For small businesses, there are a lot of tough decisions to make when it comes to the issue of offering health insurance to employees. There are myriad plans to sift through, decisions to be made regarding what's best for your business and employees, and then, of course, there are the costs, which can be dizzying to comprehend.
Business owners also have big questions ‒ and concerns ‒ about health insurance, including how much it may cost, what the options are for health insurance and how you go about offering it.
Which businesses are required to offer health insurance?
The Affordable Care Act (ACA) mandates that a company that has 50 or more full-time equivalent employees (FTE) must offer a healthcare plan to its workers. (According to the ACA, an FTE is one who works at least 30 hours a week or 130 hours a month.) Employees who work less than that can have their hours combined with other employees to make an FTE. For example, two employees who each work 15 hours a week can count as one FTE.
If your company has 49 or fewer FTEs, you do not have to offer employee health insurance, but that doesn't mean you shouldn't. There are several benefits that companies gain by offering health insurance. Businesses that don't offer health insurance will likely find it difficult to attract ‒ and keep ‒ talent.
How much does health insurance cost for small businesses?
Offering health insurance typically isn't cheap for small companies. The Kaiser Family Foundation found that in 2020, annual premiums for employer-sponsored family health insurance rose 4%, for an average cost of $21,342. Individual coverage costs were $7,470.
Where your business is located also influences how much you pay for health insurance. If your business is based in a state where there is more competition among health insurance companies – Massachusetts, California and Colorado, for example – your premiums are likely to be lower than, say, Iowa.
The age of your employees is another factor that determines how much you pay. A younger workforce typically means lower premiums.
Each year, premiums continue to rise faster than the rate of inflation. Inflation was 2% in 2019, while according to the Kaiser Family Foundation, the premiums for individuals and family increased 4%. [Read related article: Health Insurance: Employer and Employee Costs in 2020]
What are the health insurance options for small businesses?
There are four options available to small businesses with purchasing health insurance coverage for employees:
Brokers and online marketplaces
Most businesses use an insurance broker or turn to online sites such as EINSURANCE and Take Command Health to guide them through the process.
An insurance broker collects the necessary information about your employees, submits that to insurance carriers in your state and collects bids for your business. There is generally no charge to use a broker. Agents cannot negotiate rates for you. Rates are filed with the state. A good broker will explain your options and assist you with buying coverage.
The Small Business Health Options Program
Another option is the federal government's Small Business Health Options Program (SHOP). SHOP is for businesses that have between one and 50 FTE employees. Healthcare.gov has a calculator that, after you select the state your business is located in, will ask you a few questions and note whether there are tax credits that lower-paid employees may be eligible for.
Group health insurance
This has been the traditional choice for most businesses, and it is an expensive option for business owners and employees.
The Kaiser Family Foundation study revealed that slightly less than 30% of companies with fewer than 40 employees offer group plans. Group insurance can be a good recruiting tool, and many employees are familiar with how the plans work. Employers pay half or more of the premiums, but employees pay thousands of dollars per year, too, for their contributions. In 2020, the average amount employees paid for a family plan was $5,588, up 40% since 2010. In addition, workers pay $1,644 on average in deductibles.
With group health insurance coverage, there are several types of plans you can offer:
- Health maintenance organization (HMO): An HMO comprises a network of providers that require employees to pick a primary care physician to get access to specialists.
- Preferred provider organization (PPO): With a PPO, patients can see anyone in network without a referral from a primary care physician, and in some cases, out-of-network coverage is also an option, though it costs more.
- Exclusive provider organization (EPO): An EPO doesn't require an insured to have a primary care physician, but it is difficult to get out-of-network services.
- Point of service (PS): A PS plan costs less, but there are fewer physician options.
- High deductible health plan (HDHP): These plans keep premium costs down by requiring larger deductibles. The IRS defines a HDHP plan as one that has a minimum deductible of $1,400 for an individual or $2,800 for a family.
Health savings account
One way to offset health insurance costs is by offering a health savings account (HSA). With an HSA, employees can use pre-tax dollars to supplement their HDHP and pay approved medical expenses such as deductibles and co-pays. In 2020, contributions were limited to $3,550 for individuals and $7,100 for families, financed either by the employee and/or the employer.
Unspent money rolls over from year to year, and because the account belongs to the employee, it transfers with him or her if they switch jobs or retire.
Health reimbursement arrangement
Another possibility is a health reimbursement arrangement (HRA), which allows employers to reimburse employees for medical expenses, such as deductibles. There is no maximum or minimum contribution amount, and companies can set different allowances for different employees based on their jobs. Employees pay the bill, and their employer subsequently reimburses them based on the rules of the program when it is set up.
There are two major plans that allow companies to reimburse employees for individual policies: a qualified small business health reimbursement arrangement (QSEHRA) and an individual coverage health reimbursement arrangement (ICHRA).
There are some significant differences between the two plans.
- An ICHRA has no size limits; a QSHERA is for companies with fewer than 50 FTE.
- An ICHRA has no restrictions on the size of the allowance, while QSEHRA 2020 contributions top out at $5,250 for individual plans and $10,600 for family.
- With ICHRA, employers can set eligibility based on 11 different classes, such as job definitions and salary rather than hourly employees. With QSEHRA, all full-time employees are eligible.
Self-funded insurance
As its name implies, companies that self-fund their health insurance assume the risk of paying for medical claims. Typically, an employer sets up a trust fund that collects corporate and employee contributions. Monies from the trust fund are used to pay employee medical claims for the year.
Companies that choose self-funded insurance typically contract a stop-loss policy with an insurer as protection in the event of an unexpected catastrophe. But, ultimately, the responsibility for the final payment rests with the sponsoring company. With the cash reserves in self-funded insurance trust funds, the sponsoring company may withdraw some of the funds, invest the money, earn interest on it, and reinvest those funds to ensure the fund can continue to meet the financial obligations of employees. Any funds that are unused at year's end remain in the fund to be used to pay future obligations.