The rising costs of health care aren’t just a problem for individuals—they’ve also impacted businesses that make health benefits a priority for their employees.
Small businesses have been particularly vulnerable. Over the last 15 years, the cost to cover one employee under group health insurance rose nearly 200 percent—from $2,196 to $6,435.
These unsustainable costs, coupled with the hassle and one-size-fits-all nature of traditional group benefits, have caused many small businesses to look for alternatives. And while health care costs continue to grow, the good news is that small group options have as well.
In this post, we’ll review five of the most popular health benefits solutions for small groups in 2019:
- Qualified small employer health reimbursement arrangements (QSEHRAs)
- Traditional group health insurance
- Integrated HRAs
- Health insurance purchasing co-ops
- Taxable stipends
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. We'll also discuss some regulatory changes in the works that may make new health benefit options available in the near future.
Option 1: The qualified small employer health reimbursement arrangement (QSEHRA)
A new and increasingly popular option, the qualified small employer health reimbursement arrangement (QSEHRA) was created through bipartisan legislation in December 2016.
With the QSEHRA, businesses with fewer than 50 employees offer employees a monthly allowance of tax-free money. Employees then choose and pay for health care, potentially including personal insurance policies, and the business reimburses them up to their allowance amount. This allows businesses to keep control over their budget while offering a meaningful benefit to their employees.
Here’s how it works:
Step 1: Businesses set the allowance. The small business chooses a monthly, per-employee allowance of tax-free money to make available. There are no minimum contribution requirements, and small businesses can offer different allowance amounts to employees based on their family status. In 2018, QSEHRA contribution limits allowed businesses to offer up to $420.83 a month for single employees and $854.16 a month for employees with a family. The IRS hasn't released 2019 QSEHRA contributions yet, but we'll update this post once they're available.
Step 2: Employees make purchases. Employees are free to buy what fits their personal needs. There are a variety of expenses eligible for reimbursement, including personal health insurance premiums, copays, deductibles, and prescription drugs.
Step 3: Employees submit proof of expenses. After they incur an eligible expense, employees submit proof to their company through documents that include: a description of the product or service, the cost of the expense, and the date the employee incurred the expense.
Step 4: Businesses review and reimburse employees’ expenses. After an employee submits an expense, the business or an approved third party reviews the documentation and reimburses the employee from their monthly allowance.
The QSEHRA is often the best choice for small businesses because it allows for complete personalization. Employees can purchase what best fits their needs, while small businesses are free to set their own budget.
The QSEHRA also offers value to small businesses in unique situations, such as those with employees working in multiple states, those with employees who are covered under a spouse’s group policy, and even those with employees without insurance.
Option 2: Traditional group health insurance
The SHOP Marketplaces are public state- or federally run exchanges that sell small group health insurance policies. The SHOP Marketplace could be a good coverage option for employers with 50 or fewer employees if they can meet certain requirements. For example, in Massachusetts, employers participating in the SHOP must contribute at least 50 percent of the premium amount, employers with 1–5 employees must have 100 percent of the employees enrolled, and employers with 6–50 employees must have at least 75 percent enrolled.
For eligible small groups, the SHOP Marketplace gives access to small business tax credits, which are generally only available through the SHOP. Brokers registered with the Marketplace can help small groups select and purchase the plan, just as brokers would with private small group plans.
Option 3: Group-integrated HRAs
To cut benefits costs, many small businesses have opted for a high-deductible group policy paired with a group-integrated health reimbursement arrangement (HRA).
With a group-integrated HRA, small businesses set aside a monthly amount of tax-free money for employees to use on medical expenses, like prescription drugs or payments made toward the group policy's deductible.
This strategy allows the small business to pay a lower group premium while offering additional financial support to employees.
Group-integrated HRAs also allow for some personalization, as employees can decide how to spend the money offered to them through the HRA.
However, employees are still insured through a traditional group policy that likely doesn't reflect their personal needs—and this time, they may be facing a steep deductible and skimpier coverage.
Option 4: Health insurance purchasing co-ops
Another popular benefits solution for small businesses is to join a health insurance purchasing cooperative.
Regulated by state and local authorities, these co-ops allow small groups to band together and collectively purchase health insurance.
While this option allows small businesses to afford a health benefit their employees are familiar with, it decreases personalization. Not only must the small business take their own employees into consideration, it must find a policy that works for all members of the co-op.
What's more, regulations guiding group purchasing arrangements like co-ops vary from state to state, and the value of the co-op may as well. Some co-ops have failed in recent years, making this choice risky to businesses in certain states.
Additionally, small groups in states without co-ops, or small groups with employees in multiple states, may not be able to participate in a group purchasing arrangement at all.
Option 5: Taxable Stipends
Most small businesses want to offer benefits, but are discouraged by the many problems associated with traditional options. Some try to avoid these problems by implementing informal wage increases or stipends instead.
With a wage increase, business owners give each employee a flat raise and encourage them to spend it on the insurance and services they would otherwise receive as a benefit. In some cases, this wage increase takes the form of a monthly taxable stipend.
This solution allows businesses to control their costs and frees them from the administrative time they would have spent on a formal solution.
But taxable wages and stipends don't solve the root problem. Most employees don't consider extra cash a "benefit," and therefore don't value it. Even worse, this approach costs the employees and the company 35 percent on average in income and payroll taxes on top of the wage increase.
Small businesses that choose this route end up paying an average 7.65 percent in payroll taxes on the increased wages. Employees, too, would be subject to taxation. In addition to city, state, and federal income taxes (roughly 20 percent), employees would also need to pay 7.65 percent in payroll taxes.
It's still likely less than businesses and employees might spend on traditional group benefits, but it's a hefty increase for a solution that doesn't help the company hire and keep employees.
New HRAs on the horizon
In October 2018, the Departments of the Treasury, Labor, and Health and Human Services released proposed regulations that would create two new HRAs: the individual-integrated HRA and the excepted benefit HRA.
The individual-integrated HRA works much like the QSEHRA, but it wouldn't have contribution limits, and businesses could offer different allowance amounts based on certain employee classes. Additionally, the individual-integrated HRA would only be available to employees enrolled in individual health insurance; employees enrolled in a spouse's group health insurance policy couldn't participate.
The excepted benefit HRA would allow businesses with a group health insurance policy to reimburse employees for other medical expenses, such as a dental visit or short-term health insurance premium. The HRA would be capped at $1,800 per year per employee, and couldn't be offered alongside any other HRA.
If the regulations remain unchanged, these HRAs are set to go into effect January 1, 2020. However, PeopleKeep and other groups will be lobbying for an earlier adoption date. If that's successful, small businesses will have even more health benefits options in 2019.
Connect with PeopleKeep and subscribe to our blog to keep up with any developments.
The future of small group health insurance
Every day, we hear from small business owners and their brokers about the challenges of a traditional small group health insurance plan—primarily cost. As such, it is not surprising to hear that only half (54 percent) of small- and medium-sized businesses do not offer traditional insurance today.
That rate of decline isn't going to get better. If current trends continue, less than 35 percent of small businesses will offer group health insurance in 2025.
At the same time, personalized health benefits options like the QSEHRA are only getting more popular. After the QSEHRA was introduced in 2016, the federal government moved to expand these offerings even further.
Looking ahead, it's options like these that we believe will dominate the market. Businesses that adopt the QSEHRA in 2019 will be ahead of the curve.
Editor's note: PeopleKeep first published this post in March 2018.