How QSEHRA Contributions Affect Health Insurance Premium Subsidies

Qualified small employer health reimbursement arrangements (QSEHRAs) have been an option for small businesses (those with fewer than 50 full-time equivalent employees) since the start of 2017.

A QSEHRA allows a small employer to reimburse employees for at least a portion of their individual-market health insurance premiums. And those employees may also be eligible for premium subsidies in the health insurance exchange (sometimes called the marketplace).

How Does a QSEHRA Work?

The details of a QSEHRA are fairly straightforward. In 2021, a small business can contribute up to $5,300 to an employee-only QSEHRA, and up to $10,700 if the employee has family members who also have minimum essential coverage.

The reimbursement amount is prorated monthly if the employee doesn't have coverage under the QSEHRA for the full year. Therefore, in 2021, the monthly limit is $441.67 for a single employee and $891.67 for an employee with covered family members.

These amounts are indexed annually (the initial 2017 limits were lower) and employers aren't required to contribute the larger amount for employees with families. They can if they choose to, but it's also permissible for the employer to give everyone the same amount, based on self-only coverage. It's also permissible for the employer to set a lower QSEHRA limit, as long as it's done consistently across all eligible employees—for example, contributing 80% of the annual limit, instead of 100%.

If the QSEHRA will make the employee-only (not counting family members) premium for the second-lowest-cost silver plan (ie, the benchmark plan) in the exchange no more than 9.83% of the employee's household income for 2021 (the percentage is indexed annually), the QSEHRA is considered affordable employer-sponsored coverage and the employee is not eligible for a premium subsidy in the exchange.

This is the same basic rule that's followed if the employer were to offer group health insurance, instead of a QSEHRA, although the details differ a little. If the employer was offering a group plan, the employee would only be eligible for a premium subsidy in the exchange if the employee's portion of the premium was more than 9.83% of the employee's household income. Since employers generally don't have access to details about their employees' household income, they tend to use safe-harbor calculations instead.

But if the employee-only (not counting family members) premium for the second-lowest-cost silver plan in the exchange would still be more than 9.83% of the employee's household income even after the QSEHRA benefit is applied, the employee would be eligible to receive a premium subsidy in addition to the reimbursement that the employer provides. The QSEHRA benefit is subtracted from the premium subsidy, however, so there's no "double-dipping."

QSEHRA Examples

QSEHRA can get a little confusing when you dig into the details. In 2017, the Internal Revenue Service (IRS) published an extensive list of FAQs to illustrate exactly how QSEHRAs work. The following examples, based on the IRS rules and additional clarification provided by IRS Associate Chief Counsel's office, will help to clarify exactly how QSEHRAs and premium subsidies interact.

The following examples were derived from HealthCare.gov, which is the federally-run exchange that's used in 36 states as of 2021. HealthCare.gov has an online browsing tool for finding and comparing health insurance plans; the figures below were based on a Chicago zip code and an employer that provides the maximum available QSEHRA benefit. The health insurance premium amounts would be different in other parts of the country, but the concepts would still work the same way.

Example One

Brian is single and 30 years old, and his employer offers a QSEHRA with benefits up to the maximum allowed. So Brian can get up to $441.67/month reimbursed by his employer to cover his individual market plan.

The second-lowest-cost silver plan available to Brian in 2021 has a full price of $306.64/month. So his QSEHRA benefit would cover the entire premium if he picked that plan. Obviously, he would not be eligible for any premium subsidies in the exchange, regardless of his income, since he would have no premium cost at all after the QSEHRA benefit is applied.

Example Two

Bob is 60 instead of 30. His monthly premium for the second-lowest-cost silver plan in the exchange is $733.23. He has the same QSEHRA benefit as Brian, so it would reimburse him $441.67/month, leaving him with a cost of $291.56/month.

So is Bob eligible for premium subsidies in the exchange or not? It will depend on his income. $291.56/month in after-QSEHRA premiums works out to $3,498.72/year. That's 9.83% of $35,592 (you take $3,498.72 and divide it by 0.0983 to get that amount).

So if Bob earns more than $35,592 per year, he would not be eligible for a premium subsidy from the exchange, and would only get the QSEHRA benefit from his employer (because his after-QSEHRA premium would be considered an affordable percentage of his income). But if he earns less than $35,592, he would potentially be eligible for a premium subsidy, although the amount would be reduced by the amount that his employer reimburses him.

Let's say Bob earns $30,000/year. Without considering his employer's QSEHRA benefit, that income makes him eligible for $647/month in premium subsidies through the exchange, which brings the cost of that second-lowest-cost silver plan down to the level that's considered affordable based on his income.

(Note that these levels vary with income, unlike the one-size-fits-all level that's used to determine whether employer-sponsored coverage is affordable. But nationwide, premium subsidies are larger in 2021 than they have been in prior years. This is because of the American Rescue Plan's subsidy enhancements, which will continue to be in effect in 2022 as well.)

But the QSEHRA benefit would have to be subtracted from the premium subsidy ($647 minus $441.67), leaving him with a $205.33/month premium subsidy through the exchange.

From there, Bob can buy whatever plan he wants through the exchange, and the regular price will be reduced by $205.33/month. So if he picks the second-lowest-cost silver plan, for example, his after-subsidy cost will be $527.90/month.

He'll then submit his after-subsidy premium receipt to his employer, and get his QSEHRA benefit in addition to the premium subsidy. The result will ultimately be the same as it would have been if he hadn't had a QSEHRA benefit available, as his QSEHRA + premium subsidy benefit will be $647/month.

Example Three

Now let's look at 30-year-old Brian again, but let's assume he has a family, they're all purchasing coverage, and his employer will allow the maximum QSEHRA benefit. Brian's spouse is also 30, and they have two kids, ages 5 and 3. The second-lowest-cost silver plan in the exchange is $1,026.64/month for the family.

Keep in mind that Brian's cost for himself alone on that plan would be $306.64/month (from the first example above) since we have to use the self-only amount to determine whether the QSEHRA makes his coverage affordable.

First, we compare the maximum self-only QSEHRA benefit with the self-only cost for Brian to buy the second-lowest-cost silver plan in the exchange. We did that already in the first example: Brian's QSEHRA benefit results in affordable coverage since it covers the entire premium. So Brian is not eligible for a premium subsidy in the exchange, and neither are his family members since the affordability determination is made based only on the employee's costs, regardless of family costs.

(Although the American Rescue Plan has made premium subsidies larger and more widely available, it has not changed anything about the way affordability is determined for employer-sponsored health plans).

So Brian's family is not eligible for premium subsidies in the exchange. They have to pay $1,026.64/month for the second-lowest-cost plan, although they can pay as little as $797.42/month for the cheapest available plan, or up to $1,881.56/month for the most expensive plan.

Brian can then submit his premium receipts to his employer, and receive $891.67 in QSEHRA benefits each month, to put towards the premiums he has to pay for his family's coverage (note that if he enrolls in the cheapest plan in the exchange, for $797.42/month, that would be the maximum he could receive in QSEHRA reimbursement from his employer).

Does a QSEHRA Help?

So in a case where the premiums are much larger than the QSEHRA benefit, and where the person qualifies for premium subsidies based on income (and on the QSEHRA not being considered affordable coverage, as described above), the person would be equally situated with or without the QSEHRA, since their after-subsidy premium without the QSEHRA would be equal to their after-subsidy, after-QSEHRA premium (this is illustrated with Bob, in example two).

But that's not always the case. Let's go back to the first example, and look at 30-year-old Brian who doesn't have a family. If he's earning $35,000/year and his employer doesn't offer a QSEHRA, he'll qualify for a premium subsidy of $162/month in 2021. He'll have to pay the remaining $144.64/month for the second-lowest-cost silver plan himself. And if he's earning $60,000/year, he won't get a premium subsidy at all (although the American Rescue Plan temporarily eliminated the income cap for subsidy eligibility, subsidies are not available if the cost of the benchmark plan would be less than 8.5% of household income).

Keep in mind that the QSEHRA in his case (with the employer providing the maximum allowable benefit) would cover the full cost of the second-lowest-cost silver plan. Clearly, he's much better off with the QSEHRA than he would be with just premium subsidies.

So in some cases, an employee won't be any better or worse off as a result of the QSEHRA. But in other cases, they may be much better off with the QSEHRA. Is there a scenario, however, in which the person might be worse off with a QSEHRA?

Example Four

Consider Donte, who is 40 years old and has a family of six. We'll say he has five kids, ages 17, 18, 19, 21, and 22. Under the Affordable Care Act (ACA), insurance companies only charge premiums for a maximum of three kids under the age of 21 on the same family plan, but all kids 21 and older are charged premiums—so in this case, premiums will be charged for all six family members.

Let's say that Donte's employer provides the maximum allowable QSEHRA benefit for family coverage, so the family is eligible for $891.67/month in QSEHRA benefits.

To see if the family is eligible for premium subsidies in the exchange, we have to look at how much the second-lowest-cost silver plan would cost for Donte alone ($345.27/month) and subtract the single-employee QSEHRA benefit of $441.67. Since the QSEHRA benefit is more than Donte's total self-only premium, he's not eligible for a premium subsidy in the exchange. And that means his family isn't eligible for premium subsidies either, as explained in example three.

For Donte's entire family, the premium for the second-lowest-cost silver plan in the exchange will be $1,625.60/month. They'll get the full $891.67/month QSEHRA benefit from Donte's employer, bringing their net premium for the second-lowest-cost silver plan down to $844.23/month.

But what if Donte's employer didn't offer a QSEHRA at all? Premium subsidies would be available even at a fairly high income, since they are a household of six. But let's say that they earn $115,000/year. In that case, their premium subsidy would be $983/month in 2021, and their after-subsidy premium would be $642.60/month for the second-lowest-cost silver plan.

Clearly, this family would be better off if Donte's employer didn't offer a QSEHRA. That would be true unless their household income was higher (for example, if their household income were $140,000, they would only qualify for a premium subsidy of $636/month, meaning they'd come out ahead with the QSEHRA benefit instead of the premium subsidy.

The Family Glitch, QSEHRA-Style

As described at the top of this article, when determining whether a QSEHRA makes exchange coverage affordable, only the cost of the employee's coverage is taken into consideration. This is similar to the ACA's family glitch that occurs when employers offer group health insurance that's affordable for the employee but perhaps not affordable when family members are added to the plan.

If the employee has family members with minimum essential coverage and the family members' premiums are eligible for reimbursement through the QSEHRA, the family members are not eligible for premium subsidies if the QSEHRA benefit results in the second-lowest-cost silver plan being no more than 9.83% of the employee's household income (in 2021) for employee-only coverage. Let's take a look at some examples of how this could happen.

Example Five

An employer is allowed to cap QSEHRA benefits at the same amount for all employees, regardless of whether they have family members or not. Let's go back to example three: 30-year-old Brian has a 30-year-old spouse and two young children.

Now let's assume that Brian's employer offers a maximum QSEHRA benefit of $400/month to all eligible employees, and allows them to submit reimbursement amounts for their entire family. As we saw in example three, the second-lowest-cost silver plan for Brian's whole family is $1,026.64/month.

In this case, Brian's employer is capping the QSEHRA benefit at $400/month, which still results in affordable coverage for Brian: The second-lowest-cost silver plan for Brian alone is $306.64/month—the QSEHRA covers his entire premium.

So Brian's QSEHRA makes him ineligible for premium subsidies in the exchange. And since his family's premiums are also eligible to be submitted to his employer and covered under the QSEHRA, Brian's family is also ineligible for subsidies in the exchange.

That leaves them with the second-lowest-cost silver plan costing $1,026.64/month, and a maximum QSEHRA benefit of $400/month. After the employer's reimbursement is applied, they'll pay $626.64/month for the second-lowest-cost silver plan, regardless of their income.

Contrast that with a scenario in which Brian's employer does not offer a QSEHRA. If Brian's household income is $85,000 in 2021, his family would qualify for a premium subsidy of $557/month. That would bring their cost for the second-lowest-cost silver plan down to $469.64/month, which is less than their net cost if the employer offered a $400/month QSEHRA.

On the other hand, if their household income is $150,000/year, they wouldn't be eligible for any premium subsidy in the exchange at all in 2021, making them better off with the QSEHRA, since it would take $400/month off their premium, versus paying full price.

(Note that if the family members' costs are not eligible to be reimbursed via the QSEHRA, the family would still be eligible for premium subsidies in the exchange, since the family glitch would not apply. Depending on the specifics, it possible that a family could come out ahead with that approach, using the QSEHRA benefit for the employee and premium subsidies in the marketplace for the rest of the family.)

Employers and Employees Making Sense of QSEHRA

There are several important takeaways to keep in mind if you've got a small business and you're considering a QSEHRA benefit for your employees, or if you're considering a job offer that includes a QSEHRA instead of group health insurance:

• QSEHRA benefits are capped at a flat-dollar amount. If an employer offers the maximum benefit, it's likely to cover a substantial portion of the premiums for younger employees, but may leave older employees (and employees with large families) with significant after-QSEHRA premiums.
• If employees have incomes that are high enough to make them ineligible for premium subsidies in the exchange, then any QSEHRA benefit offered by an employer will be beneficial to the employees, since they would otherwise have to pay full price to buy their own coverage (this is assuming that the employer is not considering the possibility of offering group health insurance instead).
• If employees have an income that would make them eligible for premium subsidies in the exchange, will the QSEHRA benefits strip away their subsidy eligibility? If so, employers and employees need to understand that if the QSEHRA is set up so that family members can also have their benefits reimbursed, nobody in the family will be eligible for premium subsidies, even if they only end up getting a small portion of their premiums reimbursed via the QSEHRA. In some cases, this could result in a family losing out on a significant amount of premium subsidies in the exchange, making the QSEHRA a net negative for them.

A Word From Verywell

There's no one-size-fits-all when it comes to QSEHRAs. Numerous factors have to be considered, including the amount of reimbursement the employer is offering, the employee's age, whether family members' premiums are eligible for reimbursement, the employee's household income, and the cost of coverage in the exchange.

In some cases, a QSEHRA provides an obvious benefit. In other cases, it's a wash, with the employee ending up with the same net premiums with or without the QSEHRA. And in some situations, the QSEHRA actually makes employees worse off (ie, paying more in premiums) than they would be without the QSEHRA. If in doubt, it's wise to consult with a health insurance broker and an accountant before making decisions about a QSEHRA.