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 drop health benefits. As we've covered previously, this is a losing strategy for 2020. For the foreseeable future, small businesses will face a competitive war for talent in which health benefits are vital if these businesses are going to succeed.
Fortunately, there are more small business health benefits options today than ever before.
In this post, we’ll review five of the most popular benefits for small groups in 2020:
- Individual Coverage HRA (ICHRA)
- Qualified small employer HRA (QSEHRA)
- Group coverage HRAs
- Traditional group health insurance
- Self-funded health insurance
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: Individual Coverage HRA (ICHRA)
Starting this year, two new HRAs are available to business owners: the individual coverage HRA (ICHRA) and the excepted benefit HRA.
The ICHRA works well for employers of all sizes, specifically because they are not restricted based on employee count like the QSEHRA (below).
The ICHRA works much like the QSEHRA, but it doesn't have contribution limits, and businesses can offer different allowance amounts based on 11 employee classes. Additionally, 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 2: The qualified small employer HRA (QSEHRA)
An increasingly popular option, the qualified small employer health reimbursement arrangement (QSEHRA) was created through bipartisan legislation in December 2016.
With the QSEHRA, much like other health reimbursement arrangements (HRAs), businesses with fewer than 50 employees 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 the QSEHRA to get reimbursements for eligible out-of-pocket expenses. This allows businesses to keep control over their budget while offering a meaningful benefit to their employees.
With the QSEHRA, all reimbursements are free of payroll tax for the business and its employees.
Reimbursements can be free of income tax for employees if the employee is covered by a policy providing minimum essential coverage (MEC).
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 3: Group coverage HRAs
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 group coverage health reimbursement arrangement.
With a group coverage HRA, the business offers employees a monthly allowance of tax-free money in addition to the group policy. Employees then choose and pay for health care and the business reimburses them up to their allowance amount.
Generally, employees use the HRA to cover expenses like copays, deductibles, and prescription drugs. Most items listed in IRS Publication 502 are available for reimbursement, but the business can limit this list if it chooses.
Reimbursements made through the HRA are free of payroll tax to both the business and its employees. They’re also free of income tax for employees.
Businesses can structure their own employee eligibility requirements as long as employees participate in the group policy.
With a group coverage HRA, businesses and their employees receive some of the personalization they'd get with a QSEHRA. However, these HRAs must be attached to a group policy, which is still expensive and can be tiresome to administer.
Option 4: Traditional group health insurance
The traditional choice of most businesses, a group health insurance policy is a plan chosen by the business that provides coverage to employees and, potentially, employees’ dependents.
Small businesses offering group 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. The cost of traditional group health insurance is estimated to reach $15,375 per employee family in 2020 for businesses with fewer than 500 employees. This is simply out of reach for most small businesses.
Option 5: Self-funded health insurance
To avoid the expensive premiums and restrictions of group health insurance, some small businesses choose to self-insure.
With a self-insurance arrangement, the business assumes the financial risk for providing health care benefits to employees. This means that rather than paying a fixed premium to an insurer, the business pays for each employee 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. Cost savings in non-claims expenses compared to group health insurance can range from 10 percent to 25 percent, according to the Self-Insurance Educational Foundation.
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.