One common practice that many small business owners have chosen as a means of helping employees get health insurance is to encourage them to buy their own policy and then get reimbursed by the business. StartupJournal examines the pros and cons of this approach. The article suggests that a small business owner in Utah is the first to use this approach, but I have heard of many small businesses reimbursing employees for health insurance over the past couple of years.
How does it work?
The tax wrinkle used...involves something called a health reimbursement arrangement, or HRA. Employers set aside a certain sum every month, say $200, that employees can use for health expenses. The employer can write off the expense for tax purposes, just like traditional health benefits, and the money doesn't count as taxable income for the employee.The tax advantages of HRAs resemble the better-known health savings accounts, or HSAs. Both plans are sometimes used by large employers that offer comprehensive benefits and want to supplement it by giving employees tax-free dollars for noncovered medical costs.
The key difference is that employees can use the money in an HRA, but generally not an HSA, to buy health insurance. That's why an HRA can be used not just to supplement health insurance but also to buy it.
At a business with generally healthy employees, an HRA plan, in effect, allows the owner to cover a good chunk of most people's insurance bills at a fraction of the cost of a traditional group insurance plan. The idea is especially attractive to small businesses that don't have the leverage to drive a good bargain for group coverage.
One of the shortcoming of this approach according to critics is that it can be difficult for employees with pre-existing conditions to purchase affordable coverage. Also, there are questions being raised about the legality of this approach to helping employees get health insurance coverage.
I believe that this is a positive innovation in the market. It has promise as a means to help move health care back into the free market. Each employee can shop for the level and type of coverage that they want to purchase. This is a much better direction than the calls for socialized health care we are now hearing from so many politicians.
