There are a lot of benefits options for small businesses out there, and each one seems to have its own vocabulary. We've collected the most important terms and their definitions here so you can make the best decisions for your organization.
The 21st Century Cures Act is a 2016 federal law that created the qualified small employer health reimbursement arrangement (QSEHRA).
Among other things, the legislation amended the Internal Revenue Code to permit businesses with fewer than 50 full-time-equivalent employees to offer a stand-alone health reimbursement arrangement (HRA) beginning in January 2017. It also provided specific guidelines for offering the HRA, including eligibility requirements, annual allowance caps, and premium tax credit coordination.
This language was originally part of the Small Business Healthcare Relief Act before being written into the 21st Century Cures Act.
The 21st Century Cures Act received bipartisan support in Congress and was signed into law by President Barack Obama on December 13, 2016.
A 401(k) is an employer-sponsored retirement savings plan. It is named for the section of the Internal Revenue Code that governs it.
With a 401(k), employees invest a portion of their pre-tax earnings across a spread of stocks, bonds, and money market investments. Employers then offer matching funds, the most popular option being 3 percent of an employee’s salary. This means the employer will “match” the employee’s contribution, up to 3 percent of their salary.
For example, an employee with a $50,000 salary who contributes $1,500 per year toward their 401(k) would receive another $1,500 from their employer. Any amounts the employee contributes beyond this figure aren’t matched by the employer.
401(k)s do come with some restrictions. For example, most plans include a “vesting” period during which the employee can’t access their employer’s contributions. After the vesting period is over, the employee will gain access to the employer’s payments.
There are also contribution limits for 401(k) accounts, along with certain fees and penalties employees may incur if they withdraw funds before retirement.
A 401(k) is the most popular type of retirement plan in the U.S. and is typically administered by a third-party group.
An association health plan (AHP) allows small businesses and other organizations, like nonprofits and religious entities, to band together within industries, professions, or geographic regions to provide health benefits to their employees by either purchasing large-group health insurance coverage or self-insuring.
Once the benefit is in place, an AHP works much like a regular group policy or self-funded health insurance benefit.
AHPs can help cut costs, often by between $1,900 and $4,100 per employee per year.
However, AHPs aren’t subject to the consumer protections of the ACA. This means insurers can vary costs in a specific region based on factors like sex, age, or health status of the employee. AHPs also don’t need to cover the essential health benefits that ACA-compliant policies do, which means they may not cover items like prescription drugs, maternity care, or mental health services.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) is a 1985 federal law requiring most employers to allow eligible employees and their beneficiaries to continue to pay for their health insurance coverage after the employer terminates employment, for up to 36 months.
COBRA applies to all companies with more than 20 employees and its coverage can extend to terminated employees, retirees, spouses, former spouses, and dependent children.
In order to participate in COBRA, an employee must pay the full cost of the premium or benefit.
For most individuals, COBRA is more expensive than individual insurance.
A cafeteria plan is an employer-sponsored health benefit governed by Section 125 of the Internal Revenue Code.
There are several types of cafeteria plans available, but the most common are the premium-only plan (POP), which converts after-tax contribution for health care into pretax contributions, and the flexible spending account (FSA), which holds contributions that can be used for medical and daycare expenses.
With a POP, after-tax employee contributions to an employer-sponsored group plan are converted into pretax contributions. Rather than a full benefit, it’s a simple bookkeeping transaction that provides value to the employee.
With an FSA, the employee contributes a separate account with pretax contributions. These contributions can then be used for expenses including:
After incurring these expenses, employees request approval from the company and are reimbursed from their account.For more details on cafeteria plans, check out this blog post.
In health insurance, coinsurance is the percentage of a covered medical expense the insured person pays for.
For example, if a person’s coinsurance is 20 percent and they see a doctor for $200, they’d be responsible for paying $40. The insurance company would pay the remaining $160.
Depending on the insurance policy, coinsurance may apply before or after the insured person has paid their deductible. Typically, coinsurance kicks in after the deductible is paid.
Coinsurance is different from a copay. Specifically, coinsurance refers to a percentage of the total cost an insured person pays, while the copay is a flat fee. In the same example from above, a person with a $20 copay would pay $20 for the doctor’s visit regardless of how much the visit ultimately cost.
A consumer-directed health plan (CDHP) is an employer health benefit that asks employees to make consumer decisions about their health care.
Rather than give employees a group health policy chosen by the business, a CDHP gives employees access to both tax-free money and choices on how to spend it. For example, several CDHPs allow employees to use employer funds to purchase many of the items listed in IRS Publication 502.
CDHPs come in many forms, but the most common are a health savings account (HSA) or a health reimbursement arrangement (HRA).
For more information on CDHPs, check out this blog post.
A copayment – or copay – is the fixed amount an individual pays for a covered health care service, as defined by their health insurance policy.
The copayment is paid before the individual receives service, and may vary in amount based on the type of service the individual is receiving. For example, an individual could have a $25 copayment for medical service like a doctor’s visit and a $45 copayment for a specialist, like a chiropractor.
The amount of the copayment is usually listed on the individual’s insurance card. Depending on the health insurance policy, the individual may have a copayment before they’ve finished paying their deductible. They may also have a copayment after they pay their deductible and when they own coinsurance.
In health insurance, a deductible is a certain amount of money the insured person must pay before the insurance company will pay a claim. Someone with a $3,000 deductible, for example, would have to pay the first $3,000 of covered services themselves.
Many plans, including those sold on public health insurance exchanges, must pay the full cost of some preventive benefits before the deductible is met. These include screenings for things like blood pressure, cholesterol, and breast cancer; immunization vaccines; and contraception.
Typically, health insurance plans with higher deductibles come with lower premiums.
If a deductible is high enough (and meets certain other requirements), the high-deductible health care plan (HDHP) allows the policyholder to open and contribute to a health savings account (HSA). In 2019, the minimum annual deductible is $1,350 for single coverage and $2,700 for family coverage.
A defined contribution health plan is an employee health benefit that allows employers to offer a fixed, tax-free allowance that employees choose how to spend. Typically, employees are allowed to spend this allowance on individual health insurance and other out-of-pocket medical costs.
A defined contribution health plan works in contrast to a typical defined benefit health plan, like a group health insurance policy. Rather than provide a specific benefit to employees, employers instead define the financial contribution they’re making to employees’ health care.
Defined contribution health plans are governed by formal plan documents and managed either by the employer or by a third-party administrator (TPA) or benefits software provider.
Examples of defined contribution health plans include health reimbursement arrangements (HRAs), health savings accounts (HSAs), and flexible spending accounts (FSAs).
The Employee Retirement Income Security Act is a 1974 federal law that provides insurance companies and private employers with guidelines on how to administer employee benefit plans.
ERISA requires employers to inform employees about several key areas of their employee benefits plans, including eligibility requirements, significant changes made to the benefit, and what standards they need to meet to have a claim fulfilled.
Specific ERISA provisions include:
There have been several significant amendments to ERISA over the years, including COBRA.
ERISA applies to all employer-sponsored group health plans, including new benefits like the qualified small employer health reimbursement arrangement (QSEHRA).
The excepted-benefit HRA is a health reimbursement arrangement created by the Departments of the Treasury, Labor, and Health and Human Services.
Set to become available January 1, 2020, the excepted-benefit HRA allows businesses with a group health insurance policy to reimburse employees for certain medical expenses called “excepted benefits.” This includes items like a dental or optometrist visit or a short-term health insurance premium.
The HRA will be capped at $1,800 a year per employee, though the amount is tied to inflation and may change.
The excepted-benefit HRA cannot be offered alongside the individual-coverage HRA (ICHRA) and cannot reimburse premiums for individual health policies, group health policies, or Medicare parts B or D.
The employer organization may extend excepted-benefit HRA eligibility to any employee, regardless of whether they’re covered by a group health insurance policy.For more information on the excepted-benefit HRA and other types of HRAs, check out this blog post.
Excepted benefits are a category of health benefits exempt from the Affordable Care Act and its market reforms, as well as HIPAA portability requirements and many ERISA provisions.
Excepted benefits are outlined in ERISA section 733(c) and include:
Tax-free, employer-sponsored financial support for excepted benefits can be provided through an excepted-benefit HRA, available January 1, 2020.
An explanation of benefits (EOB) is a document that provides details to the employee about a medical insurance claim that has been processed. Though it often resembles medical billing documents, an EOB is not a bill.
Created and sent by the insurance company, an EOB explains how the medical claim was processed, including what portion of the claim was paid by the insurance company and what—if any—portion is payable by the claimant.
It also details:
EOBs are an accepted form of documentation that HRA participants can submit to claim reimbursement from their employer.
Fringe benefits are additional compensation outside of wages provided to employees by employers, generally on a tax-free basis.
Fringe benefits are outlined in IRS Publication 15-B and commonly include benefits like health insurance or health reimbursement arrangements (HRAs), educational assistance, employee stock options, and employee discounts.
According to IRS Publication 15-B, all benefits are taxable unless specifically listed as tax-exempt.
Those that are tax-free in most conditions include:
Generally, all employees full-time employees are eligible for fringe benefits. However, some may not be considered an employee for the purposes of fringe benefits, such as employees who own more than 2 percent of the stock in an S-corporation or a highly compensated employee who is either an officer or owns more than 5 percent of the voting power.
Along with wages, fringe benefits are an important piece of recruiting and retaining employees.
A group-coverage HRA is a health reimbursement arrangement designed to work alongside a group health insurance policy. With a group-coverage HRA, businesses offer a high-deductible health plan (HDHP) to save on premium costs and use an HRA to make up for some of the loss in value.
Businesses that use a group-coverage HRA typically offer employees an annual allowance of money equal to the policy’s deductible (though there are no firm contribution guidelines). Employees then purchase health care products and services and are reimbursed by the business from their allowance.
All reimbursements are free of payroll tax to both the business and its employees. They’re also free of income tax for employees.
Only employees who are enrolled in the business’ group policy are eligible for the group-coverage HRA.
A health insurance stipend is an alternative to traditional health benefits.
Rather than offer a formal, tax-advantaged benefit, businesses that offer a health insurance stipend give employees an allowance of taxable money intended for employees’ health insurance. Although some businesses may include this allowance as a separate line item on employee paychecks, the stipend is essentially the equivalent of a taxable wage increase, and, significantly, businesses are prohibited from verifying that employees use the money to purchase health insurance.
Health insurance stipends allow businesses to control their benefits budget and cut back on administration time, but they also cause businesses and employees to lose between 35 to 50 percent of the benefit to taxes.
Employees are also unlikely to consider health insurance stipends a true, formal benefit.For more details on health insurance stipends, check out this blog.
A health reimbursement arrangement (HRA), sometimes called a health reimbursement account, is an employer-sponsored health benefit that allows businesses to reimburse employees tax-free for health care.
With an HRA, organizations offer a monthly allowance of tax-free money to employees. Employees then buy health care, potentially including individual health insurance, and submit documentation of the purchase to the business. Finally, the business reimburses the employee tax-free up to their allowance amount.
HRAs can reimburse a wide variety of expenses, including health insurance, dental and vision insurance, prescription drugs, and copays and deductibles. A full list can be found in IRS Publication 502.
There are several types of HRAs, including:
Businesses and organizations typically use HRAs as an alternative to group health insurance, which can be limiting or cost-prohibitive. With an HRA, there are limited administration requirements and no minimum participation requirements, and businesses have complete control over their budget.
A health savings account (HSA) is a financial account established by an individual or family. The account’s funds can be used to pay for qualified medical expenses tax-free.
HSAs are similar to flexible spending accounts (FSAs), but with some major tax differences. With an HSA, you can:
To contribute to an HSA, individuals must be covered by an HSA-qualified high-deductible health plan (HDHP). Businesses can also contribute to an HSA on behalf of an employee as a health benefit.
Both individuals and businesses must abide by the HSA’s annual contribution limits. For 2019, single account holders can contribute up to $3,500 and account holders with a family can contribute up to $7,000. There is also a catch-up contribution available of $1,000 for those over age 55.
An HSA can be used alongside a health reimbursement arrangement (HRA), but the HRA must be adjusted to accommodate the HSA.
A high-deductible health plan (HDHP) is a group or individual health insurance policy with a deductible the IRS considers “high.”
In 2019, policies with a deductible of at least $1,350 and a maximum out-of-pocket amount of up to $6,750 for a single individual are considered HDHPs. For family coverage, policies must have a deductible of at least $2,700 and a maximum out-of-pocket amount of up to $13,500 to be considered an HDHP.HDHPs are critical for individuals who want to contribute to a health savings account (HSA). These individuals must be qualified by an HDHP that meets these standards, as well as not offer any benefit beyond preventive care before meeting the annual deductible, to contribute to an HSA.
The Health Insurance Portability and Accountability Act (HIPAA) is a 1996 federal law that provides regulations on security and data privacy for health insurance companies and private employers.
Specific HIPAA provisions include:
Although much of HIPAA only applies to businesses with health plans that cover more than 50 employees, the law’s privacy provisions (also called the HIPAA Privacy Rules) apply to all businesses that offer health benefits.
As such, all businesses must treat employees’ protected health information as prescribed by HIPAA. They must also designate HIPAA privacy officers in the benefit’s plan documents.
Finally, HIPAA prohibits employees from knowing specifics about their employees’ health insurance policies. For businesses that offer a health reimbursement arrangement (HRA), this means businesses can’t advise their employees on which individual health insurance policies to purchase.
An individual coverage health reimbursement arrangement (ICHRA) is a health reimbursement arrangement that can be integrated with individual health insurance policies.
Introduced through regulation from the Departments of the Treasury, Labor, and Health and Human Services, the ICHRA will be available beginning January 1, 2020.
With an ICHRA, businesses offer employees a monthly allowance of tax-free money. Employees then purchase health care, including individual health insurance, and submit proof of the expenses to the business. The business reviews the documentation and, if it supplies all necessary details, reimburses the employee up to their allowance amount.
There are no minimum contribution requirements or maximum contribution limits, and businesses can offer different allowance amounts to different employees based on nine employee classes, including:
Employees who participate in the ICHRA don’t qualify for premium tax credits. However, employees who want to use premium tax credits can waive the ICHRA.
IRS Publication 502 is an official document from the Internal Revenue Service. It explains itemized deduction for medical and dental expenses, and lists which expenses and whose expenses can be deducted from personal income while filing Form 1040.
IRS Publication 502 also serves as a guide to individuals with health savings accounts (HSAs) and health reimbursement arrangements (HRAs). Depending on the particular vehicle, most or all of the items listed are eligible for payment with an HSA or reimbursement through an HRA.
Items listed on IRS Publication 502 include:
A medical expense reimbursement plan (MERP) is an employer-sponsored health benefits plan governed by Section 105 of the Internal Revenue Code. MERPs allow businesses to reimburse employees and their families tax-free for out-of-pocket medical expenses.
With a MERP, the business offers employees an allowance of tax-free money for health care. Employees then purchase health care and submit documentation to the business. The business reviews the documentation and reimburses the employee up to their allowance amount.
Generally, businesses use MERPs to either reimburse employees for individual health insurance or for amounts paid toward the deductible of the business’s group health policy.
A health reimbursement arrangement (HRA) is an example of a MERP.
A medical spending account (MSA) is an employee-owned financial account. With an MSA, employees set aside a portion of their gross wages to spend on deductibles, copays, or uninsured expenses. MSAs can also be used to help employees save on retirement.
Businesses with fewer than 50 employees can contribute to the account as an employer-sponsored health benefit if they choose, but employees and employers can’t contribute to the MSA at the same time.
MSAs are the predecessors of health savings accounts (HSAs) and have similar deductibles and tax treatment. For example, employees who want to participate in the MSA must be enrolled in a high-deductible health plan (HDHP).
Employers can’t contribute to both an MSA and an HSA.
Minimum essential coverage (MEC) is health insurance that meets the Affordable Care Act’s shared responsibility provision, or individual mandate. Although the penalty for not meeting the individual mandate has been reduced to zero, MEC is still an important measure--particularly for those participating in health reimbursement arrangements (HRAs).
Health coverage that qualifies as MEC include:
Health coverage that doesn’t qualify as MEC include:
Individuals who want to participate in the qualified small employer HRA (QSEHRA) must be covered by MEC if they want to receive their reimbursements tax-free.
A one-person stand-alone HRA is an employer-sponsored health reimbursement arrangement offered to just one employee.
A scaled down version of the old stand-alone HRA, the one-person stand-alone HRA was explicitly mentioned by the IRS as a compliant employee health benefit when it limited HRAs in 2013.
With a one-person stand-alone HRA, the business offers the eligible employee a monthly allowance of tax-free money. The employee then purchases health care, potentially including individual health insurance, and submits documentation of their expenses to the business. The business reviews the documentation and reimburses the employee up to their allowance amount.
Only businesses with one W-2 employee can offer the one-person stand-alone HRA. As soon as the business hires another employee, it must upgrade to another HRA, like the qualified small employer HRA, individual coverage HRA, or group coverage HRA.
All items listed in IRS Publication 502 are eligible for reimbursement through the one-person stand-alone HRA.
Open enrollment is an annual period during which people can purchase individual self-only or family health insurance policies. Open enrollment applies to both public-run insurance exchanges, including HealthCare.gov, and private market options.
Beginning with 2018 coverage, the federal open enrollment schedule is November 1 to December 15, with coverage becoming effective January 1. States that run their own health insurance exchanges may choose to alter these dates.
These states include:
Once open enrollment is over, individuals will need a qualifying life event to access a special enrollment period (SEP) during which they can sign up for coverage.
Premium reimbursement is a method of providing employer-sponsored health benefits. With premium reimbursement, businesses use a formal benefits vehicle to reimburse employees’ insurance policy premiums tax-free.
Most often, premium reimbursement is used to reimburse individual health insurance. However, a business may choose a vehicle that reimburses premiums for health, vision, and long-term care policies as well.
To be a true tax-free health benefit, businesses interested in premium reimbursement must use a benefits vehicle governed by formal plan documents. Typically, health reimbursement arrangements (HRAs) provide the best vehicle for premium reimbursement.
Depending on the type of HRA it chooses, the business may reimburse health insurance premiums only or extend the reimbursement benefit to other insurance premiums. They do not reimburse premiums paid toward an employee’s spouse’s group plan.
A qualified small employer HRA (QSEHRA) is a health reimbursement arrangement that allows small businesses to reimburse employees for health care tax-free.
Created in 2016 through the 21st Century Cures Act, the QSEHRA is available exclusively to businesses with fewer than 50 full-time-eligible employees.
With a QSEHRA, businesses set a monthly allowance amount for employees. Then, employees buy the health care they want, potentially including individual health insurance, and submit proof of their expenses. Businesses approve the request and reimburse the employee up to their allowance amount.
The QSEHRA is automatically eligible to all full-time employees, and businesses can choose whether to extend eligibility to part-time employees as well.
The QSEHRA is subject to annual allowance amount caps set every year by the IRS. In 2019, those amounts are $5,150 for self-only employees and $10,450 for employees with a family.
The QSEHRA is also subject to premium tax credit coordination. Individuals who qualify for premium tax credits can still participate, but the amount of their credit must be reduced by the amount of their QSEHRA allowance.
A qualifying life event is an event that makes an individual eligible for a 60-day special enrollment period (SEP) outside the normal open enrollment window. During the SEP, the individual can purchase individual health insurance.
There are four basic types of qualifying events:
The full list of qualifying life events under each umbrella includes:
In 2020, becoming newly eligible for a qualified small employer HRA (QSEHRA) or an individual coverage HRA (ICHRA) will also be qualifying life events.
Once an individual has experienced one of these events, they should apply for a special enrollment period through HealthCare.gov or their state exchange.
Section 105 plans are employer-sponsored health benefits created through Section 105 of the Internal Revenue Code.
IRC Section 105 discusses amounts received under accident and health plans and allows qualified distributions from these plans to be excluded from income, making them tax-free.
The section also allows tax-free reimbursements for out-of-pocket medical expenses listed in IRS Publication 502, including reimbursement for individual health insurance premiums.
There are several health benefits considered Section 105 plans, including:
Health reimbursement plans and medical expense reimbursement plans (MRPs) are also terms frequently used to describe Section 105 plans.
Section 125 plans are employer-sponsored health benefits created through Section 125 of the Internal Revenue Code.
IRC Section 125 allows employees to contribute a portion of their pre-tax income to benefits, including health insurance premiums, medical expenses, and dependent daycare expenses.
This form of salary reduction reduces income tax for the employee and payroll tax for both the business and the employee.
Plans based on Section 125 are frequently called cafeteria plans and offer two different benefits vehicles: the premium only plan (POP) and the flexible spending account (FSA).
With a POP, after-tax employee contributions to an employer-sponsored group plan are converted into pre-tax contributions.
With an FSA, the employee establishes a separate account with their pre-tax contributions. These contributions can then be used for out-of-pocket medical or daycare expenses: employees submit documentation of their expenses and the business reimburses them from the account.
A self-insured health plan is an employee health benefit in which the employer provides the entirety of the benefit through its own funds. This contrasts with a group health insurance policy, in which the employer pays all or part of a monthly premium in exchange for a policy underwritten by a health insurance company.
Typically, self-insured health plans take one of two forms: self-funded health insurance or a self-insured medical reimbursement plan.
With self-funded health insurance, the employer pays each employee out-of-pocket claim as it arises. Eligibility and covered benefits are defined by the employer through formal plan documents, while third-party administrators (TPAs) manage claims and other filings. To pay claims with self-funded health insurance, employers usually set up a trust fund.
With a self-insured medical reimbursement plan, the employer provides tax-free reimbursement of employee claims up to a certain dollar amount. Eligibility and qualified expenses are defined by the employer through formal plan documents, while TPAs and other software providers handle plan administration. Employers pay these claims as they arise rather than establishing a separate fund for health care.
The key difference between the two approaches is that self-insured medical reimbursement plans are paid on a reimbursable basis. These plans are also capped at a certain dollar amount by the employer.
With self-insured medical reimbursement plans like a health reimbursement arrangement (HRA), employees are free to choose the health care they want while employers maintain better control over their benefits budget.
A special enrollment period (SEP) is a 60-day window outside of open enrollment during which a person can shop for and purchase an individual health insurance policy.
In order to obtain an SEP, an individual must experience a qualifying life event and apply to their local public health insurance exchange.
Qualifying life events can be a loss of existing coverage, a change in household, or a change in residence, among other things. Generally, an individual has 60 days from the time of the qualifying life event to apply for an SEP. As part of this process, they’ll need to verify the qualifying life event through documentation within 30 days.
Once the SEP is granted, the individual has 60 days to shop for individual health insurance.
Applying for an SEP is the only way to buy individual health insurance outside of open enrollment.
The stand-alone HRA was a widely used health reimbursement arrangement from its creation in 2002 until the IRS limited HRA availability in 2013.
With a stand-alone HRA, businesses offered employees a monthly allowance of tax-free money. Employees then purchased health care with their own money and submitted documentation of the expenses to the business. The business reviewed the documentation and reimbursed the employees up to their allowance amount.
The stand-alone HRA carried very few guidelines on eligibility and allowance amounts. Businesses could structure eligibility according to any legitimate job criteria, including tenure, job title, or geographic location. They could also offer different allowance amounts to different employees based on the same job criteria.
Additionally, there were no contribution limits associated with the stand-alone HRA. Businesses could offer as much or as little as they wanted in monthly allowances.
The stand-alone HRA was essentially eliminated in 2013 when the IRS issued Notice 2013-54. According to the notice, HRAs are group health plans and must comply with Affordable Care Act requirements—including the law’s preventive services coverage mandate and prohibition on annual limits. The stand-alone HRA didn’t follow these guidelines.
Today, businesses interested in using an HRA to pay their employees’ individual premiums can use the qualified small employer HRA (QSEHRA). In 2020, they’ll also be able to offer the individual coverage HRA (ICHRA).
A summary plan description (SPD) is a document used to communicate the rights and responsibilities of a health benefit to participants. Under ERISA, SPDs are required for all employer-sponsored health benefits.
The SPD is a summary of the material provisions included in the benefits full plan document. SPDs much be understandable to the average person and provide information on:
Businesses are required to distribute an SPD to all eligible employees. In the benefit is changed, participants must be informed either through a revised SPD or in a separate document, called a summary of material modifications.