Health Benefits Options for Small Businesses, There are 31 million entrepreneurs in the US1 While starting your own business is exciting, it can also be challenging—especially if you’re trying to grow from a one-person team to a company with employees. One of the obstacles you may face is attracting and retaining employees. Before your first hire, you need to create a compensation package with health benefits that your employee will appreciate.
Many employers who are considering health benefits for the first time turn to traditional group health insurance first. But it can be too expensive for small business owners. Insurance carriers may also have strict participation requirements that not all employers can meet..
1. Small group health insurance
Many employers think that group health insurance is only for larger companies with a few employees. But businesses with one employee may still qualify for a traditional group health plan, depending on how their state defines “group.”
Here’s a quick overview of how group health insurance works for small business owners:
- If a business has an owner and employees (making a “group” of two), they are eligible for a small group health plan in all states.
- Employers can purchase small group plans through a private health care exchange established by an insurance company, authorized agent, or broker. You can also buy a plan on a public exchange, such as the Small Business Health Options (SHOP) marketplace. SHOP plans are only available in some states and have eligibility requirements that employers must meet.
- As with large group plans, eligible employers pay a fixed premium for the policy. The employee pays the plan’s co-payments, co-insurance and deductibles. They can also pay part of the monthly premium.
- Are you the owner and sole employee of your company? Although you won’t be able to get a group plan in most states, you can enroll in an individual health plan.
About 154 million people have employer-sponsored group health insurance2. Many employees already know how it works, which makes familiarity reassuring. But just because group plans are a common health insurance option doesn’t mean they’re the best choice for small businesses.
Group health insurance can have higher premiums and administrative costs than other options. It is also a “one size fits all” plan, which may leave current employees dissatisfied with the health plan coverage. This can cause talented workers to leave your organization for a company with better employee benefits, leading to costly turnover.
Budget management and flexibility are key factors when choosing a comprehensive health benefit. Small employers should look beyond traditional options and consider alternatives to group health insurance to make an informed decision for their organization.
2. Health Reimbursement Arrangements (HRA)
Instead of a group plan, you can consider a stand-alone health insurance reimbursement arrangement (HRA). HRA is an employer-funded health benefit that reimburses employees tax-free for their individual health insurance premiums and qualified out-of-pocket medical expenses.
With HRA, you set a monthly allowance amount that your employees can spend on medical care, including health insurance policies. Once employees make an approved purchase, you reimburse them tax-free up to their compensation limit.
Here are a few ways that HRAs benefit small businesses:
- HRAs are owned by employers. Any unused funds remain with you if the employee leaves your company.
- You do not need to pre-fund the account. You only pay your employees after they make a qualifying purchase. You keep all unused funds at the end of the year.
- They have no minimum contribution limits.
- They have no annual rate increases or minimum participation requirements.
- They enable your employees to choose the individual plan that suits them best.
- HRAs come with tax benefits. All benefits are exempt from payroll tax for employers and exempt from income tax for employees.
In the sections below, we’ll highlight two HRAs available to businesses with one qualifying employee: the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage HRA (ICHRA).
Qualified Small Employer HRA (QSEHRA)
QSEHRA is for small businesses with fewer than 50 full-time (FTE) employees. As long as you have at least one W-2 employee, you can offer QSEHRA.
Here’s a quick overview of how QSEHRA works for small businesses:
- The QSEHRA has annual maximum contribution limits set annually by the IRS. For more flexibility, you can adjust monthly payments based on age and family status.
- As your business grows, you must offer QSEHRA to all full-time W-2 employees. You can extend the benefit to part-time staff members. But they must receive the same compensation as your full-time employees.
- There are also eligibility rules for business owners. C-corp owners can participate in QSEHRA. But sole proprietors, partners and S-corp owners do not qualify.
- Monthly premiums and out-of-pocket medical expenses are eligible for reimbursement through QSEHRA. However, you can only form a benefit to reimburse health insurance plan premiums.
- Employees must have a health plan that meets the Minimum Essential Insurance (MEC) to participate in benefits. MEC includes individual health insurance, Medicare, Medicaid, and coverage through a parent’s or spouse’s group health plan.
Finally, if your employee is entitled to premium tax credits, they can collect them if their QSEHRA allowance is unaffordable. But their compensation amount will reduce their subsidy.
Individual HRA coverage (ICHRA)
Businesses of all sizes can offer ICHRA. Like QSEHRA, you can offer ICHRA as long as you have at least one W-2 employee. It also reimburses your employees for their individual health insurance premiums and qualified medical expenses. However, it has different features than QSEHR.
Here’s a quick overview of how ICHRA works for small businesses:
- ICHRA is for businesses of all sizes and there is no maximum contribution limit. This makes it the perfect option if you want to significantly increase your staff. It is also a better option than QSEHRA if you want to offer more benefits to every employee.
- You can change eligibility and allowance amounts by employee class, such as hourly or salary, for greater personalization.
- Only employees with a qualifying form of individual health insurance can participate in the benefits.
- If your employees only have coverage through their spouse’s group health plan, they will not be able to participate.
Like the QSEHRA, how Premium Tax Credits and ICHRAs work together is subject to availability. If the ICHRA is affordable, participants must give up their loans to opt for the facility. If it is not affordable for them, they can opt out of ICHRA and continue receiving their loans.
3. Health Benefits Options for Small Businesses
If you want something less formal than a group plan or HRA, you can offer a health insurance scholarship. Health grants are a fixed amount of money that employers offer to their employees to cover the cost of their health insurance premiums and a wide range of other out-of-pocket expenses.
Scholarships have fewer compliance regulations than other health benefits. Therefore, they are often easier for small employers to administer.
Here’s a quick overview of how health grants work for small business owners:
- Scholarships have no minimum or maximum contribution limits. So you can give your staff as much money or compensation as your budget allows.
- You can offer the scholarship as a one-time bonus or as a regular payment. But you can also use a fee model. In this case, you reimburse your employees only after they have eligible medical expenses.
- Scholarships are flexible enough to meet the needs of any diverse workforce. Employees can spend stipend money on health items and services that work best for them, increasing job satisfaction.
- Any type of worker is entitled to a scholarship. For example, if your only employee is a 1099 contractor or international worker, you can offer them the same compensation as a full-time employee or a US employee.
- Employees with premium tax credits can receive their full grant amount without affecting their eligibility for the subsidy.
However, scholarships have several potential drawbacks. The IRS considers stipends to be taxable income for the employee, and employers must pay payroll taxes on the benefits. Scholarships also do not meet the employer mandate under the Affordable Care Act. Employers with 50 or more FTEs must offer a group plan or ICHRA to comply with federal law. So, it might not be your best long-term option if you plan to expand your business.
After all, you cannot legally require your employees to use their benefits for medical expenses or ask them to provide a receipt for individual plan premiums, medical services or prescriptions. So, there is a possibility that they can use the scholarship for something else.
Conclusion
Comprehensive health insurance is one of the best investments a business owner can make. But for many small employers, the cost of group health insurance and dealing with complex compliance regulations isn’t worth it. Fortunately, HRAs and scholarships make it easy for business owners to provide affordable health benefits that their employees will love.
If you’re ready to choose an HRA or health stipend for your first employee, PeopleKeep is here to help! With our health benefits administration software, you can manage your health benefits in minutes per month. Book a call with us today and we’ll set up your small business with the right HRA or health grant for you.
