used for qualified medical expenses. Medical expenses include insurance premiums, prescriptions, co-pays, dental expenses, hearing aids, and many other expenses as outlined by the IRS.

    If you feel that a QSEHRA is the perfect fit for your business, there are a few rules you need to know:

    • • Plans are available only for employers with 50 or fewer full-time employees (or equivalents).
    • • You cannot have a group health plan in addition to the QSEHRA.
    • • All full-time employees must be offered access to this plan.
    • • Reimbursement terms must be the same for all employees from entry level to senior management.
    • • Reimbursement limits are established by the IRS annually. The 2020 limits are $5,250 for individuals and $10,600 for families.

    These are just a few of the requirements when setting up a QSEHRA. There are also legal documents and compliance issues that must be addressed. We recommend using a specialized administrator to set up and administer your QSEHRA. Please contact us for a referral or for any additional questions you may have.