There's a new way of doing small business health insurance for owners. Business owners have more options than ever when it comes to health insurance for themselves and their employees. Gone are the days of the rigid, expensive, one-size-fits-all group plan. With health reimbursement arrangements, or HRAs, you can offer your employees flexible, customizable, tax-free reimbursements for health insurance. In many cases, owners can participate as well. It’s a win-win situation!
As a business owner, you have three options in terms of small business health insurance.
- Group insurance: Historically speaking, small-group insurance has been the primary option for many small employers who are looking to offer health benefits for their employees. In fact, around half of the U.S. population is covered through their employer plans, according to Kaiser Family Foundation. These plans are well known, tax-free, with solid product options, and are proven to be an effective retention strategy. But they aren't the only option. We see that as a good thing given that they are expensive, one-size-fits-all, and unpredictable since premiums can go up every year. What's more, as an owner you have to worry about participation rates. And remember, since your employees will all be in the same risk pool, one sick employee means higher prices. The traditional small group plan separates patients from the process; they simply swipe their card and aren't empowered to make financially savvy decisions. We'll go out on a limb and say that this attitude doesn't help an already expensive healthcare system.
- Self-funded plans: Technically speaking, self-insured employers pay for claims out of pocket when they arise as opposed to paying a predetermined premium to a carrier for a small group plan. This type of plan is usually seen with a large enterprise as a means to control their healthcare spend and manage their own risk pool. A third party administrator (TPA) is engaged to process claims for this type of plan. The benefits of this type of plan are that it's more customizable to your workforce, you have control over the health plan reserves so you can maximize your interest income, there's no pre-funding of health coverage, and you aren't subject to state health insurance premium taxes (typically 2-3%).
- Health Reimbursement Arrangements(HRA): A health reimbursement arrangement is an affordable, tax-advantaged alternative to traditional insurance. The reimbursement model is simple: An employer decides how much money to contribute each month, provides their employees with standard information about how the HRA works, and outsources some administrative functions like verifying coverage. The employee chooses a plan that works for them, submits receipts for premium payments and medical expenses (if applicable), and gets reimbursed. Super simple.
It's that last option we are jazzed up about.
It's new, it's affordable, and it's changing the way we talk about health insurance for small businesses.
So we're going to keep talking about it and what options you have with the reimbursement model.
HRAs: The best small business health insurance for owners
Take Command Health’s research shows that employers signing up for the reimbursement model appreciate many HRA benefits. With an HRA, they are realizing they don't have to stress over huge renewals, worry about participation rate requirements, or manage the variability and unpredictability that comes with being responsible for employees’ health costs. They can provide a benefit and get back to being business owners.
There are two "flavors" of HRAs that are gaining the most traction right now. The most recent, the individual coverage HRA, is new as of this year. Its predecessor, the Qualified Small Employer HRA, was signed into law in late 2016 by President Obama.
Here's a little more about these HRAs.
This superior model to traditional group insurance helps employers manage risk, cost, participation, flexibility, and issues with tax credits.
ICHRA: the individual coverage HRA is based on reimbursing employees for insurance rather than buying it for them, and brings with it a design feature that allows owners to scale benefits by class.
- It offers the most flexibility, with 11 ICHRA employee classes, the employer gets to choose, for example, how much to reimburse full time vs. part time employees, seasonal employees, and salaried vs. non-salaried employees.
- ICHRA works for companies of any size: from a start-up to a large company.
- There are no reimbursement limits.
- It can also be combined with a group plan.
QSEHRA: the qualified small employer HRA (sometimes called a small business HRA) 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.
- It works for businesses with fewer than 50 employees.
- There are QSEHRA contribution limits (for 2020: For an individual: $5,250/year or $437.50/month. For a family: $10,600/year or $883.33/month).
- It cannot be combined with a group plan.
- Unlike ICHRA, QSEHRA reimbursements must be the same for everyone, but you can vary by age and family size.
When business owners are eligible for HRAs
Partnerships: Partners are directly taxed, making them self-employed and not eligible for participation in either ICHRA or QSEHRA. The QSEHRA Loophole: if the partner’s spouse is a W-2 employee (and not a partner spouse) then the owner can participate in the QSEHRA as a dependent of the spouse.
Corporations: (Including C-Corps, B-Corps, Non-Profits, and LLCs taxed as C-Corps - anything where the entity is separate from ownership.) Corporations are the easiest entity type to handle when it comes to health insurance because owners are considered employees and can benefit from the company’s QSEHRA or ICHRA. Their dependents and any W2 employees can benefit as well.
S-Corps: An S-Corp owner that owns more than 2% of the company is considered self-employed and not an employee, therefore typically cannot participate in the HRA. However, self-employed individuals can already deduct some health insurance expenses without an HRA.
Sole proprietors: These unincorporated businesses are owned and operated by one individual with no distinction between the business and owner. In a nutshell: The sole proprietor is not an employee and will not qualify for an HRA.
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 location market conditions to determine what the best plan will be for your company benefits.