Perks of offering a QSEHRA and an HSA together

As healthcare costs continue to rise, many small employers can't afford traditional group health plans. As a result, they're seeking innovative ways to support the healthcare needs of their employees.

Opportunities to offer more flexible and personalized health benefits have grown significantly in recent years. Increased awareness of newer tax-free benefits like account-based health plans (ABHPs) has enabled small employers to increase employees' benefits.

Two popular ABHPs are health savings accounts (HSAs) and health reimbursement arrangements (HRAs), including qualified small employer HRAs (QSEHRAs) that the federal government made specifically for small businesses and nonprofits with fewer than 50 full-time equivalent employees (FTEs).

While HSAs and QSEHRAs fulfill different functions, they're both valuable and—when arranged correctly—employers can pair them together to create a standout employee benefits package.

In this article, we'll go over the differences between an HSA and a QSEHRA, how they can work together, and why small employers should consider offering both at the same time.

Takeaways from this blog post:

• HSAs and QSEHRAs both offer tax savings for out-of-pocket expenses, but they have differences in eligibility, ownership, and contribution requirements.
• Offering an HSA and a QSEHRA together allows small employers to maximize tax-free compensation for employees and help cover healthcare costs efficiently.
• Employees can use their QSEHRA allowance for specific eligible expenses and their HSA funds to cover additional out-of-pocket costs not included in their high deductible health plan (HDHP).

What's the difference between an HSA and a QSEHRA?

One of the first questions small employers have when considering offering an HSA, a QSEHRA, or both is: How do HSAs and QSEHRAs compare?

While there are tax benefits to both HSAs and QSEHRAs, there are some substantial differences in each when it comes to eligibility, ownership, and contribution requirements.

Let's take a look at how each one works.

Health savings accounts (HSAs)

An HSA is a financial account that an eligible individual or employer establishes to pay for a wide variety of qualified medical costs. While the employee owns the account, both the employee and the organization can contribute to it, so funds are made up of employees' own money and employer contributions.

The government only allows employers or employees to make contributions to HSAs when the employee is covered by a qualified high deductible health plan (HDHP), whether provided by their employer or purchased independently.

Employers and employees can make tax-free contributions to HSAs. However, there are annual contribution limits that keep the account from growing beyond a certain point.

Qualified small employer HRA (QSEHRA)

A QSEHRA is an arrangement—not an account—between small employers and their employees. The employer agrees to provide a set allowance each month, and employees can use their allowance to purchase qualified medical expenses or pay for individual health insurance coverage up to their allowance amount.

Common types of qualified expenses include:

• Individual health insurance premiums
• Preventive care services
• Emergency room visits
• Doctor's office visits
• Prescription medications
• Over-the-counter medicine
• Vision care
• Dental care
• Chiropractic care
• Mental health counseling

Rather than funds accumulating in an account, eligible employers only pay their employees after they incur an eligible expense and the employee submits it for reimbursement. Employers then review and approve the expense. Any unused funds go back to the employer at the end of the year or when the employee leaves the organization.

A QSEHRA can't work in conjunction with traditional group health insurance coverage, and the organization is the only party that makes contributions. QSEHRA payments are tax-free to the organization and can also be tax-free to employees as long as they have minimum essential coverage (MEC).

HSA vs. QSEHRA comparison chart

The following chart explores the main differences between an HSA and a QSEHRA:

Can I offer an HSA and a QSEHRA at the same time?

After understanding the differences between an HSA and a QSEHRA, many small employers want to know if they can contribute to employees' HSAs while offering employees a QSEHRA allowance.

The answer is yes—but employees must modify the QSEHRA to use the HSA.

HSAs require that account holders receive no coverage before they meet the HDHP's annual deductible, except for four exempted categories of expenses.

Because an HRA can reimburse employees (or “provide coverage”) for many medical expenses, it must conform to HSA requirements. The easiest way to do this is to alter the HRA into a limited-purpose HRA.

In the years when employees or their spouses make or receive contributions to their HSAs, they can use their QSEHRA to reimburse only four types of expenses before they meet their HDHP deductible.

These four expenses are:

• Health insurance premiums
• Dental expenses
• Vision expenses
• Long-term care premiums

These adjustments are necessary only for employees who make or receive contributions to their own or their spouse's HSA while participating in the QSEHRA. Other employees wouldn't be affected.

Additionally, eligible employees who just want to use existing HSA funds rather than contribute to an HSA don't need to adapt their QSEHRA.

Why should I consider offering both an HSA and a QSEHRA?

As the cost of medical care in the United States grows, so does the value of tax-free money to employees. Unfortunately, the federal government puts maximum contribution limits on two of its most popular tax-free vehicles. In 2024, an HSA has annual contribution limits of $4,150 for single employees and $8,300 for employees with families. QSEHRAs have annual limits of $6,150 and $12,450.

Offering both an HSA and a QSEHRA is a great way to maximize tax-free compensation to employees. It also ensures that money goes toward one of the heaviest financial burdens for employees: healthcare.

With both an HSA and a QSEHRA, employees can use their QSEHRA allowance to purchase their own HDHP and use the money from their HSA to fund expenses their HDHP doesn't cover.

Together, these two forms of health coverage provide employees with the greatest possible assistance from their employer, helping you recruit new talent and retain your best employees.

Conclusion

Employers should look beyond traditional health plans for additional cost savings. Both a qualified small employer HRA (QSEHRA) and a health savings account (HSA) are quality options for small employers looking to offer flexible and affordable health benefits to their employees. When combined, they give employees more tax-free money to spend on their medical expenses.

This article was originally published on January 2, 2018. It was last updated on May 2, 2024.