Due primarily to its skyrocketing cost, health insurance coverage is one of the most important benefits that a business can provide for its employees. The majority of American businesses provide some form of health insurance coverage. In many cases, this comes at a tremendous expense for the business's bottom line. Increasingly, many businesses are choosing to forgo salary increases, bonuses and cost-of-living raises in order to avoid disrupting the provision of these benefits. Studies have shown that most employees understand and accept these trade-offs.
If you run a business and wish to provide health insurance for your employees, you have several options for doing so. You could offer a traditional group health insurance policy that deducts premiums from your employees' pre-tax pay. Since neither your business nor its employees will be responsible for payroll tax payments on this income, this is the preferred method of providing this benefit.
However, there are plenty of other ways to provide health insurance coverage without incurring undue tax charges. Many employers choose to charge their employees up-front for part or all of their health insurance costs and then reimburse them using Health Reimbursement Arrangements. Also known as HRAs, these tax-protected vehicles confer many of these same benefits of pre-tax group health insurance plans while promoting portability and consumer choice.
HRAs are governed by complicated regulatory arrangements like HIPAA and ERISA. In general, they exist to enable small employers to provide health insurance coverage for their employees on an individual basis. Most HRAs are used to reimburse employees for their ongoing premium payments on individual health insurance plans. Since companies that employ more than 25 individuals enjoy substantial pricing power on group health insurance plans, these vehicles are rarely used by large employers. If you own a thriving business that employs dozens of employees in multiple locations, you should consider obtaining a group insurance plan with lower per-employee premium costs.
If you're worried about the rising cost of health insurance, you may wish to tie the annual increase in your employee reimbursements to inflation. Alternatively, you could arrange only to reimburse a portion of your employees' healthcare costs.
It's important to note that you may not be required to reimburse your employees' health insurance costs. In fact, you may not be required to provide any health insurance coverage at all. If you own a small business that employs fewer than 50 employees, you're exempt from the Affordable Care Act's employer-coverage mandate. Although your employees may grumble about it, you're under no legal obligation to provide them with health insurance coverage.