Are you a self-employed entrepreneur, with 0 to 3+ employees, trying to figure out how health insurance coverage works? Wondering if you have the same advantages and cost benefits? How can you explore your options and eligibility requirements? In this article, we discuss what self-employed entrepreneurs need to know to better understand how Health Reimbursement Arrangement (HRA) variations work.
HRA options for the self-employed
In the HRA model, the employer instead reimburses participating staff for exact costs like medical expenses, prescriptions, and even individual insurance premiums in a pre-tax sense. It’s always considered a best practice to consult with your licensed accountant or tax professional for guidance.
Here are the eligibility outlines based on company entity structures:
Under this company structure, the business owner and any dependents can tap into an HRA.
Under this company structure, and because the owner is already protected with certain profit and loss taxations, and because the owner owns 2% and isn’t an employee, owners are not eligible for HRA participation.
Under this company structure, where the owning partners are directly taxed, they are not eligible for an HRA. There is a caveat – should the owners’ spouses be W2 employees, not partners, an HRA can be set up for those employee-level spouses.
Under this company structure, where the business and the owner are not incorporated, nor an employee, the owner is not eligible for an HRA.
Keep in mind, not all self-employed entities will be eligible for an HRA solution. The IRS makes these determinations based on how your business is set up.
What are my options if I qualify for HRA?
For those self-employed entities that do qualify for an HRA model, the Qualified Small Employer Health Reimbursement Arrangement (QSHERA) is a great opportunity for putting yourself in the same position as a group health plan, but with fewer restrictions, requirements, costs, and hassles. Under QSEHRA, the self-employed can set aside a fixed monthly allocation of funds for participating employee reimbursements.
As enrolled employees encounter medical expenses or monthly premiums for ACA Marketplace coverage at the individual level, they can submit reimbursement requests to draw off this set monthly amount of money. The best part about these health plans is that:
- They are all tax-free – offer employees a health insurance benefit without breaking the bank nor causing tax hassles or complicated administration
- You can set the budget requirements upfront
- You’d only be reimbursing for actual out-of-pocket expenses
As a result, there are no surprise fees or overages you might find with a small employer group health plan.
With QSEHRA, there are a couple of drawbacks to consider:
- Maximum contribution limits based on how you set up your business model
- Company size limits that apply for eligibility
The Individual Coverage Health Reimbursement Arrangement (ICHRA) is typically the more popular HRA variation among the self-employed. It offers all the same range of control, affordability, and flexibility of a QSEHRA. However, ICHRA does not have contribution or company size limits that factor into eligibility.
ICHRA works with a variety of employee types. Anyone who’s self-employed knows the benefits of hiring part-time, seasonal, and temporary workers.
As your self-employed entity continues to grow, you might decide to explore a hybrid model of health insurance benefits with both ICHRA and a traditional group plan. ICHRA allows for this type of integration, so long as you aren’t offering or applying both models to the same employees.
For example, you might decide to offer a group health plan to salaried or full-time staff. You could do so for them and still manage a more affordable ICHRA model to provide benefits to your seasonal or part-time workforce separately.
For anyone who is currently self-employed, an ICHRA is definitely a viable solution to providing health insurance-related benefits. Regardless of your company size, employee type, or given budget, it’s a far more efficient option for those who are eligible to offer one.
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