The cost of offering health insurance to employees is staggering for small businesses. As of late 2023, a family health insurance plan that covers a worker and his or her family costs nearly $24,000 per year. Are there ways to reimburse employees for health insurance?
Ways to Reimburse Employees for Health Insurance
Some small business owners consider simply bowing out of the group health insurance game altogether, and simply reimbursing employees who purchase their own health plan, whether on or off the Affordable Care Act exchanges.
After all, if you have fewer than 50 full-time workers or the equivalent, there’s no federal mandate that you provide health insurance for your full-time employees, and no penalty for not doing so. But some sort of health benefit is a must if you want to retain good workers and attract new ones.
So simply telling workers you will reimburse them for the out-of-pocket cost of purchasing their own individual health plans for themselves and their family members seems like a simple and straightforward solution.
But this method has drawbacks, too. For example, every dollar you provide to workers to pay for their own health plan in the form of a direct stipend is fully taxable to employees as income. It’s also subject to payroll taxes like FICA and FUTA.
For instance, if you decide to reimburse an employee $500 per month for their health insurance premium, this amount would be added to their taxable income, reducing the overall benefit and increasing your payroll tax liability. It also increases Social Security tax liability for your employees. Moreover, such an approach does not offer any tax savings for either you or your employees, making it less attractive financially.
Employers who simply reimburse employees for their own health insurance costs using a health care stipend approach often find they need to pay additional amounts to “plus up” their stipend to account for the additional taxes their employees face on the stipend itself.
And those “plus-ups” are themselves taxable.
Employers rapidly find out that they’re paying out more than they thought they would save on health insurance premiums just in bringing employees even on an after-tax basis.
Compare Pricing on the Best Insurance Plans Available
QSEHRAs – A Tax Advantaged Option
An alternative and much more tax-efficient way to accomplish the same thing is to establish a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).
A QSEHRA allows you to reimburse employees for medical expenses, including insurance premiums, on a tax-free basis, provided they have minimum essential coverage. This approach is compliant with ACA regulations and offers significant tax benefits. This arrangement is designed to be simple and flexible, providing a viable alternative to traditional group health insurance.
To offer a QSEHRA, you must have fewer than 50 full-time employees or the equivalent, and you must not offer a traditional group health insurance benefit.
Here’s how it works: if you provide $3,000 annually per employee through a QSEHRA, these reimbursements are not taxed for the employees and are exempt from payroll taxes for you. This not only helps your employees save money but also reduces your own tax burden, as well.
However, it’s important to note that as of 2024, the annual maximum combined total that an employer can provide per employee in payments and reimbursements under a QSEHRA plan will increase to $6,150 for self-only coverage and $12,450 for family coverage.
These caps might not cover all healthcare costs for some employees. But despite these limits, QSEHRA remains an attractive option due to its simplicity and tax advantages.
To be reimbursed, employees must purchase a qualified health plan that includes the minimum essential benefits required under the Affordable Care Act.
They then submit proof of the expense to you or your plan administrator. And you reimburse them tax-free for those expenses.
Advantages of QSEHRA
Cost Control.
- Employers can control costs by setting a fixed reimbursement limit.
- QSEHRA provides predictability and flexibility in budgeting for employee health benefits.
Tax Benefits.
- Tax-free reimbursements for employees reduce their taxable income.
- Employers benefit from tax-deductible contributions and no payroll taxes on reimbursements.
Employee Flexibility.
- Employees have the freedom to choose their own health insurance plans that best meet their needs.
- Employees can be reimbursed for a wide range of qualified medical expenses.
The Health Sharing Alternative
Another option is offering a health sharing plan as an employee benefit, instead of insurance.
Health sharing plans are not insurance but are non-profit associations of like-minded, health-conscious individuals who agree to help share the medical expenses of their fellow members.
These plans are typically less expensive than traditional group insurance products.
They are often but not always faith-based organizations, and you or your employees can choose health sharing plans that align with personal or religious values, which can be appealing to some employees.
Employers should keep in mind that health sharing plans don’t immediately share costs for pre-existing conditions. Instead, they typically impose a waiting period that could last several years before costs for treating pre-existing conditions become fully shareable.
Note that while employer expenses in offering a health sharing are tax-deductible as compensation expenses, any costs paid by employees are still made with after-tax dollars.
Combining Health Sharing With Insurance and ICHRAs
For this reason, health sharing works best for relatively young and healthy workers.
If you have older workers who have pre-existing conditions, or if you have workers with family members who need full insurance coverage immediately, you could establish an ICHRA, or an individual coverage Health Reimbursement Arrangement, and use that to reimburse these workers tax-free for the cost of their coverage.
ICHRAs allow employers of any size to offer a reimbursement arrangement instead of a traditional group health insurance plan. Employees can use the funds provided by their employer to purchase individual health insurance policies that meet their needs.
As an employer you decide how much to contribute to employees’ ICHRA accounts. Unlike QSEHRAs, ICHRAs have no cap on contribution limits. You can reimburse ICHRA participants as much as necessary for them to purchase the insurance coverage you need.
As an employer, you decide how much to contribute to employees’ ICHRA accounts. Which allows you to keep costs under control.
To receive ICHRA reimbursement, employees must purchase ACA-qualified health insurance. You can also reimburse them for other medical expenses detailed in IRS Publication 502 – Medical and Dental Expenses. However, you cannot use ICHRA to reimburse employees for health sharing plan expenses.
Employers can design the ICHRA to offer different reimbursement amounts to different classes of employees (e.g., full-time vs. part-time, employees in different geographic locations, etc.). So you could potentially limit ICHRA participation eligibility to management (who are likely to be older and more prone to having pre-existing conditions), while offering a health sharing benefit to rank and file workers.
To establish any kind of HRA, including an ICHRA or QSEHRA, you must draft basic plan documents that detail the terms of the arrangement, including eligibility criteria, reimbursement limits, and the types of expenses covered.
However, the setup and administration of ICHRA can be more complex, requiring careful planning to ensure compliance with regulations. Despite this complexity, ICHRA provides a tax-advantaged way to offer health benefits tailored to your workforce’s needs.
CASE STUDY: How Group Health Sharing Saved A Small Business More Than $5,000 Per Month
A small business in Florida we worked with had 24 employees on board. 17 of them signed up for a group health sharing plan. Seven employees chose to enroll in an individual health insurance plan.
Working with one of our expert Personal Benefits Managers, the business owner set up a health reimbursement arrangement (HRA), which would help reimburse employees who chose health insurance for most of their insurance premiums, tax-free.
The business owner also set up an accident insurance voluntary benefit plan that effectively reduced every employee’s deductible for accidents to $100. This was important, because most of the employees couldn’t afford thousands of dollars in ER deductibles and coinsurance costs if, for example, a child broke her leg at soccer practice.
All together, offering employees a lower-cost health sharing alternative still saved the business more than $5,000 per month, compared to the cheapest traditional group health insurance plan they had been considering. The savings were more than enough to provide the improved accident insurance protection.
As a result, the business is more profitable, has more free cash flow, and employees have more financial security, thanks to these innovative approaches to small business health benefits.
Make an Appointment With a Personal Benefits Manager Today
Would you like to save money on your employee health care costs, improve their coverage and financial security, or both?
Would you like to find some out-of-the box health benefits solutions that leave your business more profitable and help you stay competitive?
Make your appointment with a Personal Benefits Manager today We can help you analyze your work force and their needs, your tax situation and budget, and help you design a benefits package that you can actually afford.
Compare Pricing on the Best HealthShare Plans Available
Conclusion
In conclusion, while directly reimbursing employees for their ACA Marketplace insurance premiums may seem straightforward, it’s fraught with compliance issues and tax disadvantages. Establishing a QSEHRA or ICHRA, on the other hand, provides a more compliant and tax-advantaged way to offer health benefits.
A QSEHRA is ideal for its simplicity and tax advantages, though it has reimbursement limits. An ICHRA offers greater flexibility and no reimbursement limits but requires more complex administration.
By carefully considering these options, you can provide meaningful health benefits to your employees without incurring the full cost of a traditional health insurance plan while also enjoying significant tax advantages.
For Further Reading: Why Smart Employers Are Dropping Group Health for ICHRA and DPC | The Complete Guide to Health Reimbursement Arrangements (HRAs) for Small Employers | The Most Effective Health Benefits Strategies for Small Businesses With Fewer Than 50 Employers
Read More About Group Health Insurance Options in Your State
