If you’re a small business owner, the last thing you want to spend your time, energy, and mental capacity on is health insurance for your employees, correct? Trying to choose a “one-size-fits-all” group plan is a headache, but what other options are there? We’re happy to tell you, there are indeed options! Small business HRAs, also known as qualified small employer health reimbursement arrangements, are gaining in popularity as an affordable alternative to traditional small business health insurance.
What is a small business HRA?
A small business HRA, or a qualified small employer HRA, is a health reimbursement arrangement designed specifically for small businesses (i.e., companies less than 50 employees). In short, the "HRA" part stands for “health reimbursement arrangement,” which differentiates it from HSAs (health savings accounts). The main difference is wrapped up in the word arrangement. The small business HRA allows small business 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. Employees submit health expenses for reimbursement; they don’t have a fixed amount in an account. Some know this model as defined contribution, instead of defined benefit. Make sense?
A brief look at where the small business HRA came from
At the very end of President Obama’s 2nd term in December of 2016, a hodge-podge bill called the 21st Century Cures Act was passed with a provision creating the QSEHRA.
The irony is at the height of the political debate in 2017 about healthcare reform, the 21st Century Cures Act snuck through and became law without many people noticing. It was endorsed by both Republicans and Democrats and was largely seen as a fix to the unintended consequences of the ACA and a “small business friendly” provision. Similar “defined contribution” structures were included in most major Republican healthcare reform plans.
We think this is important for prospective small business HRA users to know—while healthcare reform efforts could pick up again and things could change, the highly bi-partisan nature of support for the 21st Century Cures Act means it’s probably not going away anytime soon.
How does a small business HRA work?
The mechanics of a QSEHRA are surprisingly simple. At a high-level, employees pay for their own health expenses and you reimburse them. Here’s how it works:
- Employers design their plan and set reimbursement allowances up to the contribution limit
- Employees sign up for a plan that works for them
- Employees pay for their own health insurance and medical bills
- Employees provide proof of their expenses
- Employers reimburse the employee up to the set limit
- Employers outsource administrative functions like compliance, verifying coverage, etc.
The key to note is payments are 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.
If you want more flexibility (say you are balancing remote workers, full time, and part time, the newer HRA, called ICHRA might be a good fit for you.). Like a small business HRA, the individual coverage HRA allows employers to reimburse employees for health insurance premiums and medical expenses tax-free. But ICHRA has the ability to divide employees into classes, allowing you to give different levels of benefits to different types of employees. It also doesn't limit the amount of reimbursement like a small business HRA does.
Small business HRA eligibility requirements
For employers, the company must be less than 50 employees and not offer a group plan. For employees, it's good to remember is that in most cases, they are eligible if they are a W2 employee.
To participate, employee requirements must:
- Be covered by an insurance plan: Employees can be covered by their spouse’s plan, their parent’s plan or purchase their own individual insurance plan. Plans must provide Minimum Essential Coverage (MEC) as defined by the IRS in Section 106(g). MEC plans include major medical plans, Medicare, Medicaid, etc. Faith-based sharing ministries, short-term plans, and indemnity plans are not MEC but may be able to be supplemented with a MEC offering in order to qualify.
- Submit a claim for reimbursement: This may seem obvious but often gets overlooked! Employees have to prove they spent money on an eligible health expense before they can be reimbursed.
Can owners participate in a small business HRA?
Depending on how your business is set up, owners can participate in HRAs and enjoy the benefits as well. We go into a lot of detail in our small business HRA guide, but here are the highlights.
- Corporations are the easiest entity type to handle when it comes to health insurance because owners can also be employees.
- Sole Proprietorships can get a little tricky because there’s no separation between you and your business in the eyes of the IRS and owners are generally not considered to be employees even if you’re working for your company full-time.
- This last category we collectively refer to as “Other Pass-Through Entities.” Like proprietors, these are entities where income from your business “passes through” and is reported on your personal tax form. Most of the time, you’re not able to classify yourself as an employee (even if you work for your business full-time) and instead are classified as an owner and required to pay self-employment taxes.
Wondering if a small business health reimbursement arrangement is right for you?
While we always advise our clients to speak with their CPA before jumping in to reimbursing as an affordable alternative to health insurance for employees, 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 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, and health insurance costs for employees varies from state to state. It is important to consider your company's unique makeup and the health insurance market in your area to determine what the best plan will be for your company benefits.