As a small business owner (classified as 10-50 employees), the labyrinth of healthcare options can be bewildering, leaving you grappling with decisions that have profound implications for both your bottom line and the well-being of your employees. The complexities of obtaining medical insurance through a Professional Employer Organization (PEO) may seem like a default choice, but is it the best one? This article aims to dissect the conundrum, exploring the challenges faced by employers in understanding and selecting suitable healthcare options. Additionally, we’ll delve into the employee perspective, shedding light on the limited choices and desires for better healthcare offerings.
ichra pros and cons

The Employer’s Dilemma

The Employee’s Plight

Pro’s and Con’s of Proprietary Medical Insurance Through a PEO

Proprietary Medical Insurance Alternatives

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

Individual Coverage Health Reimbursement Arrangement (ICHRA)

Small Business Health Options Program (SHOP)

FAQs

PEO Medical Insurance: The Employer’s Dilemma

Running a small to medium-sized business involves juggling numerous responsibilities, and navigating the intricacies of healthcare plans is often a daunting task.
A PEO’s proprietary health insurance comes with its own set of pros and cons. While it provides a centralized approach, it may lack the flexibility and customization that businesses crave. The perplexity lies in striking a balance between cost-effectiveness and comprehensive coverage.

Imagine standing at a crossroads, unsure whether the chosen plan aligns with the needs of your diverse workforce. The fear of making the wrong decision looms large, especially when employee satisfaction and retention are directly linked to the benefits you offer.
The struggle is not just financial; it’s about providing a healthcare solution that resonates with the values and expectations of your team.

ICHRA QSEHRA healthcare options

The Employee’s Plight

On the flip side, employees often find themselves in a situation where healthcare choices are limited, leaving them yearning for alternatives that better suit their individual needs. The traditional approach of a health insurance plan may not resonate with the diverse health requirements and preferences of your workforce. Employees might feel restricted, grappling with a sense of unmet expectations and a desire for more personalized options.The cost of these healthcare choices can also become a major issue for all employees.

The lack of clarity surrounding available healthcare options can lead to frustration, impacting overall job satisfaction and potentially contributing to higher turnover rates. It’s a disheartening scenario when individuals, each with unique healthcare needs, find themselves constrained by a system that doesn’t cater to their individuality.

For our purposes, we will liken alternatives to a proprietary medical plan through the context of a PEO.

A PEO may offer medical benefits to their clients in the form of a Master Health Plan. It is often referred to as a master plan because it serves as a central health insurance offering that covers employees from various client companies under the PEO’s umbrella. However, receiving an Insurance Plan through your PEO or a PEO is not always the best fit for your company. We understand that each organization’s needs are different, and medical insurance through a PEO is not a one size fits all solution.

We’ll explore the Pro’s and Con’s of a proprietary medical plan through the PEO lens, and four alternative healthcare options for employers seeking alternatives to traditional health plans. These alternatives provide flexibility, cost savings, and tax benefits, making them attractive choices for small to medium-sized businesses.

Pro’s and Con’s of Proprietary PEO Medical Insurance

More than half (55%) of small businesses say providing health insurance to employees is the biggest challenge they face(1). It can be a comfort to choose the most obvious solution, but that may not always be the case for your organization. Let’s look at some of the pro’s and con’s of medical insurance utilizing a PEO.

PROS OF A PROPRIETARY PEO MEDICAL PLAN

Cost Savings:
PEO’s often leverage their collective bargaining power, which can lead to potential cost savings on health insurance premiums for businesses participating in the plan through the PEO.

Administrative Efficiency:
PEOs handle administrative tasks related to health benefits, such as enrollment, claims processing, and compliance. This can reduce the administrative burden on the business owner.

Risk Mitigation:
PEOs may assist in managing compliance and regulatory risks related to health benefits, helping businesses stay in compliance with changing healthcare laws.

CONS OF PROPRIETARY MEDICAL INSURANCE WITH A PEO

Loss of Control:
Businesses participating in a medical plan through a PEO may have less control over the selection of specific health insurance plans and benefit structures. The PEO makes these decisions on behalf of multiple client companies.

Limited Customization:
The master health plan may have limitations in terms of customization to meet the unique needs of a specific business or its workforce.

Potential for Premium Increases:
While PEOs aim to negotiate better rates, there is no guarantee that the master health plan will consistently offer lower premiums, and businesses may experience premium increases. You should also be wary of bait and switch tactics, as there is no guarantee that your year one rates will stay the same and could face incremental increases for each year thereafter.

Exit Challenges:
Disentangling from a PEO, especially concerning health benefits, can be complex. If a business decides to leave the PEO relationship, transitioning health plans for employees may pose challenges. Should you decide to exit a medical insurance relationship with a PEO, you should also note that after the notice period has expired, benefits stop.

Uniformity Across Diverse Workforces:
A PEO’s proprietary medical plan may provide uniform benefits, which may not cater to the diverse needs and preferences of employees in different locations or roles within the company. The lack of available options for diverse work forces poses a factor in decision making.

So now that we’ve laid out some of the Pro’s and Con’s of a medical partnership with a PEO, let’s look at what your alternative options are.

Proprietary PEO Medical Insurance Alternatives

Health Reimbursement Arrangements (HRAs) offer a flexible and cost-effective way for small employers to provide health benefits to their employees.
There are two main types of HRAs, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) and the Individual Coverage Health Reimbursement Arrangement (ICHRA). Both alternatives offer their own benefits and uses.

Let’s delve into the QSEHRA first.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), commonly known as QSEHRA, is tailored for small employers with fewer than 50 full-time employees who do not offer a traditional group health plan.

BENEFITS OF QSEHRA FOR SMALL BUSINESSES

QSEHRA offers several advantages for small businesses:

  • Savings through Fixed Costs: Helps companies budget and control healthcare expenses by fixing costs and eliminating group plan increases.
  • Attract and Retain Employees: Offering health benefits can attract and retain top talent. Employees value health benefits, and QSEHRA provides choice and portability.
  • Tax-Free Reimbursements: Businesses and employees save on taxes, reducing payroll taxes and income tax on healthcare expenses.

STARTING A QSEHRA

Small employers can establish a QSEHRA at any time. Written notice is required for eligible employees and 90 days before the plan year for current employees. Employees must have qualifying health coverage to use their QSEHRA amount.

Eligibility Criteria:

  • Have fewer than 50 full-time employees.

  • Offer the arrangement on the same terms to all full-time employees (reimbursement amounts may vary based on age and the number of individuals covered).
  • Not offer a group health plan or flexible spending account (FSA).

HOW DOES QSEHRA WORK

Employees pay their healthcare expenses upfront and submit proof for reimbursement. What this means is that when employees receive medical services or incur healthcare-related costs, they pay for these expenses upfront using their personal funds. This upfront payment requirement is a key characteristic of the QSEHRA structure. But this aspect should not be a deterrent.

  • 1

    Retaining Proof of Expenses:
    After making the upfront payment, employees must retain proof of their healthcare expenses. This proof typically includes receipts, invoices, or other documentation that verifies the nature of the healthcare service or expense, the date it occurred, and the amount paid.

  • 2
    Submission of Proof for Reimbursement:
    To access the QSEHRA benefits, employees submit the documentation of their healthcare expenses to their employer. This submission serves as a request for reimbursement from the funds allocated in their QSEHRA.
  • 3
    Employer Verification and Compliance:
    Upon receiving the reimbursement request and accompanying proof of expenses, the employer reviews the documentation to ensure that the incurred expenses align with the QSEHRA’s guidelines and comply with IRS regulations. The employer verifies that the expenses are eligible for reimbursement based on the plan’s terms.
  • 4
    Tax-Free Reimbursement:
    If the submitted healthcare expenses meet the criteria specified in the QSEHRA plan documents and comply with IRS regulations, the employer processes the reimbursement. Importantly, reimbursements from the QSEHRA are typically provided on a tax-free basis. This means that the amount reimbursed is not subject to income tax for the employee.
  • 5
    Timely Processing of Reimbursements:
    Employers often establish procedures for the timely processing of reimbursement requests. This ensures that employees receive the financial reimbursement for their qualified medical expenses within a reasonable timeframe.

CONTRIBUTIONS

The annual maximums that can be contributed to Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) are set by the Internal Revenue Service (IRS) and are subject to change. The annual maximum contribution limits for QSEHRAs are determined based on whether the coverage is for an individual or a family. Small employers decide what to contribute, up to an annual maximum set by the IRS.

For taxable years beginning in 2024, the total amount of payments and reimbursements for any year cannot exceed $6,150 for individual coverage (up from $5,850 in 2023) or $12,450 for family coverage (up from $11,800 in 2023), the IRS said(2).

IMPACT ON PREMIUM TAX CREDITS

The QSEHRA amount affects employees’ eligibility for premium tax credits when obtaining coverage through the Marketplace. Premium tax credits are a form of financial assistance provided by the government to help individuals and families with lower incomes afford health insurance coverage. These credits are designed to reduce the amount of money individuals need to pay for their health insurance premiums.

Premium tax credits are often income-dependent, meaning they are more substantial for individuals with lower incomes. If the QSEHRA provides a significant contribution towards employees’ health insurance costs, it may impact the total amount of premium tax credits they are eligible to receive.

Individual Coverage Health Reimbursement Arrangement (ICHRA)

Individual Coverage Health Reimbursement Arrangement (ICHRA) is another alternative option that offers flexibility and customization. Here’s what you need to know about ICHRA.

ICHRA provides several benefits for both employers and employees:

  • Tax-Free Reimbursements: Reimbursements are tax-free for both employers and employees, reducing payroll taxes and income tax on healthcare expenses.
  • Customization and Flexibility: Employees can choose the best plan that suits their needs, providing flexibility and personalization.
  • Cost Control: Employers can set a budget and stick to it, avoiding costly renewals.
  • Portability: Employees can take their health plans with them when changing jobs, eliminating the need for short-term options.

ICHRA Health Insurance:

  • Employees purchase their own health insurance on the open market.
  • Employees submit claims for reimbursement of premiums and qualified medical expenses.

Qualified ICHRA Health Plans:

Qualified Health Plans (QHPs) for Individual Coverage Health Reimbursement Arrangement (ICHRA) must meet specific criteria outlined by the Internal Revenue Service (IRS) and the regulations governing ICHRA.

Here are the types of health plans that are generally considered qualified for ICHRA:

Major Medical Plans Purchased on the Exchange (Marketplace):

Individuals can choose from major medical plans available on the Health Insurance Marketplace (Exchange). These plans typically fall into Bronze, Silver, and Gold tiers, offering varying levels of coverage and cost-sharing.

Medicare Coverage:

ICHRA can be integrated with certain aspects of Medicare coverage:

  • Part A: Hospital insurance that covers costs from hospital stays.
  • Part B: Medical insurance that covers approved doctor visits and outpatient procedures.
  • Part C: Also known as Medicare Advantage, this covers supplemental insurance or hospital and doctor coinsurance.
  • Part D: Prescription insurance that helps with the cost of medications.

Catastrophic Plans:

Catastrophic health plans, designed for individuals under the age of 30 or those who qualify for a hardship exemption, can be integrated with ICHRA.

Student Health Insurance:

Health insurance plans specifically designed for students, often offered by educational institutions, can qualify for integration with ICHRA.

Special Enrollment Period:

Employees qualify for a special enrollment period when ICHRA becomes available, allowing them to purchase a qualifying plan outside the normal open enrollment period. ICHRA doesn’t have a fixed, universal date. Instead, it is tied to the individual employee’s eligibility for ICHRA coverage.

HERE’S HOW ICHRA TYPICALLY WORKS

Timing Based on ICHRA Eligibility:

The 60-day Special Enrollment Period begins from the date the employee becomes eligible for ICHRA coverage. This eligibility is specific to each employee and is determined by factors such as their start date with the company or when the ICHRA is made available to them.

Individualized Timeline:

For example, if an employee becomes eligible for ICHRA on January 1, their Special Enrollment Period would typically extend for 60 days from that date. During this period, they have the opportunity to enroll in a Qualified Health Plan (QHP) through the Health Insurance Marketplace (Exchange).

Avoiding Coverage Gaps:

The purpose of the Special Enrollment Period is to provide employees with flexibility and prevent gaps in healthcare coverage. It allows them to make informed decisions about enrolling in a QHP that aligns with the ICHRA offering.

Communication by Employers:

Employers should communicate the specifics of the Special Enrollment Period to employees, including the start and end dates based on their individual eligibility for ICHRA. Clear communication ensures that employees are aware of their options and can take timely action.

Flexibility Outside of Open Enrollment:

The Special Enrollment Period is especially valuable because it allows employees to enroll in a QHP outside of the regular Open Enrollment Period, which typically occurs annually.

Small Business Health Options Program (SHOP)

The Small Business Health Options Program (SHOP) is designed for small employers who want to provide health and dental insurance to their employees.

Key features of SHOP include:

  • Eligibility: Generally, businesses with 1 to 50 employees can purchase SHOP insurance.
  • Year-Round Enrollment: You don’t have to wait for an Open Enrollment Period to start offering SHOP coverage to your employees.
  • Choice and Flexibility: SHOP insurance gives you the choice to offer one or multiple plans, health coverage, dental coverage, or both. You can also determine your contribution to employee premiums and decide waiting periods for new employees.
  • Agent or Broker Assistance: Employers can work with SHOP-registered agents or brokers to help with enrollment.
  • Small Business Health Care Tax Credit: Enrolling in SHOP insurance is often the only way for eligible small employers to access the Small Business Health Care Tax Credit, which can lead to significant savings.

Enrolling in SHOP Insurance

When you’re ready to enroll in SHOP coverage, you have two options:

  • Contact your insurance company and enroll directly through them.
  • Enroll with the assistance of a SHOP- registered agent or broker.

Remember that the choice between these healthcare options depends on your unique business needs, the preferences of your employees, and your budget. Evaluate your options carefully to provide the best benefits for your employees while optimizing your budget.

Frequently Asked Questions (FAQ’s)

How can I determine which option is best for my small business – QSEHRA, ICHRA, or SHOP?

The choice depends on your specific business needs. QSEHRA and ICHRA are ideal for small employers, with different levels of customization and cost control. SHOP is designed for small businesses seeking choice and flexibility with year-round enrollment.

Can employees use QSEHRA, ICHRA, or SHOP to cover their dependents?

Yes, all three options can be used to cover dependents’ healthcare expenses.

What are the tax benefits of these arrangements and SHOP?

QSEHRA and ICHRA offer tax benefits with tax-free reimbursements. SHOP may also offer the Small Business Health Care Tax Credit, providing potential savings for small employers.

How do I get started with QSEHRA, ICHRA, or SHOP?

Small employers can set up QSEHRA or ICHRA at any time, with specific notice requirements for employees. SHOP offers year-round enrollment through insurance companies or registered agents and brokers.

What is the Small Business Health Care Tax Credit, and how can I qualify for it with SHOP?

The Small Business Health Care Tax Credit is available to eligible small employers who enroll in SHOP coverage and meet specific criteria. It can lead to significant savings on health insurance premiums for your employees.

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