For small business employees, group health insurance is no longer the attractive benefit it once was. Today, employees are paying a record-high percentage of the total premium while watching their policy choices shrink.
Since 2007, average worker contributions to group health premiums have increased 75 percent for single coverage and 74 percent for family coverage. In 2017, employees were responsible for 18 percent of the premium for single coverage and 31 percent of the premium for family coverage, or monthly payments of $101 and $476, respectively.
At the same time, employees are given fewer policy choices from their company. Although data from the Employee Benefit Research Institute concludes that 80 percent of employees want a say in choosing their health benefits, small businesses offer just two policy options through group insurance on average. Many offer only one.
In this environment, it’s hardly surprising that employees are abandoning their company’s group policy in favor of alternatives like health care sharing ministries or personal short-term policies.
While these alternatives may help employees, though, they often hurt small businesses.
Group health insurance policies carry strict participation requirements, mandating that at least 70 percent of employees offered coverage must either enroll or have coverage from another source. While some health insurance alternatives satisfy this requirement, others don’t; this means businesses that fail to meet participation requirements because employees have chosen alternatives are limited to buying a policy during a one-month open enrollment period at the end of the year. What’s more, employees who don’t receive any value from their company’s benefits package are more likely to leave their job.
Thankfully, there’s an answer: the qualified small employer health reimbursement arrangement (QSEHRA). With a QSEHRA, all full-time employees can receive reimbursement for health care expenses, regardless of their insurance status.
In this post, we’ll introduce the QSEHRA and explain how it works. Then, we’ll go over five common alternatives to traditional group coverage and explain how both a group policy and a QSEHRA would treat an employee using that alternative.
What is the QSEHRA?
The QSEHRA is a new health benefit created through congressional legislation in 2016. It is available exclusively to small businesses with fewer than 50 employees.
With a QSEHRA, businesses offer employees a monthly allowance. Employees then choose and pay for health care, potentially including insurance policies, and the business reimburses them up to their allowance amount.
With a QSEHRA, all reimbursements are free of payroll tax for both the business and its employees. Reimbursements can be free of income tax, too, if the employee has minimum essential coverage (MEC).
1. A family member’s group health insurance
At any small business, a sizable number of employees will have health insurance coverage through their spouse. Employees under 26 may also have coverage through a parent.
If offered a group health insurance policy through their company, these employees will compare coverage options. If the family member’s policy is preferable, they won’t enroll in their company’s policy.
Group health insurance policy: Depending on the insurer, employees covered under a family member’s policy are either counted toward the company’s participation requirement or are excluded from the total employee count. Either way, these employees don’t negatively affect the company. However, they don’t receive any value from the company’s benefit offering either.
QSEHRA: Employees covered under a family member’s policy can’t receive reimbursement for their portion of the premium. However, they can be reimbursed for any other eligible expenses under the company’s QSEHRA. These reimbursements will be free of both payroll and income tax.
2. Individual health insurance
Some employees may choose to forgo group coverage from their company in favor of an individual health insurance policy.
In some cases, this makes financial sense. Depending on the state of the local environment, it may be less expensive for an employee to cover themselves and their family through an individual policy rather than pay for family coverage through their company’s benefit.
In other cases, the employee may not like the coverage available through their company. An important health condition may not be covered, for example, or the employee may want a high-deductible health plan (HDHP) so they can contribute to a health savings account (HSA).
On the individual market, the employee can find a policy that best suits their needs.
Group health insurance policy: Under most insurers, employees who waive group coverage to purchase an individual policy negatively affect the company’s participation rate. They also don’t receive any value from the company’s benefit offering.
QSEHRA: Employees with individual coverage can be reimbursed for their premiums under the company’s QSEHRA, along with any other eligible expenses. These reimbursements will be free of both payroll and income tax.
3. Short-term health insurance
For many reasons, employees may not want ongoing major medical coverage. One alternative is to purchase a short-term health insurance policy.
With a short-term policy, employees can get coverage fast and drop coverage without penalty. They can also choose from a range of deductible amounts.
Group health insurance policy: Employees who waive group coverage to purchase a short-term health insurance policy negatively affect the company’s participation rate. They also don't receive any value from the company’s benefit offering.
QSEHRA: Employees with a short-term health insurance policy can be reimbursed for their premiums under the company’s QSEHRA, along with any other eligible expenses. These reimbursements will be free of payroll tax, but because short-term coverage doesn’t qualify as MEC, they’re subject to income tax.
4. Health care sharing ministries
An increasingly popular alternative to health insurance is a health care sharing ministry.
Health care sharing ministries are faith-based cost-sharing programs. Members who share religious beliefs contribute a fixed dollar amount each month to their own savings account. When a member needs help paying medical expenses, they submit a request for the amount and the organization decides whether to approve the request. If the request is approved, the amount is paid using funds from other members’ savings accounts.
These organizations, which include programs like Medi-Share and Liberty Healthshare, aren’t considered insurance, but members are exempt from the Affordable Care Act’s individual mandate.
Group health insurance policy: Employees who waive group coverage in favor of joining a health care sharing ministry negatively affect the company’s participation rate. They also don’t receive any value from the company’s benefit offering.
QSEHRA: Employees belonging to a health care sharing ministry can’t be reimbursed for their membership fees under the company’s QSEHRA, but they can be reimbursed for any other eligible expenses. These reimbursements will be free of payroll tax, but because ministry membership doesn’t qualify as MEC, they’re subject to income tax.
5. Going uninsured
Some employees don’t want to deal with insurance or health care financing of any kind. In this case, they may choose to go uninsured.
Although they face a steep IRS penalty for this choice, they’re free to make it.
Group health insurance policy: Employees who waive group coverage and don’t enroll in any other policy negatively affect the company’s participation rate. They also don't receive any value from the company’s benefit offering.
QSEHRA: Employees without insurance can still be reimbursed for any eligible expense under the company’s QSEHRA. These reimbursements will be free of payroll tax, but subject to income tax.
In every case, employees using an alternative to their company’s group health insurance policy either negatively affect their company’s participation requirements, don’t receive value from the company’s benefit, or both.
By contrast, the QSEHRA provides value to all employees and is never negatively affected by eligible employees’ health care decisions.
In an environment where employees increasingly make individual decisions about health care, the QSEHRA is among the most valuable of small business benefits.