How QSEHRA Contributions Affect Health Insurance Premium Subsidies

A QSEHRA Can Be Beneficial, Neutral, or Harmful, Depending on Circumstances

Making sense of the combination of QSEHRA benefits and premium subsidies
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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 exchange.

How Does a QSEHRA Work?

The details of a QSEHRA are fairly straightforward. In 2019, a small business can contribute up to $5,150 to an employee-only QSEHRA, and up to $10,450 if the employee has family members who also have minimum essential coverage. The amount is prorated monthly if the employee doesn't have coverage under the QSEHRA for the full year. In 2019, the monthly limit is $429.17 for a single employee and $870.83 for an employee with covered family members.

These amounts are indexed annually (the 2017 and 2018 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 percent of the annual limit, instead of 100 percent.

If the QSEHRA will make the employee-only (not counting family members) premium for the second-lowest-cost silver plan in the exchange no more than 9.86 percent of the employee's household income (that's for 2019; 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 9.86 percent 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 9.86 percent 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 late 2017, the 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 are based on a Denver zip code (80014), 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 $429.17/month reimbursed by his employer to cover his individual market plan.

The second-lowest-cost silver plan available through Connect for Health Colorado (the state-run exchange) is $413.83/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 $989.54. He has the same QSEHRA benefit as Brian, so it would reimburse him $429.17/month, leaving him with a cost of $560.37/month.

So is Bob eligible for premium subsidies in the exchange or not? It will depend on his income. $560.37/month in after-QSEHRA premiums works out to $6,724/year. That's 9.86 percent of $57,395 (you take $5,487 and divide it by 0.0986 to get that amount).

So if Bob earns more than $68,194 per year, he would not be eligible for a premium subsidy from the exchange, and would only get the QSEHRA benefit from his employer. But if he earns less than $68,194, he would potentially be eligible for a premium subsidy, although the amount would be reduced by the amount that his employer reimburses him.

Keep in mind though, that premium subsidies in the exchange are never available to people with income above 400 percent of the poverty level. For a single person with 2019 coverage, that's $48,560. So even though Bob's QSEHRA wouldn't make his coverage "affordable" (less than 9.86 percent of his income) if he's earning between $48,560 and $68,194, he still wouldn't be eligible for a premium subsidy in that income range.

But let's say Bob earns $40,000/year. Without considering his employer's QSEHRA benefit, that income makes him eligible for $661/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 the QSEHRA benefit would have to be subtracted from the premium subsidy ($661 minus $429.17), leaving him with a $231.83/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 $231.83/month. So if he picks the second-lowest-cost silver plan, for example, his after-subsidy cost will be $757.71/month.

He'll then submit his after-subsidy premium receipt to his employer, and get his QSEHRA benefit in addition to the premium subsidy. Assuming his premium is at least $429.17, he'll get the full QSEHRA amount from his employer (and that will be the case since the cheapest plan available to him in the exchange would be $482.26/month after applying the $231.83/month premium subsidy from the exchange).

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 $1,385.50/month for the family.

Keep in mind that Brian's cost for himself alone on that plan would be $413.83/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 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.

So Brian's family is not eligible for premium subsidies in the exchange. They have to pay $1,385.50/month for the second-lowest-cost plan, although they can pay as little as $999.82/month for the cheapest available plan, or up to $2,078.22/month for the most expensive plan.

Brian can then submit his premium receipts to his employer, and receive $870.83 in QSEHRA benefits each month, to put towards the premiums he has to pay for his family's coverage.

Example Four

Let's go back to our 60-year-old Bob, and give him a family. His employer offers the maximum allowable QSEHRA benefit. His spouse is 55, and they have two college-age kids on their health plan, ages 19 and 22. We know from Example two that Bob's QSEHRA doesn't constitute affordable coverage, so he's potentially eligible for premium subsidies, as are his family members.

So now we have to check to see if Bob's family is eligible for premium subsidies in the exchange based on their income. The income cap for subsidy eligibility in 2019 for a family of four is $100,400. If Bob's household income is $95,000, the family would be eligible for $1,729.72/month in premium subsidies, leaving them with an after-subsidy monthly premium of $780.58 for the second-lowest-cost silver plan.

But if Bob’s household income is $105,000, his family wouldn't get any premium subsidy at all, and they'd have to pay $2,510.30/month for the second-lowest-cost silver plan. (Note that there are steps you can take to get your income under the subsidy-eligibility threshold if you're just a little above it).

Let's assume Bob's household income is $95,000 and his family is eligible for $1,729.72/month in premium subsidies. Since his employer is offering the maximum allowable family QSEHRA benefit ($870.83/month), we have to subtract that from his premium subsidy, to get an allowable premium subsidy amount of $858.89/month.

If Bob's family buys the second-lowest-cost silver plan, which retails for $2,510.30/month, they'll actually end up spending $780.58/month after the QSEHRA and premium subsidy are both taken into consideration. This is the same amount that they would have spent if the employer had not offered a QSEHRA since they would have qualified for the full premium subsidy in that case.

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 both with and without the QSEHRA, since their after-subsidy premium without the QSEHRA would be equal to their after-subsidy, after-QSEHRA premium.

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 $47,000/year and his employer doesn't offer a QSEHRA, he'll qualify for a premium subsidy of just $28/month. He'll have to pay the remaining $385.83/month for the second-lowest-cost silver plan himself. And if he's earning $50,000/year, he won't get a premium subsidy at all.

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 worse off with a QSEHRA?

Example Five

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 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 $870.83/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 ($465.96/month) and subtract the single-employee QSEHRA benefit of $429.17. That leaves Donte with a net premium of just $36.79/month. For that to be more than 9.86 percent of his income, Donte would have to be earning less than about $4,500/year, which is unlikely. So chances are, Donte doesn't qualify for any premium subsidies in the exchange, because his QSEHRA provides affordable coverage. And that means his family isn't eligible for premium subsidies either, as explained in example three.

Donte's family will have to pay $2,193.80/month for the second-lowest-cost silver plan in the exchange. They'll get the full $870.83/month QSEHRA benefit from Donte's employer, bringing their net premium down to $1,323/month.

But what if Donte's employer didn't offer a QSEHRA at all? Premium subsidies would be available for this family with a household income up to $134,960 since they are a household of six. Let's say that they earn $120,000/year. In that case, their premium subsidy would be $1,208/month, and their after-subsidy premium would be $986/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 in excess of $134,960, making them ineligible for premium subsidies. If their household income was $140,000, for example, the QSEHRA would be their only available benefit.

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 in the exchange if the QSEHRA benefit results in the second-lowest-cost silver plan in the exchange being no more than 9.86 percent of the employee's household income, for employee-only coverage. Let's take a look at some examples of how this could happen.

Example Six

An employer is allowed to cap QSEHRA benefits at the same amount for all employees, regardless of whether they have family members or not (see Question 14 in the IRS FAQs). 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 $1,385.50/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 $413.83/month, leaving him with only $13.83/month in after-QSEHRA premiums (an amount that would only exceed 9.86 percent of his household income if his household income were $1,683/year or lower—unlikely, given that he's employed).

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 $1,385.50/month, and a maximum QSEHRA benefit of $400/month. After the employer's reimbursement is applied, they'll pay $985.50/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 $70,000, his family would qualify for a premium subsidy of $952/month. That would bring their cost for the second-lowest-cost silver plan down to $538.21/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 $105,000/year, they wouldn't be eligible for any premium subsidy in the exchange at all in 2019, making them better off with the QSEHRA, since it would take $400/month off their premium, versus paying full price.

The IRS has confirmed 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. So let's look at one last example of how this might work out.

Example Seven

We'll use the same information as example six, but in this case, the employer caps the QSEHRA benefit at $400/month and only allows employees to submit their own expenses for reimbursement, regardless of whether they have covered family members or not.

So if Brian's family buys the $1,385.50/month second-lowest-cost silver plan, Brian can only submit his own portion of the premium ($413.83/month) for reimbursement and will receive the full $400/month QSEHRA benefit.

But Brian's family can still qualify for premium subsidies in the exchange since their expenses aren't eligible for reimbursement from Brian's employer. The premium subsidy for the other three family members would be $449/month if their household income is $70,000. The QSEHRA benefit would not make them ineligible for that subsidy benefit since the QSEHRA doesn't apply to them. Brian would still be able to get his $400/month QSEHRA benefit, and his family members would be eligible for premium subsidies in the exchange as well.

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 (above the 400 percent column on this chart), 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 the employee's area.

    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 an insurance broker and an accountant before making decisions about a QSEHRA.

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