6 takeaways from the first year of the QSEHRA
Benefits professionals, small businesses, and employees have now had one year to experiment with the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), a new benefit created by Congress in December 2016.
Thousands of small businesses used the QSEHRA last year, offering tax-free monthly allowances to reimburse employees for their personal healthcare expenses.
While the program was largely a success, there were a few sticking points in the benefit’s design that limited its value.
Here are six takeaways from the first year of the QSEHRA, drawn from data reported in the PeopleKeep 2018 QSEHRA annual report:
1. The QSEHRA is most popular among small businesses that didn’t previously offer benefits.
The Internal Revenue Code allows all small businesses with fewer than 50 employees to offer a QSEHRA. However, it proved most popular among the estimated 50 % of small businesses that don’t currently offer a group health insurance policy.
According to PeopleKeep data, 71% of businesses that used the QSEHRA did so to offer health benefits for the first time. Nearly 20% previously gave employees an informal, taxable stipend for healthcare and more than half offered nothing.
Just 6% previously offered traditional group health benefits.
2. Small businesses use the QSEHRA to better control their benefits budget.
Perhaps the single biggest reason small businesses adopted the QSEHRA was cost.
Group health insurance premiums continue to climb, and in 2017, small businesses offering a group policy spent an average $455 per employee per month for single coverage and $900 per employee per month for family coverage, after passing some of the cost on to employees.
For many small businesses, these costs are too high; while they understand the value of offering benefits, their budgets won’t stretch to cover it.
The QSEHRA represented an opportunity to both offer a benefit and control expenses. On average, businesses using a QSEHRA offered $280 per month per single employee and $477 per month per employee with a family—a cost reduction of 38% and 47%, respectively.
Allowances also varied greatly among businesses, from as little as $100 a month to the federally imposed maximums of $412.50 for single employees and $833.33 for employees with a family.
Both of these data points suggest that businesses offering a QSEHRA do so to exert greater control over how much they spend on benefits than they would have with a traditional group policy.
3. Employees use a majority of their allowance regardless of its size.
Although allowances varied greatly, employees’ behavior did not. In almost every case, employees collected at least 70% of the tax-free money available to them through the QSEHRA.
In fact, 52% of employees who submitted at least one expense for reimbursement collected the entirety of their allowance, including 53% of self-only employees and 52% of employees with a family.
Between the lowest allowances ($100 or less a month) and the highest ($412.50 for single employees and $833.33 for employees with a family), there was some difference, but it was modest. Employees receiving the smallest sums used 93% of their allowance, while those receiving the largest used 76%.
This suggests employees’ healthcare use is dictated at least in part by support from their company, and many businesses should consider increasing the monthly allowances they make available.
4. The federal caps on QSEHRA allowances are too low.
In 2017, nearly 30% of single employees and 32% of employees with a family received the $412.50 per month and $833.33 per month respective maximums that a small business could offer.
There is evidence these caps are too low. In 2017, the premium for the second-lowest-cost silver plan for single coverage was higher than the QSEHRA allowance caps in 17 states. Depending on their personal budgets and healthcare needs, employees may purchase lower quality policies or even avoid seeking treatment to stay within their allowances.
The caps are also below the average employer contributions to a group health policy, which were $455 per month for single coverage and $900 per month for family last year.
With the cost of healthcare continuing to increase, QSEHRA allowance caps should increase at a competitive rate. As it is, the caps were raised by just $100 annually for single employees and $250 for employees with a family.
5. Premium tax credit coordination requirements lessen the value of the QSEHRA.
Internal Revenue Code Section 36B requires everyone eligible for a QSEHRA benefit to coordinate their premium tax credit to reflect their QSEHRA allowance.
This means employees must determine whether their QSEHRA allowance qualifies as “affordable coverage” under the Affordable Care Act. If it does, the employee doesn’t qualify for the tax credit. If these conditions aren’t met, though, the employee must reduce the amount of their tax credit dollar for dollar by the amount of the QSEHRA monthly allowance.
In practice, this means the business essentially “pays first” and, if the employee’s premium tax credits are reduced to zero, the employee loses much of the value they would have received from the QSEHRA.
It also defeats the purpose many businesses have in offering a QSEHRA, which is to boost employee loyalty by offering a valuable health benefit.
6. The QSEHRA’s tax advantages don’t help everyone.
With the QSEHRA, all reimbursements are free of payroll tax to the business and its employees. They can be free of income tax, too, provided the employee has minimum essential coverage (MEC).
Often, this means employees who secure comprehensive coverage can receive QSEHRA reimbursements tax-free, while those who choose to go without coverage must pay taxes on any reimbursements they receive.
And employees fall through the cracks. For example, those who belong to groups like healthcare sharing ministries aren’t subject to the individual mandate, but they are considered without MEC and therefore subject to income tax on QSEHRA payments.
Additionally, membership fees for these groups aren’t reimbursable through the benefit.
This diminishes the value that these employees receive from the QSEHRA.
Evaluating the QSEHRA one year on
While quirks in the legal framework mean the QSEHRA provides different degrees of value for different employees, it almost always offers something for everyone.
Currently, it’s the only benefit that provides tax-free money to employees, whether they have an individual policy, are on a family member’s group policy, want to open a health savings account or have no coverage at all.
It also provides small businesses with a way to offer health benefits when traditional options aren’t possible. With a QSEHRA, these businesses gain control over their budgets, take themselves out of the middle-man role between insurance companies and employees, and offer a benefit that helps them hire and keep employees in a challenging market.