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Small Business Employee Benefits and HR Blog

The Small Business Solution for 2014 - Health Insurance Allowances

Small businesses face large health care challenges. Some of these challenges are not new -- the cost of health insurance has been increasing more and more each year, making traditional group health insurance cost-prohibitive for many small businesses. But some of the challenges brought on by the Affordable Care Act are new -- additional fees and new requirements that make many small businesses nervous about the cost of health care.

For most (if not all) small businesses, the solution to the Affordable Care Act's new challenges and new opportunities is simple: Offer employees health insurance allowances and free your small business from the cost and complication of group health insurance. This strategy is often called "pure" defined contribution health care, and it works because it offers small businesses predictable costs while giving employees access to quality health insurance. 

health insurance allowances and freedom from group health

How Health Insurance Allowances Work

With health insurance allowances, small businesses give employees a set monthly amount to spend on their own health insurance policy. Employees can purchase a policy in a state health insurance exchange, or through the private market via a broker, online, etc. 

Then, using a limited purpose Section 105 medical reimbursement plan (such as a Healthcare Reimbursement Plan or HRP), the business reimburses employees for their qualified expenses. To stay compliant with various regulations, the plan must be formally administered to meet certain requirements of the IRS, HIPAA, ERISA, and ACA:

(1) The funds must reimburse qualified health insurance premium expenses;

(2) Expenses must be substantiated (usually through a payment receipt or bill); and

(3) Any amount received by an employee in excess of actual expenses must be returned to the employer.

In order to administer health insurance allowances correctly, the employer must ensure that employee reimbursement requests are substantiated in compliance with HIPAA. Because of these HIPAA privacy rules, virtually all businesses use a third-party to handle the premium expense substantiation process.

How Can a Small Business Offer Health Insurance Allowances?

To offer this type of plan, the business should select a defined contribution software provider and follow the below steps:

(1) Setup the Plan - The business determines employee eligibility and the monthly allowance amounts, by class of employee or family status if they choose.

Employer Administration Time: 15 minutes online

(2) Add Eligible Employees - The business enrolls employees into the plan and distributes IRS/ERISA/ACA required plan documents, SPDs, and Welcome Kits to each eligible employee.

Employer Administration Time: 15 minutes online

(3) Let Employees Purchase Their Own Individual Health Insurance Plan - Each employee chooses and pays for his or her own individual health insurance policy and submits proper documentation for reimbursement.

Employer Administration Time: 0 minutes

(4) Substantiate the Expense in Compliance with HIPAA - A HIPAA-compliant claims processor should review the reimbursement requests.

Employer Administration Time: 0 minutes

(5) Reimburse Employees - Once reimbursements are substantiated, the business should reimburse each employee for the approved amount up to the available balance.

Employer Administration Time: 1-5 minutes online per month

Why Health Insurance Allowances Work

Group health insurance is broken for small businesses and employees. Employees no longer need employers to purchase high-cost health insurance, and employees earning less than 400% of the FPL (~$94,000 for a family of four in 2013) per year who purchase a personal policy in a state health insurance exchange will receive a large federal subsidy on their premium if their employer doesn’t offer a group health insurance plan.

Being able to completely control all costs and liability is revolutionary for many small businesses. Health insurance allowances free small business owners from many of the challenges of the Affordable Care Act and from the cost and complication of traditional group health insurance.

 The Comprehensive Guide to the Small Business HRA