How Business Owners Can Pay for Individual Health Insurance Plans: A Comprehensive Guide

In today’s ever-evolving workforce, business owners are constantly looking for new ways to attract and retain top talent. Instead of offering a costly group health plan, one tactic they may consider is offering to pay employees’ individual health insurance costs. While it may seem like a generous and attractive perk for employees, employers need to consider several factors before deciding to pay for individual health insurance plans. From costs and tax implications to legal requirements and employee preferences, navigating this benefit option can be complex.

Historical Context

Historically, organizations could pay for employees’ individual health insurance premiums directly. However, the Affordable Care Act (ACA) changed this. IRS Notice 2015-171 clarified information about employer payment plans (EPPs) and whether employers could pay for employees’ individual health insurance plans.

Employer Payment Plans (EPPs) and ACA Compliance

Because the IRS and ACA consider EPPs group plans, they must meet ACA standards. Since EPPs can’t integrate with individual health insurance plans, they don’t satisfy the ACA. Offering an EPP could subject you to fines if you have 50 or more full-time equivalent employees (FTEs).

Health Reimbursement Arrangements (HRAs)

Thankfully, federal law allows employers to reimburse employees for their monthly premiums for individual health insurance policies, as long as it’s done through a compliant health reimbursement arrangement (HRA). This allows employees to choose a health insurance plan that best fits their individual needs while still receiving financial assistance from their employer.

Types of HRAs

Qualified Small Employer HRA (QSEHRA)

The QSEHRA is only available to employers with fewer than 50 full-time equivalent employees (FTEs). All W-2 full-time employees are automatically eligible for the QSEHRA. Employers can include W-2 part-time employees as long as they offer the same allowance amount as full-time employees. Employers can’t offer a QSEHRA if they also offer a group plan. The IRS sets annual contribution limits for QSEHRAs. For 2024, the annual limit is $6,150 for single coverage and $12,450 for family coverage. Employer funds can roll over from month to month and year to year, but total QSEHRA amounts can’t exceed the annual maximum allowance limit.

Individual Coverage HRA (ICHRA)

The ICHRA is available to employers of all sizes. It is only available to employees who have health insurance coverage through individual plans. Employers can’t offer the same class of employees an ICHRA and a group plan. However, they can offer different classes different benefits. There are no contribution limits with an ICHRA. Businesses can offer different allowance amounts to different classes of employees based on job criteria and family status. Employer funds can roll over month to month and year to year.

Setting Up an HRA

HRAs aren’t as complicated as they may seem. Each type of HRA follows the same basic steps:

  1. Employer Sets Allowance: The employer sets aside a specific amount of tax-free money for each employee.
  2. Employee Pays for Expenses: Employees pay for medical expenses such as health insurance, doctor visits, prescriptions, and other healthcare services using their own money.
  3. Submit Proof: They submit proof of those out-of-pocket costs to their employer for reimbursement.
  4. Reimbursement: Once the employer or third-party administrator approves the expense, employers reimburse employees up to their allowance amount.

Employers can reimburse employees on a pre-tax basis for more than 200 medical expenses listed in IRS Publication 502 and the CARES Act.

How HRAs Benefit Employers

HRAs are employer-friendly for two reasons: they offer tax advantages and work with all budgets. Under an HRA, reimbursements are exempt from payroll taxes for employers. Employees enrolled in a policy that meets minimum essential coverage (MEC) requirements can participate in the HRA, meaning they also receive tax-free reimbursements. Unlike a traditional group health plan, an HRA isn’t subject to unpredictable rate increases or strict participation requirements. They’re a more affordable alternative since employers control their own budgets. They set a monthly allowance that they can afford, so they can offer employees as much or as little as they choose.

How HRAs Benefit Employees

In today’s competitive labor market, offering competitive benefits is crucial for attracting top talent. Employers also need to keep job satisfaction high if they want to discourage their current employees from looking for better opportunities elsewhere. PeopleKeep’s 2024 Employee Benefits Survey found that 81% of employees said an employer’s benefits package is an important factor in whether or not they accept a job. Another 92% of employees said that health benefits are an important employee benefit.

While a traditional group health plan can satisfy this need, it’s a one-size-fits-all approach that groups your employees together. HRAs promote individuality since your employees can pick the health insurance plans that meet their specific wants and needs. In addition to having their health insurance premiums reimbursed, they can also submit other eligible healthcare expenses for reimbursement, resulting in additional savings.

Case Studies and Examples

John F. Pace, a CPA at Pace & Associates with more than 40 years of experience, observed various business insurance structuring scenarios, including the intricate ways employers handle health insurance. He finds HRAs beneficial because they offer greater flexibility and tax benefits. “For example, in one instance at my firm, we transitioned a client from a traditional group insurance plan to an HRA,” Pace said. “This change not only streamlined their benefits administration but also resulted in notable cost savings, echoing similar benefits to the ones I managed during my tenure overseeing family trusts and associated commercial properties, where every financial decision impacted broader estate and tax planning strategies.”

Common Challenges and Solutions

Implementing HRAs can present challenges, such as understanding legal requirements and managing employee expectations. However, these challenges can be overcome by consulting with experts and using specialized HRA administration services. Employers should ensure they are well-informed about HRA regulations and provide clear communication to employees about how the HRA works and the benefits they can expect.

Future of HRAs

The future of HRAs looks promising, with trends indicating increased adoption by employers of all sizes. Potential legislative changes could further enhance the flexibility and attractiveness of HRAs as a viable alternative to traditional group health insurance plans.

Conclusion

Healthcare costs are on the rise, and many employers are seeking out more affordable healthcare coverage options for their employees. An HRA is an excellent alternative to a costly group health plan. With a QSEHRA or an ICHRA, employers can reimburse employees for their individual health insurance coverage on a pre-tax basis. Providing reimbursement for employees’ individual health insurance plans can be a cost-effective and attractive benefit for businesses looking to take care of their employees’ well-being while staying within their budgets.

FAQs

What is an HRA?

An HRA, or Health Reimbursement Arrangement, is an employer-funded plan that reimburses employees for out-of-pocket medical expenses and individual health insurance premiums on a tax-free basis.

How does an HRA differ from traditional health insurance?

Unlike traditional health insurance, where employers pay premiums for a group health plan, HRAs allow employers to reimburse employees for their individual health insurance costs, offering greater flexibility and potential cost savings.

The tax benefits of an HRA?

HRAs offer tax benefits for both employers and employees. Employers can provide reimbursements tax-free, which are also exempt from payroll taxes. Employees receive these reimbursements tax-free, reducing their overall healthcare costs.

Can any employer offer an HRA?

Yes, any employer can offer an HRA, though the type of HRA available may depend on the size of the business. For example, QSEHRAs are only available to employers with fewer than 50 full-time equivalent employees.

How can employees benefit from an HRA?

Employees benefit from HRAs by receiving tax-free reimbursements for their individual health insurance premiums and other eligible medical expenses. This allows them to choose the healthcare coverage that best meets their needs and potentially save on overall healthcare costs.

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