A QSEHRA allows small churches who do not offer group health insurance to their employees to provide money to employees on a tax-free basis; the money can be used to pay for individual health insurance policies and to reimburse employees for certain medical expenses.
To offer a QSEHRA, a small church must have fewer than 50 full-time equivalents (FTE) the previous calendar year. To be eligible to offer a QSEHRA, a small church cannot provide group health plan to its employees.
An eligible church must offer the QSEHRA to all employee except:
- Employees with fewer than 90 days of service;
- Employees under the age of 25;
- Part-time and seasonal employees (regulatory guidance is needed to define ineligible part-time and seasonal employees);
- Union employees unless a collective bargaining agreement provides for eligibility; and
- Employees who are non-resident aliens with no U.S. source income.
A QSEHRA must be funded solely by church contributions. Employees may not make contributions to a QSEHRA and may not contribute to the QSEHRA on a pre-tax basis. Churches must offer the QSEHRA on the same terms to all of its employees. However, the church is allowed to vary the reimbursements to employees based on rate variations in the price of an individual insurance policy due to age rating or family size.
Reimbursements under a QSEHRA
QSEHRAs are subject to a number of rules regarding reimbursements and the employee’s use of the tax-free reimbursements available through the plan.
- An employee who is covered by a QSEHRA may receive reimbursement for the employee’s and eligible family members’ medical expenses (as defined in IRC section 213(d)). The employee must provide the church with proof of his or her medical expenses prior to receiving reimbursement under the QSEHRA.
- Eligible medical expenses include insurance premiums for individual insurance coverage. Churches could limit the reimbursements to individual health insurance premiums only. Although the QSEHRA can reimburse both unreimbursed medical expenses and individual premiums, it is expected that this arrangement will principally be used by the church to help fund the purchase of individual health insurance policies.
- The maximum amount of reimbursement that the church can provide tax free to employees is $5,050 per year for employee-only coverage or $10,250 per year for family coverage. An employee is not taxed on the medical expense reimbursements received through a QSEHRA. However, if the employee does not have “minimum essential coverage,” then any reimbursements he or she receives through the QSEHRA are considered taxable and must be included in the employee’s gross income.
- Depending on the amount of reimbursement that an employee may receive from a QSEHRA, these reimbursement amounts may reduce (or completely eliminate) the amount of subsidy the employee (and spouse and dependent(s)) may receive through the Health Insurance Marketplace.
Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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