Of all employee benefits, studies show that workers value medical, vision, and dental benefits the most.
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Already sold on offering health benefits to your team? Let’s move on to what comes next.
As a small business owner, you likely have two major options. You can offer health benefits through:
- Small group health insurance (SGHI), or
- QSEHRA, aka Qualified Small Employer Health Reimbursement Arrangement
Small group health insurance
Small group health insurance is the most common way for small employers to provide benefits for their employees. Here’s how it works: You (the employer) sign a contract with insurance carriers, and your employees can then obtain coverage from your chosen carriers.
Small group plans are available to employers with two to 50 full-time employees, while in some states, like California and New York, these plans are available to employers with two – 100 employees. (If you have employees who have moved out-of-state and out of your plan’s network, please consult with a licensed advisor to determine what changes can be made as this varies state by state and by carrier).
Carriers set rates for their plans based on a few factors like:
- Employee age
- Location of your business
Unlike large group insurance, there is no room to negotiate rates in the small group insurance market. However, group rates are often more affordable than individual rates if your employees were to go out and get a plan on their own. Additionally, if plans are set up through a section 125 POP plan (also known as a “cafeteria” or pre-tax plan), then all premiums are tax-free.
Another option gaining momentum among small employers is the QSEHRA, a type of health reimbursement arrangement (HRA).
QSEHRA allows employers to reimburse medical expenses of their employees without offering group health insurance. Note: Employers offering a QSEHRA are actually not allowed to offer group health insurance at the same time. As long as employees maintain an individual health plan that provides minimum essential coverage (MEC) and employers follow the setup requirements, the reimbursements under a QSEHRA are tax-free to both employers and employees.
Employers set their annual contribution amount for eligible employees based on IRS limits, and then simply reimburse eligible expenses as they are incurred on a monthly basis up to the annual amount.
A little bit on HRAs
Traditional HRAs are tax-advantaged, employer-funded accounts that employers use to reimburse employees for eligible medical expenses. Employers can use HRAs integrated with group policies to reimburse employees for medical expenses not covered by the group plan (e.g., deductibles, co-pays, etc.). There are many types of HRAs that are allowed and almost each one has specific requirements surrounding its offering.
The Affordable Care Act ACA originally did not allow for “standalone HRAs,” or HRAs that would reimburse for medical expenses or premiums that were not coupled with group insurance. However, federal legislation authorized standalone HRAs for small employers—as long as they follow certain rules. This is the QSEHRA, which allows reimbursement of medical expenses or premiums when the small employer does not provide any group coverage.
Small group health insurance versus QSEHRA
So how do you know which of the two options is a better fit for your company? It depends on how much you want to contribute, how big your company is, and how involved you want to be in the health benefits of your employees.
Let’s break down the key features of small group insurance offered through a cafeteria plan and a QSEHRA.
|Small group health insurance||QSEHRA|
|Eligibility||Businesses must have 2–50 full-time employees (some states allow small group up to 100 employees).||Businesses must have 1–49 full-time employees.|
|Cost||Variable—requires minimum employer contribution, in most cases at least 50% of premiums.||Low—employer can choose how much to contribute, up to the maximum amount set by the IRS.|
|Scope of coverage||Can include medical, vision, and dental coverage.|
Both employees and their dependents can enroll, but enrollment may not be required.
|Cannot be offered in conjunction with any group health plan, including vision and dental plans.|
QSEHRA must be available to all eligible employees, but employees may choose not to seek reimbursements.
Depending on the QSEHRA administrator, employers may have the option to reimburse all eligible health expenses, or premiums only.
|Who pays and how much||The employer generally pays 50% or more of the employee premium; the employee covers the rest pre-tax.||Only the employer can make QSEHRA contributions. The employer decides how much money to set aside for each employee, up to the annual maximum set by the IRS.|
|Tax benefits||Employer and employee contributions are free of payroll taxes. Employee contributions are free of income tax. Employer contributions are deductible as a business expense.||Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in MEC. Employer contributions are deductible as well.|
However, if employees purchase individual coverage, premiums are paid with after-tax dollars (unlike SGHI where premiums are paid pre-tax). If an employee receives a premium tax credit (PTC) for a Marketplace Exchange plan, the offering of a QSEHRA could affect the PTC.
|Time cost to employers||High—Plan selection and plan renewal require employer oversight. Employers must also provide an open enrollment period each year so employees can make changes to their benefits.||Low—Employees find their own coverage either through the individual marketplace or their spouse’s group coverage. |
Employers select the reimbursement amounts, and a third-party administrator can handle the rest.
|Ease for employees||High—Employees choose between plan options provided by their employer.||Low—Employees have to find the right plan that meets MEC requirements.|
– Integrated HRAs
– Health FSAs
– HSAs, but only if coupled with a premium-only QSEHRA (a QSEHRA that reimburses only premiums, not other healthcare expenses)
|Participation requirements||Generally at least 60% of your team must enroll, but this varies by state and carrier.||0% (but all eligible employees must be offered a QSEHRA)|
Even with all this info, deciding which option is better for your particular business isn’t cut and dry. To figure out the right option for you, ask your broker the following questions:
- Which option will be most cost-effective for my company?
- Which option will provide the most value for my employees?
- The average age of my employees is “X,” what will be most helpful to them?
The bottom line
In general, if you have the budget and time to invest in your team’s health benefits, small group health insurance is a great option for them. Eligible employees can sign up for plans you’ve selected and access care when they need it.
But if saving money is currently essential for your business, the QSEHRA can be your first step toward offering a health benefits package. There are no participation and employer contribution requirements, so you decide what and how much to reimburse—calculate how much a QSEHRA will cost you with this tool. Once you’re ready to get started, learn how to set up a QSEHRA.
Then, when your business is ready and able, you can offer more robust small group plans yourself.
The best first step is to talk to a health insurance broker. We can help with that.
Originally published on April 25, 2019.