Yesterday I was hired for a single consultation engagement for a small business in Silicon Valley to answer a few simple questions about setting up a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This is a simple, low cost and highly effective way for a small business to save money on employee health costs in situations where it applies.1. In this case the plan will save about $30 in wage taxes for every dollar invested in setting up and running the plan. That’s a strong rate of return on investment!
Our consultation came down to this:
- A plan document is required. There are free sample documents online but I think I have some better ones. One that I looked at online left too many questions unanswered. It makes sense to use a well-written plan that follows conventional format.
- Satisfying the “same terms” nondiscrimination requirement unique to QSEHRAs may not be as simple as it appears. The most commonly used employer funding formula for health insurance based on percentage of premiums paid, is not directly addressed by IRS. we considered the options.
- If the HRA plan is premium reimbursement only, there is no need for a third-party administrator. A good payroll clerk can handle the task easily.
- There is a strict employee notification requirement backed up with tax penalties. Guidance is not clear whether employees should be notified on adoption of a new plan document but it makes sense to do so.
- There are two IRS reporting requirements for all HRAs but one doesn’t kick in until late 2019. For now, we should just focus on getting the payroll and W2 reporting right.
IRS issued guidance last year in Question and Answer format with examples at https://www.irs.gov/pub/irs-drop/n-17-67.pdf
1 A Freedom Benefits QSEHRA is only available to qualified small businesses that do not offer a group major medical health insurance plan. It is only advisable in situations where employees’ income is high enough that they do not qualify for insurance premium subsidies. In other cases we recommend other similar types of small business health plans.