Top three types of employer-sponsored health coverage

It's no surprise that health insurance consistently ranks as the benefit employees value most 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 setting up a health benefit for your employees, it's essential to understand your options. That way, you can make sure the employer-sponsored coverage you choose is the best fit for your organization.

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

Small group health insurance

Let's start with small group health insurance. Employer-sponsored coverage is the most popular type of health plan employers generally offer. The Kaiser Family Foundation¹ (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 benefits that are required by the Affordable Care Act (ACA).

Pros of small group health insurance

Given the popularity of traditional group health insurance plans, many of your employees will already be familiar with them. Therefore, there's much effort involved for you to educate employees 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 options and can walk you through your enrollment documents.

Finally, employees can benefit from the cost-sharing of their monthly premium between them and their employer. The required employer contribution for small group plans is generally 50%, but KFF² finds that the average percentage of health insurance paid by employers was much higher—83% for single coverage and 73% for family coverage in 2021.

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 plan. The one group health insurance plan you choose has to work for all employees—both young and old, healthy and high-risk. This means the plan 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 also costly for employers, which can be a burden for small employers. The average cost of health insurance has increased in recent years and is expected to continue to rise. Not to mention, employers can be 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. These are excellent options to manage healthcare costs. 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, depending on the HRA offered.

Unlike traditional group health insurance, an HRA allows small employers to control their health spending by setting their own budget. Employers set aside a monthly allowance of tax-free money and use it to reimburse employees for any qualifying healthcare purchases and individual insurance premiums for a 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 equivalent employees (FTEs).
• Individual coverage HRA (ICHRA)
• An ICHRA is another alternative to group coverage that can be leveraged by 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. A GCHRA can reimburse employees for out-of-pocket medical expenses, copays, coinsurance, and deductibles. However, you can’t reimburse premiums with a GCHRA.

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 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 medical costs. 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 offers more flexibility and gives you complete control over the benefit.

Wellness stipends

With a wellness stipend, you can give your employees the ability to use their health benefit on a broader scale. A wellness stipend allows you to reimburse them for expenses like gym memberships, exercise classes, mental healthcare apps, nutrition trackers, meditation programs, and more.

Our 2022 Employee Benefits Survey found that 96% of employers say they value their employees’ mental health, but only 64% of employees feel that way. When you choose to offer a wellness stipend, it shows your employees that you're willing to invest in their overall health and well-being.

To take it one step further, you can introduce a holistic wellness program. A holistic approach to health and wellness focuses on who we are as a whole: our mind, body, and soul. Through this type of program, you could offer nutrition education classes, weight loss programs, or stress management programs.

Pros of stipends

A health or wellness 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.

You can also offer stipends to more types of 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.

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 the expenses listed in IRS Publication 502, whereas an HRA requires this information. This means you can’t ensure your employees are using their stipend allowances on the expenses you intend.

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 credit³ 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 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 once you have more than 50 FTEs.

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 employee health benefits 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 easy.

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

This blog article was originally published on May 21, 2021. It was last updated on May 24, 2023.

1. https://www.kff.org/other/state-indicator/total-population/?dataView=1%C2%A4tTimeframe%3D0¤tTimeframe=0&selectedDistributions=employer&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D

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

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