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 2019. In 2019 and beyond, 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 2019:
Qualified small employer health reimbursement arrangements (QSEHRAs)
Traditional group health insurance
Group-integrated HRAs
Self-funded health insurance
Association health plans
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: The qualified small employer health reimbursement arrangement (QSEHRA)
A new and increasingly popular option, the qualified small employer health reimbursement arrangement (QSEHRA) was created through bipartisan legislation in December 2016.
With the QSEHRA, businesses with fewer than 50 employees offer employees a monthly allowance of tax-free money. Employees then choose and pay for health care, potentially including personal insurance policies, and the business reimburses them up to their allowance amount. This allows businesses to keep control over their budget while offering a meaningful benefit to their employees.
Here’s how it works:
Step 1: Businesses set the allowance. The small business chooses a monthly, per-employee allowance of tax-free money to make available. There are no minimum contribution requirements, and small businesses can offer different allowance amounts to employees based on their family status. In 2018, QSEHRA contribution limits allowed businesses to offer up to $420.83 a month for single employees and $854.16 a month for employees with a family. The IRS hasn't released 2019 QSEHRA contributions yet, but we'll update this post once they're available.
Step 2: Employees make purchases. Employees are free to buy what fits their personal needs. There are a variety of expenses eligible for reimbursement, including personal health insurance premiums, copays, deductibles, and prescription drugs.
Step 3: Employees submit proof of expenses. After they incur an eligible expense, employees submit proof to their company through documents that include: a description of the product or service, the cost of the expense, and the date the employee incurred the expense.
Step 4: Businesses review and reimburse employees’ expenses. After an employee submits an expense, the business or an approved third party reviews the documentation and reimburses the employee from their monthly allowance.
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 2: 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 $13,363 per employee family in 2019 for businesses with fewer than 500 employees, according to Mercer’s National Survey on Benefit Trends. This is out of reach for many small businesses.
Option 3: Group-integrated 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-integrated health reimbursement arrangement (HRA).
With a group-integrated 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-integrated 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: 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.
Option 5: Association health plans
A new rule issued by the Department of Labor in 2018 expanded the availability of association health plans (AHPs) for small businesses.
AHPs allow small businesses to band together within industries, professions, or geographic regions to either purchase large-group coverage or self-insure.
Once the benefit is in place, it works much like a regular group policy or self-funded health insurance benefit would. However, AHPs aren’t subject to the ACA’s rating rule, which prevents insurers from varying costs in a specific region based on things like sex, age, or health status. They also don’t need to cover the essential health benefits that ACA-compliant policies do.
Administration is typically done by the association, rather than by the small business members.
AHPs can help cut costs, often by between $1,900 and $4,100 per employee per year. However, AHPs achieve these cost savings not only by widening the risk pool, but also by cutting out standard coverage items. The AHP may not cover essential health benefits, such as prescription drugs, maternity care, or mental health services.
New HRAs on the horizon
Though they're not yet final, October 2018 regulations from the Departments of the Treasury, Labor, and Health and Human Services would create two new HRAs: the individual-integrated HRA and the excepted benefit HRA.
The individual-integrated HRA works much like the QSEHRA, but it wouldn't have contribution limits, and businesses could offer different allowance amounts based on certain employee classes. Additionally, the individual-integrated HRA would only be available to employees enrolled in individual health insurance; employees enrolled in a spouse's group health insurance policy couldn't participate.
The excepted benefit HRA would allow businesses with a group health insurance policy to reimburse employees for other medical expenses, such as a dental visit or short-term health insurance premium. The HRA would be capped at $1,800 per year per employee, and couldn't be offered alongside any other HRA.
If the regulations remain unchanged, these HRAs are set to go into effect January 1, 2020. However, PeopleKeep and other groups will be lobbying for an earlier adoption date. If that's successful, small businesses will have even more health benefits options in 2019.
The future of small group health insurance
Every day, we hear from small business owners about the challenges of traditional small group health insurance—primarily cost. As such, it's not surprising that only 30 percent of businesses with fewer than 50 employees offer traditional group insurance today.
Fortunately, the health benefits options for small businesses are growing. You can learn more about the options presented in this blog in our latest eBook, The Small Business's Guide to Health Benefits in 2019.
In this eBook, we dive even further into these five health benefits, how they work, their pros and cons, and how they're implemented. We also give you a framework for deciding which benefit is the right choice for you and your small business.
Looking ahead, we believe these options will continue to expand. Access to alternative benefits, especially HRAs, will grow and small businesses will be in an even better position to succeed this year and for many years to come.
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