Navigating small business health insurance can be one of the hardest parts of running your small business, as there are many options and rules to figure out, and if your small business doesn’t have a full human resources department, you’re left to work it out on your own. Use this guide to help you learn about how small business health insurance works, why you should offer it and what types of health insurance are available for small businesses.
There are four main elements you, as a small business owner, should be aware of concerning small business health insurance: coverage, number of employees, employee premiums and shopping for coverage.
Editor’s note: Looking for the right PEO service for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.
Small businesses with fewer than 50 employees are not legally required to offer health insurance to employees under the Affordable Care Act (ACA). Of course, that means businesses with 50 or more employees are legally required to provide affordable health insurance.
For the health insurance to be considered “affordable,” the employee’s annual cost must be no higher than 9.12 percent of their annual income. Not offering health insurance subjects you to a penalty of $2,880 per full-time employee, excluding the first 30 employees.
Starting and running a small business is expensive and it can be easy to dismiss health insurance as an unnecessary cost to help stay within your budget. However, health insurance is a vital part of running a successful business that people want to work for.
Here are a few reasons why you should offer health insurance to your employees:
Whereas an individual plan offers coverage for only you or your family, group health insurance is insurance that businesses purchase and offer to eligible employees and their dependents. Group insurance offers certain advantages over individual health insurance, including generally being more affordable and offering more extensive coverage.
The purchase of health insurance for yourself and your employees can help you qualify for tax credits if you purchase a plan through the Small Business Health Options Program (SHOP) Exchange, an insurance portal created by the ACA. You must meet the following requirements:
As a small employer, you can receive up to 50 percent of your contributions toward employee premiums, which can significantly reduce the costs of providing health benefits to your employees.
Offering a health insurance option can greatly increase your chances of attracting and retaining top talent, as it shows that you care for and value your employees.
Healthy employees are productive employees, and the best way to ensure your employees remain so is to provide comprehensive health insurance. Employees without insurance are less likely to receive annual checkups or visit the doctor when they’re sick, which can cause them to become sicker and take time off work.
If you’re self-employed with no employees, health insurance is a necessity that can help you protect yourself, your dependents and your business against a potentially disastrous illness.
Because the costs of health insurance depend on your specific business, it can be difficult to estimate how much health insurance will cost. According to the Society for Human Resource Management (SHRM), healthcare insurance costs are expected to rise about 5.6 percent per employee in 2023. For reference, last year the average employer health insurance premium per employee in California was $8,083 for single coverage and $22,818 for family coverage.
When choosing health insurance for your employees, it’s important to consider the financial cost but also the work that goes into selecting benefits, educating your team on their options, and administrative work to support the plan.
The monetary costs of providing health insurance depend on the type and number of benefits you plan on providing, who you are covering (employees only, or employees plus dependents) and the percentage of the monthly premium that you are going to cover as your employer contribution. If you plan to use a broker, a professional employer organization (PEO) or another third party to find health insurance coverage options for your business, prepare to factor in those fees as well.
PEOs manage payroll and benefits administration on your behalf. Technically, a PEO service employs your teams on its own books, shifting the burden of administration away from your business so you can focus on operations.
Time costs are often not considered, but they are an important part of finding a health insurance plan. You will be spending a considerable amount of time searching for providers, understanding your employees’ needs, setting up the insurance carrier plan, educating your employees about the plan options, looking over your health insurance plan every year for open enrollment, and ensuring it’s properly maintained.
On the employee side of things, insurance costs will look substantially different. For the most part, these costs can be split into three categories: premiums, deductions and out-of-pocket costs.
Premiums are the regular payments made to the insurance company. For employee health insurance, premiums are typically deducted from every paycheck. This is a fixed price that does not depend on how much the employee works or earns. It is easy to think of premiums as a monthly subscription cost for being on the insurance plan.
Deductions are where things get complicated. Every policy has a deductible. This is the amount of money the employee pays for medical expenses before insurance benefits kick in. To make things more complicated, every policy has exceptions to this rule. For example, it’s normal for a policy to include a free annual check-up that doesn’t require the deductible to be met.
When large medical expenses crop up, however, the deductible can be a little bit easier to understand. Say the deductible is $5,000. If an employee incurs a $10,000 medical bill, they will have to pay $5,000 toward the bill from their own pocket before the insurance will pay. After the deductible is met, the insurance coverage will pay for bills as outlined in the policy — usually a percentage of the total bill.
Out-of-pocket expenses are expenses not covered by insurance. The employee is on their own to pay these expenses, which can include deductibles. They can also include copays, which is where matters again can be complicated. With a copay, the insurance policy sets a specific price that comes out of the patient’s pocket for a given service or medication. For example, an eye insurance policy might have $10 copays for eye appointments. The $10 refers to the out-of-pocket expense the employee pays toward the appointment. The rest of the visit may be covered by the insurance company.
There are four main types of health insurance that small businesses can choose from: PPO plans, HMO plans, HSA-qualified plans and indemnity plans. Here are some of the pros and cons of each type of plan.
PPO plans are the most common type of health insurance. Employees covered under a PPO plan can choose either in-network or out-of-network doctors and hospitals, but selecting from the insurance company’s list of preferred (in-network) providers means the insurance company covers a larger percentage of each claim.
HMO plans offer a wide range of healthcare services through a network of providers that are exclusively contracted with the HMO or that agree to provide services to members. Employees who are on this type of plan generally must select a primary care physician who will provide the majority of their care and will refer them to a specialist if needed.
HSA-qualified plans are PPO plans designed specifically to be used with health savings accounts (HSAs). An HSA is a bank account that allows participants to save pretax money specifically to be used for future medical expenses.
Indemnity plans allow members to direct their own healthcare and visit any doctor or hospital they want. The insurance company pays a set portion of the total medical charges. Employees may be required to pay for some services upfront and then apply for reimbursement from the insurance company.
Some indemnity plans may include additional wellness benefits, such as telemedicine, so that members can access medical care 24/7 at no additional cost.
Shopping for small business health insurance is a tough and time-consuming process, but there are many ways you can accomplish your goal of providing health insurance to your employees. Keep in mind that you can outsource much of the process to third parties, but that will eat into your business’s budget.
If you have between two and 50 full-time employees, there are five main ways to find insurance coverage:
If you have already done your research and have a good idea of which insurance companies and plans best fit your business’s needs, then you can contact those providers directly. Some insurance companies may work only through brokers, but some, such as Aetna and United Healthcare, work directly with business owners.
Going directly to the companies may help you get better rates than going through a third party. You can use consumer review sites, such as the National Committee for Quality Assurance, to find companies you are eligible for.
Hiring an insurance broker may be an expense, but it can save you significant amounts of time and effort in searching for an insurance plan that works for you and your business. An insurance broker will help you with paperwork, ensure your business is compliant with relevant laws, get you plans with up-to-date policies, and help with implementation and renewals.
Brokers will earn a commission once they find a plan that works for you, but they should not ask for money upfront; avoid any brokers that do.
Also referred to as private health exchanges, purchasing alliances are miniature marketplaces that bring small businesses together and allow them to purchase health insurance as a group, which decreases costs for everyone. This option allows you to offer your employees multiple choices, rather than a single one-size-fits-all plan.
While purchasing alliances can be great for providing employees with more options, you as the business owner will not reap the benefits of wide selection and tax credits that come from purchasing insurance through SHOP, the government’s health exchange.
PEOs are similar to purchasing alliances in that they also group together multiple businesses to decrease costs. However, PEOs are different because in addition to health insurance, they tend to offer other services, such as payroll, recruiting and tax filing services. With a PEO, you’re likely to get a better rate than if you were to go directly to a broker or an insurance company.
The Small Business Health Options Program (SHOP) is the federal health insurance exchange database. It can help you get healthcare tax credits of up to 50 percent of premiums, which can save your business a lot of money on health insurance.
You can use a SHOP plan to locate health insurance in your state and choose from several tiered plans, with easy-to-use comparison charts and standard benefits such as coverage for medications and hospital stays.
If you are a small business owner with 30 full-time employees or more, you are obligated under federal law to offer health insurance benefits that meet certain regulatory standards. Failure to do so can result in fines, and lack of benefits can also carry other consequences like low employee morale and high employee turnover. Choosing a health insurance benefits plan doesn’t have to be difficult, though. You can work with a PEO service to outsource the task, or you can hire an insurance broker to find you the best plan for your team. Health insurance can be a daunting subject, but with these tools and partnerships, your business can offer benefits to your employees with ease.
Tejas Vemparala contributed to this article.