The quality and variety of a company’s health insurance benefits remain among the top priorities for employees when considering a job in 2021, according to numerous studies, including recent ones from the Hartford and MetLife. The problem for small employers is being able to provide these benefits affordably and competitively, particularly in a tight labor market.
Two little known plans could help. One is called the Qualified Small Employer Health Reimbursement Arrangement plan, or QSEHRA. The other is the Individual Healthcare Reimbursement Arrangement, or IHRA. Neither of these plans is getting the attention it deserves.
“QSEHRAs and IHRAs have gained little traction since they were introduced,” said Rob DeNinno, a principal at Precision Benefits Group in Philadelphia. “But depending on the employer, both can save a small business and its employees a significant amount of money,” and provide a competitive health benefit.
There are many types of HRAs but these two are specifically relevant to small businesses.
As of 2020, an employer with an IHRA can contribute tax free money (contributions are not subject to payroll tax and often may not be subject to income tax) to full time and certain part-time employees’ accounts. Those workers can then use the money to help pay for qualified healthcare expenses, including premiums. Companies of any size are eligible. To offer an IHRA, you would normally have a group health insurance plan in place and there are no contribution limits.
But what if you can’t afford a group health insurance plan? That’s where a QSEHRA would be an option.
To qualify for a QSEHRA — which has been around since 2016 — you must have fewer than 50 employees.
Like an IHRA, a QSEHRA lets the employer reimburse the employee’s qualifying medical expenses, including premiums. But unlike the IHRAs, there is a limit to these contributions. For 2021, the employer’s contributions are maxed at $5,300 for individuals and $10,700 for households. Like the IHRA, the money must be used by the employee. Otherwise it’s ultimately returned to the company, although rollovers to the next year are permitted.
DeNinno saidthat, although “it depends on the client and the situation, we find that these kinds of plans can be a very cost conscious remedy” for small businesses. “They’re essentially a ‘self-fund’ for out-of-pocket costs and may offer a lower cost option for saving medical premium dollars,” he said.
There are the tax savings as mentioned above. But in addition, when set up correctly, these plans may relieve an employer from having to go through the annual angst of comparing and selecting group health insurance plans as well as the headaches involved with re-enrollment and premium increases. An employer has better control over costs. It gives an employee more choice because they can use the money to purchase their own healthcare plans that they find more suitable.
Most important, it can be a way for smaller companies to attract workers by providing a health insurance benefit that they otherwise would have been unable to offer.
However, there are downsides to HRA plans like these.
“HRAs can add a layer of complexity to small businesses that already have limited time to dedicate to things outside of their core business,” said Noah Glassman, president of benefits firm Philadelphia Life and Health Inc. Glassman says that in his experience, the actual benefit to the employees is often not realized due to not knowing how to use it.
Both Glassman and DeNinno say that an employer may realize more benefits by instead offering a high deductible group insurance plan combined with a Health Savings Account which still allows tax-free reimbursement of qualified medical expenses – but not premiums.
But different from QSEHRAs and IHRAs, any money contributed to a Health Savings Account plan doesn’t have to be used by the employee by the end of the year, and whatever is left stays with the employee instead of reverting back to the company.
There are plenty of options to provide competitive healthcare benefits without breaking the bank. As a small business owner, you can offer a standard group insurance plan or one with a higher deductible that’s paired with a Health Savings Account. Or you can offer a high deductible plan with an IHRA that reimburses employees for some of their premiums with tax advantages.
Or if you can’t afford to provide health insurance and you’re under 50 employees, you can choose not to offer a health insurance plan at all and instead reimburse employees – again with tax advantages - through a QSEHRA so that they can buy their own health insurance elsewhere.
“Most small business owners have difficulty understanding how these options work,” DeNinno said. “Unfortunately, without proper explanation from consultants, they tend to opt for the more expensive plans because they are familiar with them.” This is unfortunate because with the right fit, both small business owners and their employees can save a significant amount of premiums.
Gene Marks is a certified public accountant and the owner of the Marks Group, a technology and financial management consulting firm in Bala Cynwyd.