Small Company Health Insurance: Five Options

Providing top-tier company health insurance options correlates with higher employee retention, but the cost of health insurance can deter some employers from considering this key employee benefit.

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Not only is health insurance a great benefit to offer, but it may be required, depending on the size of your business. Under the Affordable Care Act, certain small businesses – namely, those with 50 full-time or full-time equivalent employees – must offer employee health insurance plans or pay a penalty. Small businesses with 1 to 50 employees don’t face a penalty.

Below, learn all about the costs and benefits of small company health insurance and the five most popular health insurance options for small businesses.

Time and money: the main costs of small business healthcare

As a small business owner, you may have run the numbers to determine how much it costs to provide health insurance. There may have been some sticker shock: it can take significant resources to research, identify, and manage plans, and paying for coverage each month can be expensive.

One survey found that, in 2018, the average monthly per-person premium for a small business healthcare plan was $409. At this premium rate, a small business with 10 employees to cover would pay $4,090 per month for small business healthcare.

Another survey assigned a monetary value to the time involved in setting up, offering, and administering health insurance for a small business. According to this survey, the 13 hours per month that the average small business devotes to its health insurance benefits and legal requirements translate to $13,000 per year or $1083.33 per month.

These numbers might have you worried, but for many small businesses, this figure is the right price to pay for employee satisfaction. According to a Gallup poll, 75 percent of employees who like their employer-sponsored health insurance also like their jobs. This means one-quarter of your workforce won’t feel a sense of loyalty to your business if they don’t have good healthcare options, and unsatisfied employees look elsewhere for employment. Providing your employees with good insurance is as much an investment in their health as it is in your employee retention rates.

The tax credits associated with employee health insurance

Every small business owner loves a good tax break, and certain small businesses can receive employee health insurance tax credits. Any business with at most 25 full-time equivalent employees is eligible for these tax credits if:

  • The average wage paid to employees – total wages paid divided by the number of employees – is no greater than $50,000 per year.
  • The employee health insurance plan offered is provided through the Small Business Health Options Program Marketplace (also known as the SHOP Marketplace).
  • The small business covers at least half of each employee’s insurance premium. Note that this stipulation does not apply to family or dependent healthcare offerings since tax credits cannot be taken on these plans.

If your small business meets these qualifications, you can claim these tax credits for two consecutive tax years. The credit will be at most:

  • 50 percent of the total your business spends on premiums
  • 35 percent of the total your business spends on premiums if you are a tax-exempt employer

The fewer employees your business has, the closer your tax credits will be to these caps.

Now that you understand the benefits of employee health insurance – both for your bottom line and for keeping your employees happy – you’re prepared to find the right health insurance plan for your small business.

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How to find the right health insurance plan for your small business

When comparing and contrasting health insurance plans, you’ll notice that the plans available to you fall into five categories.

1. Qualified small employer health reimbursement arrangement (QSEHRA)

If you haven’t heard of a qualified small employer health reimbursement arrangement (QSEHRA), don’t be taken aback. QSEHRAs were enacted in 2016, when these small business insurance plans were first created through bipartisan legislation. These plans enable small businesses – in the case of QSEHRAs, a small business is any company with no more than 50 employees – to provide employees with a monthly tax-free allowance.

This tax-free allowance isn’t just free money. It comes with a major stipulation: Employees can only use this money toward paying for any individual health insurance plan of their choice. The only other acceptable use for QSEHRA allowance money is to cover certain out-of-pocket medical expenses. All QSEHRA reimbursements are tax-free for businesses and may sometimes be free for employees too.

You may want to choose a QSEHRA if you need to eliminate the time burden of choosing the best insurance plan for your employees. Through a QSEHRA, your employees do all the research and make all their own choices. If you have employees based in many states, a QSEHRA may be especially helpful for saving your business time costs since you won’t have to navigate each state’s unique healthcare rules.

2. Traditional group health insurance

Whereas QSEHRAs are newer employee healthcare options, traditional group health insurance may be more familiar to the average employer. Through traditional group health insurance, you choose one insurance plan that you offer to all your employees (and, sometimes, their dependents).

For traditional group health insurance, primary – but not necessarily all – payment responsibility for paying insurance premiums will fall to you. Your employees will cover their co-pays, deductibles, and other personal costs. But just because your employees handle these costs doesn’t mean that traditional health insurance comes cheap: Annually, it can cost your small business as much as $15,373 per employee family.

3. Group coverage HRAs

If you’re inclined to balk at the high price tag of traditional group health insurance, group coverage HRAs may work better for you. They combine certain features of traditional group health insurance with those of QSEHRAs. Namely, in addition to the group insurance policy of a traditional setup, employers who offer group coverage HRAs will provide a monthly allowance to employees just as with QSEHRAs.

With group coverage HRAs, your employees can only use their monthly allowance toward their co-pays and other healthcare costs. Payroll tax cannot be collected on these allowances, and employees will not have income tax levied on these allowances. Of course, none of these benefits eliminate the major problem with group health insurance: its price.

4. Self-funded health insurance

The self-funded health insurance model emerged among larger businesses to address the price issues often associated with group coverage HRAs. Of course, small businesses can opt for this health insurance type too. As long as you’re willing and able to cover all your employees’ out-of-pocket healthcare costs and devise formal agreements outlining the terms of this agreement – benefits covered, employee eligibility requirements – you can offer self-funded health insurance.

Usually, the money used toward self-funded health insurance payments comes from employer and employee contributions. However, even the steadiest of employer and employee contribution plans might not build up enough money for a small business to have on hand for covering particularly catastrophic out-of-pocket expenses. This last concern explains why almost all self-funded health insurance providers are businesses with several hundred employees. But there is one more option for your small business.

5. Association health plans

If you worry that your small business can’t go it alone when it comes to finding the time and money for administering employee health insurance, turn to association health plans (AHPs). Through AHPs, several self-employed people or small businesses in a region or industry can come together to purchase a group health insurance policy. AHPs theoretically give participants access to more expensive, higher-quality insurance plans that might normally only be accessible to larger businesses.

The inclusion of self-employed people who do not employ other people is a new development that the Department of Labor signed into law in June 2018. Another new rule: The families of self-employed people can also join AHPs, which may give employees especially large power to purchase higher-quality health insurance at less expensive prices. If your business is struggling to justify any of the other employee health insurance options here, don’t be afraid to talk with other people and companies in your network or area about starting an AHP.

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