If you’re reading this article, you may be considering providing health insurance for your employees, but you’re not sure where to start.
This guide to providing health insurance for small business owners is going to break it down into manageable pieces, such as why you’d provide it, the benefits of providing it (like tax credits!), what your options are (the who, what, and how), and what all of the kinds of plans are, along with best practices and how to break down costs. Please note that this article contains general information only, so you should consult your own legal professional before making any decisions about whether and what type of health insurance to provide.
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. We recommend you check out Gusto, a payroll service that can also provide health benefits and many more HR solutions. Click here for a free quote.
In this article, we are going to explain:
- Do I Need to Provide Medical Insurance for My Employees?
- The Benefits of Providing Health Insurance (Even If You Don’t Have To)
- What Are My Options for Providing Health Insurance?
- How Much Will It Cost Me to Provide Health Insurance?
- What Do I Need to Do Next? Getting Quotes and Comparing Plans
- Our Story: How did FSB Go Through This Process?
- FAQs for Small Business Owners
- Common Health Insurance Jargon Defined
Do I Need to Provide Medical Insurance for My Employees?
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 Affordable Care Act (Obamacare) requires you to provide health insurance for your employees or pay a penalty when you file your taxes.
Even if you aren’t legally required to provide health insurance, you can attract and retain employees by doing so. We explain more about the benefits of providing health insurance and affordable options for providing health insurance below.
Am I Required to Pay for the Health Insurance if I Offer It?
The answer is no. However, employers that choose to offer 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 9.96 % of the full time employees’ salary. Employers that don’t provide affordable insurance may be subject to penalties. This is known as the employer mandate under the ACA.
Remember, even if you’re not required to provide health insurance by law, employer-paid health insurance is a big benefit for employees and can help you attract and retain talent. Below, we explain some affordable ways you can provide health insurance for your employees without breaking the bank.
The Benefits of Providing Health Insurance (Even if You Don’t Have To)
Even if you have fewer than 50 FTEs, you may opt to have your business provide health insurance.
Why Would I Want to Provide Health Insurance?
The top 4 benefits of providing health insurance are:
- Tax benefits for employer: There are two primary tax benefits. First, employers can take a take deduction on health insurance premiums that they pay. Further, employers may be eligible for the small business health care tax credit up to 50 % of the premiums paid if they do all of the following:
- Cover at least 50% of employees’ premium costs
- Have fewer than 25 FTEs with average annual wages of less than $50,000
- Purchase their own coverage through the same plan that employees use
- Tax benefits for employee: If you gave your employees a raise, they would have to pay income taxes on that money. However, if you provide health insurance, employees don’t have to pay income taxes on the portion of the premiums that they pay for.
- Attracting talent: Employees need health insurance, period. The ACA makes it illegal for individuals to go uninsured, so everyone is looking for an employer-provided health plan.
- Keeping your current talent: As your business grows, perhaps your staff’s personal needs will change as they grow older, get married, have children, or perhaps encounter their own health issues. Providing health insurance ensures that these employees will stay with you for the long term, saving you in recruitment costs and training headaches.
What Are My Options for Providing Health Insurance?
Your options for providing health insurance depend on two main factors:
- The who – who will you work with to provide a health plan for your employees?; and
- The what – what are the health plans you might choose to provide your employees with?
First, we will address the who aspect and tell you about the kinds of organizations that can provide your small business with health insurance plans.
Who Can Provide Health Insurance to My Business?
Small businesses have 3 primary options for a partner in providing health insurance:
- A broker, or agent, who is a licensed insurance salesperson
- A Professional Employer Organization (PEO) like Justworks, which is an outsourced service provider
- The SHOP marketplace, which is the government-sponsored health insurance marketplace (you can also get a SHOP-specific broker, rather than doing it on your own)
Here is an overview of the basics and the general pros and cons of each:
|Who Provides Insurance||Definition||Cost to Employer||Pros||Cons|
|Broker||Also known as agents, brokers provide a direct link to health insurance companies and to the government marketplace.||Though commissions have recently been cut, count on paying premium since you’ll have a direct representative.||Direct help; face-to-face meetings usually; can do the presentations to employees for you.||Cut commissions = overworked brokers who take on too many clients. Make sure your broker can give you the attention you need.|
|PEO (Like TriNet or Insperity)||A professional employer organization (PEO) lets employers outsource employee management tasks, such as providing employee benefits.||For each employee, about 2% of their salary||Reputable; can serve business in several areas; guaranteed compliance||Online- less personal contact; complex web sign ups for employees.|
|SHOP Marketplace||The federal government’s marketplace for small businesses to purchase health insurance.||Depends on your state and size; it can be super affordable in some places and expensive in others.||Compliance; may be lower cost depending on location||Customer service issues; new system, still working out bugs|
Unfortunately there is no best 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 will also vary by your exact location.
If you are located in a major city, brokers might be a dime a dozen, but a good one might only be found by using Yelp or by engaging your network (like posting the question for a rec on Facebook or LinkedIn- you’d be surprised what your network knows!). Whereas if you are located in a small town, you might only have one option for a broker, and heading towards the internet for online providers might give you more options.
This is why we recommend researching a health insurance partner via the following few ways:
- Ask your fellow small business owners who they use – recommendations for a good broker or PEO can be invaluable
- Using the internet to look up customer reviews, reviews in the Better Business Bureau, and potentially even Yelp for a broker
- Find local brokers who work with SHOP
Once you have a few ideas for who you might work with, perhaps one from each kind of business, there should be an option to schedule an initial meeting or call to learn more about the products they have.
It is wise to get a quote from all three types of organizations. Why? Because costs for insurance vary greatly by state and even by city. A place where the SHOP exchange is cheap might be expensive for brokers. The number of employees you have that might participate also affects cost.
For example, SHOP tends to be expensive in New York City, and so going with a PEO like Justworks or 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 all 3 kinds.
The bottom line is that getting a quote from all three kinds won’t hurt you and it costs nothing. Better to have the power of knowledge than to wonder after the contract is signed!
Once you set up meetings with a broker, a PEO account manager, and a SHOP agent, they will probably ask you questions in advance of your meeting such as:
- How many employees do you have?
- How many do you think will participate in the insurance plan?
- What are you looking to spend per employee?
They need this information in order to best figure out compliant options for your business and to be able to present to you your options. We will talk more about how to determine what you want to pay later in the article.
Here are some questions you may want to ask each provider when you are considering your options, beyond just cost:
- Customer service for you (or your HR Manager, whoever will be the administrator)
- Customer service for your employees
- Willingness to help (i.e. are they willing to take on open enrollment paperwork? Creating you a website for enrollment?)
- Accessibility (tying into customer service)- do you have the feeling s/he will disappear once the contract is signed? What other support can you get from the company?
- Website reliability and integrity of data- do you see any complaints online on the company? What are they about?
Now that you know who you might buy from, let’s talk about what you might buy…or at least get quotes on!
What Kinds of Health Plans are Available?
No matter who you work with to get health insurance for your employees, the organization should have access to various kinds of 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 plan options you might want to consider for your business.
There is a huge range of health insurance plans available, but there are three primary ways in which they differ:
- The extent of the coverage
- The monthly premium cost
- The ease of use for the insured person
The service provider you choose from above should help you with this process, but 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 provider must be in-network or none or very little will be covered, making it difficult to use from the end-user standpoint. Employees also will need a referral for specialists like an orthopedic. However, once you find a doctor in-network, it is usually covered 100%. As an employer, this will have the lowest cost premiums.|
|High Deductible Health Plan (HDHP)||A health insurance plan with a large deductible is a health insurance plan with a very large out of pocket cost that’s usually paired with tax-free savings options. Anything with more than a $1350 deductible falls into this category. This plan is going to have a very low cost to the employer for premiums. This plan is a POS or PPO and then is paired with one of the Savings-Style Plans. It is easy for employees to use, albeit expensive for them.|
|Point of Service Plan (POS)||A health insurance plan with a choice: going in-network or getting a referral prior to treatment. This plan is going to have reasonable premiums but also provides decent coverage and pretty good ease of use for the employee (certainly easier than an HMO). The employee will have some out of pocket costs, such as a deductible or co-pay.|
|Preferred Provider Organization (PPO)||A health insurance plan with, usually, a very expansive network of included practitioners and no referrals required. This plan is going to have the highest premiums but also the best coverage and best ease of use for the employee. The end user will still have a deductible, co-pay, or both depending on the treatment.|
Savings-Style Add-On Healthcare Options
Please note that the following 3 options are not traditional health insurance plans; these are value-added benefits that allow employees to save for their health expenses. Employers often make them available in conjunction with one of the traditional health plans mentioned above, but they can also be used stand alone as well (except for the HSA, which must be paired with a HDHP).
|Type of Benefit||What It Is|
|Flexible Spending Account (FSA)||Employer-sponsored tax advantaged account (usually via a credit card) which employees can use to save for medical expenses of all kinds. Your FSA cannot roll over 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 issues.|
|Health Savings Account (HSA)||A savings account which an employee can use to save for healthcare expenses with pre-tax money, typically paired with a High Deductible Health Plan. This plan operates like a 401K for health expenses: an employee can contribute, an employer can match it, and then the employee can take it with him when he moves to another company. To take part in an HSA, you MUST have a qualifying HDHP.|
|Health Reimbursement Account (HRA)||Employer-funded and maintained account where employees can be reimbursed for medical expenses by submitting receipts. This is a murky area though regarding medical privacy; do you as the employer really want to know their health issues? Probably not, as it can lead to privacy problems and even cause discrimination (i.e. if you skipped over someone for a promotion because you knew s/he was ill with cancer). This would only be a good option if you have it administered by an outside broker or an inside HR Manager who is certified in HIPAA (the medical privacy laws).|
This table outlines the main types of benefit offerings, from the bare bones up to the more premium full coverage options:
- Premium “Rolls Royce” Options – high cost to the employer (and possibly the employee) but great coverage for the employee
- Average Options – medium cost to the employer with medium coverage for the employee
- Bare Bones Options – low cost to the employer but low coverage for the employee
Premium “Rolls Royce” Options – PPO or POS
If an employer has the cash to pay for a significant part of the premium, the employer might consider offering:
- PPOs and POSs with low deductibles (i.e. $500 per person covered)- These plans will have the highest premiums but also the best coverage and with a lot of choice in providers for your employees. The low deductible then provides a low cost to your employees.
- PPOs and POSs with larger deductibles- Having a larger deductible lowers the premium cost for the employer, but ups the cost for the end user. It still provides easy care with a choice of providers.
- HMO and an HDHP, along with the savings-style health plans as add-ons – These will put a good portion of the cost onto your employees, so if you do offer this, an an employer, you can probably afford to cover 100% of the premiums and/or contribute to the employees’ elected savings plan.
Rolls Royce options may be a good if you have:
- Employees with a range of varying incomes (i.e. there is a managerial level that makes a significant amount of salary)
- Employees with a range of varying needs with spouses or dependents
- An employee base that is informed in general about health insurance and able to take the matter into their own hands
Note: This is where working with a PEO can help the small business owner- you can provide a Rolls Royce selection of options while also having the power of numbers work in your and your employees’ favor in terms of cost.
Average Options – HMO or HDHP
Lower cost premiums and average coverage traditional health insurance plan options include:
- The Health Maintenance Organization (HMO)- This is the plan where you are required to be in-network in order to be covered at all, making it harder for the end user. It also usually requires referrals. However, it has low cost premiums, making it a good option for employers on a budget.
- High Deductible Health Plan (HDHP). An HDHP is usually a version of a Point of Service Plan (POS) or Preferred Provider Organization (PPO) plan but with a larger deductible, which essentially turns it into emergency-only coverage.
A Savings Style Add-On Plan like a Health Savings Account (HSA) or Flexible Spending Account (FSA) is commonly offered along with these plans to offer more complete coverage and better fiscal risk management if someone encounters a health issue.
Average options may be a good choice if you have:
- A wide range of employees in age
- A wide range of employees with dependents or spouses
- An employee base that is almost more than 50 FTEs – a plan like this is commonly seen at employers of all sizes and would make an easy transition
Bare Bones Options – FSA or HSA
An FSA or HSA is commonly offered at smaller companies who want to provide some kind of health benefit for their employees though on a shoestring budget. Both the employer and employee can contribute to these accounts, up to certain limits.
These allow employees to save money for health expenses tax free. The difference between a HSA and FSA is that the HSA is like a 401K- an employee will take it with them when they leave and it accumulates over years. The FSA is use it or lose it on an annual basis, where employees need to use their dollars before the year is up. Another difference is that the FSA can be offered stand alone, whereas the HSA needs to be offered in conjunction with a HDHP.
Certain kinds of employees, like young people, value a higher salary over health insurance since they 1) might be covered by their parents still (until age 26) and 2) they don’t go to the doctor very often. For such employees, an FSA may be the best option.
The above plan might be a good option for employers that can’t afford to provide a traditional health plan and may also be a good choice if you have the following type of employee base:
- Young, healthy employees who tend to never go to the doctor
- An employee base that does not have dependents or spouses
Best Practices on Plan Offerings:
There are so many choices! How can I best pick plan offerings?
First, figure out your budget and then talk to your chosen broker, PEO, or SHOP agent. Once you figure out how much you can pay on behalf of the employees, you then can narrow down what you are going to offer to employees and ask employees for feedback.
For example, a few combinations might be:
- An HSA and an HDHP – this would be a health insurance plan that would be good if you want to offer something, but don’t have a big capability to help the employee with their expense.
- A PPO and an HMO (where the employee would choose one or the other) – these are two good options if you have an employee base that has multiple generations and spans multiple concerns (i.e. some have families, some are young kids who never see a doctor). It also gives the employee the power to “roll the dice” on the coverage they want and how much they want to pay.
- A PPO, an HMO, and an FSA – Adding on an FSA is a nice value-add if you know you have employees who want to plan for the “just in case”. The dollars are then their own to spend or take with them, so it’s very little responsibility on 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 adventure with health insurance and planning for the future. If you want to offer something like this, a PEO is going to most likely be your answer since the power is in the numbers of businesses that use them!
How Much Will It Cost Me to Provide Health Insurance?
Your 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 purchase coverage
- What type of health benefits you provide – This can range from just providing a health savings account at no cost to the employer, all the way to providing an employer-sponsored health care plan.
- Who you are going to cover – Is it the just the employee, employee and spouse, employee and dependents, or full family coverage?
Percentage of Premium or Stipend for Employee
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:
- Set percentage of the monthly premium, usually ranging from 50-100%
- Sometimes with a clause of up to a certain dollar amount
- Sometimes with a clause covering only the employee
- A flat amount each month that the employee can use towards health insurance only
- A flat amount each month that the employee can use towards any employee benefits provided (e.g. 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.
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 3 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/month or $2,100/year per employee.
- You decide to give each employee up to $400/month to use only for health insurance. That makes your cost $400/month (or less) or $4,800/year per employee (or less).
Now, your gears should be turning on what this might look like to have health insurance for your small business and the cost you are comfortable with.
What 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).
For example, here are some typical premium cost ranges:
At age 21, the premiums for the following plans average nationally (as of 2016):
Keep in mind, premiums go up as age increases, and premiums vary greatly by state as well. For example, Alaska pays almost 76% more in premiums than New Mexico, which pays below the national average. If an employee is 40 or older, the premium will most likely double at minimum.
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 numbers extensively depending on your location and the ages of your employees who will be participating.
Who Are You Going to Cover?
The answer to this question might seem obvious – your full time employees. Not so fast! You can choose to just cover your employees, but you may need to consider their spouses and children too (or dependents, as they are called in insurance land).
If you offer a flat amount, then this takes this off your plate – the employee can just use that flat amount for covering whatever health costs he or she wants. However, if you cover a percentage of the premium, then your cost will go up or down depending on how many people are covered.
Take a look at your employee base. Are they:
- Young, unmarried with no kids?
- Married with children?
- Older and using Medicare?
- A mix of many phases of life?
When considering whether to cover just employees or 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 young, unmarried employees may get married and have children sometime in the near future and will then need to add spouses and dependents onto their health insurance plans.
What To Do Next: Getting Quotes & Comparing Plans
Now that you know what’s out there in terms of providing health insurance, we advise you to try all three approaches – a broker, a PEO, and SHOP. Why? Because costs vary by state and getting quotes is free. Once you have a clear perspective on what each kind of organization will charge, what plans they offer, and what your cost will be, you can then evaluate which one you will choose.
Remember, cost is only one aspect. Did you get good customer service when receiving your quote, or did you have to wait a week? Keep in mind that this is during the “wooing” phase. If you didn’t like the interface or the customer service aspect, you certainly won’t like it when there is a problem or when you need to sort something out, and neither will your employees.
Our Story- How did FSB Choose its Insurance Provider?
Here at Fit Small Business, we were in a situation probably similar to yours. We wanted to provide our team with health insurance, but we technically didn’t have to since we have under 50 employees. We decided to anyway in order to be supportive of our employees and to create an environment that everyone would want to work in.
Here’s the approach we took:
First, we debated about using private insurance, like a broker or PEO, versus SHOP and what that would mean. We spoke to both PEOs and SHOP. Since we are in New York, we have a unique market that makes SHOP very expensive, and a PEO ended up being substantially lower. A PEO also let us outsource payroll and employee benefit onboarding.
Choosing a PEO was a no brainer for us because of the value add and the price tag. However, remember, again, it’s because we are in New York! We advise all business owners to look at their options of a broker, PEO, and SHOP prior to making their decision.
FAQs for Small Business Owners
Do You Have More Resources on Providing Healthcare? Where Should I Go For More Info?
If you are interested in reading a comprehensive guide on the Affordable Care Act (aka ACA or “Obamacare”), which regulates how businesses provide health insurance, this resource can help you. This is a much shorter resource if you just want the basics laid out.
If you would like guidelines by company size, here are some more resources that focus on the tax credit aspect of providing health insurance:
Why Can’t I Just Work With an Insurance Company Directly?
Unfortunately, working directly with an insurance company is not an option for a small business, and instead working with a broker, PEO, or SHOP agent will be the way you still get insurance through one of the big carriers like Blue Cross Blue Shield, Aetna, or United Healthcare (UHC).
What about New Hires? Do I Have to Give Insurance Right Away?
Under the Affordable Care Act, 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; even companies under 50 employees need to comply with this if they offer health insurance.
Are there other Health Insurance Laws Besides the ACA, such as State Laws?
States have the ability to expand upon the Affordable Care Act and place additional requirements on health insurance for small business owners. However, currently no states have added onto the ACA to what small businesses and employers must do to provide health insurance for their employees.
Besides Health Insurance, What Other Insurance Do I Need to Provide?
Most small businesses in the US must have unemployment and workers’ compensation insurance. 5 states require employers to provide disability insurance: California, Hawaii, New Jersey, New York, and Rhode Island. You can learn more here.
Common Health Insurance Jargon 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 9.66% of the employee’s household income. Your broker, PEO, and SHOP can also help you make sure your choices are compliant.|
|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 for employers with 50+ FTEs and their compliance with ACA.|
|Flexible Benefits Plan (aka Cafeteria Plan)||This kind of plan allows employees to pick from a “menu” of benefits, like health insurance, life insurance, etc.|
|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 Period||The general period when an employee can apply for insurance coverage. Your broker or PEO can help with your dates.|
|Qualified Health Plan||A Qualified Health Plan means it is ACA compliant.|
|Summary of Benefits & Coverage||You must provide easy to read summaries of the health insurance plans you are giving as options to your employees. Your broker or PEO might provide this for you.|
The Bottom Line
Providing health insurance can be a great perk for your employees. Hopefully, this guide helped you navigate how to provide health insurance for your employees and introduced you to some of options. If you’re looking for more information, check out our guide to the SHOP Exchange for small businesses.
In the comments below, let us know if you decided to provide insurance or not, and if so, why or why not? What plans did you pick and why?