There are 31 million1 entrepreneurs in the U.S. While it can be exciting to start your own business, be your own boss, and do what you love, it can be challenging. One challenge you may face is attracting and retaining key employees. Once you have your first hire in place, it’s critical that you build a compensation package that includes a meaningful health benefit your employee will appreciate.
Traditional group health insurance can be costly for small business owners, and they come with participation requirements that not all employers can meet. If you run a small business with one employee, you may think this means you can’t offer a health benefit at all. Luckily, this isn’t the case.
If you’re a small employer looking for a health benefits option for one or a few employees, our blog will review three options that will work for your organization.
1. Small group health insurance for businesses with one employee
Many employers think group health insurance is only attainable for big companies with dozens or even hundreds of employees. In reality, businesses with one employee can still qualify for a group plan depending on how their state defines a “group.”
If the business has both an owner and an employee (making a “group” of two), they’re eligible for a small group health plan in all states. As with large group plans, eligible employers with these plans pay a fixed premium amount, and the employee pays the policy’s copay, deductible, and potentially a portion of the monthly premium cost if the employer chooses.
Small group health insurance plans are typically purchased through a private health exchange, like a licensed agent or insurance broker, or a public exchange, like the federal Small Business Health Options (SHOP) marketplace. SHOP plans have eligibility requirements, however, so check on the marketplace before applying.
Now let’s look at another scenario. If the business has just one employee who is also the owner (or a group of one), not all states consider that eligible to purchase a group plan. Since this varies by state, you should check your state’s regulations to see if group health insurance is available to you.
If you don’t qualify for small group health insurance or just don’t want to go this route, that’s okay! Just because group plans are a common health insurance option doesn’t mean it’s the best choice for small business owners.
There are some pros that come along with group health insurance. About 159 million people2 have employer-based health insurance. Therefore, many employees already know how it works and what to expect, so the familiarity can be reassuring.
However, group health insurance often has more expensive premiums and administrative costs than other health benefit options. And they’re generally “one-size-fits-all,” leaving employees at risk of being unhappy with their medical coverage and causing them to leave your organization for a company with better benefits, leading to costly turnover.
Because the overall cost and flexibility of a health benefit are critical factors, small business owners should look past popularity and consider alternatives to group health insurance before making a decision.
2. Health stipend
Instead of buying small business health insurance, some companies offer a health insurance stipend. Health stipends are a fixed amount of money provided to an employee to cover the cost of their health insurance premium and other out-of-pocket costs. You can offer your employee the amount of money, or allowance, that works best for your company’s budget.
Stipends typically follow the reimbursement model. When your employee makes a purchase, they provide you with a receipt or invoice, and you reimburse them up to their allowance amount for the medical expense. However, with a health stipend, you can’t require your employee to submit a receipt for insurance premiums, medical services, or prescriptions.
Stipends are rising in popularity because they’re flexible. Employees can spend the money on the healthcare items and services that best fit their needs. That also makes them easier for employers to administer with fewer compliance regulations than other, more formal health benefits.
Another upside of health stipends is that they can be offered to any type of worker you employ. For example, if your sole employee is a 1099 contractor or international worker, you can offer them a stipend the same as you would a full-time or U.S. employee.
Additionally, if your employee receives advance premium tax credits (APTC), or health insurance premium subsidies, they can receive their full stipend amount without negatively impacting their APTC eligibility.
However, stipends do have a few catches. Because they’re essentially “grossing up wages,” stipends are taxable income for the employee, and employers must pay payroll taxes on reimbursements. Also, you can’t legally require your employee to use their allowance on health expenses, so there is a possibility they may use the funds on something else.
Despite this, stipends can be an excellent benefit for employees looking for increased flexibility and personalization from their health benefits—especially if they’re looking for a less restrictive option than a group health policy.
3. Health reimbursement arrangement (HRA)
If you’ve made it this far and think a small group health plan is too expensive or complex and a health stipend isn’t formal enough, there’s one more option: a health reimbursement arrangement (HRA).
With an HRA, companies give employees a monthly allowance to purchase health insurance policies and other medical expenses outlined in IRS Publication 502.
Once employees incur and substantiate an eligible expense, you reimburse them tax-free up to their allowance amount. This allows you complete budget control while giving your employees the freedom to choose a health insurance policy that works for them.
There are two HRAs available to businesses with one eligible employee: the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA). Let’s dive into both below.
Qualified small employer HRA (QSEHRA)
If you have between one and 49 full-time equivalent employees, the QSEHRA is likely to be the best fit for you.
With a QSEHRA, employers can differ allowance amounts based on family status or age, but cannot vary allowance based on statuses like location or full-time or part-time status. Additionally, maximum allowances are capped by annual limits that are set by the IRS each year.
While C-corp owners can participate in a QSEHRA, sole proprietors, partners, and S-corp owners aren’t eligible. However, the QSEHRA is available to all full-time and part-time employees, so if you only have one part-time worker, they can participate.
All reimbursements are free of payroll taxes for employers, and they’re income tax-free for employees as long as their health plan meets minimum essential coverage (MEC). Regarding premium tax credits, eligible employees can keep their subsidy and have their QSEHRA. However, they have to reduce the subsidy by their allowance amount, and they don’t get the choice to opt out of the HRA.
Individual coverage HRA (ICHRA)
If you want to grow your business to more than 50 employees or offer an allowance greater than the QSEHRA’s annual cap, you can offer the individual coverage HRA (ICHRA).
The ICHRA works much like the QSEHRA in that it reimburses your employees for their individual health insurance premiums and qualified out-of-pocket medical expenses. However, it has greater flexibility compared to the QSEHRA.
The ICHRA is for businesses of all sizes and comes with no allowance limits, so it’s perfect if you’re looking to grow your staff and benefits budget substantially. It also allows for more personalization because you can offer different allowance amounts based on 11 employee classes, further tailoring your benefit to your employees’ specific needs. However, how many classes you can tailor by will depending on your benefits administrator software.
How premium tax credits and ICHRAs work together depends on affordability. So, if you’re considering an ICHRA, work with a benefits advisor to determine if this is the right benefit for you and your employees’ needs.
Offering health benefits is one of the best investments a business owner can make. But for many small employers, the cost of group health insurance, the hassle of dealing with an insurance company, and confusing compliance regulations make it too challenging.
Luckily, HRAs and health stipends make it easy for entrepreneurs to provide affordable and comprehensive health benefits that their employees will love.
If you’re ready to get started with an HRA or stipend, PeopleKeep is ready to help you administer them in just minutes per month. Schedule a call with us today, and we’ll get your small business set up with the perfect health benefit.
This article was originally published on February 14, 2019. It was last updated on April 7, 2023.