Small businesses understand the importance of each employee. Recruiting and retaining talent is crucial for every business, but especially for ordinary organizations competing against large corporations with seemingly endless resources. Small business owners simply can’t afford to lose their best people.
High turnover is expensive for small businesses in any sector. The outlay — the 2024 Express Employment Professionals-Harris Poll survey found employee turnover costs an average of $36,295 annually, although one in five businesses report costs exceeding $100,000 — can quickly consume a family-owned retailer or restaurant’s bottom line.
One proven way for small businesses to reduce turnover is by offering an attractive benefits package, even though federal law only requires employers with 50 or more full-time employees to offer healthcare coverage. However, group insurance plans are often too expensive for compact companies running on tight profit margins. To make matters worse, small businesses often employ a mix of part-time and salaried employees that don’t match the traditional one-size-fits-all plans. It’s a difficult situation for owners that want to take care of their employees.
In response to these challenges, many small business owners are taking a new approach to healthcare: health reimbursement arrangements. With HRAs, employees choose and buy their own insurance, either on healthcare.gov or a state-based exchange, and get reimbursed on their paycheck, tax-free. This model allows small businesses to provide employees with quality healthcare as they scale without taking on the enormous expense of group coverage.
For some small business owners, HRAs are allowing them to offer healthcare to their employees for the first time. For others, the new insurance model offers a convenient off-ramp from expensive group plans.
Affordable benefits for small but mighty teams
People want to work for employers that offer benefits, whether it’s a global corporation or a family-owned business. A Georgetown University survey found health insurance is one of the most important factors when considering whether to change jobs. However, employer-sponsored healthcare must be affordable to attract new employees and keep the current ones onboard.
Group health plans are a poor fit for small businesses. The plans are often prohibitively expensive, and the overall group rate skyrockets if a single employee or one of their dependents has a medical emergency or requires specialized care. Small business owners don’t have the time to manage group plans, which often struggle to accommodate part-time employees, nor do they need the added stress of uncertain renewal costs. Many companies see double-digit annual increases — a cost that few can weather.
While large corporations have sufficient headcount to negotiate favorable rates with insurance providers, small businesses don’t have that luxury. With HRAs, organizations escape the cycle of expensive plan renewals. HRAs require less than an hour of administrative work each month, so owners of small businesses can effectively outsource benefits. Employers simply set a monthly reimbursement budget, and employees choose the plan that best fits their needs.
There are two types of HRAs: the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) was designed for small businesses with less than 50 employees, while the Individual Coverage Health Reimbursement Arrangement (ICHRA) is available for employers of all sizes. ICHRA offers greater flexibility and allows employers to set higher limits.
Both types of HRAs add up to savings and cost control for small businesses. Employees who choose an HRA join the country’s largest risk pool — the 20 million Americans who purchase insurance on the individual market. As a result, there is no risk of unexpected price increases due to an expensive diagnosis, nor do leaders have to worry about participation requirements, because the plan stays in place regardless of who enrolls.
For employees of small businesses, ICHRA means quality coverage. The individual marketplace offers ACA-compliant, HSA-compatible plans across multiple carriers and tiers. Employees determine how much they want to pay for benefits instead of having coverage chosen for them based on the health status of their coworkers.
Hands-off HR administration
For new small business owners, or owners new to benefits, administering employee healthcare reimbursements can seem overwhelming. HRAs reduce the amount of time businesses spend managing benefits. By shifting ownership of each policy to the employees, the owner (or the HR team, if one exists) is no longer responsible for negotiating rates or resolving individual issues.
This is an especially timely moment to consider switching to an HRA. Offering healthcare could help small business owners on Tax Day: owners may be able to deduct the cost of healthcare premiums from their taxes, and employees may be able to exclude the value of their coverage from their taxable income. The tax benefits are especially enticing for owners new to benefits.
Small business owners in every sector are achieving budget stability with HRAs — no more participation requirements, no more double-digit renewals. Staff are healthier, happier, and less likely to look for employment elsewhere. The new benefits model allows small businesses to take care of employees, control costs, and focus on growing their business.