There are many advantages to running your own business: being your own boss, setting and achieving lifelong goals, doing what you love. That's probably why more than 27 million Americans have decided to become entrepreneurs. But as exciting as it can be to start your own small business, you’ll also face many challenges.
If you run a small business with one employee, you might think you can’t afford health insurance. Happily, this doesn’t have to be the case. Whether you plan to stay solo or you’d like to grow, you have several options for small business health insurance.
1. Group health insurance
Most people think group health insurance is 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 “group.”
If the business has both an owner and an employee (making a group of two), insurers in all states are required to issue a group policy. However, if the business has just one employee who is also the owner (a group of one), some states don’t require insurers to issue a policy.
Just because a business of one qualifies for group health insurance, however, doesn’t mean this is the best small business health insurance option. On the plus side, group health insurance is familiar to most people. They believe they know how it works and they understand what to expect. This kind of familiarity can be reassuring.
On the downside, group health insurance is more expensive than other types of small business health insurance. And when you’re running a small business, cost is a major factor when choosing what benefits to offer. In addition to high annual premiums, small businesses pay more for administrative costs.
For businesses owners who plan to hire more people, the prospect of high turnover can also add extra costs. Because group health plans are one-size-fits-all, employees who are unhappy with their coverage may seek greener pastures.
2. Informal stipend
Instead of buying small business health insurance, some companies offer an informal health insurance stipend or wage increase, thinking that employees will put the bump in pay toward health expenses. The problem with this approach, however, is that the money is taxable to both the company and the employee. Also, the business can’t be sure the employee uses the money for health insurance.
Additionally, employees don’t consider a wage increase a health benefit. When you consider that 69 percent of job seekers say they might take one job offer over another if it meant getting better benefits, it’s easy to see why informal stipends fall short of formal benefits.
3. Health reimbursement arrangement (HRA)
So we already know that group health plans are too expensive, too complex, and too one-size-fits-all. And informal stipends don’t really count as a health benefit. So what’s a small business to do? Fortunately, there is a popular alternative: a health reimbursement arrangement, or HRA.
With an HRA, companies give their employees a monthly tax-free allowance to use for health expenses. Employees then buy health care, including health insurance policies, and the business reimburses them up to their allowance amount. This allows businesses to completely control their benefits budget while employees are free to make the purchases that fit them best.
There are two HRAs currently available to businesses with one employee: the one-person stand-alone HRA and the qualified small employer HRA (QSEHRA).
For businesses with one employee that don't intend to grow soon, the one-person stand-alone HRA could be a good fit. As the name states, this type of HRA is only available for one participant.
If your business plans to bring more people on board, though, the QSEHRA is a better fit. Unlike the one-person stand-alone HRA, the QSEHRA is available to companies with up to 49 employees. The company sets an allowance, and employees submit their medical expenses for reimbursement. To get the income tax advantages offered by the QSEHRA, employees must have minimum essential coverage (MEC).
Finally, a new type of HRA is coming to businesses in 2020: the individual coverage HRA, or ICHRA. The ICHRA is available to businesses of all sizes and allows businesses to offer different allowance amounts to different employees based on nine different employee classes. For businesses looking to grow and diversify, the ICHRA is a great fit, too.
HRAs make it easy for entrepreneurs and small business owners to budget for medical expenses. Now that you know which small business health insurance options are available, you can make an informed decision about which type of plan best fits your goals.