In the modern workforce, employees look for value from their employers that goes beyond wages, job location, and their daily tasks. The job market has shifted to an environment where employees have more choices between employers than ever. A comprehensive benefits package that includes a health benefit has become a normal expectation. This holiday season is a good time for your business to consider how to best provide value to current and future employees in the new year.
Let’s discuss some of the best health benefit options available this coming year.
An individual coverage health reimbursement arrangement (ICHRA) is a company-funded, tax-free health benefit that allows businesses to reimburse their employees for their personal health care expenses.
The ICHRA is available to businesses of any size, unlike the QSEHRA. This means that an ICHRA can be offered by companies with more than 50 employees as well as small businesses. With an ICHRA, a business determines a monthly allowance of tax-free money for their employees to use on individual health insurance and other health care expenses. Businesses can also offer different amounts to different classes of employees, including:
- Employees in a waiting period
- Temp employees that work through a temp agency
- Employees covered under a collective bargaining agreement
- Employees in different locations, based on rating areas
- Foreign employees who are working abroad
- Any combination of the options above
In general, ICHRA allowances should be the same within each class, but distinctions can be made based on the employee’s age or family size.
After the employer sets the classes and distinguishes the allowance amounts for each, employees incur expenses for health care products and services according to their personal needs, potentially including individual health insurance. A complete description of eligible expenses can be found under IRS Publication 502.
Employees then submit proof of their expenses by providing documents to the business. The documents could be an invoice, an itemized receipt, or an explanation of benefits from their insurance provider.
If the documentation is sufficient and the employee’s expense is eligible for reimbursement, the business reimburses the employee for the cost of the expense up to their allowance amount. The reimbursements are nontaxable for both the employees and the business.
Two considerations should be kept top of mind when deciding on an ICHRA:
First, there are premium tax credit restrictions with the ICHRA. If an employee opts in to ICHRA participation, they’re not eligible to receive a premium tax credit. Employees have the ability to opt out and accept their tax credit instead, as long as the allowance they’re offered is low enough that any policy would still be considered “unaffordable” and doesn’t meet minimum value as defined under the ACA.
Second, individuals and their family members may only participate in the ICHRA if they are enrolled in an eligible individual health insurance policy. If an employee or one of their family members doesn’t obtain or loses individual coverage, they won’t be eligible to participate.
The qualified small employer health reimbursement arrangement (QSEHRA), created in 2016 through legislation from the federal government, is becoming a popular option for small businesses.
The QSEHRA allows a business with under 50 employees to offer a monthly allowance of tax-advantaged money. The employer decides on the allowance before launching the benefit. Employees then choose the health care they want, like individual insurance policies, medical services, prescriptions, dental services, and more. The employees submit proof of their expenses, and the business then reimburses the employees up to their allowance amount for the cost of the services. The business can limit the benefit to full-time employee,s who are automatically eligible, or they can choose to include part-time employees as well. The QSEHRA lets a business offer a meaningful benefit to their employees while staying within a predefined budget.
Self-funded health insurance
To avoid the higher cost of premiums and restrictions associated with a group health insurance policy, some businesses decide to self-insure.
Under a self-insurance arrangement, the business takes on the financial responsibility for covering health care expenses for their employees. Rather than paying a premium for an insurance policy, the business pays for their employee’s out-of-pocket claims as they arise.
Eligibility and covered benefits must be detailed in formal legal plan documents. In general, businesses set up a trust to earmark money. Contributions are then made by both the employees and the business to pay for claims. A business might also include a stop-loss policy that limits the potential financial burden.
With a self-insurance arrangement, third-party administrators (TPAs) manage claims and other filings.
Self-funded insurance arrangements can help businesses to save money, particularly in administrative expenses. Savings in non-claims costs compared to group health insurance can range from around 10 percent to 25 percent, according to the Self-Insurance Educational Foundation.
Self-insurance can be risky, however. In a worst case scenario, claims that are larger than expected could potentially put a small employer out of business. Self-funded health insurance is more common among larger businesses because of that. In fact, on average the size of a business providing self-funded insurance is around 300 to 400 employees.
A group health insurance policy has historically been the health benefit choice for most businesses. Group health insurance is a plan chosen by the employer that provides coverage to employees and, usually, the employees’ dependents.
Businesses that offer a group insurance policy to their employees pay a fixed premium to the insurance provider. Most employers share a portion of the cost with employees by passing a percentage of the premium. Employees enrolled in the plan are responsible to pay for deductibles and copays associated with the services they receive. Group policies have a defined network of providers that employees may seek services from. Typically, the services provided by out-of-network providers are either not covered under group plans, or the insurance covers a lower percentage of the total cost.
Most businesses will purchase coverage through the public Small Business Health Options (SHOP) marketplaces or an insurance broker
Traditional group health insurance can be a good choice for businesses because employees are usually already familiar with how it works and it’s fairly easy for employers to obtain.
With that said, the costs of premiums can be over budget for small businesses with a restricted budget. Group health insurance premiums have increased rapidly in recent years and continue to rise. The the most inexpensive premiums are generally paired with higher deductibles for employees. On the same coin, employees don’t get a choice in regard to the covered network. That means they may not get the services they want from their preferred providers.
Health benefits are a necessity for a business wanting to draw in talented and high performing employees. It’s important to select the one that fits your business's budget and is most attractive to the employees you want. Gift your employees a benefits package that makes them feel valued, keeps them healthy, and helps them to perform at the level you’d expect. Give your company the peace that comes with a benefit that fits the budget and attracts the skill and talent of the best employees.
Learn more about the benefits available in 2020 by checking out our other resources on the topic:
7 FAQs employees have about HRAs
Which HRA is right for my organization?