When it comes to choosing a health insurance package for your business, the devil is in the details. Depending on your business’s characteristics and employee makeup, one form of health benefit will meet your needs better than another.
Below are some of the key criteria you should use to select the best type of health insurance for your small business.
Most types of health insurance vary in their ability to serve your needs depending on how many employees you will be covering. This first point of consideration is not only an indicator for how much you should budget toward health insurance, but it also determines which insurance types you qualify for.
For example Many small businesses are unable to meet minimum participation requirements or afford traditional group health insurance. In this case, a health reimbursement arrangement (HRA) will likely be the better option.
Types of employees
The next point of consideration is the types of employees you hire. If your business primarily hires seasonal, full-time employees, you’ll likely choose a different insurance solution than a company that hires non-seasonal employees.
Businesses operating in more than one state
One more consideration to make is whether or not the company has employees based in multiple states. In these cases, businesses often have a hard time finding a single, traditional group policy that works for all eligible employees, and must find an alternative solution as a result, or offer multiple group health policies, which is not feasible for most businesses.
Below, the most common types of insurance are listed with use-case examples and considerations:
Traditional group health insurance
Traditional group insurance is one of the most common health benefits that businesses in the United States use. It is typically purchased through an insurance broker and administered through an insurance company. Group health insurance plans function by distributing the cost of healthcare across the company’s employees participating in the plan. Therefore, the larger the employee base, the lower the overall premium cost will be for employees.
For example: If a company has very few employees, and someone must have an expensive procedure done, the cost of insurance will go up significantly the next year. However, companies with a lot of employees will not experience the same sharp increases in insurance premium costs year over year.
Another point of consideration that businesses should make before offering a group health insurance plan is their available budget. According to the Kaiser Family Foundation, in 2019, the average business offering traditional group health insurance paid 71% of individual plans, equating to an average of $5,946 per year (this data includes all business sizes offering traditional group health insurance). And in order to be competitive, some small- to medium-sized businesses investigating group health insurance policies cannot afford this solution.
For large businesses, however, traditional group health insurance is better understood and more commonly offered than other insurance benefits. For this reason, many large employers choose to offer group policies simply because they are easier to communicate to potential employees than other insurance solutions.
Health Reimbursement Arrangements (HRAs)
Health reimbursement arrangements (HRAs) are just what they sound like, a reimbursement for health expenses. In this arrangement, employees shop for and purchase their own health insurance policies and submit the expenses to the employer for reimbursement.
One important advantage to HRAs is the tax-free nature of the reimbursements. Employers make the reimbursement payments without paying payroll tax, and employees receive the money without having to pay income tax. In this scenario, the employer and employee save a combined 35% on taxes.
For some small employers, this insurance benefit is more preferable to group health insurance for a few reasons:
- Employees have the freedom to choose a health plan that fits their needs best
- For small companies, both the employee and employer pay less per individual premium plan
- Employers set a guaranteed reimbursement allowance cap, helping keep them on budget
- There are 6 different types of HRAs that employers can choose from to fit their specific needs
While there are several different types of HRAs, the two most commonly-used HRAs for small employers are the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA).
The QSEHRA is restricted to businesses with fewer than 50 employees and that do not already have a group health insurance plan. With the QSEHRA, employers reimburse employees for individual health insurance plans as well as eligible out-of-pocket expenses. Therefore, the QSEHRA is beneficial for employees that have their own plan, are on a spouse’s plan, or simply want to use the reimbursement for out-of-pocket expenses. In addition, employers have the power to dictate the allowance cap and whether or not they want to restrict the HRA to insurance premiums or also include out-of-pocket expenses.
Use case 1: an employee could use the QSEHRA to pay for a portion of their spouse’s insurance premium and use the rest of the allowance to pay for medications, co-pays, and other out-of-pocket expenses.
Use case 2: employers can also restrict the QSEHRA to only apply toward the employee’s self-acquired insurance plan, and offer different allowance amounts to single employees and employees with families.
Businesses that exceed 50 full-time equivalent employees and have a group health insurance plan should look into the ICHRA (next).
The ICHRA is a health insurance benefit for companies of all sizes which focuses specifically on reimbursing employees for money spent on health insurance premiums. In this HRA, employers can choose to offer the ICHRA as a standalone benefit, or couple it with their own group health insurance policy.
The ICHRA is a new type of HRA that becomes available on January 1, 2020. With it, employers who were previously restricted from the tax advantages and budgetary control of the QSEHRA will now have those same privileges through the ICHRA.
Another difference from the QSEHRA is there are no allowance caps for how much an employer can reimburse their employees for. And, instead of being restricted to two employee types for setting allowance amounts, employers can use the 11 employee classes designated by the IRS.
- Full-time employees
- Part-time employees
- Seasonal employees
- Temporary employees who work for a staffing firm
- Salaried employees
- Hourly employees
- Employees covered under a collective bargaining agreement
- Employees in a waiting period
- Foreign employees who work abroad
- Employees in different locations, based on rating areas
- A combination of two or more of the above
Health Insurance Stipend
Businesses that simply want to provide financial support for health expenses to employees can use a health insurance stipend. With this benefit, employers simply add a line item to payroll checks that are labeled separately from the income amount. Health insurance stipends work well for employers that don’t have enough budget to offer a more formalized health benefit.
Although health insurance stipends allow employers to operate on a lower budget than other insurance solutions, they have their drawbacks. For example:
- Health insurance stipends are considered income and are not tax-advantaged funds
- Because health insurance stipends do not offer tax-advantaged funds, job-applicants are more likely to prioritize jobs with more competitive benefits packages
- There is no guarantee the funds will be used for health care costs
HSA vs. Health Insurance Stipend
A health insurance stipend is not an HSA and differs significantly. With a stipend, the employee is merely receiving additional income through payroll. In this situation, neither the employer nor the employee qualifies for tax savings. With an HSA, however, money is placed into a government-regulated savings account, is tax-advantaged, can be used for investments and even retirement. In fact, many financial advisors suggest maxing out HSA contributions each year over contributing additional money to a 401K.
Before you choose a health insurance benefit for your business, first use the following points of consideration to select the right health benefits option for your business:
- Does your business qualify to offer the benefit?
- Businesses with more than 50 employees cannot offer the QSEHRA
- Any size business can offer the ICHRA, but are restricted to reimbursing insurance premiums only
- Group health insurance can be very expensive for small businesses
- Who will you offer benefits to?
- Many businesses initially plan on setting exclusive rules for who they will offer health insurance benefits to. It is important to ensure the proposed restrictions are legal before moving forward
- Will your employees use the benefit?
- Another common issue that employers face is getting employees to participate in the benefit. Business owners should work to ensure employees participate in the benefit or make alterations to make it more appealing.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.