Health Care Benefits for Small and Medium Employers – Which Approach is Right for You?

Over the last few days, I posted some entries about alternative approaches to health care benefits for small and medium-sized employers.   This post is to provide an overview of the two key options and their respective pros and cons.

If you’re a small to mid-sized business owner, you’ve probably realized that traditional group health insurance is… well, a lot. The costs keep climbing, the administration is a headache, and trying to find a “one size fits all” plan usually ends up fitting no one perfectly.

Enter the world of HRAs (Health Reimbursement Arrangements). Instead of buying a plan for your team, you give them a tax-free monthly allowance to buy their own. It’s a win-win: they get a plan they actually like, and you get a fixed budget.

But when you start looking into it, you’ll run into two main acronyms: QSEHRA and ICHRA. They sound like alphabet soup, but they work quite differently. Let’s break them down.

1. The QSEHRA: The “Small Business Original”

The Qualified Small Employer HRA (QSEHRA) was designed specifically for small businesses (under 50 employees) that don’t offer a group plan.

The Pros:

• Simple and Fair: Everyone gets the same amount, or you can vary it slightly based on age or family size.
• Ultimate Flexibility: Employees can use the money for premiums and out-of-pocket costs like dental, vision, or prescriptions.
• No Minimum Spend: You decide what you can afford; there’s no “floor” to the contribution.

The Cons:

• Strict Caps: The IRS sets an annual limit on how much you can give. If you want to be extra generous, your hands are tied.
• Company Size Limit: If you grow past 50 full-time employees, you’re legally required to stop using it.
• Premium Tax Credit Impact: If an employee gets a subsidy on the ACA Marketplace, their QSEHRA allowance might reduce or eliminate that subsidy.

2. The ICHRA: The “New, Powerful Alternative”

The Individual Coverage HRA (ICHRA) is the newer, more muscular cousin of the QSEHRA. It’s available to businesses of any size.

The Pros:

• No Contribution Limits: Want to give your employees $2,000 a month for healthcare? Go for it. There is no ceiling.
• Employee Classes: This is the game-changer. You can offer different amounts to different “classes” of employees (e.g., full-time vs. part-time, or salaried vs. hourly).
• Scalability: You’ll never outgrow an ICHRA. It works for a team of 2 or a team of 2,000.

The Cons:

• Stricter Insurance Requirements: To participate, employees must have a qualifying individual health plan. They can’t use it with a spouse’s group plan or “sharing” ministries.
• The “Opt-Out” Rule: If an employee’s ICHRA allowance makes health insurance “affordable” by IRS standards, they lose their ability to claim any government subsidies (Premium Tax Credits).
• Slightly More Complex: Because of the “classes” and affordability rules, the setup takes a bit more strategy than a QSEHRA.

Which One is Right for You?

Choosing between the two usually comes down to your growth goals and how much you want to contribute.

The Short Version: If you’re a small shop wanting to help your team with various medical bills and keep things simple, QSEHRA is your best friend.

If you’re looking to scale, want to offer different benefits to different departments, or want to provide a high-dollar benefit that replaces traditional insurance entirely, ICHRA is the way to go.

Do you need help to identify options that make sense for your business? Schedule a free consultation to discuss your challenges and explore the alternatives. Ken’s calendar