Small business owners are finding out more and more that offering group plans for their employees is getting outlandishly expensive. If this is you, read on to see why QSEHRA might be the answer you’ve been looking for. Let’s break down the pros and cons of a group plan vs QSEHRA as well as how stipends and QSEHRAs compare.
Comparing QSEHRA vs Group Plans
Why QSEHRAs Trump Group Plans for Small Businesses
In the past, a big advantage of group plans was that they were deductible expenses for employers and were taken out of employee paychecks on a pre-tax basis. More and more, these big group plans are simply unaffordable and cumbersome for small business owners to offer. Another disadvantage of group plans is forcing everyone to choose the same type of plan, when people by nature have different needs and preferences.
Fast forward to the implementation of the 21st Century Cures Act, a new tool allows small businesses to enjoy the same tax benefits as big corporations, with more customizable and flexible options for employees to choose what's best for them.
With QSEHRA, employers can make reimbursements without having to pay payroll taxes and employees don’t have to recognize income tax. In addition, reimbursements made by the company count as a tax deduction. Pretty awesome, right?
There's one exception to note, however. The only reason QSEHRA is not on the exact same level as group plans is if an employee wants to “buy up” to higher coverage. For example, if a small business owner offers employees $400/mo through a QSEHRA but an employee wants to buy the $600/mo health plan, the remaining $200/mo comes from the employee using his or her after-tax dollars, whereas on some group plans employees could buy up with pre-tax dollars.
Affordability: QSEHRA vs. Group Plans
| QSEHRA | Group Plan | |
| Pros | There is no minimum contribution to give each month to your employees. You as the employer get to choose how much you are contributing each month, and when your contribution is deposited to your employees. Your employees also have the freedom to choose the insurance that is right for them. They don’t have to sign up for a plan that only slightly benefits them. | Employees have access to discounted group plan rates when they go the group plan route. Employees buying their own individual plans don’t have the benefit of discounted rates. |
| Cons | One way an employer might want to cut down on costs is to exclude different classes of employees. For example, employees who are older or have large family numbers would cost an employer more in contributions. This would not be fair to employees according to the rules of QSEHRA. | Group plan pricing increases year over year on average. Each state is different but there are increases over the last 10 years with most states seeing double. |
Flexibility: QSEHRA vs. Group Plans
| QSEHRA | Group Plan | |
| Pros | There are many options when it comes to strutting your QSEHRA plan. Employers are able to include AND exclude different classes of employees. For example, part time employees, seasonal, and employees under 25 can be excluded from contributions each month. Not to mention, employees are able to find a plan that is exactly what they need. Who wouldn’t want to be able to choose their own plan knowing what their health needs are! | Employers have the ability to advertise benefit packages that can attract a range of potential employees. |
| Cons | There are different tax rules when it comes to QSEHRA. Depending on how you file your taxes, the government has maximum limits in place. | Small businesses don’t usually have the flexibility to offer multiple plans so employees don’t have multiple options to find the right plan for them. |
Participation: QSEHRA vs. Group Plans
| QSEHRA | Group Plan | |
| Pros | The minimum number of employees needed to participate is 1! | N/A |
| Cons | QSEHRAs are only available for small businesses. This means that businesses with more than 50 employees are not eligible for QSEHRA. | Most states have a high participation rate of around 70% which makes it difficult for small business owners to compete with.
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Coverage Options: QSEHRA vs. Group Plans
| QSEHRA | Group Plan | |
| Pros | A huge benefit about QSEHRA is the personalization for each employee. Employees have the freedom to choose the plan that is right for them based on health needs, family size, and marital status. | N/A |
| Cons | Short term plans and Sharing plans are not reimbursable under QSEHRA rules. Some states have limited selections for individual and family plans. This might make it difficult for employees to find a truly personalized coverage option. | Most group plans have a one size fits all approach. Employees aren’t able to reap the full benefit of an “individualized to them” plan. |
Tax Benefits: QSEHRA vs. Group Plans
| QSEHRA | Group Plan | |
| Pros | A huge benefit of QSEHRA is that the reimbursements are tax free and employees can save around 30% compared to a large group plan insurance option. Additionally, reimbursements from employers cover monthly health insurance premiums and qualifying medical expenses. | Tax free contributions are allowed from both the employer and the employee. Allowing the most bang for you buck pre tax. |
| Cons | Unfortunately, any cost after the employer reimbursement is on the employee to pay for with post tax money. | Only health insurance premiums are covered while medical expenses are not covered. |
Location: QSEHRA vs. Group Plans
| QSEHRA | Group Plan | |
| Pros | Small business owners with employees in multiple states are still eligible for QSEHRA. | N/A |
| Cons | N/A | There are limited options when it comes to plans that cover employees across multiple states. For small businesses with employees in different states, this wouldn’t be an option. |
PTC (Personal Tax Credit): QSEHRA vs. Group Plans
| QSEHRA | Group Plan | |
| Pros | N/A | N/A |
| Cons | Personal tax credits offset the QSEHRA reimbursement money dollar for dollar. They cannot be stacked and used simultaneously. | Employees that would qualify for PTC are not able to access them if they are participating in a group plan. |
HRAs vs Health Stipends
Healthcare stipends aren’t subject to compliance issues that group plans have, and they can be really easy to administer through payroll. But they aren’t tax advantaged like a QSEHRA. Not only are small businesses required to pay payroll tax on the reimbursements, employees must claim the stipend as income and there isn’t exactly any accountability for whether or not the money is even used for health insurance.
For companies that help employees with health insurance by offering a “health stipend” or by “adding to employee salaries”, QSEHRA will typically have a huge tax advantage.
Here's an example:
Small business owner Ron runs a 10 person company offering $300 a month in salary increases, totally $3,000 per month for his team for a health stipend, which is subject to several types of taxes. In a one month period, a 25% employee income tax will run around $750, a 15% employer payroll tax runs about $450, totaling $1,150 in taxes.
Small business owner Hermione offers reimbursement through a QSEHRA and avoids employee income tax and employer payroll tax, saving a whopping total of $1,150 per month more than Ron (roughly a 30% savings).
With a QSEHRA, employees get to use the full value for their health insurance and medical expenses.
What's more, in contrast to a health stipend that really comes with no accountability, a QSEHRA allows small businesses to keep the unused funds at the end of the year and it's only paid out when employees submit a claim for reimbursement.
What's best for your business?
As you can see, QSEHRA is a great option for small businesses that want to offer benefits to their employees that are flexible and affordable for health benefits for their staff. The customizable design of Take Command's QSEHRA administration tool helps small businesses create a small business HRA that works best for their budget and business.
Still wondering what the best option is for your business? Learn more about your options for small business health insurance or schedule a call with one of our small business HRA experts today.
