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This guide is for small business owners looking to compare the cost of health insurance for their employees. After reading this guide you should understand small business health insurance costs and which option is going to be the most cost effective for you and your employees.
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. It’s worth checking out Zenefits, a free HR service that can help broker a plan that works for you. Click here to check it out.
If your average employee makes less than $50,000 per year, you should not offer a group health insurance. The most cost effective option for you and your employees is for the business to provide additional funds to the employee, which can be used to offset the cost of the employee purchasing an individual health insurance policy on their own.
If your average employee makes more than $50,000 then you may want to consider offering a group health insurance plan.
Small Business Health Insurance Cost Summary Table
Average Monthly Premium Per Employee for Health Insurance (Second Lowest-Cost Silver Plan)
*Obamacare Individual Exchange
*Private Individual Exchange (eHealth)
SHOP Small Business Exchange
Private Small Business Exchange (eHealth)
*Does not include potential subsidy explained below.
How We Came Up With This Table
There are four main options small business owners have to purchase health insurance for their employees. They are:
Offer Group Health Insurance via:
- Traditional Group Insurance – Buying a group health insurance plan through a broker or private online exchange like eHealth.
- SHOP Exchange – Buying group insurance through the Obamacare website, healthcare.gov. SHOP is short for Small Business Health Options Program. (learn more about SHOP)
Giving Your Employees Money To Buy Individual Insurance via:
- Private Individual Insurance – Giving your employees money to purchase individual insurance through a broker or from a private online exchange like eHealth.
- Obamacare Individual Insurance – Giving your employees money to buy individual insurance via healthcare.gov.
There are many different health plans you can buy, so to make an apples to apples comparison we chose to compare one health insurance plan (the second lowest cost silver plan) which we feel represents a typical health plan. We then calculated the cost of that plan on a per employee basis using each of the 4 purchase avenues above.
Where We Obtained Pricing
To find rates for individual Obamacare insurance and SHOP exchange group insurance we used healthcare.gov. To find rates for traditional group insurance and private individual insurance we used eHealth.com, a website that aggregates many different providers.
IMPORTANT: How Individual Subsidies Affect Small Business Health Insurance Costs
If your employees earn below a certain amount (example: $46,680 for an individual, or $95,400 with a family of 4), they can apply for a health insurance subsidy when buying individual insurance. If you offer a group plan however they cannot receive this subsidy. This is true even if your employees do not opt in to the group plan.
Assuming you do not offer a group health insurance plan and your employees meet the income requirements to be eligible for a subsidy, their health insurance premiums and out of pocket costs can be slashed significantly. This pertains to all plans on healthcare.gov and some plans on eHealth. Use the tool below to figure out how much they could save:
If you offer group health insurance through the SHOP exchange, your business might qualify for a tax credit of up to 50% the amount the business spends on premiums. To qualify, you must have fewer than 25 employees and their average salary must be below $50,000. The credit is only significant, however, if you have closer to 10 or fewer employees and/or if their average salary is around $25,000 or lower.
The Advantages of Individual Health Insurance
Looking at the chart you’ll notice individual health plans, on average, are much cheaper than group plans. This means that rather than buy a group health insurance plan, you might be better off giving your employees extra money to buy their own plans. On top of enjoying lower rates, your employees get the freedom to choose their own plans.
They can also apply for federal subsidies, which are currently available to individuals earning below $46,680 (or $95,400 for a family of four). The subsidy can be very generous. For example, an individual who earns $25,000 a year could save about 32% on their premiums. If you chose to offer group health insurance, however, the subsidy will not be available. Even if employees opt out of your plan and buy a policy on their own, they will not be eligible for a subsidy.
So if individual exchanges are cheaper, offer more freedom of choice and potential subsidies for employees, why even consider group health plans?
The Advantages of Group Health Insurance
For many small businesses, the individual route is probably the way to go (especially if your employees qualify for subsidies.) However, there still is an important case to be made for group health plans. They hold a key advantage in that you and your employees can use pre-tax dollars to pay for coverage. Your contribution will not be subject to payroll tax and your employee’s contributions are not subject to income tax. So if your employees are in a relatively high tax bracket, group health insurance may actually be the most economical option.
How To Decide Which Option Is Best For Your Business
There are some basic rules of thumb to figure out if individual plans or a group plan is the way to go:
- If employees earn below $45,000 a year, go with individual plans. Your employees will qualify for subsidies. By offering a group plan, however, you take this away from them. Even if an employee earns above $50,000 a year, if they have any dependents (spouse or children), they’ll qualify for subsidies. A family of four that earns $50,000 can get about 62 percent of their premiums slashed by a subsidy.
- If your employees do not qualify for subsidies and are in a high tax bracket, consider a group health plan from SHOP or a private exchange. Your business and your employees can use pre-tax dollars to pay for coverage, which can mean significant savings for you and your employees.
Other Things To Keep In Mind
- Healthcare.gov averaged slightly lower rates than eHealth, but this doesn’t necessarily mean they charge less for plans. It just means they tend to have more affordable silver plans to choose from.
- Costs vary greatly across regions. In some areas, eHealth actually had the advantage. If you decide to buy health insurance from an exchange, you should maximize your options by checking both websites. See eHealth Sample Rates and Obamacare Sample Rates.
With that in mind, you’ll be on track to finding the ideal coverage for your business. For more on choosing an insurance plan for your business, check our article “9 Questions To Ask Before Providing Health Insurance.”
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.