What is Health Insurance for Small Business?
Instead of employees each signing up for individual health insurance on their own, small businesses can provide group health insurance. A group health insurance plan allows employees and their families to get coverage.
Health insurance is optional for most small businesses, but there are several reasons to consider it. The primary benefit is attracting and retaining top talent. Benefits are high motivators for employees, and most rank health insurance as their top benefit when considering an employer.
As a business owner, it also allows you to enroll in the group plan rather than paying for an individual one. Group plans tend to have lower premiums because the risk for the insurance company is spread out over multiple members.
As the small business owner, you select a plan and give your employees the option to enroll. Employees are not required to enroll in the plan.
You should know four primary health insurance components when considering plans for your business: coverage, number of employees, premiums, and enrollment periods.
Coverage
Health insurance companies generally guarantee coverage if you’re eligible for a small business health insurance plan. That means you, your employees, and their family members cannot be denied for pre-existing medical conditions. All new employees and their dependents can enroll in the plan regardless of their medical condition(s).
Number of Employees
You must have at least one employee to qualify for a group coverage plan. Companies with 50 or more employees are required to provide health insurance or pay a penalty. Some states will allow you to list yourself as the employer and employee to qualify for group coverage.
Employee Premiums
The employer must pay 50% of the employee’s health insurance premium, although some companies pay more to be more competitive in attracting and retaining talent. The minimum required percentage could vary depending on your state and insurance carrier.
Enrollment Period
You can shop for and enroll in a health insurance plan anytime if you don’t currently have one. Once you purchase a plan, you’re usually locked into the premiums for a year. You can add new employees and their dependents throughout the year or drop coverage for employees that no longer work for you.
New employees can enroll when eligible for benefits, but otherwise, employees can only enroll or change coverage during the Open Enrollment period. The only exceptions are for qualifying life events (QLEs), such as getting married, having a child, etc.
What are the requirements for Small Business Health Insurance?
The Affordable Care Act (ACA) established requirements employers must follow when providing health insurance plans. Some of these requirements vary by state.
Inclusivity
When you provide a health insurance plan, it must be made available to all full-time employees. You cannot offer the plan only to managers, executives, or any other subset.
Essential Coverage
The ACA also stipulates that employer-provided health insurance plans provide coverage for essential health benefits. Examples of essential benefits include emergency services, pregnancy, maternity and newborn care, outpatient care, prescription drugs, and more.
Minimum Contribution
As stated, small businesses must contribute at least 50% of the employee premium. Most states also require a certain percentage of your employees to be enrolled. This helps mitigate risks by ensuring a mix of healthy and sick people are paying into the plan. Otherwise, premium costs would significantly grow year-over-year.
Am I required to provide Health Insurance for my Small Business?
The ACA defines a small business as a company with no more than 50 employees. Group health plans are optional for small businesses, but there are several benefits to providing health insurance for your employees.
According to a 2022 study from the Kaiser Family Foundation (KFF), the fewer employees a company has, the less likely it is to offer health insurance. The breakdown of health insurance coverage by number of employees is as follows:
- 3-9 Employees; 39%.
- 10-24 Employees: 58%.
- 25-49 Employees: 73%.
- 50-199 Employees: 91%.
What are the available Small Business Health Insurance options?
As a small business owner, you have many options for types of health insurance plans for your employees. Some companies prefer to pay a higher premium for more coverage, while others will take a lower premium and risk more out-of-pocket costs.
Here are the different types of health insurance to consider for your small business.
Preferred Provider Organization (PPO)
A PPO plan gives the most flexibility to policyholders, but they typically have higher premiums. However, that increased cost provides significant coverage with few limitations. PPO plan members can visit in-network and out-of-network doctors and specialists.
Health Maintenance Organization (HMO)
HMOs provide a lower premium cost but have a more rigid structure. The primary care physician (PCP) coordinates the care of the policyholder. That means you’ll usually need a referral to see a specialist. In addition, members of this plan can only see in-network care providers. However, HMOs have excellent coverage for in-network services.
Exclusive Provider Organization (EPO)
An EPO operates like an HMO, but there’s no requirement for a PCP referral to see a specialist. Members can still only see in-network care providers. EPOs have higher premiums than HMOs, with a smaller in-network list than other plans.
Health Savings Account (HSA)
Some plans include the option to add a health savings account. Enrolled employees can contribute some of their pre-tax income to the HSA to cover certain health expenses like prescriptions, co-pays, and deductibles. Employees don’t pay tax on HSA contributions.
Point of Service (POS)
POS plans combine the organization of an HMO with the flexibility of a PPO. Members of this plan have a PCP refer them to specialists when needed but can choose to go to specialists without a referral. Members can also go out-of-network, but the coverage is less.
Integrated Health Reimbursement Account (HRA)
An Integrated HRA is similar to an HSA, but only the employer contributes to the account. HRA plans must be in conjunction with a health insurance plan that at least offers the minimum essential coverage defined by the ACA.
What are the advantages of Small Business Health Insurance?
Offering a health insurance plan for your small business provides several benefits. One of the primary reasons companies offer health insurance is because a good benefits package helps attract and retain top talent.
Providing a health insurance plan also carries some tax incentives. You can write off most business expenses, and the money you spend on health insurance for yourself and your employees could be tax-deductible.
Group coverage also carries lower premiums. As the business owner, you could secure a much lower premium than you would have for an individual plan.
Health insurance programs also help promote healthier employees and a healthy workplace. Several insurance plans offer discounts for preventative health measures and offer programs like nutritional education and smoking cessation.
What are the disadvantages of Small Business Health Insurance?
The most significant downside is the cost. The business is responsible for paying at least half of the employee’s premiums. The company is locked into the premium for an entire year, and rates could increase the following year. However, those costs are often mitigated by tax incentives, savings on premiums, and employee retention.
Another drawback is navigating the myriad options and finding programs in the marketplace. It can be overwhelming and time-consuming to review all the available options.
Since your employees’ health needs are as diverse as the available options for plans, finding the best health coverage for everyone is also challenging. Some employees prefer lower premiums, while others prefer more coverage and flexibility.
Pros & Cons
Pros:
- Group health insurance premiums are lower than individual health insurance.
- Provides a competitive recruitment tool to attract new employees.
- Helps retain current employees.
- Possible tax incentives.
- Promotes healthier employees and a healthy workplace.
Cons:
- Adds to your business expenses.
- The number of options can be overwhelming.
- Difficult to find a plan that works for every employee.
- Must comply with ACA requirements.
How do I find a Small Business Health Insurance plan?
Several considerations go into finding a health insurance plan for your small business. When comparing plans, you want to consider the following:
- Benefit: You want to consider what’s covered in the plan and what the benefit designs are. This includes picking between a PPO, HMO, EPO, etc.
- Premiums: This is the cost of membership. While the employer pays most of the premium, employees must also pay a percentage. You want to weigh what both you and your employees can afford.
- Out-of-Pocket Costs: Another important consideration is what the plan doesn’t cover. Review the deductibles, co-pays, and payout maximums.
- Provider Network: Insurance company networks include hospitals, specialists, and primary care providers. When selecting a plan, you want to consider how expansive or limited the network is.
Finding the best health insurance companies and most affordable health insurance options can be challenging. Here are some strategies to help you navigate group health insurance coverage.
Research & Contact Insurance Companies
If you have the time and patience, you could research the available health insurance companies and coverage plans yourself. You can then contact a health insurance provider to discuss the options that best suit your business’s needs.
Use an Insurance Broker
Insurance brokers can help you find the best plans at the best prices. They know the insurance companies and work with them every day, so you can leverage that existing relationship when you hire a broker.
Insurance brokers can help you complete the requisite paperwork, ensure compliance with the law, find the most up-to-date plans, and help with implementation and renewal. Using a broker might be expensive, but it can save you significant time and frustration.
Most insurance brokers receive a commission once you get a plan. Avoid brokers who ask for an upfront fee.
Use the SHOP Marketplace
The ACA created a healthcare exchange marketplace for individuals. The Small Business Health Options, or SHOP, is the business-facing version of that marketplace. Eligible small businesses can use the marketplace to compare health insurance providers, plans, and costs.
If you get a plan through SHOP, you might be eligible for the Small Business Health Care Tax Credit. To be eligible, your business must:
- Have fewer than 25 full-time equivalent (FTE) employees.
- An average employee salary of $56,000 or less per year.
- Pay at least 50% of your full-time employees’ health insurance premiums.
- Offer SHOP coverage to all full-time employees.
Private Health Exchanges
Private health exchanges, or purchasing alliances, are mini marketplaces that pool together small businesses to purchase health insurance as a group. The more businesses and employees enrolled in a group coverage plan, the lower the costs for everyone involved.
Use a Professional Employer Organization (PEO)
PEOs provide a marketplace for health insurance plans and provide additional HR and administrative tasks. Many PEOs are full-service HR shops offering payroll, recruiting, and tax filing services. You’ll likely get a better rate with a PEO than with a broker or contacting an insurance company directly.
Frequently Asked Questions
Here are the most common questions about health insurance for small business owners.
What are the costs of Small Business Health Insurance?
Employee health insurance costs can vary significantly depending on coverage, number of employees, and other factors. The annual costs per employee can range from under $1,000 to over $10,000.
According to the Kaiser Family Foundation’s 2021 Employer Health Benefits Survey, the average annual cost for employers is about $6,589 per employee. The average cost for employees is $1,244.
In addition to monetary costs, you also have to consider time costs, deductions, and out-of-pocket costs.
Can I get a group plan if I’m self-employed?
Sole proprietors, independent contractors, and other self-employed individuals typically cannot qualify for a group health insurance plan. However, some states will consider you both employer and employee, allowing for a group plan.
Can self-employed Business Owners write off Health Insurance premiums?
In most cases, health insurance premiums are deductible for eligible self-employed individuals with a qualifying health insurance plan.
What’s the difference between fully funded and self-funded plans?
Most small businesses use fully funded plans from major health insurance companies. However, you do have an option for a self-funded plan.
Here are the differences between the two.
Fully Funded Plans
Fully funded plans are the most common type of small business health insurance. As a small business owner, you enroll in a group coverage plan from an insurance company.
The primary providers for fully funded plans are five legacy plans: Blue Cross Blue Shield (BCBS), United Healthcare, Cigna, Aetna, and Humana. These five companies are sometimes abbreviated as BUCAHs.
Self-Funded Plans
Another option is to create a self-funded plan, where the employer sponsors the plan. That means you pay your employees’ health insurance claims. It’s riskier in terms of cost, but if your company can afford it, you have more direct control over your structure.
With a fully funded plan, you must pay the same premium each month regardless of whether or not your employees use benefits. With a self-funded plan, you only pay for medical expenses as needed.
Fully funded plan premiums can change yearly depending on how much coverage your employees use. You have more control over the yearly changes in premiums with a self-funded plan.
Small Business Health Insurance – Final Thoughts
Today’s employees have come to expect benefit packages like employer-provided group health insurance plans. While you might not be required to provide a health insurance plan, it will significantly help bring in and keep the top talent.
Business health insurance also offers some cost-mitigating benefits. You can potentially reduce your tax burden with a health insurance premium deduction. A group coverage plan also means your personal health insurance premium is lower than if you got an individual plan.
The bottom line is that the most competitive companies provide health insurance benefits to their employees. When considering if your business can afford a health insurance plan, you might want to ask yourself if you can afford not to offer one.
Contact us if you have more questions on small business health insurance programs or want to apply for a small business loan. Our loan executives can help you find funding options for adding a health insurance program.
