Health insurance options for franchises

Franchises are a common type of organization in the U.S. In 2023, there were 805,000 franchises nationwide, generating $860.1 billion in revenue¹. Because of their potential for higher profits under the umbrella of a recognized brand, franchise businesses are often a draw for entrepreneurs. But as with any other business, you must know your health insurance obligations before hiring workers.

Depending on how many franchises you own and how many workers you employ, federal law may require you to offer your employees health insurance. Even if the federal government doesn’t require you to provide health benefits, doing so is a great way to recruit and retain talented workers. But what options are out there for franchises?

In this article, we’ll go over several health benefits available to franchise owners and what type of franchises must offer health insurance under the Affordable Care Act (ACA).

Takeaways from this blog post:

• Franchise owners must offer comprehensive health benefits to maintain employee satisfaction and improve retention efforts.
• The requirement to provide health insurance for franchise employees depends on the number of franchises owned and the number of full-time equivalent employees.
• Supplementing your traditional group plan with an integrated HRA, HSA, or medical FSA can provide employees with more financial support for out-of-pocket medical expenses. Franchise owners can also choose an association health plan, a stand-alone HRA, or a health stipend for greater flexibility.

What is a franchise?

A franchise is a business operated by an individual or separate entity that obtains a license from the owner of a larger corporation to sell its products or services under an existing system and trademark.

The way a franchise works is simple. The owner of the original company, also known as the franchisor, creates their brand and business model. They then sell the right to use its name to outside individuals or organizations, called franchisees. The franchisee pays a one-time licensing fee and an ongoing royalty fee to use the franchisor’s trademark and business system.

While they’re a part of the larger company’s brand, the franchisee owns their individual business. This means they’re responsible for managing their business’s daily operations, making staffing decisions, paying their business taxes, and more. Simply put, the success of their business depends on their leadership and abilities as a manager and business owner.

Running a franchise has many advantages. In addition to being your own boss, there’s less risk of failure by using an existing brand name with an established customer base. You can also leverage your franchisor’s expert industry knowledge and have more financing options. The benefits of this type of business continue to make it attractive for entrepreneurs.

Do franchises have to offer their employees health insurance?

Determining whether you must provide health insurance to your employees depends on how many franchises you own and how many workers you employ. If you’re only licensing one franchise, the federal government considers your business an individual entity, like other small businesses.

In this case, you don’t need to provide your workers with health insurance if your franchise has fewer than 50 full-time equivalent employees (FTEs). But, if your franchise has 50 or more FTEs, you’re an applicable large employer (ALE) under the ACA and are subject to the employer mandate, meaning you must offer health coverage.

However, suppose you own at least 20% of more than one franchise. In that case, the IRS considers all your franchises to be one controlled group, and you must follow aggregation rules.

If your combined number of FTEs across all your franchises equals 50 or more, you’re an ALE and must offer health insurance. Controlled groups that fail to correctly determine if they’re subject to the mandate may have to pay costly penalties.

In contrast, the law doesn’t require controlled groups with an aggregate number of fewer than 50 FTEs to provide employee health benefits.

What are the best health insurance options for franchises?

Whether or not you’re an ALE, you can improve your employees’ health and well-being by offering them a quality health benefit. Let’s look at four popular health benefit options below that can work for franchisees.

Traditional group health insurance

One of the most popular coverage options is a group health plan. With traditional group health insurance, employers choose a group medical plan for their organization and offer coverage to their employees and eligible dependents at a reduced rate.

You can purchase a group health policy through an insurance carrier, licensed agent, or insurance broker. Franchisees that aren’t ALEs can buy a small group health insurance plan on the Small Business Health Options (SHOP) marketplace² and may even qualify for the Small Business Health Care Tax Credit, which can save you money on premium costs.

Traditional group health insurance can be a good choice for franchisees because most employees are familiar with group plans. If you’re an ALE, you’re also more likely to qualify for a reduced group rate and meet your carrier’s participation requirements.

However, group health insurance doesn’t always offer the best coverage to meet every employee’s diverse needs, and you may have limited plan options—especially if you own franchises in multiple states. They also have steep participation requirements and come with unpredictable rate increases each year.

If you do offer a group plan and want to build more assistance and flexibility into your health benefit, you can supplement it with other benefits.

The following three health benefit options can make your group health insurance plan more attractive to employees:

• Group coverage health reimbursement arrangement (GCHRA): Also known as an integrated HRA, this benefit is for organizations of all sizes. It allows you to reimburse your employees tax-free for their out-of-pocket medical expenses that your group doesn’t fully cover, like deductibles and coinsurance. There are no minimum or maximum employer contribution limits, and unused HRA funds stay with you if the employee leaves your franchise.

• Health savings accounts (HSAs): HSAs allow employers and employees to contribute money on a pre-tax basis that employees can later withdraw to pay for medical care services and qualified out-of-pocket costs. HSAs have annual contribution limits, and the employee owns the account, meaning any unused HSA funds stay with them indefinitely. It’s important to note that you can only contribute to an HSA if you have an HSA-qualified high-deductible health plan.

• Medical flexible spending accounts (FSAs): A medical FSA allows employees to withdraw pre-tax dollars to pay for qualifying medical expenses, like copays and over-the-counter medicine. Employers and employees can contribute to an FSA up to the annual limit; however, unused funds don’t roll over annually.

Association health plans

Another option for franchisees is association health plans (AHPs). AHPs allow small businesses with fewer than 50 employees and self-employed individuals to join together to buy large group health coverage. AHPs help many small franchise owners afford health insurance coverage they wouldn’t have been able to pay for on their own.

AHPs work similarly to traditional health insurance. However, they aren’t subject to many ACA regulations. For example, they can refuse to pay for medical treatment relating to an employee’s pre-existing condition, don’t have to cover the 10 essential health benefits, and can charge higher premiums based on age, health status, and gender.

Because of their size restrictions and lack of appropriate coverage under the ACA, AHPs aren’t suitable for franchisees that are ALEs. Though they tend to be cheaper than traditional health insurance, individual franchisees looking to provide more comprehensive coverage may want to consider other health benefit options to meet all their employees’ needs.

Health reimbursement arrangements (HRAs)

One of the most flexible options for franchise owners is a health reimbursement arrangement (HRA). An HRA is a tax-free health benefit employers use to reimburse employees for individual health insurance premiums and qualified out-of-pocket medical expenses. With an HRA, you set a monthly allowance that your employees can spend on healthcare costs. Once employees make an approved purchase, you reimburse them up to their allowance amount.

As previously mentioned, the GCHRA integrates with group health insurance. But there are two stand-alone HRAs that can also support franchises: the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA).

The QSEHRA is for employers with fewer than 50 full-time FTEs that don't offer a group plan. This makes it a great option for franchises that aren’t ALEs but want to provide an affordable health benefit to attract and retain workers. Like other HRAs, QSEHRA reimbursements are income-tax-free for employees as long as their policy provides minimum essential coverage (MEC). However, they have annual maximum contribution limits.

If you choose to offer a QSHERA, you must offer it to all your W-2 full-time employees. You can also provide it to your part-time employees as long as they receive the same allowance as full-time employees. Lastly, when designing your benefit, you can choose to reimburse your employees for only health insurance premiums or their premiums plus qualified out-of-pocket costs.

Group health insurance isn’t the only option for ALEs. Franchises that are ALEs can satisfy the employer mandate with an ICHRA. The ICHRA works much like the QSEHRA, but it’s available to organizations of all sizes and has no contribution limits. With the ICHRA, you can also set different allowance amounts based on 11 employee classes, making it easier to customize the benefit to suit you and your staff’s needs.

One caveat is that the ICHRA can only cover employees with an individual health insurance policy. This means employees on a family member's group policy or with alternative coverage like a healthcare sharing ministry can't participate in the benefit.

Health stipends

The last option for franchisees is a health stipend. You can use a health stipend to offer your employees a set amount of money to pay for health insurance premiums and other qualified out-of-pocket expenses, like mental health services.

Stipends are flexible; therefore, you can structure yours as a one-time lump payment, a regular payment, or as reimbursements. Additionally, stipends have no contribution limits, so you can offer as little or as much money as your budget allows.

Stipends aren’t subject to as many regulations as an HRA or traditional group health insurance. Because of this, they don’t satisfy the ACA’s employer mandate if your franchise is an ALE. However, stipends can work alongside group health insurance, AHPs, or HRAs, so they’re a great way to offer your employees even greater coverage no matter what benefit you choose.

As a franchise owner, you must file your own business taxes. Therefore, it’s essential to remember that the IRS considers stipends taxable income. You won’t have to withhold any taxes for your employees, but you do have to pay payroll taxes, and your employees must pay income taxes when they file their tax returns.

Conclusion

Operating a franchise can be a rewarding business venture. With a franchise, you have the potential for strong profits, brand recognition, and ongoing business support. But as a business owner, your employees should always be a top priority. Whether or not you’re an ALE, offering comprehensive health benefits is vital for maintaining a satisfied workforce that will want to stay at your franchise long-term.

If you want to enhance your benefits package, PeopleKeep has just what you need. With our HRA software solution, you can provide your staff with customized employee benefits that meet everyone’s needs.

Schedule a call with one of our personalized benefits advisors to see how we can help your franchise become a successful business.

1. https://www.franchise.org/franchise-information/franchise-business-outlook/2023-franchising-economic-outlook

2. https://www.healthcare.gov/small-businesses/choose-and-enroll/shop-marketplace-overview/