Let's talk about the questions a small business owner should ask about health insurance, because whether you like it or not, that plays into the financial reality of your company and needs to be a part of your growth plan. More business equals more employees equals a greater need for health insurance. The good news is you have more options than you might realize!
Why is health insurance important for my small business?
If you are planning on growing, having a competitive benefits package is key to recruiting and maintaining the top talent in a tight job market. Your company is only as good as the team you build, and it's just common sense to ensure that those valuable team-members remain loyal. Compensation is a big driving factor for effective retention strategies, but other things like benefits and culture are also extremely important to today's workforce.
Benefits aren't just important to ensure that your team is happy and covered, if you fail to offer competitive benefits, it can bring some serious financial consequences, not to mention the risk of losing employees you depend on (and information and ideas) to competitors.
Small business health insurance options
Historically, small-group insurance has been the primary option for many small employers who are looking to offer health benefits for their employees, but that's just not the case anymore.
While these plans are the most widely known and understood, they are not the only option. You actually have THREE options! What works best for you depends on how your company is set up, how individual and group plan costs vary in your geographic area, and the health of the individual market near you.
Here are your options for health insurance for small business:
- Small group insurance
- Self funded plans
- Health Reimbursement Arrangements (HRAs)
Let's look briefly at each option.
Option 1: Small group insurance
What is small group insurance?
Historically speaking, small-group insurance—or fully-funded insurance—has been the primary option for many small employers who are looking to offer health benefits for their employees. It is geared toward businesses with less than 50 full time employees everywhere except four states where it applies to businesses with up to 10 employees.
Group Insurance health plans provide coverage to a group of members, usually comprised of company employees or members of an organization. Group health members usually receive insurance at a reduced cost because the insurer’s risk is spread across a group of policyholders.
Option 2: Self-funded plans
What is a self-funded plan?
With the cost of healthcare continuing to rise, some employers are looking to self-funding as a means to save on costs. 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, also known as a self-insured plan, is usually seen with a large enterprise as a means to control their healthcare spend and manage their own risk pool.
Option 3: Reimburse for health insurance with an HRA
A health reimbursement arrangement is an affordable, tax-advantaged alternative to traditional insurance where employers reimburse their employees for individual insurance premiums and medical expenses (if applicable) on a pre-tax basis.
Unlike Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) that are accounts, HRA stands for Health Reimbursement Arrangement, meaning that the model operates on reimbursements. Employees will pay the insurance company or doctor’s office directly and then submit a claim to get reimbursed for their expenses tax-free.
The use of new reimbursement models of HRAs put the employer's reimbursements on nearly the same tax playing field as traditional small group plans, but without all the hassles and requirements. Before, a big advantage for group plans was that they were deductible expenses for employers and were taken out of employee paychecks on a pre-tax basis. With an HRA, employers can make reimbursements without having to pay payroll taxes and employees don’t have to recognize income tax. In addition, reimbursements made by the company count as a tax deduction.
Types of HRAs
QSEHRA: To cut quickly through the insurance jargon (it stands for “Qualified Small Employer Health Reimbursement Arrangement” by the way), a QSEHRA allows small employers (businesses with less than 50 FTEs) to set aside a fixed amount of money each month (up to $437.50 per month for individuals and $888.33 for families in 2020) that employees can use to purchase individual health insurance or use on medical expenses, tax-free.
ICHRA: The individual coverage HRA has all the same benefits as QSEHRA, but with no maximum contribution limits and no company size limit. In addition to the flexibility of varying rates based on age and family size like QSEHRA, the hallmark feature of ICHRA is that benefits can be scaled across different classes of employees. That means an employer can offer one reimbursement amount to seasonal workers, another amount to part-time, and varying amounts based on geographic area, allowing further streamlining of total benefit spend. An ICHRA can also be integrated with a group plan, which is another distinction.
Benefits of reimbursing for health insurance
- Optimized Benefits
- Tax Efficiency
- Flexible Design
- Budget Control
- Allows employers to get out of the health insurance risk management game.
What's best for my company?
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 stack up against group plans in your area. 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.
Here are a few other helpful resources if you want to learn more:
- The best options for health insurance for companies
- Group health insurance for self-employed
- Health insurance for employees: where to start?
- How much does health insurance for employees cost?
- Health insurance options for business with one employee
- The best strategy for health insurance for small business