The rising costs of healthcare aren’t just a problem for individuals—they’ve also impacted businesses that make health benefits a priority for their employees.
According to survey data from the Kaiser Family Foundation, 98% of employers feel that the high costs of offering healthcare to their employees is excessive. Small businesses are particularly vulnerable to these unsustainable costs.
These rising prices, coupled with the hassle and one-size-fits-all nature of traditional group benefits, have caused many small businesses to drop health benefits altogether. However, not offering health benefits ends up costing more in the long run as employees look elsewhere for jobs with better benefits packages.
Fortunately, there are more small business health benefits options today than ever before that serve as affordable alternatives to traditional group health insurance.
In this post, we’ll review five of the most popular benefits for small groups in 2020:
- Small group health insurance
- Group coverage HRA (GCHRA)
- Qualified small employer HRA (QSEHRA)
- Individual Coverage HRA (ICHRA)
- Self-funded health insurance
We’ll go over how they work, what advantages they offer, and what disadvantages a business might have to contend with should it choose these options.
Option 1: Small group health insurance
The traditional choice of most businesses is a group health insurance policy is a plan chosen by the business that provides coverage to employees and, potentially, employees’ dependents. Businesses that have between 2 and 50 full-time employees (or as many as 100 in some states) can purchase small group health insurance.
Small businesses offering small group health insurance pay a fixed premium for the policy, though they may pass on a portion of the premium cost to employees. Employees are responsible for copays and deductibles associated with the services they seek.
Businesses typically purchase coverage through an insurance broker or the public Small Business Health Options (SHOP) marketplaces.
Traditional group health insurance can be a good choice for small businesses because it's relatively easy to obtain and most employees are already familiar with how it works.
However, premium prices can be a challenge. The cost of traditional group health insurance is estimated to reach $15,375 per employee family in 2020 for businesses with fewer than 500 employees. This is simply out of reach for most small businesses.
Option 2: Group coverage HRA (GCHRA)
If you like the idea of offering a group health insurance plan, but want to help offset your employees' out-of-pocket costs, a group coverage HRA (GCHRA) is a great supplement. Because of their lower cost, high deductible health plans (HDHPs) are the most frequently offered group health policy. However, there’s a reason they’re less expensive: they cover less than other policies.
To mitigate some of that loss, small businesses can offer a GCHRA. With a GCHRA, the business offers employees a monthly allowance of tax-free money in addition to the group policy. Employees then choose and pay for health care and the business reimburses them up to their allowance amount.
Generally, employees use the HRA to cover expenses like copays, deductibles, and prescription drugs. All of the items listed in IRS Publication 502 are available for reimbursement, but the business can limit this list if it chooses.
Reimbursements made through a GCHRA are free of payroll tax to both the business and its employees. They’re also free of income tax for employees.
In addition, businesses can structure their own employee eligibility requirements, as long as employees participate in the group policy.
Option 3: Individual coverage HRA (ICHRA)
Another health benefits option for small employers is the ICHRA. With an ICHRA, you can choose to offer the benefit to a select number of employees while offering a group health insurance plan to the rest, or you can offer the ICHRA to all of your employees.
The ICHRA works well for employers of all sizes, specifically because they are not restricted based on employee count like the QSEHRA (below). With an ICHRA, employers offer employees a monthly allowance of tax-free money. Employees then enroll in an individual health insurance policy, and the businesses reimburses them up to their allowance amount.
In addition, employees can use their ICHRA to get reimbursements for eligible out-of-pocket expenses. This allows businesses to keep control over their budget while offering a meaningful benefit to their employees
The ICHRA doesn't have any contribution limits, and businesses can offer different allowance amounts based on unique employee classes. Additionally, the ICHRA is only available to employees enrolled in individual health insurance; employees enrolled in a spouse's group health insurance policy can't participate.
Option 4: Qualified small employer HRA (QSEHRA)
If you’d like to get away from offering traditional group health insurance all together, a QSEHRA is a formal, IRS-approved benefit for employers with fewer than 50 full-time equivalent employees that doesn’t require you to offer a group health insurance plan along with it.
A QSEHRA works much like an ICHRA, with a few exceptions. Unlike an ICHRA, employees don’t need to be covered by a qualifying individual health insurance policy in order to participate, but reimbursements will be free of income tax for employees if the employee is covered by a policy providing minimum essential coverage (MEC).
Also unlike the ICHRA, QSEHRAs come with annual allowance caps that employers can’t exceed. A QSEHRA is often the best choice for small businesses because it allows for complete personalization. Employees can purchase what best fits their needs, while employers are free to set their own budget.
QSEHRAs also offer value to small businesses in unique situations, such as those with employees who are covered under a spouse’s or parent’s group policy, and even those with employees without insurance.
Option 5: Self-funded health insurance
Finally, to avoid the expensive premiums and restrictions of group health insurance, some small businesses choose to self-insure.
With a self-insurance arrangement, the business assumes the financial risk for providing health care benefits to employees. This means that rather than paying a fixed premium to an insurer, the business pays for each employee out-of-pocket claim as it arises.
Terms of eligibility and covered benefits are outlined in formal plan documents. Typically, the business sets up a trust fund to earmark money, contributed by both the business and its employees, to pay these claims. Businesses may also pair the fund with a stop-loss policy that limits the businesses’ potential risk.
Third-party administrators (TPAs) manage claims and other filings.
Small businesses can save money with self-funded health insurance, particularly in administrative costs. Cost savings in non-claims expenses compared to group health insurance can range from 10 percent to 25 percent, according to the Self-Insurance Educational Foundation.
However, self-insurance is risky and larger than expected claims could put a small business out of business. For this reason, self-funded health insurance is more common among larger businesses. In fact, the average size of a self-funded business is 300 to 400 employees.
While it may seem tricky for small businesses to find an affordable health insurance plan, there are several options designed specially with small employers in mind. Whether you choose to offer a small group health insurance policy, an HRA, or a combination of the two, understanding your options is the first step to finding the right policy for you and your employees.
This article was originally published on January 6, 2020. It was last updated October 17, 2021.