Small Business

Health insurance for small business with one employee

by Keely S.

If you are a small business with only one employee, you're going to want to find the best small business health insurance option to cover your health needs. There's a few routes self-employed individuals can go here, but make sure you choose an option that helps you from a tax standpoint and is budget-friendly. 

Whether you're a freelancer, consultant, independent contractor, or other self-employed worker who doesn’t have any employees, you'll need to add health insurance to that long list of "to dos" you have as a business owner. 

Since you're self-employed, you're likely either a sole proprietor or a single-member LLC. Sole Proprietorships are awesome because, well, you’re doing your own thing! It can get a little tricky though because there’s no separation between you and your business in the eyes of the IRS (i.e., you’re a “pass-through entity” or “disregard entity”) and owners are generally not considered to be employees even if you’re working for your company full-time. This includes Sole Proprietorships and Single-Member LLCs that did not elect corporate taxation..

Even if we're just talking about health insurance for you as a self-employed individual, it's incredibly important to play your cards right from a tax perspective, find a plan that will work for your budget, and to set yourself up for growth if you add members to your team moving forward. 

Here are your small business health insurance options. 

  1. Purchase an individual health plan, either off-exchange or from the ACA exchanges. 
  2. Consider an affordable alternative to traditional insurance like a faith-based sharing plan.
  3. Get on your spouse's employer-sponsored health plan, if applicable. (Note: QSEHRAs will reimburse for premiums for spouse's employer sponsored health plans but ICHRAs will only reimburse if spouse is on an individual plan, not a group plan).
  4. Purchase a group health insurance plan for yourself.
  5. Set up a health reimbursement arrangement.  

We're going to cover those last couple points in more detail. 

Group health insurance for one person?

This seems a littler counterintuitive if you are a one-man or one-woman show looking to sign up for a group plan. But some states require that insurance companies offer guaranteed-issue group health polices to self-employed business owners with no employees. This chart from Kaiser Family Foundation shows states where a self-employed group of one can buy a guaranteed-issue group health policy.

These plans are well known, tax-free, with solid product options but they also come at a high price, with very little flexibility, and with unpredictable year over year changes - all things that are tough for small businesses to accommodate. But don't worry, they aren't the only option. 

The best health insurance for a small business with one employee

While an individual plan or a group plan for one are both options to consider, we believe there's a better way, thanks to recent regulatory rule updates that increase the accessibility of health reimbursement arrangements. As advocates of small businesses of all kinds (we are a small business as well!), we like to help fellow business owners sort out the best health insurance option for them and cut through all the jargon and confusion. 

The best strategy for you depends on whether or not you're married (bet you didn't expect that!). If you are self-employed and are single, just take the self-employed tax deduction and purchase an individual health plan (or you may qualify for a group plan in certain states).

If you are a sole proprietor and work for yourself and have no plans to hire, and you are married, then we can explore a few more options. Recall that HRAs only work for employees. Although as a proprietor you generally are not eligible for an HRA because you’re not an employee, your spouse can be an employee and eligible for an HRA and health plan that covers you.

Here’s the strategy if you’re a sole proprietor with no employees and you’re married:

  • Hire your spouse as a W-2 employee:
    • Your spouse’s salary can just be the amount you want to reimburse through the HRA, but it must be a fair wage for what they are doing (i.e., you can’t reimburse $100k through an HRA if your spouse is not actually doing that much work)
    • It’s a good idea to have an employment contract and timesheet for record-keeping purposes

  • Make your spouse the primary member on your family health plan

  • Cover yourself as a dependent on your spouse’s health plan

  • Set up a One-Person 105 HRA or QSEHRA for your spouse:
    • Choose QSEHRA if you have health expenses that are less than the QSEHRA reimbursement limit ($10,250 as of 2018) or have other employees that are excludable under the QSEHRA regulations so that your spouse is the only eligible employee for the QSEHRA 
    • Choose an individual coverage HRA if you want to reimburse more than the QSEHRA reimbursement limit. Just note that it will only reimburse your spouse's health insurance premiums if the plan was purchased on the individual market; it doesn't not integrate with spouse's group plans.

    • Choose the One-Person 105 option if you have significant medical expenses or have other employees that are only excludable under the One-Person 105 rules (see Pro-Tip in the One-Person 105 HRA section above); the One-Person 105 HRA meets the HRA discrimination requirements because your spouse is the only eligible employee
    • Save all your medical bills and records and have your company reimburse the bills each month from a separate account

This strategy only works if you don’t hire any other W-2 employees that would be eligible for either the QSEHRA and assumes that you and your spouse don’t own any other businesses that have employees (common ownership rules would likely apply and the plan would fail to meet Section 105 requirements). You’ll need to keep good records, too. This sounds like a loop-hole and it is, but it’s held up in tax court. The main case was Shellito v. Commissioner

How does an HRA work?

You're probably wondering what all of this HRA business is about. Let us explain. As a self-employed individual, you can reimburse premiums and medical expenses with an HRA. The reimbursement model (sometimes called a “defined contribution”) gives you a greater ability to control costs and provides more options to choose from. This is very different from the current model of group insurance (sometimes called a “defined benefit”) where you choose a plan and are limited to the options that fit.

Many small business owners like you are opting for the new reimbursement model instead (aka an HRA), which offers benefits galore, helps with budget control, and is more predictable.

There are two types we are going to talk about here: QSEHRAs and ICHRAs. (Sorry in advance for more acronyms coming your way). 

QSEHRA benefits

First up is QSEHRA (pronounced “Q-Sarah” for fun), a more efficient way for small businesses to offer health insurance. To cut quickly through the insurance jargon (it stands for “Qualified Small Employer Health Reimbursement Arrangement” by the way), a QSEHRA allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. 

QSEHRA benefits include:

  • QSEHRA can be offered to an employee on a spouse’s group plan.
  • Employees continuing coverage via COBRA are eligible for QSEHRA if they are personally paying the premium.
  • Employees with premium tax credits can also use QSEHRA, but the amounts offset (the do not stack).
  • QSEHRA is not subject to COBRA and ERISA.

QSEHRA rules

  • QSEHRAs, also known as small business HRAs, are only for companies with less than 50 employees. Makes sense. 
  • QSEHRA cannot be offered with a group plan.
  • There are reimbursement limits set by the IRS. Annual QSEHRA allowance limits for 2020 are $5,250 for employees with individual insurance plans ($437.50/mo) and $10,600 for employees with married and family insurance plans ($883.33/mo).
  • Premiums only and premiums + medical expenses are the only two options for reimbursement. Medical expenses only is not an option.

Individual coverage HRA (ICHRA) 

If you've read through some of the limitations of QSEHRA and feel they're not the right fit, there's another HRA available as of January 2020. The individual coverage HRA (ICHRA) has a few benefits that might make it more appealing. 

  • No reimbursement limits. If QSEHRA's reimbursement limits are a deterrent for you, then ICHRA could be the way to go.
  • Can be combined with a group plan. In the future, you'd have the flexibility to offer a group plan for some types of employees and an HRA of varying amounts for others. 
  • For companies of any size. Assuming growth is in your future, it's good to know that companies of any size can use this health reimbursement arrangement, not just small companies.

Pro-tip: Note that with an ICHRA, if you're on your spouse's plan and planning to reimburse premiums with the HRA, it won't work if your spouse is on a group plan. It only works if they've purchased a plan on the individual market. 

Is an HRA right for you? 

While we always advise our clients to speak with their CPA before jumping in, we are ready to chat on our website if you have any specific questions about your business and how HRAs could help. Setting up a small business HRA or setting up an ICHRA is simple and quick, and our team is here to help if you need it. 

And remember, what's best for one company isn't necessarily best for another. It is important to consider your company's unique makeup and your local market conditions to determine what the best plan will be for your company benefits. 

Picture of Keely S.

Hi, I'm Keely S.! A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.