When it comes to medical health insurance for small businesses, nowadays there are more options than ever! Gone are the days of the rigid, expensive, one-size-fits-all group plan. With health reimbursement arrangements, or HRAs, you can offer your employees flexible, customizable, tax-free reimbursements for health insurance. And in some cases, owners can participate too. Let's take phone possibilities for health insurance for small business owners.
Three choices for medical health insurance for small business owners
- Group insurance: Historically, small-group insurance has been the primary choice for many small employers who're seeking to offer health benefits for his or her employees. Actually, around half of the U.S. population is covered through their employer plans, based on Kaiser Family Foundation. These plans are very well known, tax-free, with solid product options, and therefore are shown to be a highly effective retention strategy. But they aren’t your best option.
We see that like a good thing, as they are expensive, one-size-fits-all, and erratic: premiums can go up each year. What’s more, as an owner you need to be worried about participation rates. And don't forget, as your employees will all be in the same risk pool, one sick employee means higher prices. The standard select few plan separates patients in the process; they just swipe their card and aren’t empowered to make wise financial decisions. We’ll go out on a limb and say that this attitude doesn’t help a previously expensive healthcare system.
- Self-funded plans: Technically speaking, self-insured employers purchase claims out of pocket once they arise as opposed to paying a predetermined premium to a carrier for a select few plan. This type of plan is usually seen with a large enterprise as a way to control their healthcare spend and manage their own risk pool. A third party administrator (TPA) is engaged to process claims for this type of plan. The advantages of this kind of plan are that it’s more customizable to your workforce, you've treatments for the health plan reserves so that you can maximize your interest income, there’s no pre-funding of coverage of health, and you aren’t subject to state health insurance premium taxes (typically 2-3%).
- Health Reimbursement Arrangements(HRA): A health reimbursement arrangement is an affordable, tax-advantaged alternative to traditional insurance. The reimbursement model is straightforward: An employer decides how much money to contribute every month, provides their employees with standard here is how the HRA works, and outsources some administrative functions like verifying coverage. The worker chooses an agenda that actually works on their behalf, submits receipts for premium payments and medical expenses (if applicable), and gets reimbursed. Super simple.
The HRAs you have to know
ICHRA: the person coverage HRA is based on reimbursing employees for insurance rather than buying it for them, and brings by using it a design feature that enables owners to scale benefits by class.
- It offers the most flexibility, with 11 ICHRA employee classes, the employer gets to choose, for example, just how much to reimburse full time vs. part-time employees, seasonal employees, and salaried vs. non-salaried employees.
- ICHRA works for companies associated with a size: from the start-up to some large company.
- There aren't any reimbursement limits.
- It can also be coupled with an organization plan.
QSEHRA: the qualified small employer HRA (sometimes known as a small company HRA) allows small employers to set aside a fixed amount of cash every month that employees may use to purchase individual medical health insurance or experience medical expenses, tax-free.
- It works for businesses with less than 50 employees.
- There are QSEHRA contribution limits (for 2022: For an individual: $5,450/year. For any family: $11,050/year).
- It can't be coupled with a group plan.
- Unlike ICHRA, QSEHRA reimbursements should be exactly the same for everyone, but you can vary by age and family size.
If you want to dive deeper into ICHRA and QSEHRA, we've comprehensive guides (here and here), and FAQ pages (here and here).
Small business proprietor HRA eligibility
Whether or not self-employed owners can participate in an HRA depends upon the way the plan and business are set up.
In order for a business proprietor to participate within an HRA, they must be considered an employee of the business.
Partnerships: Partners are directly taxed, making them self-employed and never entitled to participation in either ICHRA or QSEHRA. The QSEHRA Loophole: when the partner's spouse is a W-2 employee (and not someone spouse) then your owner can have fun playing the QSEHRA like a dependent of the spouse.
Corporations: (Including C-Corps, B-Corps, Non-Profits, and LLCs taxed as C-Corps – anything in which the entity is outside of ownership.) Corporations are the easiest entity type to handle with regards to medical health insurance because owners are thought employees and can benefit from the company's QSEHRA or ICHRA. Their dependents and then any W2 employees may benefit as well.
S-Corps: An S-Corp owner that owns more than 2% of the clients are considered self-employed and never a worker, therefore typically cannot participate in the HRA. However, self-employed individuals can already deduct some health insurance expenses without an HRA.
Sole proprietors: These unincorporated businesses are managed by one person with no distinction between the company and owner. In a nutshell: The only proprietor isn't an employee and won't qualify for an HRA.
Take Command might help small business owners!
While we always advise our clients to speak with their CPA before jumping in, we're prepared to chat on our website if you have any sort of questions about your business and just how HRAs may help. Establishing a QSEHRA or perhaps an ICHRA is simple and quick, and our team is here now to assist if you need it.
And remember, what’s perfect for one company isn’t necessarily perfect for another. It is important to consider your company’s unique makeup and your location market conditions to determine what the best plan will be for the company benefits.
