If you’re a small employer ready to offer your employees a more flexible option for health insurance, setting a budget for your qualified small employer health reimbursement arrangement (QSEHRA), is an important first step.
With the QSEHRA, employers set aside a monthly allowance of pre-tax dollars for their employees to purchase individual health insurance and other medical expenses.
While there’s a maximum allowance amount employers are allowed to contribute (this figure is updated annually), there’s no minimum allowance amount. This flexibility is great for small employers on a budget, but it can be tricky to know just how much is the right amount to offer.
To help you arrive at the right answer for your organization, we’ll walk you through seven strategies you can use for determining your QSEHRA budget.
1. Maximize for a percentage of your employees’ premiums
According to PeopleKeep customer data, employees primarily use their QSEHRA to pay for their individual health insurance premiums. Because of this, it makes sense to budget your QSEHRA allowance amount for the average cost of a monthly premium in your area.
However, individual health insurance isn’t the only premium cost to consider. PeopleKeep customer data also finds that among the employees who use their QSEHRA allowance to pay for a premium, one in three get multiple premiums reimbursed. This includes insurance policies for vision and dental.
Depending on your organization’s budget, you can aim to cover a percentage of your employees’ premiums or the entire cost.
2. Maximize for the best available individual insurance policy
Another option is to position your benefits budget to encourage employees to purchase the best available individual insurance policy in your area.
Our customer data shows that employees are more likely to increase their premium spending with higher allowance amounts.
The average total premium submitted for self-only employees was just $190 for employees receiving $100 or less a month, but increased to $420 for employees receiving between $301 and $412.50 a month. For employees with a family, average spending increased from $455 for those receiving $100 or less to $1,048 for those receiving between $701 and $833.33.
This suggests employees buy higher-tier insurance policies when they have higher QSEHRA allowances—something that leads to better health outcomes and higher employee satisfaction.
3. Maximize for organization size competitiveness
Another important factor to consider is what other organizations in your industry are doing for health benefits. Because many small employers are faced with the same budget constraints, comparing benefits budgets by organization size is a good guideline.
Hiring and keeping employees is especially crucial for small employers—that’s why they must place a greater emphasis on leveraging health benefits to recruit and retain employees than their larger counterparts.
For the QSEHRA, our customer data consistently shows that the smaller the employer, the higher the allowance amount offered to employees. For example, in 2020, employers with 1–4 employees offered 33% more in allowances than those with 20–49 employees.
4. Maximize for local competitiveness
Another way to gauge the competitive landscape is to see how much organizations in your geographic area are budgeting toward benefits.
For example, in 2020, Connecticut, Michigan, and Kentucky held the top spots for offering the highest QSEHRA allowances in the U.S., while Idaho, New Hampshire, and Louisiana offered the lowest.
A broader step is to investigate how much small employers in your area contribute toward their employees’ health benefits, regardless of platform.
For example, according to the Kaiser Family Foundation, 31% of covered small-firm employees had their employer pay the entire premium for their single coverage plan and 10% for their family coverage plan. That figure changes depending on the region, state, and city where the organization is located.
While you may not be able to match organizations’ benefits budgets exactly, you’ll get a better idea of where you fall and, as you grow, you can adjust your spend going forward.
5. Maximize for QSEHRA averages
As the QSEHRA grows more popular—and more employees recognize it as a desirable health benefit—employers are increasing their allowance amounts. To compete against other small employers offering a QSEHRA, you may want to compare averages and make budget adjustments accordingly.
PeopleKeep data shows that small employers offering a QSEHRA give employees an average of $360 a month ($294 for self-only employees and $455 for employees with a family).
While it’s always a good idea to offer as much as you can through your QSEHRA, these averages should act as guidelines if you can’t afford to max out your contribution.
It’s important to note that not every employee uses their entire allowance. In 2020, employees only used an average of 67% of their allowance. That means an employer offering their employees the average monthly allowance of $360 would expect to reimburse each employee $248.40 per month.
6. Maximize for certain employees only
Your QSEHRA can be used to offer health benefits to all W-2 employees, including full-time and part-time employees. However, extending eligibility to part-time employees is your organization’s choice.
If you’re facing a limited budget, one option is to limit benefit eligibility to full-time employees only.
Current QSEHRA guidelines don’t allow organizations to limit QSEHRA eligibility beyond that, though regulations may change in the future. If you are interested in offering different amounts to individual employee classes, you may consider offering an individual coverage HRA (ICHRA).
7. Maximize for certain expenses only
The internal revenue code (IRC) allows small organizations to use their QSEHRA to reimburse their employees for over 200 medical expenses listed in IRS Publication 502.
A few of the most popular items include:
- Individual insurance premiums
- (Including those for health, vision, and dental policies)
- Prescription and non-prescription drugs
- Prescription lenses
- Certain medical mileage expenses
One way to trim your budget is to reduce this list. Your organization may choose to exclude prescription drugs from reimbursement or to make only premiums eligible through your QSEHRA. This would limit your expense liability and save money.
This comes with a big caveat. Remember that employees often get the greatest value from their QSEHRA when they are flexible and address a variety of potential healthcare needs. You should evaluate your organization’s budget along with your employees’ health benefits needs before cutting options out of the benefit. It’s likely that reducing your allowances is the better option.
For organizations with enough budget to offer a formal health benefit—but not enough to afford a traditional group policy—the QSEHRA is a great fit. Unlike group health benefits, the QSEHRA has significant structural flexibility. This allows small employers to identify their benefits goals and adapt their budget accordingly.
Adopting one or more of these seven budgetary strategies is a great way to satisfy your two biggest benefit needs: 1) satisfying your employees and 2) stabilizing your finances. As your organization continues to grow, you’ll be able to adapt your QSEHRA to meet those needs every step of the way.