Small Business Health Care Options To Stay Competitive in 2020

Published: September 9, 2019 by Gary Stockton

This week’s guest post is by small business tax expert and best selling author, Barbara Weltman of Big Ideas for Small Business. Barbara shares ideas on how small businesses can remain competitive with health care benefits to attract employees in a tight labor market.

With the cost of healthcare premiums rising, and a tight labor market, small businesses are looking at all options to attract employees, and benefits are one way to remain competitive. So, in this post I thought it would be timely to share some ways employers can deal with offering health coverage without breaking the bank.

As P.T Barnham famously said “The foundation of success in life is good health,” so let’s start with a quick dose of reality then get down to the business of assessing your options for 2020 . It’s estimated that premiums for large employers in 2020 will be on average 5% higher than 2019 (statistics on premiums for small employers are not available).  Small business owners are tasked with the challenge of offering health coverage to their staff that is within their budget. Fortunately, there are several ways for employers to deal with health coverage, and the tax law provides breaks to help defray the cost.

Here is a summary of health coverage options and a brief discussion of the tax breaks that result.

Employer mandate

Despite repeal of the individual mandate, the employer mandate requiring certain employers to “play or pay” continues to apply. If you have at least 50 full-time and full-time equivalent employees, you are an applicable large employer (ALE) and must offer minimum essential health coverage that’s affordable (meaning the employee share of premiums doesn’t exceed a set percentage of their household income) or pay a penalty.

In deciding whether to play or pay, keep in mind that the penalty amounts (there are different penalties) are increasing for 2020. And if you play, there are cost management initiatives—shopping around, increasing deductibles, using virtual care—to help keep premium costs down.

Small employer options

Even if you aren’t an ALE, small companies want to offer their employees health coverage. They want their workers to be healthy. And in today’s tight job market, health coverage is an important benefit, with the majority of employees saying that their coverage is a key factor in deciding whether to stay with the company. Here are some affordable options to consider:

Health savings accounts (HSAs). If you offer employees a high-deductible health plan (HDHP), which is a low premium policy that requires employees to pay out of pocket up to their policy’s deductible before coverage kicks in. The HDHP is then combined with an IRA-like savings plan called a Health Savings Account (HSA). You can decide whether to contribute to an employee’s HSA or let the employee do so. If you make the contributions, they are tax deductible and as a tax-free fringe benefit are not subject to payroll taxes.

Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). Instead of having the company obtain a group plan, a small employer (one that is not an ALE) can reimburse employees up to a set dollar amount for their individually obtained health coverage. Reimbursement limits for 2020 have not yet been announced. For 2019, they were $5,150 for self-only coverage and $10,300 for family coverage.

Individual Coverage Health Reimbursement Arrangements (ICHRAs). Starting in 2020, employers of any size can reimburse employees for their personal health coverage premiums. The employer—not the government—sets the reimbursement limit. The ICHRA must be offered on a nondiscriminatory basis. And the arrangement must meet other requirements, including notice of the plan and verification of coverage by employees in order to receive reimbursement. Sounds similar to the QSEHRA, but there are some important differences.

Excepted Benefit Health Reimbursement Arrangements (EBHRAs). Also starting in 2020, employers that want to offer certain extra coverage up to $1,800 to help employees pay for non-covered expenses (e.g., vision or dental care) can do so with an EBHRA. This is a supplement to and not a substitute for group health coverage.

Association Health Plans (AHPs)

In 2018, the U.S. Department of Labor issued a final rule permitting chambers of commerce, trade associations, and other groups to band together to offer their members affordable group health coverage. The groups, referred to as Association Health Plans (AHPs), would be treated as a single large employer and, due to economies of scale, would be able to command favorable premiums.

Tax incentives

Premiums paid by employers are fully tax deductible. What’s more, employer-provided health coverage is a tax-free fringe benefit exempt from payroll taxes, but employers must report it on employee W2’s.

Instead of a deduction, small employers that purchase coverage through a government Small Business Health Options Program (SHOP) (or through an insurer where there is no SHOP) may be eligible for a 50% tax credit for the premiums they pay for their staff. Details of this tax credit are in the instructions to Form 8941.

Final thought

Because of the wide array of options for obtaining health coverage, small business owners have a lot to think about. But they must do so soon so they can select their option and shop around now to have coverage in place by January 1, 2020.

About Barbara Weltman

Called the “guru of small business taxes” by the Wall Street Journal, Barbara Weltman is a prolific author with such titles as J.K. Lasser’s Small Business Taxes and J.K. Lasser’s Guide to Self-Employment and a trusted advocate for small businesses and entrepreneurs. She has appeared on numerous radio shows and television programs, including Fox News, CNN, and The Today Show. She has been named one of the 100 Small Business Influencers in the U.S. five years in a row.  Learn more by visiting Big Ideas for Small Business.

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