Rising healthcare costs aren’t just a problem for individuals—they’ve also impacted businesses that prioritize health benefits 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. We’ll go over these options and how they work, what advantages they offer, and what disadvantages a business might have to contend with should it choose these options.
Let’s review five of the most popular benefits for small businesses:
- Small group health insurance
- Individual coverage HRA (ICHRA)
- Qualified small employer HRA (QSEHRA)
- Self-funded health insurance
- Healthcare stipends
Do small businesses really need to offer health insurance?
Before we dive into your options, let’s talk about why it’s important for small businesses to offer health insurance in the first place. With so many businesses offering group health insurance coverage to employees, it might seem as though employers are required to offer a group health insurance policy. However, that isn’t the case.
Under the Affordable Care Act, employers with 50 or more full-time employees 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 provide benefits to your employees. We’ll review the different types of HRAs in the sections below.
Option 1: Small group health insurance
The traditional choice for most businesses is a group health insurance policy. This is a health plan chosen by the business that provides coverage to employees and, potentially, employees’ dependents. Businesses with 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 business 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. Traditional group health insurance costs reached $15,375 per employee family in 2020 for businesses with fewer than 500 employees. This is simply out of reach for most small businesses.
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 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 healthcare, 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 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). With an ICHRA, you can cover the cost of individual health insurance premiums for employees that aren’t covered by your group health insurance plan, or you can offer the ICHRA to all of your employees.
The ICHRA works well for employers of all sizes, specifically because they’re not restricted based on employee count like the qualified small employer HRA (QSEHRA). 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.
In addition, employees can use their ICHRA to get reimbursements for eligible out-of-pocket expenses. This allows businesses to control 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. 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 3: Qualified small employer HRA (QSEHRA)
Suppose you’d like to get away from offering traditional group health insurance altogether. In that case, a QSEHRA is an excellent option for small businesses. A QSEHRA is a formal, IRS-approved benefit for employers with fewer than 50 full-time equivalent employees.
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 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 for its lower allowance caps and flexibility. Employees can purchase what best fits their needs, while employers can 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 4: Self-funded health insurance
Some small businesses choose to self-insure to avoid the expensive premiums and restrictions of group health insurance.
With a self-insurance arrangement, the business assumes the financial risk for providing healthcare benefits to employees. This means that rather than paying a fixed premium to an insurer, the business pays for each employee's 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. According to the Self-Insurance Educational Foundation, cost savings in non-claims expenses compared to group health insurance can range from 10 percent to 25 percent.
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.
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 be used to reimburse employees for individual health insurance premiums plus out-of-pocket medical expenses. This can also include vision insurance premiums and dental insurance premiums.
Stipends aren’t subject to as many regulations as an HRA or group health insurance. This makes them great for helping employees who receive premium tax credits because they can keep their premium tax credits and receive their health benefit.
Stipends are also flexible in that they can even be offered in addition to 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.
>While it may seem tricky for small businesses to find an affordable health insurance plan, several options were designed with small employers in mind.
Whether you choose to offer a small group health insurance policy, an HRA, a 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. With WorkPerks, you can create a customizable health stipend benefit for your employees in minutes.
This blog article was originally published on January 6, 2020. It was last updated on March 1, 2022.