Offering a QSEHRA vs. group health insurance

The traditional healthcare benefits option for employers remains group health insurance. But, group policies are difficult for small employers to offer. That’s why more small business owners are turning to more cost-effective personalized benefits like the qualified small employer health reimbursement arrangement (QSEHRA).

The introduction of the QSEHRA in 2016 gave small business owners access to an affordable and flexible health benefit. As an alternative to a group health plan, the QSEHRA has grown popular among employers. But if you’re unsure which option is best for your organization, you may want to compare the two employee benefits first.

This guide will explain the differences between the QSEHRA and group health insurance. We’ll also compare the two health benefits in a comprehensive chart.

In this blog post, you’ll learn:

• The critical differences between QSEHRA and group health insurance.
• The financial implications of each benefit type.
• The ease of administration associated with QSEHRA compared to group health plans.

What is a QSEHRA?

First, let’s briefly review how a QSEHRA works. A QSEHRA is for employers with fewer than 50 full-time equivalent employees (FTEs) who don't offer a group health or ancillary plan. With this type of HRA, small employers can reimburse employees tax-free for their individual health insurance premiums and other qualified out-of-pocket medical costs.

With a QSEHRA, you set a monthly allowance for your employees. This is the most you’ll spend on reimbursements for monthly premiums and other medical care expenses. Once employees make an approved purchase, you reimburse them tax-free up to their set allowance amount.

HRAs are employer-owned, so only you can fund them. The QSEHRA has no minimum contribution requirements. But, the IRS sets annual maximum contribution limits. Because of its flexibility, the QSEHRA is an excellent solution for small businesses looking for a quality health benefit that won’t blow their budget.

What is group health insurance?

Next, we’ll discuss group health insurance. A group health plan is an insurance policy employers buy and offer their employees. Employees can enroll in this type of plan at a reduced rate because insurers spread risk across the entire group. Individuals can’t buy group coverage on their own—it’s only available to a group.

Most employers offer a major medical group plan, such as a health maintenance organization (HMO) policy, preferred provider organization (PPO) plan, or another type of policy.

Employers can buy a group plan from a health insurance company, licensed agent, or broker. In some states, smaller employers can buy a small group plan on the Small Business Health Options (SHOP) marketplace.

Group health insurance covers 153 million Americans. Because most individuals are familiar with how it works, it continues to be a popular health benefit for employers of all sizes.

How does a QSEHRA compare to group health insurance?

Choosing the right health benefit can go a long way toward attracting and retaining key employees in a competitive job market. So before you decide between offering the QSEHRA or group health insurance at your company, let’s go into detail about how they compare.

Eligibility

In most states, employers with 1-50 employees can buy small group health insurance on the SHOP Marketplace. The SHOP Marketplace helps small employers provide secure, affordable health coverage. But there are eligibility requirements.

Below are the eligibility rules small employers must follow to buy a SHOP plan¹:

• SHOP plans are for employers with 1-50 FTEs. In some states, employers can have up to 100 FTEs.
  • If you have only one FTE, it must be someone other than the owner. It also can't be the owner’s spouse, another family member, or a business partner.
• Typically, small employers must enroll at least 70% of workers in the group plan. Minimum participation requirements can be challenging for small organizations to meet.
  • The organization can't offer coverage if it doesn’t meet the minimum requirements.
  • SHOP plans waive minimum participation requirements if you enroll from November 15 to December 15.
• If you’re shopping on a state-based SHOP exchange, you must have a physical office within that state.
• You must offer coverage to all your full-time employees, which is anyone who works 30 or more hours per week.

Employers ineligible for a SHOP plan can enroll in traditional group health coverage directly from a private insurance company as long as they meet the participation requirements and can afford the premiums.

To avoid the eligibility requirements that come with group health plans, small employers can offer a QSEHRA.

The following are the eligibility requirements for QSEHRAs:

• A QSEHRA is only for employers with fewer than 50 FTEs. Employers can’t offer group health insurance or an ancillary plan.
  • If you have 50 or more FTEs, you can still offer an HRA. An individual coverage HRA (ICHRA) is available to employers of all sizes.
• As long as you have at least one W-2 employee, you can offer a QSEHRA.
• You must offer the QSEHRA on equal terms to all your W-2 full-time employees.
  • You can offer it to your part-time workers on the same terms as full-time employees.
• Employees must have a health plan that provides minimum essential coverage (MEC) to participate.

Flexibility

Group plans have limited flexibility, especially if you have a diverse workforce.

Here are some potential flexibility concerns that come with group plans:

• The one-size-fits-all structure of group coverage can leave your employees with limited healthcare options depending on their needs and location.
• Each state has its own minimum participation requirements and other insurance regulations. Depending on how many locations your company has, finding a group plan that works for every employee can be tricky.
• Your chosen insurance company may only operate in some states or counties. If you have remote workers who live across the U.S., they may not all be able to get coverage. You may have to offer multiple health plans.
  • Some insurance providers offer multi-state group health plans. But even if your insurer offers one, your employees’ network providers and covered medical services will vary. This can provide a negative employee experience and reduce company morale.
• Employers choose the group plan that works best for their organization. This means employees don’t have a say in their plan options or covered services.
  • For example, your plan may not cover their preferred healthcare provider or medical services. This can result in your staff paying more out-of-pocket medical expenses.

If you want to offer a flexible benefit, a QSEHRA is the better choice. You can customize it and support your employees—regardless of their specific needs.

Here’s a snapshot of how a flexible QSEHRA can work for your organization:

• With a QSEHRA, employees can choose the individual coverage that works best for them. They can use the benefit as long as their health plan provides MEC. This means employees with coverage through their spouse or parent can still participate.
• Employers can determine whether they want only premiums or premiums plus qualified out-of-pocket costs to be eligible for reimbursement.
  • Our 2024 QSHERA Report found that 42% of all QSEHRA reimbursements were for health insurance premiums. But 58% were for non-premium medical expenses. So, offering a premium plus QSEHRA is the most valuable option for employees if you have the budget.
• You can design your QSEHRA to allow employer-sponsored premium reimbursements (ESPR). This allows you to reimburse your employees for their spouse’s employer-provided health plan premiums. These reimbursements will likely be taxable.
• If your company is fully remote, you can still reimburse your employees for their individual health plan premiums. This allows them to choose the best plan for themselves, their families, and their geographic location.
• You can vary QSEHRA allowance amounts by family status, age, and family size.
• Unlike group health insurance, QSEHRAs have no minimum participation requirements.

Cost

Group health insurance is sometimes less expensive for employees than other coverage options. This is because the risk spreads among the entire group and because their employer contributes toward the cost of their premium. But it’s generally still a costly option for small employers because they have a smaller group.

Let’s look at the general cost of group health insurance below:

• In 2023, the average annual group health insurance premium was $8,435 for self-only coverage and $23,968 for family plans².
  • Employers contributed an average of $7,034 toward their employees’ self-only coverage and $17,393 toward family coverage.
• Employers who qualify for the small business health care tax credit can save on premium costs for SHOP plans.
  • Eligible employers who qualify for the tax credit can receive up to a 50% discount on their employees' premiums. Nonprofit employers can receive up to 35% off.
• Group plan premiums vary by age, number of participating employees, your company’s medical claim history, industry, and other factors.
• Most group policies have annual rate hikes. So, it can be difficult for employers to predict their costs from year to year.

In contrast, QSEHRAs don’t require employers to buy a group plan. So, they’ll save on premiums and avoid rising healthcare costs.

Here’s a look at how cost works with a QSEHRA:

• QSEHRAs have no minimum contribution limits. You can offer an allowance that works best for your organization if you have a smaller budget. This gives you greater control over your company finances.
• You can offer up to the set annual maximum if you have a larger budget. In 2024, small businesses can contribute up to $6,150 for self-only employees and $12,450 for employees with a family. Once you set your allowance, employees can’t exceed it.
  • These allowance caps are less than the average cost of employer contributions to a group plan. This shows that even by offering the full allowance, employers can save money compared to a group plan.
• You don’t pre-fund HRAs. Instead, you only reimburse employees after they buy an eligible expense and you approve their claim documentation. Any unused allowance at the plan year's end (or if an employee leaves your company) stays with you.
• All QSEHRA reimbursements are free of payroll taxes for employers and employees. Reimbursements are also free of income tax for your staff.
• If you use HRA administration software or a third-party administrator (TPA), you’ll have to pay a monthly or annual fee for their services. Depending on your chosen TPA or HRA administrator, your costs will vary.

Premium tax credits

Employees who have employer-sponsored group coverage are usually ineligible to receive premium tax credits. That’s because credits are only available to individuals who have unaffordable coverage. Most times, traditional group plans meet the ACA affordability requirements so employees can’t qualify for credits.

However, on the rare chance that an employee has unaffordable group coverage, they may be able to qualify for premium tax credits.

Check out how employees with unaffordable group plans can leverage premium tax credits in the section below:

• Employees with group health coverage are only eligible for tax credits if their premiums are unaffordable.
• Before, affordability testing for group plans only used the employee’s income and the cost of a self-only plan. Now, the calculations use household income and the cost to cover the employee and their eligible family members.
  • If an employee’s plan is unaffordable (meaning they pay more than 9.02% of their income for coverage), they can decline it and buy subsidized marketplace coverage if they qualify for premium tax credits.
  • If employees accept their employer’s plan, their family members can still decline it and buy subsidized ACA coverage.

HRA allowances pay for monthly health insurance premiums with tax-free money. Therefore, eligible employees must coordinate their QSEHRA allowance with tax credits. Similar to group health plans, this depends on affordability.

Let’s see how employees must coordinate their QSEHRA with tax credits:

• For 2025, an employee’s QSEHRA allowance is affordable if they’re not paying more than 9.02% of their actual income for the second-lowest-cost silver plan premium on the Marketplace.
  • They’ll run these affordability calculations after they factor in your QSEHRA allowance.
• If an employee’s QSEHRA is affordable for a given month, they can’t collect their credits that month. If your benefit isn’t affordable for one or more months and they’re eligible for credits, they can collect them. But they must reduce their subsidy by their QSEHRA allowance.

Ease of administration

Even though many employers offer group health insurance, it can be time-consuming and complex to administer. This is especially true for small employers with limited resources and budgets.

Learn what you need to know about administering a group health plan below:

• You must frequently communicate with your health insurance company and employees to manage your group plan effectively. This ensures your enrollment process runs smoothly and your staff knows what to expect from their health plan coverage.
  • A benefits specialist can help you manage your employees’ health insurance questions. But, this may not be workable if you have a small HR team.
• The annual benefit renewal process for group health insurance plans is complex. You must review your benefits package, survey your employees, research policy options, work with insurers, negotiate premium rates, conduct an effective enrollment process, and potentially more.
  • These tasks are time-consuming and can take time and money away from running other aspects of your business.

You must manage a QSEHRA properly to avoid compliance issues and deliver the most value for your employees. You can self-administer a QSEHRA. But, using an HRA administrator, like PeopleKeep, is easier for small employers. Plus, it will save you time and help reduce errors.

Here’s how PeopleKeep can help you manage your QSEHRA benefit:

• Administering your QSEHRA with PeopleKeep is quick and headache-free. Most small employers can administer their benefit in only a few minutes per month.
• We tackle tedious tasks, such as:
  • Preparing and updating plan descriptions
  • Reviewing reimbursements
  • Storing employee documentation
  • Following compliance regulations
  • Staying current on industry trends
• Your employees can shop for health insurance right from their PeopleKeep accounts, simplifying the process of finding coverage.
• You and your employees will have access to our award-winning customer support team. You can contact our team if you have questions about administration, reimbursing employees, IRS regulations, what expenses are eligible, and more.
• Unlike working with a TPA, our software is only a support system for you for plan design and beyond. That way, you remain in control of your benefit the entire time.

QSEHRA vs. group health insurance comparison chart

The chart below recaps the key differences between the QSEHRA and group health insurance.

Conclusion

While many large employers still offer group health insurance, it may not be the best choice for small business owners. Group plans are costly, rigid, and time-consuming to administer. Plus, they may not meet your diverse staff’s unique needs. Instead, a QSEHRA is an attractive alternative to group health plans that gives your employees greater control over their healthcare outcomes while saving your company money.

If you’re a small business owner looking to offer a QSEHRA, PeopleKeep has what you need. With our HRA administration software, we’ll help you manage your QSEHRA benefit quickly and easily so you can spend your valuable time running your business. Have a conversation with one of our HRA specialists today, and we’ll get you started!

1. HealthCare.gov SHOP eligibility

2. KFF's 2023 Employer Health Benefit Survey