If you’re a small employer ready to offer your employees a more flexible option for health coverage beyond traditional group health insurance , setting a budget for your qualified small employer health reimbursement arrangement (QSEHRA) is an important first step.
Unlike a traditional group plan, a QSEHRA is an alternative health benefit. Employers set aside a monthly allowance of pre-tax dollars for their employees to purchase individual health insurance and other medical costs with QSEHRA health coverage.
While the employer contribution is capped at a maximum allowance amount (this annual contribution limit 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 to determine 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 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.
PeopleKeep customer data finds that 94% of all qualified expenses submitted for reimbursement in 2021 were individual health insurance premiums. This includes health insurance coverage like vision, dental, Medicare policies and other essential coverage.
And on average, 37% of employees reimbursed for insurance premiums had multiple premiums each month, including dental and vision.
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 expenses.
Even though premiums are the most submitted expenses with a QSEHRA, 96.5% of PeopleKeep customers choose to reimburse their employees for additional out-of-pocket medical expenses with a premium-plus plan.
In 2021, employers offering a premium-only plan offered higher allowances, on average, than those with a premium-plus plan. So setting your budget will largely depend on what medical plan features you want to offer your employees.
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 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. For example, in 2021, business employers with 1–4 employees offered 13% more in allowances than larger employers 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, 29% 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 increase 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 only 10% of business owners chose to offer the annual maximum allowance amount in 2021. That’s an average of $364 a month for single coverage ($307 a month for individuals with no dependents and $422 a month for those with dependents).
Employees with families were offered an average allowance of $440 a month ($432 for married employees with no dependents and $449 for those with dependents).
While it’s always a good idea to offer as much as possible through your QSEHRA, these averages should act as guidelines if you can’t afford to max out your annual limit.
It’s important to note that not every employee uses their entire allowance. In 2021, employees only used an average of 71% of their allowance. That means if an employer offers the full $441.67 allowance amount to a single employee, they would only be reimbursed $313.59 each month on average.
6. Maximize for certain employees only
Your QSEHRA can be used to offer a health benefit to employees, including all W-2 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 determine 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 health reimbursement arrangement (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. The internal revenue code (IRC) allows small organizations to use their QSEHRA to reimburse their employees for 200+ medical expenses listed in IRS Publication 502.
A few of the most popular health expenses 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 certain reimbursements to employees, like prescription drugs, 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 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.
For organizations with enough budget to offer a formal health benefit—but not enough to afford a traditional group health insurance—the QSEHRA is an excellent benefit solution. 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: 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.
This article was originally published on July 15, 2021. It was last updated on June 3, 2022.