With all of the regulations and restrictions surrounding group health insurance plans, it can be frustrating for small and midsize business owners (SMBs) to find a plan that works for their employees.
One of the most difficult requirements for SMBs to meet is the minimum contribution requirement that mandates how much employers must contribute to their employees’ group health insurance premium costs.
With group health insurance premiums becoming more expensive each year, employers are required to contribute increasingly higher amounts to meet their plan’s minimum contribution requirement.
While most employers want to help their employees with their healthcare, SMBs with tighter budgets may not have the kind of money to fully contribute to a group health insurance plan. Luckily, there are other ways for SMBs to take care of their employees’ healthcare without breaking the bank, like health reimbursement arrangements (HRAs).
In this article, we’ll take a closer look at employer contribution requirements and why they were created in the first place, as well as explore how HRAs can help SMBs offer a quality health benefit on a budget.
What are employer contribution requirements?
The majority of health insurers place a minimum contribution requirement on group health insurance policies to protect the insurance company from increased risk.
If an employer covers a significant portion of a health insurance premium, employees are more likely to enroll in the coverage, allowing for a more diverse risk pool.
In addition, this requirement prevents “adverse selection,” which occurs when only those with chronic conditions and illnesses sign up for coverage. Having an even ratio of healthy to sick people creates a more stable risk environment for health insurance companies.
What are the minimum contribution requirements for group health insurance plans?
Most health insurers require that employers cover at least 50% of their employees’ group health insurance premium, but many employers are paying much more than that.
According to data from the Kaiser Family Foundation, covered workers contribute an average of 17% of the premium for single coverage and 28% of the premium for family coverage. That leaves the remaining 83% of single coverage and 72% of family coverage for the employer to pay.
You may have heard of the Small Business Health Care Tax Credit that helps small business owners get a discount on their employees’ health insurance premiums. However, even that comes with a 50% minimum contribution requirement in order to qualify.
What are the minimum contribution requirements for HRAs?
If you’re wary of the minimum contribution requirements that come with traditional group health insurance plans, an HRA is a great option that comes with absolutely no minimum employer contribution requirements.
With an HRA, you choose a monthly allowance of tax-free money to offer your employees for them to spend on individual health insurance premiums and over 200 qualifying medical expenses. Any unused allowance at the end of the year goes back to you.
If you choose to offer the qualified small employer HRA (QSEHRA), there are maximum contribution requirements (not to be confused with minimum contributions explained above) that cap your annual allowance amount. If you want to offer more than the QSEHRA limits allow, then you can offer the individual coverage HRA (ICHRA) that has no maximum contribution requirements.
While meeting the minimum contribution requirements that come with traditional group health insurance plans can be a challenge for small and midsize business owners, HRAs come with no such restrictions. If you’re interested in offering a formal, flexible, and cost-controlled health benefit, an HRA is an excellent choice for both you and your employees.
This article was originally published on January 18, 2017. It was last updated August2, 2021.