As small businesses grow larger in terms of employee numbers, they tend to have less-generous allowances for the QSHRAs. (Photo: Shutterstock)

An HRA designed for small businesses is overall providing adequate employee health coverage, although some variation exists, depending on the size of the company, a new study suggests.

The model is a relatively new one: qualified small employer HRAs (QSHRAs) came onto the market in 2016, amid a growing demand for new insurance options for small businesses, which were still struggling to provide affordable insurance to employees years after the passage of the Affordable Care Act.

Related: New HRA rules could allow businesses to circumvent ACA's employer mandate

The 2020 QSHRA Annual Report was released this week by PeopleKeep, a software provider for businesses using QHRAs. PeopleKeep has been tracking data on the new model, which allows it to analyze yearly trends and provide insights to employers.

An HRA for smaller employers

The QSHRA model allows employers with fewer than 50 employees to give workers tax-free money to purchase individual or family health care coverage and services. QSHRAs are like traditional HRAs in that funds are not put into a specific account for employees. Instead, the employer reimburses employees for expenditures like premiums or medical appointments. Unused funds do not roll over for future use but revert back to the employer at the end of the year.

The latest report notes that in 2020, the IRS increased the allowance for single employees (to $5,250 annually) and families (to $10,600 annually.) One concern is around whether these caps are set at levels that fit with actual spending.

The study suggests that in most cases, caps seem to be sufficient. The findings show 18 percent of single employees used up their total allowed funds in 2019, and 19 percent of families used their allowed funds. Although those numbers are not insignificant, the survey noted that for most employees, spending is well within the allotted budgets.

At the same time, the study found that most employers have not yet felt it necessary to set budgets that approach the IRS caps—the average single employee allowance was at 64 percent of the federal cap; the average family alliance was at 58 percent of the IRS cap. "In this case," the report said, "IRS regulations seem to be setting standards that meet and even exceed the needs and capabilities of small businesses."

Covering the basics—but bigger small companies provide less money

The PeopleKeep study found that employees are spending their funds about as expected: the five most common items submitted for reimbursement (outside of premiums) were: medical office visits, prescription drugs, chiropractic care, dental care, and mental health counseling. The two most common items were medical office visits and prescription drugs.

One the more interesting findings of the study was that as small businesses grew larger in terms of employee numbers, they tended to have less-generous allowances for the QSHRAs. This is seen in both individual and family accounts: 1-4 employee company single employee accounts were found to be, on average, $319 per month; the allowance goes down as more employees are covered, until single allowances for companies at 20-49 employees was, on average, set at $260. For family reimbursement, the accounts went from an average of $499 per month (1-4 employees) to $342 (20-49 employees).

"This … reveals a little bit about the way companies operate and prioritize benefits as they grow," the report said. "What is most clear is that as companies increase in size, the less they offer to employees. One hypothesis we have about why this might be, is smaller employers have to place more significant emphasis on leveraging health benefits to recruit and retain employees than their larger counterparts."

The study also noted that while employee participation in QSHRAs has increased, on average, employers have not raised allowances to adjust for rising costs. "Larger businesses with 10-49 employees will likely need to increase the allowance amounts they offer if they want to compete with smaller businesses," the report said.