Small business health insurance options

Rising healthcare costs aren’t just a problem for individuals—they’ve also impacted businesses that offer health benefits to their employees. According to recent data, 98% of employers feel the cost of offering healthcare to their employees is excessive—and small business owners are especially vulnerable to these costs.

Increased health insurance costs and rigid participation requirements have caused many small businesses to drop their traditional health benefits. However, not offering health benefits costs more in the long run as they cause employees to look elsewhere for jobs with better benefits packages.

Fortunately, there are many small business health benefits options today that are affordable alternatives to traditional group health insurance. Below we’ll go over five popular coverage options and how they work, including what pros and cons employers will need to consider before they make a decision.

Learn how to use health reimbursement arrangements to your advantage in our guide

Do small businesses need to offer health insurance?

Before we dive into your options, let’s review why small businesses need to offer health insurance in the first place.

With so many businesses offering employees traditional group health insurance coverage, it might seem as though all employers are required to offer a group health insurance policy. However, that isn’t the case.

Under the Affordable Care Act (ACA), employers with 50 or more full-time equivalent employees (FTEs) must provide minimum essential coverage (MEC) to their employees.

This doesn’t have to be in the form of traditional group health insurance. Offering a health reimbursement arrangement (HRA) is another way to give your employees access to healthcare. We’ll review common types of HRAs and other health benefit options in the sections below.

Option 1: Small group health insurance

The traditional choice for most businesses is a group health insurance policy. Group plans are chosen by employers and provide health coverage to employees and, potentially, employees’ dependents. Companies with between two and 50 full-time employees (or as many as 100 in some states) can purchase small group health insurance.

Small employers offering small business health insurance pay a fixed premium for the policy. In some cases, they pass on a portion of the premium cost to employees. Employees are responsible for copays and deductibles associated with the services they receive.

Businesses typically purchase health coverage through an insurance agent, broker, or the public Small Business Health Options (SHOP) marketplace¹. SHOP plans provide affordable health and dental coverage, but you’ll need to ensure you qualify for a plan before you can enroll.

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, employee premium prices with group medical plans can be costly. In 2022, employers contributed about $6,500 each year toward each employee’s individual coverage premiums and about $16,300 per employee with family coverage premiums.

Pairing an integrated HRA with small group health insurance

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), also known as an integrated HRA, is a great supplement.

Because of their lower cost, high deductible health plans (HDHPs) are a 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, you offer your employees a monthly allowance of tax-free money in addition to the group policy. Employees then pay for their out-of-pocket healthcare expenses, 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 items listed in IRS Publication 502 are available for reimbursement, but you can limit this list or require an explanation of benefits (EOB) for out-of-pocket expenses if you choose.

Reimbursements made through a GCHRA are free of payroll tax to the business and its employees. They’re also free of income tax for employees.

In addition, businesses can structure their employee eligibility requirements as long as employees participate in the group policy.

Option 2: Individual coverage HRA (ICHRA)

Another health benefits option for small employers is the individual coverage HRA (ICHRA). An ICHRA is an alternative to traditional group health insurance that can be leveraged as an employers’ only health benefit option or as an option for employees that don’t qualify for an employer’s existing group benefit.

With an ICHRA, you can reimburse the cost of individual health insurance premiums and—if you choose to—any eligible out-of-pocket health costs.The ICHRA works well for employers of all sizes, specifically because it has no employee count requirements or participation requirements.

With an ICHRA, employers offer employees a monthly allowance of tax-free money. Employees then enroll in an individual health insurance policy, and the business reimburses them up to their allowance amount.

The ICHRA has no contribution limits, and businesses can offer different allowance amounts based on unique employee classes. It’s only available to employees enrolled in individual coverage; employees enrolled in a spouse's group health insurance policy can't participate.

Option 3: Qualified small employer HRA (QSEHRA)

A QSEHRA is a formal, IRS-approved benefit for employers with fewer than 50 FTEs. 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 to participate. Reimbursements will be free of income tax for employees if the employee has a policy that meets MEC.

Also, unlike the ICHRA, QSEHRAs come with annual allowance caps that employers can’t exceed. A QSEHRA does not have a minimum allowance requirement, so employers can set their own budget and define a monthly allowance for their employees as long as it doesn’t exceed the cap.

Employees can use the allowance to purchase a health policy and out-of-pocket medical expenses that best fit their needs.

QSEHRAs also offer value to small businesses in unique situations, such as those with employees included on a spouse’s or parent’s group policy or who have employees without insurance.

Option 4: Self-funded health insurance

Some small businesses choose to self-insure to avoid group health insurance's expensive premiums and restrictions.

With a self-insurance arrangement, the business assumes the financial risk of providing healthcare benefits to employees. This means that rather than paying a fixed premium to an insurance company, the business pays for each employee's out-of-pocket claim as it arises.

The plan documents will outline eligibility requirements and covered benefits. Typically, the business sets up a trust fund to earmark money the company and its employees contributed to pay these claims. Businesses may also pair the fund with a stop-loss insurance 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. According to the Self-Insurance Educational Foundation², cost savings in non-claims expenses compared to group health insurance can range from 10% to 25%.

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 firms. In fact, the average size of a business with self-funded healthcare is 300 to 400 employees.

Option 5: Health stipends

Finally, health stipends are another option for small businesses to help their employees with medical expenses.

Businesses can offer stipends upfront or through a reimbursement model similar to an HRA. With a reimbursement system, employers grant employees an allowance that they can use to cover their medical expenses.

Employers are in control of employee classes and allowance amounts. When an employee submits a request for reimbursement, employers simply approve the amount for qualifying expenses.

Health stipends can reimburse employees for health insurance premiums plus out-of-pocket costs relating to medical care. This can also include expenses incurred by additional insurance plans your employees may have, like premium amounts for vision and dental plans.

Stipends aren’t subject to as many regulations as an HRA or traditional group health insurance. It’s important to note that with a stipend, you can’t require proof of health insurance or receipts for medical expenses from employees.

It’s also helpful to know that if you have employees who receive premium tax credits, their stipend allowance won’t interfere with their premium tax credit eligibility the same way a formal health benefit would.

Stipends are also flexible in that they can even work alongside group health insurance or an HRA. However, stipends are considered taxable income. While you won’t have to withhold any taxes for your employees, you’ll have to pay payroll taxes. Your employees will then pay taxes when they file their tax returns.

Conclusion

It may seem tricky for small businesses to find affordable benefits, but luckily, several health insurance options are designed for small employers. Whether you offer a small group health insurance policy, HRA, health stipend, or a combination of the three, understanding your options is the first step to finding the right policy for you and your employees.

PeopleKeep’s personalized benefit administration software makes offering employee benefits easy. If you’re interested in learning more about HRAs or employee stipends with PeopleKeep, schedule a call with one of our personalized benefits advisors today!

This blog article was originally published on January 6, 2020. It was last updated on April 3, 2023.