Seven strategies to set a QSEHRA budget
Health Benefits • November 16, 2023 at 1:25 PM • Written by: Holly Bengfort
The qualified small employer health reimbursement arrangement (QSEHRA) offers small businesses a cost-effective way to provide healthcare benefits to their employees. Setting a budget for your QSEHRA is critical to ensure that your employees receive adequate health coverage without straining your company's finances. However, setting the right budget for a QSEHRA can be challenging without proper planning.
To help you navigate this process successfully, we've compiled a list of seven strategies you can use to determine your QSEHRA budget. By following these strategies, you can provide valuable benefits to your employees while maintaining financial stability for your business.
How does a QSEHRA compare to a traditional group health insurance plan?
A QSEHRA is an employer-funded health benefit. It allows organizations with fewer than 50 full-time equivalent employees (FTEs) to reimburse their employees tax-free for more than 200 qualifying medical expenses, including individual health insurance premiums.
It's a cost-effective alternative to traditional group health insurance. With a QSEHRA, you're able to set your own budget and avoid annual rate hikes. It also simplifies the quoting process and eliminates minimum participation requirements associated with traditional group health plans.
On top of helping your employees with their medical bills, a QSEHRA benefits your workers by allowing them to choose the health policy that best suits their needs. Unlike a one-size-fits-all group health plan, a QSEHRA gives employees more choice over doctors, health coverage, and monthly premiums. Our 2022 Employee Benefits Survey Report found that 65% of employees value choosing their own benefits. Yet, only 36% of respondents felt they had a say in them.
QSEHRAs are also free of payroll taxes for employers and employees. As long as your employees have minimum essential coverage (MEC), reimbursements are also free of income taxes for your employees.
What are the benefits of offering a QSEHRA?
A QSEHRA can help boost your employee retention and recruitment. It can also improve employee satisfaction at your organization. According to our report, 82% of employees say that an employer’s benefits package is an important factor in whether or not they accept a job. Health coverage is one of the most important benefits for workers. Report findings show that 87% of employees value health benefits, such as health insurance.
How do you set a QSEHRA budget?
You can set your budget with a QSEHRA. Because there are no minimum contribution requirements, you can offer any allowance up to the 2025 annual contribution limits of $6,350 for single employees and $12,800 for employees with families. This allows you to save money compared to traditional group health insurance. However, you’ll want to ensure you’re offering enough to make the benefit worthwhile to employees.
With so many factors to consider, it can be overwhelming to determine the right amount to allocate for your employees' healthcare expenses. Let's review seven strategies to set a QSEHRA budget.
1. Maximize for a percentage of your employees' premiums
According to our 2024 QSEHRA Report, employees primarily use their QSEHRA to pay for their individual health insurance plan premiums. Because of this, it makes sense to budget your QSEHRA allowance amount for the average cost of a monthly premium in your area.
Based on our findings, the average reimbursement amount for individual health insurance premiums in 2023 was $249. Depending on your organization's budget, you can aim to cover a percentage of your employees' premiums or the entire cost.
2. Maximize for benefit design
Business owners can choose between two health plan types if they design their QSEHRA through PeopleKeep: a premium-only plan that reimburses employees only for their insurance premiums, or a premium-plus plan that also reimburses eligible employees for other qualifying out-of-pocket medical costs.
Even though premiums are the most submitted expenses with a QSEHRA, 99.7% of PeopleKeep customers choose to reimburse their employees for additional out-of-pocket medical expenses with a premium-plus plan.
If you want to offer a premium-plus plan, you should ensure you offer an allowance that covers the cost of employees’ health insurance policies and out-of-pocket expenses.
3. Maximize for organization size competitiveness
Another important factor to consider is what other organizations in your industry are offering with their health benefits. Because many small employers deal with the same budget constraints, comparing benefits budgets by organization size is a good practice.
Hiring and keeping employees is especially crucial for small employers—that's why they must place a greater emphasis on leveraging health insurance in their benefits package 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. In 2022, organizations employing between one and four employees offered roughly 8.4% more than the largest organizations with 20 to 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.
According to the KFF1, 30% of covered workers at small firms are enrolled in a plan where the employer pays the entire premium for single coverage. Additionally, 32% of covered workers at small firms are in a plan where they're required to contribute more than half of the premium for family coverage.
While you may not be able to match another organization's benefits budgets exactly, you'll get a better idea of where you stand. Plus, you can always adjust your spending as you grow.
5. Maximize for QSEHRA averages
As the QSEHRA grows more popular—and more employees recognize it as a desirable health benefit—employers increase their allowance amounts. To compete against other small employers offering a QSEHRA, you may want to compare averages and make budget adjustments accordingly.
The average monthly allowance employers offered their employees in 2023 was $431, a 4.6% increase from the 2022 average monthly allowance of $412.
It's also important to note that only some employees use their entire allowance. In 2022, employees only used an average of 53% of their allowance, leaving the remaining 47% with the employer. This contributes to even greater benefit savings.
6. Maximize for certain employees only
If you offer a QSEHRA, you must offer it to all full-time W-2 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 customize QSEHRA eligibility beyond that, though regulations may change in the future. If you're interested in offering different amounts to individual employee classes, you may consider offering an individual coverage HRA (ICHRA).
7. Maximize for certain expenses only
While a traditional group health plan has set coverage guidelines, QSEHRAs are flexible regarding what they can reimburse.
A few of the most popular reimbursable expenses include:
- Monthly premiums for health insurance
- Preventive services such as exams, shots, lab tests, and screenings
- Emergency health services
- Prescription drugs
- Over-the-counter medicines
- Bandages
- Sunscreen
One way to trim your budget is to reduce this list. Your organization may choose to exclude certain reimbursements to employees, like prescription drugs, or to make only premiums eligible through your QSEHRA. This would limit your expense liability and save you money.
This comes with a big caveat. Remember that employees often get the greatest value from their QSEHRA when they are flexible and address various potential healthcare needs. You should evaluate your organization's budget and your employees' health benefits needs before cutting options out of the benefit. Reducing your allowances is likely the better option.
What if you want to offer a greater allowance than a QSEHRA allows?
If budget isn’t a concern and you want to offer a higher allowance than a QSEHRA allows, you can still take advantage of an HRA. ICHRAs don’t have maximum limits on employer contributions, giving you more flexibility.
They also allow you to customize eligibility and allowances with 11 classes of employees. If you offer an ICHRA through PeopleKeep, we only support full-time, part-time, salaried, non-salaried, seasonal employees, and state-based classes.
Conclusion
For smaller businesses that don't have the budgets for traditional group health insurance, the QSEHRA is an affordable health coverage option. Unlike employer-sponsored health insurance, the QSEHRA has significant structural flexibility. This allows small business owners to identify their employee benefits goals and adapt their budgets accordingly.
Adopting one or more of these seven budgetary strategies is a great way to satisfy your two biggest benefit needs: employee satisfaction and financial security. As your organization continues to grow, you'll be able to adapt your QSEHRA to meet those needs every step of the way.
This article was originally published on July 15, 2021. It was last updated on November 16, 2023.
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Holly Bengfort
Holly Bengfort is a content marketing specialist at PeopleKeep, with two years of experience in HRAs and health benefits. Having experienced the QSEHRA firsthand as an employee, Holly provides invaluable insights into how it can benefit small businesses and their workforce. Before joining the team in 2023, Holly worked in television news as a broadcast journalist. With her experience as a news anchor and reporter, Holly has an exceptional ability to break down intricate stories into clear, compelling narratives that resonate with diverse audiences. Her talent for simplifying tricky topics ensures that everyone can fully grasp important information. Outside of work, Holly enjoys spending time outdoors, staying active, and relaxing on the beach.