Small Business Health Insurance — The Ultimate Guide
If you’re a small business with fewer than 50 employees, providing small business health insurance to your staff is optional. There are many small business health insurance options available if you choose to offer it to attract new employees and to keep your current ones happy. However, if you have over 50 full-time employees, you are required by law to offer health insurance and you must provide proof of that to the IRS. In this article, we’ll show you how to provide small business health insurance to your employees, what it costs, how to maximize your tax savings, and other best practices. At the end of the article we’ll also explain some of the confusing jargon and answer some of the more common questions you may have. If you want an easy way to offer benefits to your employees, consider working with an HR, benefits, and payroll company like Gusto that provides health insurance for small business employees at a fraction of the cost of buying it on your own, due to their buying power. They also provide all required IRS reporting to keep your business in compliance with the Affordable Care Act (ACA). Average Cost of Employer-Provided Health Insurance There are many variables that affect health care costs. This chart from the Kaiser Foundation provides overall averages and shows that coverage for an employee can cost close to $600 per month, whereas the cost for family coverage is closer to $1,500 per month (premiums shown shown below are annual). Only after you choose the provider and coverage types is it possible to estimate your specific business’ health care costs, which we cover later in this article. How to Provide Health Insurance There are tens of thousands of health care plans available to small businesses. Because these plans vary so widely by state, there’s no one plan we can recommend for all businesses. What we can do is tell you about the types of organizations that can provide your small business with health insurance plans, then we’ll clarify the types of health plans each type of organization might offer. What the ACA Requires Businesses with fewer than 50 full-time employees (FTEs) are not required to provide health insurance for their employees. If your business has 50 or more FTEs, the ACA (aka Obamacare) requires you to provide health insurance for your employees or pay a penalty when you file your taxes. The ACA requires companies with 50 or more FTEs to do these three things: Offer a qualified health plan to eligible employees and their families Ensure that the health plan is affordable for employees Complete required IRS forms: 1094-C and 1095-C The rest of this article will focus on how. Disclaimer: Please note that this article contains general information only, so please consult your own legal, HR, or insurance professional before making any decisions about whether and what type of health insurance to provide. 3 Kinds of Health Insurance Providers for Small Businesses Small businesses have three primary options for a partner in providing health insurance: licensed insurance agent or broker, a Professional Employer Organization, and the SHOP marketplace. Here’s a table with information explaining the pros and cons of each. Table Showing Pros and Cons of 3 Types of Health Insurance Providers Who Provides Insurance Definition Cost to Employer Pros Cons Insurance broker Also known as health insurance agents, brokers provide a direct link to health insurance companies and/or to the government marketplace. Cost vary widely. Count on paying a premium for having an agent service your company’s health insurance accounts. Direct help; face-to-face meetings; can do enrollment presentations for employees. Low or no commissions may mean overworked brokers who may take on too many clients. Make sure your broker can give you the attention you need. Professional Employer Organization (PEO) A PEO lets you outsource employee management tasks, such as providing employee benefits. Costs ≃ 2% of an employee’s salary. Compare cost in our article on the best PEOs for small business. Reputable; can serve business in several other areas like HR and payroll; guaranteed ?IRS compliance. Online -- less personal contact; requires web sign ups for employees, which may confuse them. SHOP Marketplace The federal government’s marketplace for small businesses to purchase health insurance. Depends on your state and size; it can be affordable in some places and expensive in others. Compliance; may be low cost depending on location Customer service issues; new system, still working out bugs. Unfortunately there is no one answer as to which option is going to be best for everyone. Not only can the pros and cons vary by state, but your options and costs will vary based on your exact geographic location, the plans you offer, and the amount you choose to contribute to help employees pay for their coverage. For example, if you’re located in a major city then you’ll likely have greater access to a selection of brokers. However, it may require a Yelp search or tapping into your personal network to find a good one. Try getting recommendations from your contacts on Facebook or LinkedIn — you’ll be surprised by what your network knows. Conversely, if you’re located in a smaller town, you may be limited to a single broker so searching for online benefit providers might give you more choices. Researching Health Insurance Providers We recommend researching a health insurance partner in the following three ways: Ask your fellow local small business owners who they use – their recommendations can be invaluable Use the internet to look up customer reviews, reviews in the Better Business Bureau, or Yelp Find local brokers who work with SHOP Getting Health Insurance Quotes Once you have a few ideas for who you might want to work with, schedule an initial meeting or call to learn more about the benefits, products, and services that they offer. It’s wise to get a quote from each of the three types of organizations. Why? Because insurance offerings vary greatly by state and even by city. The same place where the SHOP exchange is cheap might be expensive to use a broker. The number of employees you have that might participate also affects cost. And some locations have few providers available, driving costs up. For example, SHOP tends to be expensive in New York City, and so opting for a PEO like Justworks or a broker is usually more cost efficient — even after factoring in their fees. Also, once you put together what they call the “census” of your employees for one of the insurance vendors, it makes sense to use that information and get quotes from the others. In fact, getting a quote from at least one of each of the three types of providers costs you nothing. Meeting With Your Chosen Health Insurance Provider Here are some questions to ask each provider when considering your options: Cost per employee, including service charges and account fees Customer service for the health plan administrator (you or your HR Manager) Customer service for your employees Willingness to help — for example, do they manage open enrollment paperwork? Have a website for employees to sign up? Answer employee questions about plan options and coverage? Accessibility — will you have a dedicated rep or do you get the feeling they’ll disappear once the contract is signed? What support can you expect from the company? Website reliability and data integrity — do you see any complaints online about the company? Do the online reviews concern you? Remember, cost is only one aspect. Did you get a quick and friendly response when receiving your quote or was it a hard sell? Did you have to wait a week? Keep in mind that this is the “wooing” phase. If you don’t like their customer service now, you certainly won’t like it when there is a problem that you need resolved. Neither will your employees. Once you set up meetings with a broker, a PEO account manager, and/or a SHOP agent they will probably ask you questions in advance of your meeting, such as: How many full time employees do you have? (this is your “census”) How many of those employees do you think will participate in the insurance plan? How much are you looking to spend per employee? Are you planning to contribute any business funds to help employees purchase their insurance? This information is needed by the vendor to figure out the best ACA-compliant options for your business and to be able to present those choices and costs to you. Now that you know who you might buy from, let’s talk about what you might buy — as in, what kinds of health plans to get quotes on. Types of Health Plans Available For Your Employees No matter who you work with to get health insurance for your employees, the organization should have access to various types of health insurance plans and the actual insurance companies who provide those plans. In this section of our guide to providing health insurance for small business owners, we will delve into health benefit plan options you might want to consider for your business. Keep in mind that there is a huge range of health insurance plans available — from traditional health plans to savings accounts. Here are four primary ways in which they differ: The extent of the coverage The monthly premium cost The ease of use for the insured person Whether they’re ACA compliant Traditional Healthcare Insurance Plans There are four main types of health insurance plans: health maintenance organizations (HMO), high deductible health plans (HDHP), point of service plans (POS), and preferred provider organizations (PPO). The service provider you choose will help you identify which of these is best for your organization based on your budget, number of full-time employees, and life stages of your employees. For example, older employees may want to stay with their existing medical provider, while younger employees may prefer to save on co-pays instead. Of course, employees have the option to purchase these kinds of plans on their own through the exchange or a private health insurance company; but it’s often cost prohibitive, especially for families and older workers. Providing healthcare plans through your business allows you to offer group plan rates that are more affordable for employees. Typically you as the employer will also have the option to enroll in the plans you provide to employees. Here’s a summary of the types of plans you can choose from: Traditional Healthcare Insurance Plans Type of Plan What It Is Health Maintenance Organization (HMO) An insurance plan that limits where a person can get care. The employee’s medical provider must be in-network for the employee to receive benefits. Employees may need a referral for specialists like an orthopedic doctor. However, once they find a doctor in-network, co-pays are low or even $0. HMO plans may offer the lowest premiums. High Deductible Health Plan (HDHP) A health insurance plan with a large deductible. An HDHP is a medical plan with high out of pocket costs (high deductible). It’s often paired with a tax-free savings option such as an Health Savings Account (HSA). This type of plan offers lower premiums than a traditional POS or PPO. One of the benefits is that it’s easy to use and the employee can often keep their own doctor. Point of Service Plan (POS) A health insurance plan with a choice. This type of plan allows the insured employee to use an in-network provider or get a referral prior to treatment. POS plans have reasonable premiums, provide decent coverage, and are easier to use than an HMO. The employee will have some out of pocket costs, such as a deductible and/or co-pay. Preferred Provider Organization (PPO) A health insurance plan with, usually, a very expansive network. PPOs offer a large list of practitioners and no referrals are required. This type of plan is going to have the highest premiums but also the best coverage. It’s also easy for employees to use. Like a POS, the insured will still have a deductible, co-pay, or both depending on the treatment. Add-On Healthcare Savings Options Please note that the following three options are not traditional health insurance plans like those listed above. They don’t meet ACA requirements by themselves. Instead, these are value-added health benefit savings accounts that allow employees use pre-tax dollars to pay for their health expenses. Employers often make these available in conjunction with one of the traditional health plans mentioned above. All but an HSA can also be offered as a stand alone option if you have under 50 employees and can’t afford or don’t want to offer traditional health insurance. Types of Healthcare Savings Accounts Type of Benefit What It Is Flexible Spending Account (FSA) Employer-sponsored tax advantaged account. An FSA is a pre-tax savings account that employees can use to pay for medical expenses. An FSA doesn’t roll over from year to year, so it’s a use it or lose it system, and employees should be reminded to use their dollars regularly to avoid losing them. It’s a good option if you have fewer than 50 FTEs, and want to help employees use pre-tax dollars to pay their health care. An FSA is owned by the employer. Health Savings Account (HSA) A health savings account. An HSA is a another kind of pre-tax savings account, but it’s only available if it’s paired with an HDHP. This plan operates like a 401K for health savings: an employee can contribute, an employer can match it, and the employee can use it to pay health care costs and deductibles. An HSA is owned by the employee, so it stays with them even if they change jobs. Health Reimbursement Account (HRA) Employer-funded and maintained account. An HRA is an account that allows employees to be reimbursed for medical expenses by submitting receipts. However, it’s a murky area regarding medical privacy because it can lead to privacy problems and even cause discrimination -- for example, if you skipped over someone for a promotion because you knew they were ill with cancer. An HRA is a good option if it’s administered by an outside broker or a HIPAA-certified HR Manager. Read our article on Federal Labor Laws to learn more about HIPAA. Best Practices on Combining Plan Offerings You may be wondering how to build the best small business health insurance plan for your employees with so many choices available. After you work out your budget with your chosen health care plan provider — broker, PEO, or SHOP agent — you can narrow down what you are going to offer to employees. It’s not a bad idea to also ask your employees for feedback on what kinds of plans or plan combinations might be most helpful to them. For example, a few options might be: An HSA and an HDHP. This health insurance combination would be good if you want to offer something, but don’t have a lot of money to offset the premium costs for employees. HSApremiums are lower than other health plan types, and your employees could save pre-tax dollars to help pay their deductibles and co-pays. A PPO and an HMO. Allow employees to choose which is best for their family. These are two good options if you have an employee base that has multiple generations and spans multiple concerns (for example, some have families and others are millenials who rarely see a doctor). It also gives the employee choices on the coverage they want and how much they want to pay. Read our article on HMO vs PPO to learn more. A PPO, an HMO, and an FSA. Adding on an FSA is a nice value-add if you have employees who want to plan for just-in-case. FSA savings are pre-tax dollars they set aside to spend each year, and anything they over $500 they don’t use after year end, rolls over to you, the employer. An HDHP, an HMO or POS, a PPO, and an FSA or HSA. This would be a more comprehensive offering so that you really empower your employees to choose their own health insurance based on their budget and family needs. If you want to offer a broad range of choices like this, a PEO is going to be your best provider option. They have more options and can negotiate lower costs with health care providers thanks to the power of numbers. Am I Required to Pay for the Health Insurance If I Offer It? The answer is no. However, employers that choose to offer small business health insurance, regardless of company size, must offer health insurance that is affordable. This means that the cost to the employee must be less than 9.5 percent of the full time employees’ salary. Employers that don’t provide affordable insurance may be subject to penalties. This is part of the employer mandate under the ACA. Benefits of Providing Health Insurance (Even if You Don’t Have To) Even if you aren’t legally required to provide health insurance, doing so can help you to attract and retain employees. The top five benefits of providing health insurance are: Tax savings for you, the employer There are three nice tax benefits: Employers can take a take a deduction for health insurance premiums that they pay When employees use pre-tax dollars to pay for their health insurance it lowers their taxable income, which, in turn, lowers your business payroll taxes You may be eligible for the small business health care tax credit up to 50% of the premiums paid if you meet the following criteria: Cover at least 50% of your employees’ premium costs Have fewer than 25 FTEs with an average annual salary of less than $50,000 per year Purchase you own coverage through the same plan that your employees use Tax benefits for your employees When you give employees additional money, such as a pay increase or bonus, they pay income tax on that money. However, if you provide small business health insurance, employees don’t have to pay income taxes on the portion of the premiums that they pay using pre-tax dollars. Health care benefits are considered pre-tax deductions from the employee’s paycheck. Attracting talent Employees need health insurance, period. The ACA makes it illegal for individuals to go uninsured, so it’s likely that most of your employees are looking for an employer-provided health plan whether through your business or the company their spouse works for. Health benefits are one of the most sought after employee benefits according to our article on 2018 workplace trends. Keeping your current employees happy Providing benefits such as health insurance is a key part of building a positive employer brand. As your business grows, your staff’s personal needs may change — they age, get married, have children, or perhaps encounter health issues. Offering health insurance makes it more likely that these employees will stay with you for the long term saving you in recruitment costs, employee turnover, and the time it takes to onboard replacement employees. Saving money on your own health care When you offer health insurance to your employees, you have the option of purchasing it for yourself and your eligible dependents as well. If you are older than 40, group plan pricing can save you thousands off your health insurance costs versus purchasing health insurance from an agent or on your own in the marketplace. Calculating the Employer Cost of Offering Health Insurance Now that we’ve reviewed provider types and coverage options, the cost of providing health insurance is going to depend on three main factors: The percentage of the premium you’ll cover or amount of money that you give to employees to help them purchase coverage. The exact type of health benefits you provide – this can range from just providing a health savings account at no cost to you, all the way up to providing an employer-sponsored health care plan in which you cover all employee premiums. Who you are going to cover – is it just the employee, employee and spouse, employee and dependents, or full family coverage? Are part-time employees eligible for health insurance or only full-time staff? Are you going to enroll in the plan yourself as well? Choosing a Flat Rate or Percentage Employer Contribution You’ll need to determine how much of the health insurance plan you as the employer want to pay for. Employers traditionally pay for health insurance in one of the following ways: A set percentage of the monthly premium, usually ranging from 50-100% Sometimes with a limit, such as 50% up to $250 per employee Or a clause covering only the employee, such as 75% of employee-only premium A flat amount each month that the employee can use towards health insurance or a health savings account (HSA or FSA), such as $100 per employee A flat amount each month, such as $500 per employee, that they can use towards any employee benefits provided like health insurance, retirement plan, disability insurance, etc. In general, a flat amount per month is the best practice since it’s easy to budget for and makes the most sense in term of fairness for your employees. Example Say you decide to offer a PPO health insurance plan for your employees. Here is what a PPO through a major carrier might cost: Employee monthly premium: $350 Employee + spouse monthly premium: $700 Employee + dependents monthly premium: $700 + $300 per additional dependent Family coverage monthly premium: $1500 (spouse plus usually up to three dependents) Think about what that would look like if: You decide to cover 50% of the premium for the employee only (no spouses or dependents). That makes your cost $175 per month or $2,100 per year per employee. You decide to give each employee up to $400 per month to use only for health insurance. That makes your cost $400 per month (or less) or $4,800 per year (or less) per employee. Cost Varies by Type of Health Benefits You Provide The type of health insurance benefits you provide will affect your cost, unless you are doing a set amount per month per employee. Let’s look at an example of some typical cost-ranges for health insurance premiums by type based on 2017 data. Health care costs have been going about about 3-4% a year according to factcheck.org. Example: HMO: $230 POS: $244 PPO: $251 Keep in mind that premiums also vary greatly by state. For example, Alaska pays almost 76% more in premiums than New Mexico, which pays below the national average. Additional cost information can be found in our article on health care costs. If you would like to cover a percentage of the employee’s premiums, which is what allows you to be eligible for the health care tax credit, we would advise you to crunch the numbers considering your location and the number of employees who will be participating. Cost Varies Depending on Who You Provide Health Benefits To You may be thinking that of course you’ll provide health insurance or contribute towards the cost for your full time employees, but will you also supplement the costs for their families or dependents, such as spouses and children? Will you offer benefits to part time employees? Or only to those full time employees who work 35-40 hours or more a week? If you offer a flat amount, then you don’t need to make that decision – the employee can just use that flat amount for whatever health care coverage they want. However, if you cover a percentage of the premium, then your cost will go up or down depending on how many people are covered. Also take a look at your employee base. Are they mostly: Young and unmarried with no kids? They’ll need single coverage. Married with children? They’ll need family coverage. Single with children? They’ll need coverage that allows them to add dependents. Older and using Medicare? They may only need an FSA, not health insurance. A mix of many phases of life? You may need to provide multiple options. When considering whether to cover just employees or to cover their spouses and dependents as well, you’ll obviously need to think about your budget but also the changing needs of your business. Many of your younger unmarried employees may get married and have children sometime in the future. They’ll then need to add spouses and dependents onto their health insurance plans. FAQs for Small Business Owners Here are answers to a few of the most common questions you may have about offering health insurance to your employees. Where Can I Find More Information on Providing Healthcare? If you are interested in reading a comprehensive guide on the ACA, which regulates how businesses provide health insurance, read this guide from the DOL. The IRS provides a simpler document if you just want the basics laid out. If you want guidelines by company size, here are some Small Business Administration (SBA) resources that focus on the tax credit aspect of providing health insurance: Under 25 employees Under 50 employees 50+ employees And lastly, here’s a calculator to help employees who don’t have health insurance figure out how much health care coverage would cost if they had to purchase it on their own through the marketplace. This is helpful if you plan to offer a healthcare FSA, so they know how much to contribute to it. Why Shouldn’t I Work with an Insurance Company Directly? Unfortunately, working directly with an insurance company is not an affordable option for small business health insurance due to so few employees. However, if you work with a broker, PEO, or SHOP agent you’ll likely be able to get insurance through one of the big carriers like Blue Cross / Blue Shield, Aetna, or United Healthcare at a group rate. What about New Hires? Do I Have to Provide Insurance Right Away? Under the ACA, if you offer health insurance to your employees, you must offer it to all eligible employees within 90 days of their employment start date. This is regardless of company size. So even if you have fewer than 50 people working for you, if you offer small business health insurance at all, you need to make it available to new hires within 90 days. Are there State Laws Besides the ACA? States have the ability to expand upon the ACA and place additional requirements on health insurance. The only changes we’ve seen are some states that mandate specific coverages, such as for contraceptives to be included as part of their health care plans. Besides Health Insurance, What Other Insurance Do I Need to Provide? Most small businesses in the US must have unemployment and workers’ compensation insurance. Five states require employers to provide disability insurance: California, Hawaii, New Jersey, New York, and Rhode Island. You can learn more about state-specific small business insurance requirements on the SBA website. Common Health Insurance Terms Defined Terminology Short Definition & Resource Affordable Care Act (ACA) or “Obamacare” Passed in March 2010, it is a sweeping healthcare reform bill. Affordable Coverage Insurance provided needs to cost less than 9.5% of the employee’s household income. Your broker, PEO, and SHOP can help you make sure your choices are compliant. Applicable Large Employers (ALEs) Employers with over 50 FTEs required to provide health insurance per the ACA. COBRA Federal law that lets employees keep their health insurance benefits after termination or layoff for a certain amount of time, but employees have to pay 100% of the premium costs. If you provide insurance, you must provide COBRA paperwork upon termination. Employer Shared Responsibility Payment (ESRP) This is essentially the term used to describe employers with 50+ FTEs and their compliance with ACA. Flexible Benefits Plan (aka Section 125 Cafeteria Plan) This kind of plan allows employees to pick from a “menu” of benefits, like health insurance, life insurance, etc. Learn more by reading our article on Section 125 Cafeteria plans. Fully-Insured Job-Based Plan A health plan purchased by an employer from an insurance company. Grandfathered Health Plan A healthcare plan created before March 23rd, 2010. These plans still must overcome certain hurdles to be compliant. Open Enrollment (OE) Period The general time frame when an employee can apply for insurance coverage. Your broker or PEO can help with annual OE dates. Qualified Health Plan A Qualified Health Plan means it is ACA compliant. It is also referred to as a plan that provides minimum essential coverage. Summary of Benefits & Coverage You must provide easy to read summaries of the health insurance plans and options you offer to your employees. Your broker or PEO will most likely provide these documents for you or help you create them. The Bottom Line Providing small business health insurance to your employees is required by the ACA if you have 50 full-time employees or more. Employee benefits are a great perk for your employees. We hope this guide helps you navigate how best to provide health insurance as an employer-sponsored pre-tax benefit. If you’re looking for more information, check out our guide to the SHOP Exchange for small businesses or read our companion article on the various types of health insurance plans. In the comments below, let us know whether you decided to provide insurance or not, and if so, why or why not? What plans did you pick and how is it working out for you and your employees?