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This guide is for small business owners who want a basic overview of their health insurance options. We’ll cover the four main options and explain the pros and cons of each – including cost, the amount of work to set it up and the effectiveness of the benefit.
A Summary of Your 4 Broad Options For Offering Health Benefits
Most small business have absolutely no legal obligation to provide health insurance, since only businesses with the equivalent of 50 full-time employees need to offer health benefits. That being said, you may want to offer health insurance in order to attract and retain great employees.
There are four main options that you should consider as you begin exploring your health insurance options:
- Offer small group health insurance – How health insurance has typically been offered by employers.
- Use a health insurance exchange – Either through the government or private companies, an exchange is a webstore for health insurance.
- Use a Professional Employer Organization (or PEO) – For a little extra money, these services will handle all the details of your health plan, as well as human resources, payrolling and other benefits.
- Increase compensation / Give a Taxable Stipend – Give your employees an annual bonus so they can purchase health insurance on their own.
Before we dive into the details on this topic, if you are looking for the best health benefits package for your employees, we suggest you check out Gusto. Gusto will look at hundreds of health plans and offer you the best choices for your budget and your employees. Visit Gusto and schedule a free demo.
What We Recommend
If you want to offer very concrete benefits and don’t mind the administrative hassle, check out small group health insurance plans. We recommend working with a broker who can show you a variety of options (often at no extra charge). If you want a simpler and more flexible solution, then consider increasing compensation. Within the next few years, the online SHOP Marketplace will also become a very strong option. You can learn more about it’s progress here.
If you still can’t decide which route is best for your business, here’s some questions that will point you in the right direction.
Here is a more detailed overview the ins and outs of each option:
Traditional Group Health Insurance Plans
When people think about health insurance, they are most likely thinking about an employer-provided group plan that gives employees access to a single, one-size-fits-all policy.
- Easy for employees to understand: most people are already familiar with the concept of employer-based health insurance, and view it as the most important job related benefit. Offering a group plan will almost certainly increase your appeal as an employer.
- Tax benefits: the money you spend on providing health insurance counts as a business expense, which means it is tax deductible. Employees are also able to pay for their share of health insurance premiums out of their pre-tax income, which decreases their overall tax obligation.
- Share the premium payment: Offering a group plan doesn’t necessarily mean that you need to pay the whole cost of the premium. Employers typically pay 50-80% of the premium cost, but small business can generally make smaller contributions and defer the rest to the employee. Depending on your particular circumstances you may end up paying anywhere from 0% to 100% of the premium cost.
- Cost: Providing group health insurance can be expensive. In 2012, the average cost to all employers was $4,226 per employee. In addition to this, employees paid an additional $1,118 on average (See this report for state averages).
- Changing prices: Health insurance premiums often change from year to year depending on the costs of medical procedures, physician pay, prescription drugs, and administration. The complex calculations underlying health insurance premium makes it difficult to fully anticipate changes and budget accordingly. If you commit to a group plan, you may end up on the hook for a larger expense than you anticipated.
- Minimum requirements: In order to qualify for most group plans, you have to give all your full-time employees the option of enrolling, and at least 70% need to actually opt in. The exact requirements will vary depending on the insurance company and plan, but group plans generally give you less flexibility than simply increasing compensation, which you can do on a case-by-case basis.
- Administrative hassle: With a group health insurance plan, its up to you to select and manage the plan you offer. The administrative responsibilities associated with this can take up a lot of time, and keep you from more important aspects of your business. It can be difficult to choose a one size fits all plan that will satisfy all your employees and meet their diverse needs.
You can find a small group health insurance plan online, such as on the private health exchange eHealth. However, we recommend speaking with an experienced health insurance professional. Using a broker won’t cost you more than shopping on your own, and they will be able to explain to you the benefits and options of various plans.
Obamacare SHOP Exchange
Think Amazon.com for health insurance. An exchange is an online platform where you (and your employees) can shop for health insurance policies. You can sort by various measures of cost, levels of coverage, type of network and many other features.
The government runs an exchange specifically for small employers. It’s called the Small Business Health Options Program (SHOP) and will be launching on the web for the first time this November.
- Greater Employee Choice: In many states, SHOP plans include an “employee choice” feature in which employees can select their own health policies among a list. Currently 28 states will have the feature, but that number will increase next year.
- Tax credits: Businesses with fewer than 25 employees whose average salary is below $50,000 might qualify for tax credits if they purchase on the SHOP Marketplace. To qualify for this tax credit you must pay at least half of your employees’ health care premiums and have 25 or fewer full-time equivalent employees who earn an average of $50,000 or less per year. The tax credits will be available to small businesses for 2 consecutive years, and more information is available from the IRS here.
- Tax benefits: As with traditional group plans, the money you spend on providing health insurance is a tax deductible business expense. Employees are also able to pay for their share of health insurance premiums out of their pre-tax income.
- Share the premium payment: When you buy a group plan through an exchange, you decide how much of the premium you’ll be paying. Depending on your particular circumstances you may end up paying anywhere from 0% to 100% of the premium cost. Note, however, to qualify for tax credits on a SHOP plan you have to cover at least 50%.
- Minimum requirements: As with traditional group plans, you have to give all your full-time employees the option of enrolling, and (in most states) at least 70% need to actually opt in.
- Some administrative hassle: While health insurance exchanges do relieve the burden a bit by offering handy web tools and allowing employees to manage their health policies, there’s still plenty of administrative work to be done.
- New Service: It could be a few years before the SHOP Marketplace is viable. New features are rolling out slowly and the Marketplace is still working on adding more insurance companies.
For more on this option, check out our guide to the SHOP exchange.
Professional Employer Organization
Some services can not only handle your health insurance, but your payrolling, onboarding/offboarding, works compensation and other benefits as well. These services, known as Professional Employer Organizations (PEOs), effectively “hire” your employees, adding them to the PEOs payroll. Thus, you can focus on your day-to-day while the PEO handles human resources and administrative tasks.
- Takes administrative burden off employer: Your PEO will handle HR, payrolling and other benefits.
- Greater Employee Choice: Often the PEO will have a variety of health plans your employees can select from.
- Cost: You have to pay for the extra service. PEOs charge either a flat fee per employee or take a small percentage of their paycheck, usually between 2 to 6 percent.
- Loss of management: By joining a PEO you’re essentially becoming co-employers. You’ll want to make sure you and your employees agree with their HR practices before committing.
- Still some hassle: To join a PEO you have to fill out an application and await approval. It can be a time-consuming task with no guaranteed outcome. Also, some businesses owners have found they still face tedious paperwork, despite help from their PEO. It ultimately depends on the policies of the PEO and which services you sign up for.
If you’re interested in pursuing this option, check the National Association of Professional Employer Organizations’ (NAPEO) website to search for a list PEOs in your area.
Offering health insurance can be extremely complicated, so one option is to completely avoid getting involved, and just give everyone a raise that they can use to buy their own plan. It’s better to formalize this and break it off from regular pay, otherwise employees might fail to see it as a benefit. Fortunately, there’s software that let’s you do this. Check out the Zane Health package from Zane Benefits as an example.
- Fixed costs: You are in complete control of compensation, so you can set the exact amount you want to spend on health insurance and easily stick to your budget.
- Tax deductible: Salaries are tax deductible as business expenses.
- Greater employee choice: Employees can shop around on the individual exchanges for the plan that best suits their needs.
- Customizable incentives: You can offer different amounts to different employees, which helps you attract and retain valuable employees.
- Cheaper plans and subsidies: In most cases, plans purchased through the individual marketplaces are cheaper than the equivalent costs when paid as part of a small group plan. Furthermore, many of your employees may qualify for health insurance subsidies through the Obamacare health insurance marketplaces (discussed in more detail below).
- Ease of use: Letting your employees select and manage their own plans means one less thing for you to worry about.
- No tax deductions for employees: Employee salaries are taxable, so they will pay tax on any additional compensation that you provide to help them purchase health insurance. Group health plans, on the other hand, allow employees to contribute towards their their insurance premiums using “pre-tax” income. The portion of premiums which is paid by the employer is also not taxed as income to the employee.
- You Have To Pay Payroll taxes: Even though you can deduct salaries as a business expense, you will still be on the hook for the payroll taxes on the additional salary you are paying.
- No control over employees’ use of funds: There is no way for you to compel your employees to use their extra income to buy health insurance. You can encourage them to buy insurance, but there is no way to guarantee that they won’t use it for a vacation instead.
Increasing employee’s compensation so they can buy their own health insurance allows your employees to shop around for the plan that works best for them, and saves you a huge administrative hassle.
If your employees make less than 400% of the federal poverty line ($45,960 in 2014), they may qualify for government subsidies on health insurance plans offered through the individual Obamacare marketplaces. These subsidies could further reduce your employees’ health insurance costs, but they won’t qualify if you offer a group plan.
This means that the only way to ensure your employees will have access these subsidies is to not offer group health insurance. Furthermore, plans purchased on the individual market are generally cheaper than equivalent group plans, so going the individual route is often the best bet.
Before 2014, not offering group health insurance was seen as a serious drawback, since people with preexisting or chronic health conditions could be denied individual health insurance, or charged extremely high premiums. This made it important for people to get health insurance through their employer, where they could be sure to find coverage at a reasonable cost.
The Affordable Care Act (Obamacare) changed all of this, however, by making it illegal for insurance companies to deny anyone coverage. This relieves some of the pressure on small business owners to provide group health insurance, since you know that all your employees will be able to access quality, affordable health insurance on the individual marketplaces. Many experts believe the Affordable Care Act will make small group health plans obsolete, and encourage small business employees to go to the individual exchanges.
The downside of increasing compensation to help your employees pay for health insurance is that you pay higher taxes. Because the extra money is being paid out as salary the business must pay payroll taxes on the money, and the employee pays their normal income taxes on the additional income.
Here at Fit Small Business we always try to give business owners all the information they need to accomplish a specific task, without any outside help. In this instance however, we strongly recommend that you seek professional advice in order to find the best solution for your business. Trying to navigate the post Obamacare health insurance marketplace on your own is simply not worth the time, hassle, or risk.
Looking for the best health benefits package for your employees? Gusto will look at hundreds of health plans and offer you the best choices for your budget and your employees. Click here to visit Gusto and schedule a free demo.
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