Are you a self-employed entrepreneur, with 0 to 3+ employees, wondering how health insurance coverage works? Do you have the same advantages and cost benefits? Are you wondering how you can explore your options and eligibility requirements? This article discusses what self-employed entrepreneurs need to know about Health Reimbursement Arrangements (HRAs).
Self-employed HRA options
In the HRA model, the employer instead reimburses participating staff for exact costs such as medical expenses, prescriptions, and even individual insurance premiums in a pre-tax sense. Whenever possible, you should consult with a licensed accountant or tax professional for advice.
Based on company entity structures, here are the eligibility guidelines:
Corporations
HRAs are available to the business owner and any dependents under this company structure.
S-Corporation
Owners are not eligible for HRA participation because, under this company structure, they are already protected from certain profit and loss taxes, and because they own 2% of the company and are not employees.
Creating a partnership
Generally, partners are not eligible for an HRA under this company structure, since they are directly taxed. However, spouses who are W2 employees, not partners, are eligible for an HRA.
Ownership of a sole proprietorship
An HRA is not available under this company structure, since neither the business nor the owner is incorporated.
The IRS determines whether a self-employed entity is eligible for an HRA solution based on how your business is structured.
If I qualify for HRA, what are my options?
QSEHRA
The Qualified Small Employer Health Reimbursement Arrangement (QSHERA) is a great opportunity for self-employed businesses that qualify for an HRA. It provides a similar benefit to a group health plan, but with fewer restrictions, requirements, costs, and hassles. The QSEHRA allows self-employed individuals to set aside a fixed amount of funds to reimburse participating employees on a monthly basis.
This set monthly amount of money can be drawn from as employees incur medical expenses or monthly premiums for ACA Marketplace coverage at the individual level.
- All are tax-free, so you can offer your employees a health insurance benefit without breaking the bank or causing tax hassles.
- Budget requirements can be set in advance
- Only out-of-pocket expenses would be reimbursed
As a result, you will only be reimbursed for actual out-of-pocket expenses.
There are a couple of drawbacks to QSEHRA:
- Contribution limits based on your business model
- Eligibility limits for companies of a certain size
ICHRA
The Individual Coverage Health Reimbursement Arrangement (ICHRA) is typically the more popular HRA variation among the self-employed. In contrast to a QSEHRA, ICHRA offers all the same control, affordability, and flexibility. However, it does not have contribution or company size limits that affect eligibility.
Any self-employed person knows the benefits of hiring part-time, seasonal, or temporary employees.
In the future, your self-employed business may decide to combine ICHRA with a traditional group health insurance plan as your business grows. As long as the two models aren’t offered or applied to the same employees, ICHRA allows for this type of integration.
As an example, you might offer a group health plan to your salaried or full-time employees. However, you could manage a more affordable ICHRA model separately for your seasonal or part-time employees.
Regardless of your company size, employee type, or given budget, an ICHRA is a more efficient option to provide health insurance-related benefits to your self-employed employees.
