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Top three types of employer-sponsored health coverage

Written by: Chase Charaba
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Published on August 18, 2022.

It's no surprise that health insurance consistently ranks as the top benefit2 employees value in the U.S. That's why offering a quality health benefit is an essential strategy for recruiting and retaining top talent in any industry—especially for small to medium size organizations.

While there's no right or wrong way to go about finding and enrolling in a health coverage plan for your employees, it's essential to understand your options. That way, you can make sure the employer-sponsored coverage plan you choose is the best fit for your organization.

In this article, we'll cover three of the most common ways small employers can offer health benefits to their employees: group health insurance, health reimbursement arrangements (HRAs), and employee stipends.

Looking for a health benefit for your organization? Learn which HRA is best for your organization in our comparison chart

Small group health insurance

Let's start with small group health insurance. Employer-sponsored health insurance coverage is the most popular type of health plan employers generally offer. The Kaiser Family Foundation2 (KFF) finds that nearly half of all Americans have insurance through an employer-sponsored group health plan.

Organizations with at least two full-time employees, but no more than 50, are eligible to enroll in a small group health insurance plan for their employees. These plans cover all the essential health benefits3 outlined by the federal government in the Affordable Care Act.

Pros of small group health insurance

Given the popularity of group health insurance plans, many of your employees will already be familiar with them, so there's not as much effort involved for you to educate them on how they work.

Moreover, the popularity of traditional group plans also makes it easy to find an insurance broker to help you purchase a policy. Brokers are generally knowledgeable about insurance and can walk you through your enrollment documents.

Finally, employees like the cost-sharing of their monthly premium between them and their employer. The required employer contribution for small group plans is generally 50%, but KFF4 finds that the average percentage of health insurance paid by employers was much higher—83% for single coverage and 73% for family coverage in 2020.

However, small employers generally contribute less to family coverage, with 28% of small business employees paying more than half of their family coverage premiums for employer-sponsored health coverage.

Cons of small group health insurance

The biggest downside of offering traditional group health insurance as your employer-sponsored health plan is the one-size-fits-all nature of the plans. The employer chooses group health insurance to be offered to all employees—both young and old, healthy and high-risk. This means workers don't get any say in the plan chosen, and it may not fit their unique healthcare needs. Likewise, they don't get to choose what network they'll have available, the deductible they'll need to meet, or the premium they'll have to pay.

Group plans are costly for the employer, which can be a burden for small employers. The average cost of group health insurance has increased in recent years and is expected to continue to rise. Not to mention employers are subject to annual rate hikes every year the plan is due for renewal.

Lastly, employer-sponsored insurance plans often come with minimum contribution and participation requirements. That means if you don't have the budget to meet the total 50% contribution required of you, or if you don't have enough employees interested in enrolling, you won't qualify to offer a group health plan.

Health reimbursement arrangements (HRAs)

Next, let's look at HRAs. An HRA is an IRS-approved, employer-funded health benefit used to reimburse employees for either out-of-pocket medical expenses, individual health insurance premiums, or both.

Unlike traditional group health insurance, an HRA allows small employers to control their benefits costs by setting their own budget. Employers set aside a monthly allowance of tax-free money, and employees are reimbursed for any qualifying healthcare purchases and premiums on an individual health insurance plan that works best for them.

Three of the most popular types of HRAs are:

  • Qualified small employer HRA (QSEHRA)
    • A QSEHRA is a simple, controlled-cost alternative to group health insurance for employers with fewer than 50 full-time employers.
  • Individual coverage HRA (ICHRA)
    • An ICHRA is a flexible health benefits solution for organizations of all sizes. You can set up different classes to vary employee eligibility and allowances, such as for full-time workers.
  • Group coverage HRA (GCHRA), also known as an integrated HRA:
    • A group health plan supplement to help employees with out-of-pocket expenses due to gaps in coverage.

Pros of health reimbursement arrangements

For employers, the biggest perk of offering an HRA is its affordability. An HRA allows you to personally decide how much of an allowance to offer your employers, giving you a fixed cost you can consistently rely on and budget for every year—with no annual rate hikes! And, if your workers don't use their full allowance at the end of the year, you get to keep those funds for your organization.

In addition, HRAs are easy to set up and manage and are inclusive. Whether your organization is big or small or has a tight budget or a flexible one, there's a unique type of HRA for every employer. When you use an HRA administration software like PeopleKeep, you'll only need about five minutes each month to administer the benefit.

Employees benefit from an HRA by getting a personalized benefit that meets their unique healthcare needs. Unlike a group health plan, an HRA allows each employee to use the benefit differently and personally choose an individual insurance plan that works for them.

Cons of health reimbursement arrangements

Because group plans are the traditional choice for employer-sponsored health coverage, your employees may be unfamiliar with reimbursement models like HRAs. You will be responsible for informing your workers about how an HRA works, what expenses qualify, and where to shop for individual insurance.

By partnering with PeopleKeep, we help you every step of the way. We'll send documentation to help your employees understand their new health benefits, talk them through which expenses qualify for reimbursement, and even help them find an individual insurance plan that meets their specific needs.

On the employer's side, some organization owners can’t participate in their own HRA. This will depend on what type of organization you run. For example, C-corporation owners can fully participate in their HRA, but S-corporation owners can’t.

Health stipends

Some smaller employers who don't offer health benefits consider giving employees a raise or salary bonus as an informal strategy for employer-provided health benefits. The extra money offered through employees' pay is intended to cover their health needs that the organization isn't formally covering.

Instead of offering increased compensation in place of employer-sponsored coverage, you can provide your employees with a health stipend.

A health stipend allows you to offer employees a monthly allowance for their healthcare expenses. This is generally provided to your workers through a benefits expense card, an expense reimbursement, or a lifestyle spending account (LSA).

While a stipend is taxable and works like a bonus or raise, it ensures that your employees are actually spending their monthly allowance on healthcare expenses instead of other costs, giving you complete control over the benefit while still providing flexibility to your workers.

Pros of health stipends

A health stipend is an excellent option for small organizations looking to provide a benefit to employees without the compliance or restrictions of formal employer-sponsored health coverage such as group health insurance or HRAs.

As an informal benefit, healthcare stipends are entirely customizable to your needs. If you only want employees to be able to submit insurance premiums for reimbursement, you can do that. You can also expand your eligible expenses beyond what the federal government allows for HRAs.

You can also offer healthcare stipends to more employees than you can health insurance or HRAs, such as 1099 contractors and international employees. If any of your employees receive federal advance premium tax credits (APTC), stipends allow your employees to take advantage of both benefits instead of choosing one over the other.

Best of all, you get to choose the maximum monthly allowances for your employees, allowing you to set your own budget without annual rate increases.

Stipends are also simple and easy to manage, especially through PeopleKeep's employee stipend administration software.

Cons of stipends

If your workers see stipends as additions to their wages, they may not see it as a benefit over an HRA or employer-sponsored health insurance coverage.

From an administrative perspective, you can't ask employees to submit proof of insurance or receipts for certain expenses, whereas an HRA requires this information.

Another downside is that you miss out on the tax savings associated with offering pre-tax contributions to your employees' HRA allowance or covering a portion of their group health insurance premium. Small employers can even qualify for the small business healthcare tax credit5 in some cases—but not if you don't offer a formal health benefit.

In addition, since a stipend isn't a formal health benefit, it doesn't satisfy the ACA's employer mandate. While small employers with 50 or fewer full-time equivalent employees (FTEs) aren't legally required to offer health insurance, you will be as your organization grows. If you continue offering only a healthcare stipend instead of group health insurance or an HRA, you'll be out of compliance and have to pay a penalty.

Employers will also have to pay payroll taxes, while workers see their reimbursements added to their W-2s as additional wages. This means employees must pay income taxes on their stipend benefits.

Conclusion

Whether it's your first time offering health benefits to your employees or you're looking to change up your strategy, prioritizing the time to fully understand your healthcare benefit options is an important first step to finding a plan that's right for your organization. The energy you put in now will more than pay for itself in the employees you'll be able to recruit and retain through your quality health benefits package.

If you're ready to offer a personalized health benefit to your employees, PeopleKeep can help! Our personalized benefits administration software makes setting up and managing your HRA or employee stipend easy.

Schedule a call with a personalized benefits advisor to see how HRAs or stipends can work for your organization

This blog article was originally published on May 21, 2021. It was last updated on August 18, 2022.

1. https://www.shrm.org/hr-today/trends-and-forecasting/research-and-surveys/Documents/SHRM%20Employee%20Benefits%202019%20Healthcare%20and%20Health%20Services.pdf

2. https://www.kff.org/other/state-indicator/total-population/?dataView=1¤tTimeframe=0&selectedDistributions=employer&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

3. https://familiesusa.org/resources/10-essential-health-benefits-insurance-plans-must-cover-under-the-affordable-care-act/

4. https://www.kff.org/health-costs/report/2020-employer-health-benefits-survey/

5. https://www.irs.gov/affordable-care-act/employers/small-business-health-care-tax-credit-and-the-shop-marketplace

Originally published on August 18, 2022. Last updated August 18, 2022.
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