Offering affordable health benefits to employees is a vital choice that impacts their well-being and the company's bottom line. Regardless of the business' size, this can be a daunting task: keeping workers happy and finding the right financial and administrative fit for the whole organization.
Today's healthcare landscape certainly doesn't make it any easier. According to the Kaiser Family Foundation, health insurance premiums are expected to increase roughly six percent this year. Such a trend may force companies to spend more or offer fewer benefits. Others may elect to shift any additional costs directly to their employees. However, this kind of increase would be devastating to many Americans. When surveyed, one in four respondents said a medical bill under $500 was "unaffordable" if they had to pay it out-of-pocket.
Thankfully, newer approaches like the Qualified Small Employer (QSEHRA) and Individual Coverage (ICHRA) HRAs can help. The latest data suggests that these offerings are becoming very popular with businesses of all sizes.
For Certified Public Accountants (CPAs), these innovative tools can support your business plans and assist in guiding your clients toward more tax-efficient and employee-centric financial planning.
This article differentiates a QSEHRA and an ICHRA and helps determine which might be the best fit for your firm and your clients' businesses.
Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)
Let's say you're a small accounting firm with five employees. Offering a traditional group health plan might not make sense since specific requirements, such as minimum participation, must be met. Nevertheless, you still want to help your employees care for their basic healthcare needs.
Here are some helpful reasons to determine if a QSEHRA will benefit your firm:
Tax Advantages. Contributions under QSEHRA benefit plans are tax-free for both employers and employees. In fact, employers are allowed to deduct the reimbursement amounts from their business taxes, while employees do not pay income or payroll taxes on their contributions. Additional tax benefits, such as the Indiana Small Business HRA Tax Credit, may also be available depending on your location.
More Flexibility. QSEHRA plans allow smaller employers to provide health benefits without committing to a specific group health insurance plan. This enables these businesses to tailor offerings to fit the needs and preferences of their employees.
Cost Control. Employers can set a fixed monthly allowance for their employees, making costs predictable. Who benefits? Imagine you're a small business with an equally small budget. Control over the amount allocated for health benefits can be enormous for your bottom line.
Portable Benefits. In the modern world, more employees are working outside the traditional office. QSEHRA plans afford continuity by allowing small businesses to benefit all types of workers, including out-of-state employees and those participating in remote work.
Still, some businesses may not fit the QSEHRA model. A few drawbacks include:
Limited to Small Employers. If your business has more than 50 full-time employees, QSEHRA rules and plans will not meet your needs.
Administrative Burdens. Managing a QSEHRA plan can be complex for small employers. Detailed records must be kept to stay compliant, and employee expenses must be verified and validated. This only adds to your workload and could require additional time or professional resources.
Hard Time Explaining Benefits. It can be challenging to see all the benefits of this plan type. For instance, QSEHRAs usually require employees to seek coverage on the individual insurance market – which can be challenging as they try to select plans that align with the reimbursement structure.
Potential Cost Shift to Employees. Employees may incur additional healthcare costs beyond the reimbursed amount, depending on the employer's contribution limits. This could make it less attractive, especially if they desire more comprehensive coverage.
What if your firm or clients want to offer something other than group health, but you have more than 50 employees? Let's take a look at how an ICHRA works.
Individual Coverage Health Reimbursement Arrangements (ICHRAs)
Suppose you run a practice with more than 50 employees. In that case, another fresh HRA choice is the Individual Coverage Health Reimbursement Arrangement (ICHRA) – which allows companies to reimburse their associates without offering traditional group health to them.
Some of the positives of an ICHRA include:
Satisfies the Affordable Care Act Mandate. Unlike a QSEHRA plan, the ICHRA is geared toward businesses with 50 or more full-time equivalent employees (FTEs). Under the ACA, these businesses are required to offer health insurance to 95 percent of their full-time workers. ICHRA can help fulfill this requirement.
No Contribution Limits or Participation Requirements. Another plus is that no annual reimbursement or minimum monthly contribution limits exist. This helps small businesses on a fixed budget and differs from traditional group health, which usually asks for a participation rate of at least 70 percent.
Customizable Employee Allowances. All employees do not need the same coverage. Under an ICHRA, different classes of employees (i.e., full-time, part-time, seasonal, hourly) can have additional allowances for their health benefits. For example, you can offer a particular benefit to only your full-time employees.
Tax Advantages Lead to Greater Retention. ICHRA contributions are tax-free for both employers and employees. Business owners can deduct the reimbursement amounts, while employees are not left liable for income or payroll taxes on them. Again, depending on where you operate, you may be able to locate more tax break opportunities.
Similar to QSEHRAs, there are a few potential negatives when opting for an ICHRA:
Less Flexibility with Plans. If you choose the ICHRA, you cannot offer the same employees a traditional group health plan – which may limit their benefits options.
Premium Tax Credit Eligibility. Many employees qualify for premium tax credits, which can help them reduce their monthly premiums. Affordability plays a role here – and figuring out who claims this benefit or wants to waive it can add to your administrative time and costs.
Large Learning Curve. Change is never easy; however, employees may not find the initial transition from group health insurance to an ICHRA appealing. For example, they may have questions about how to submit their eligible expenses or even how to shop for their plans. Finding the answers will take time away from normal business operations.
Keep Moving Forward with HRAs
At the end of the day, your goal is to provide the best possible guidance to your clients. To effectively achieve this, HRAs must be a central part of your advisory services. Understanding how to maximize their tax advantages, integrating them into broader, strategic financial planning, and recognizing their compliance requirements are all ways that you can gain a competitive edge and expand client trust.
Moreover, if you don't know an answer, you can always speak with your clients or point them toward licensed agents or advisors. These professionals will help you stay up-to-date on market trends, give feedback, offer solutions, and keep you moving in a forward-thinking financial direction.
After all, those who look back rarely make the most of today's opportunities. Optimizing human benefits now, especially HRAs will help you build stronger, long-lasting relationships with your clients and truly position yourself as an invaluable partner to their success.
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This information is not intended as tax or legal advice. If you have any questions, contact a tax or legal professional. Automatic Data Processing Insurance Agency, Inc. (ADPIA) is an affiliate of ADP®, Inc. All insurance products will be offered and sold only through ADPIA, its licensed agents, or its licensed insurance partners; 1 ADP Blvd. Roseland, NJ 07068. CA license #0D04044. Licensed in 50 states. All services may not be available in all states. ADP, the ADP logo, and ADPIA are registered trademarks of ADP, Inc. All other marks are the property of their respective owners. Copyright © 2024 ADP, Inc. All rights reserved.