While for many years group plans have been the primary option for small businesses looking to offer health insurance, that is no longer the case. You’ve got options when it comes to health insurance reimbursement to employees, thanks to recent health reimbursement arrangements (HRAs). In this post we break down how small group plans and the reimbursement model work (and don't work).
Our new guide to small business health insurance provides an in-depth look, but for now let’s look briefly at the pros and cons of each option as you compare traditional small group insurance and the newer, superior model we call 401(K) style benefits or HRAs.
Small-group health insurance
Most people think of the model of small-group insurance (sometimes referred to as “fully funded”) because it’s the model of insurance with which most people have experience. While it is the standard-bearer of employer-sponsored benefits, small-group insurance remains difficult to understand both for employers and employees alike.
- Tax-free for employers and employees
- Well known model
- Great products available
- Employees don’t have to think much
- Perceived as an excellent recruiting tool
- Fluctuating yearly costs
- Required participation rates
- Subject to potential risks
- True cost of care hidden from employees
- Little plan flexibility
Health reimbursement arrangements (HRAs)
There are several types of HRAs, but there are currently only two types that allow for employers to reimburse employees tax-free for qualified individual insurance premiums:
These new HRAs are sometimes referred to as “401(K)-style” insurance.
In general, HRA is an umbrella term for any legal arrangement between an employer and their employees to reimburse for medical expenses and/or insurance premiums on a tax-free basis. Under this arrangement, employees purchase their own health insurance on the open market and then submit claims to their employer to get reimbursed for the cost of their premium and if allowed, all qualified medical expenses.
- Reimbursements are tax-free
- Employers keep unused funds
- Predictable budget year after year
- Insurance not tied to employer
- More plan choices for employees
- No participation rates
- Fast and easy setup
- Dependent on a strong individual market
- Limited provider networks
- Conflicts with premium tax credits
- Owner participation limitations
- Confusion over new model
How health insurance reimbursement to employees works
As the name implies, HRAs like ICHRA and QSEHRA are based on reimbursing employees for insurance rather than buying it for them. At a high-level, the way HRAs work is very simple:
- Design: Employers design their plan, including establishing reimbursement limits and defining which employees are eligible. For ICHRA specifically, employees can be divided by classes (full time, seasonal, part time, salaried vs. non-salaried, etc. and each class can be extended a different level of benefit—varying reimbursement amounts or even in combination with a group plan. For QSEHRA, you can only vary based on age or family size.
- Choose: Employees purchase the individual plans they want.
- Submit Proof of Coverage: Employees submit claims for reimbursement (can be as easy as snapping a picture of a receipt).
- Reimburse: Employers reimburse employees for valid claims.
How can Take Command Health help you?
If you are searching for a hassle-free way to offer affordable benefits, a small business HRA is certainly worth considering. Use our QSEHRA tax savings calculator to see how much you could save, or take a spin with our QSEHRA plan designer tool to see what your monthly costs would look like.
If you're ready to get started, setting up a small business HRA is a breeze! Our team is here to help clear up any confusion surrounding small business health insurance options. Don't hesitate to give us a shout via our chat feature on the website. We would be happy to help.