As a small business owner, offering a meaningful health benefit can be key to attracting and retaining employees. However, it can be challenging and costly for small employers to offer a health traditional health insurance plan.
One affordable option is an association health plan (AHP), which is a type of health insurance customized for people with a “commonality of interest.” This means plan members must share the same industry or profession. But what does that really mean for small employers?
In this article, we’ll explore what AHPs could mean for you, how they differ from typical group health insurance plans, and what alternative health insurance options you have as a small business, including health reimbursement arrangements (HRAs) and employee stipends.
What is an association health plan (AHP)?
AHPs are arrangements in which small businesses with fewer than 50 employees and self-employed workers band together within industries, professions, or geographic regions to buy large group health coverage or self-insure. AHPs aren’t a new category of health insurance but a way for small employers to provide health insurance.
AHPs aren’t required to follow certain Affordable Care Act (ACA) rules, like covering the essential health benefits or paying specific fees that individual health insurance has to pay. However, they can qualify as minimum essential coverage (MEC) under the ACA.
Other advantages of AHPs include compatibility with a health savings account (HSA) and the ability to cover contract and freelance employees, including 1099 employees, self-employed individuals, and sole proprietors.
You can design your AHP in a way that will best meet your employees’ healthcare needs. Some AHPs offer less coverage for prescription medications but greater coverage for annual wellness checkups with their primary care physician (PCP).
Therefore, it’s important to understand what your employees are looking for in a health benefit before you choose the AHP for your organization.
How much do employers save with an AHP?
AHP representatives negotiate with health insurance companies, medical network providers, and other suppliers for lower premium rates and more affordable healthcare services. The U.S. Chamber of Commerce reported that several successful AHPs across multiple states achieved large savings of 13% to 49% in recent years.
However, these savings could be because many AHPs don’t need to cover essential health benefits. This puts workers at risk for not having coverage for prescription drugs, maternity care, or mental health services.
Although lower in cost, AHPs come with fewer consumer protections. AHP critics claim the plan will encourage healthy workers to leave the individual health insurance market, making it less competitive and leaving behind sicker and costlier employees in the markets to fight for coverage.
How do AHPs differ from group health insurance?
AHPs work much like traditional group policies. However, the biggest difference between the two is that AHPs aren’t subject to the regulations put in place by the ACA. For example, AHPs can charge members higher premiums based on factors like their age, health status, and gender. Additionally, they can refuse to cover treatment associated with a pre-existing condition.
Although both insurance options have been around for years, AHPs have a history of financial instability and sometimes leave members unexpectedly without coverage. AHPs can offer significant savings for employers, but they should be considered carefully to ensure they’re providing exactly what you want.
How can employers enroll in an AHP?
Like traditional group plans, employers can enroll in an AHP anytime during the year without waiting for the annual open enrollment period. To enroll, you’ll need to provide your business type (such as for-profit, non-profit, incorporated, etc.), your business taxes from the previous year, your company’s location, and other pertinent information.
To give you a more accurate estimated rate, you’ll also need to know which employees you’ll be offering the AHP to, their ages, and their eligible dependents. However, even if you offer your employees coverage, they can decline to participate.
Once you’re enrolled, your employees will receive an insurance card, just like they would with other group plans.
HRAs and stipends provide an alternative health benefit option for small employers
While they could be financially beneficial, AHPs don’t always provide the most comprehensive coverage for employees in the long run. If you’re seeking an escape from expensive traditional group health insurance, consider offering an HRA. An HRA is an employer-funded health benefit used to reimburse employees, tax-free, for qualifying out-of-pocket medical expenses and health insurance premiums.
Many small employers prefer HRAs over group health insurance because they’re more flexible and affordable. With an HRA, employees can purchase their own health insurance through the state-based or federal Marketplace and are guaranteed coverage of essential benefits as stated by the ACA. Let’s take a quick look at two popular types of HRAs.
Qualified small employer HRA (QSEHRA)
With a QSEHRA, employers with fewer than 50 full-time equivalent employees (FTEs) offer employees a set monthly allowance. Employees then purchase the health insurance policy that works best for them and their families.
The employee submits proof they incurred an eligible expense, often in the form of a receipt or invoice, and the employer reimburses them up to their allowance amount. QSEHRAs have an annual contribution limit that the IRS sets. Employers can choose an allowance that works best for their budget up to the annual limit.
QSEHRA reimbursements are tax-free for both the employer and its employees, so long as the employee has a health insurance policy that meets MEC. There are over 200 eligible expenses that are eligible for reimbursement, including insurance premiums, copays, and prescriptions, making the QSEHRA customizable for every employee.
Individual coverage HRA (ICHRA)
The ICHRA is for businesses of all sizes and is also used to reimburse employees, tax-free, for individual health insurance premiums and other medical expenses with a monthly allowance.
Unlike the QSEHRA, employees must be enrolled in individual health insurance coverage, like a plan purchased through the Marketplace, to be eligible to participate. From there, they can get qualified medical expenses reimbursed with their allowance, just like the QSEHRA.
In addition, the ICHRA allows employees to select the health plan and expenses that fit their needs making it a great alternative to traditional group health insurance. With rising healthcare costs becoming more typical, the ICHRA allows employers to set their budgets once and for all.
Better yet, ICHRAs have no minimum or maximum contribution limits. And for further customization, employers can set job-specific employee classes to offer different allowance amounts to different groups of employees.
You can also give your employees a fixed amount of money to pay for their health insurance premiums and other out-of-pocket medical expenses.
Health stipends don’t have any contribution limits, so you can offer as much money as your budget allows. Money is typically added to the employee’s paycheck, and you can offer it once or on a regular basis, such as monthly or quarterly.
One downside to stipends is that they’re taxable. Employers are subject to payroll taxes, and your employees must pay income taxes on the money they receive. But, since they’re essentially extra income, stipends are flexible and personalized enough to allow employees to use the funds to pay for whatever health policies and medical services they need.
Stipends have fewer regulations than HRAs meaning they’re easier to administer and have fewer compliance requirements. However, you can use them in addition to HRAs if you want to offer even more financial assistance for your employees’ healthcare.
AHPs can be a great cost-saving way to offer health benefits to employees, but with low regulations and high-risk, many employers don’t see it as a true benefit. Luckily for employers, there are other affordable health benefits options, including HRAs and stipends. They're budget-friendly, decrease administration time, and provide a comprehensive health benefit to employees.
But because HRAs and stipends allow employees to purchase their own health insurance, they can help you avoid many of the pitfalls of AHPs. If you’re interested in an HRA or stipend for your business, PeopleKeep can get you started. Simply schedule a call with one of our personalized benefits advisors, and we will get you on your way!
This article was originally published on April 23, 2019. It was last updated on May 15, 2023.