When it comes to beginning your own business, there are a lot of what-ifs. First and foremost, do you have a fantastic product or service idea? How will it be promoted? What is the size of the market in which you will compete? What does the competition resemble? Should you engage a team to create a cool logo and website, or should you do it yourself?
Now, let’s speak about the questions you should ask regarding your health insurance. Whether you like it or not, it affects your company’s financial reality and must be part of your growth strategy. More business means more employees, which means more demand for health insurance. The Employer Mandate of the Affordable Care Act compels all business owners with more than 50 employees to provide affordable cost health insurance.
Why Offer Health Insurance Cover for Business Employees?
If you intend to expand, having a competitive benefits package is critical to attracting and retaining top talent in a competitive job market. Your company is only as good as the team you put together, therefore it makes sense to keep those essential team members on board. Compensation is a major motivator, but other factors such as benefits and culture are as critical in today’s workforce.
According to research conducted by the Society for Human Resource Management (SHRM), the average cost of hiring an employee is $4,129, with the average time to fill a post being 42 days.
The figures are significantly worse if you replace an employee rather than hire for a new role.
According to another SHRM study, finding a direct replacement can cost up to 50-60% of a worker’s annual compensation. Turnover can be highly costly, averaging 90-200 percent of an employee’s annual compensation. That alone is reason enough to ensure that your most valuable employees are completely satisfied with their jobs and remuneration packages.
Is it Mandatory for me to Give Health Insurance to my Employees in my Business?
The Employer Mandate of the Affordable Care Act compels all business owners with more than 50 employees to provide affordable health insurance.
To determine whether the rule applies to you, first determine how many full-time equivalent (FTE) employees you have on your team. To calculate your FTE number, use the formula below.
(Total weekly hours worked by part-time employees / 30) + number of full-time employees = your FTE number.
If you have 49 FTE, you are technically not obligated to offer insurance; if you have 50 FTE, 95 percent of your full-time employees must be covered by your business health insurance. However, there are also more advantages to provide health insurance, such as keeping your employees healthy and increasing recruiting and employee retention.
How much does small business health insurance cost?
The cost of small business health insurance should be considered in both dollars and time.
If you choose a group plan, you should evaluate the proportion of premiums you are willing to cover. Know if you are covering employees or their families and whether you utilize third-party services to obtain insurance for you, as they charge a fee as well. However, it takes time to look for and evaluate health insurance plans that match your business’s needs. Did we mention the paperwork? There is so much paperwork.
According to the Kaiser Family Foundation’s 2019 Employee Benefits Survey, yearly premiums for employer-sponsored family health coverage reached $20,576 in 2019, up 5% from the previous year, with workers contributing an average of $6,015 toward the cost of their coverage. According to the Wall Street Journal, employers borne 71% of the expense, while employees borne the remainder. For single coverage, the average deductible among covered workers in a plan with a general annual deductible is $1,655.
Pro tip: A percentage of your payroll or monthly per-employee payment is the best method to budget for health insurance.
Your small business health insurance options
While these are the most well-known and recognized schemes, they are not the only ones. What works best for you is determined by how your business is structured, how individual and group plan costs vary in your geographic area, and the health insurance of the local individual market. Here are your small business health insurance options:
- Small Group Insurance
- Self-funded Plans
- Health Reimbursement Arrangements (HRA)
We’re most excited about the last choice. But first, let’s go through the specifics of each choice to be sure we’ve covered everything.
#1. Small Group Insurance
Small-group insurance, often known as fully-funded insurance, has historically been the major option for many small businesses wishing to provide health benefits to their employees. Except in four states, where it applies to enterprises with up to ten employees, it is intended toward businesses with less than 50 full-time employees.
Group Insurance health plans cover a group of people who are usually firm employees or members of an organization. Because the insurer’s risk is dispersed among a group of policyholders, group health members typically receive insurance at a lower cost.
How does Small group health insurance work for a Business?
Business employers purchase small group health insurance plans and then offer them to their employees. Plans can only be purchased by groups, not individuals, and most plans require at least 70% participation to be valid. In most states, you must have at least one employee to be eligible. You must contribute to employee premiums, and you can sign up at any time of year rather than just during open enrollment.
A group health plan’s cost is theoretically shared by everyone in the organization, as well as the employer and employees. Because the risk pool is larger, these plans can be less expensive. However, in many markets, the cost difference is insignificant. Employers with small businesses can pass on most or all of the expense of group health insurance to their employees. However, it is better for attracting and maintaining talent, if the business pays a portion of the health insurance costs.
When the business selects a health insurance plan, group members are offered the option of accepting or declining coverage. In some locations, plans may be divided into tiers (such as gold, silver, and bronze) that provide basic coverage or advanced insurance with add-ons.
The premium costs of the health insurance are then divided between the business and its employees based on the plan’s specifications. Another factor to consider is if insurance coverage will be extended to group members’ dependents at an additional fee.
There are numerous options available, including managed care (HMO, PPO, and POS), indemnity fee-for-service, and high-deductible health plans.
Where can I get small group insurance?
As an employer, you have the option of purchasing small-group plans directly from an insurance company, through a broker or private exchange, or through your state’s SHOP Exchange. You can enroll at any time of year, not just during open enrollment.
The Advantages of Small Group Insurance
These ACA-compliant plans are well-known, tax-free, have a wide range of product alternatives, and have been shown to be an excellent retention strategy. Coverage is generally assured, which means that anyone who applies and meets the eligibility requirements will be accepted into the program. The purchase of a SHOP plan may entitle the purchaser to the Small Business Health Care Tax Credit. Your employees may have access to a larger network of doctors than they would if they were on an individual plan.
Cons of Small Group Insurance
Small group plans are pricey, one-size-fits-all, with unpredictable premium hikes year over year, and participation rate limitations. This can be damaging to small business owners’ budgets. Patients are also isolated from the process in the standard small group plan; they just swipe their cards and are not empowered to make financially sensible selections. We’ll go out on a limb and claim that this mindset does nothing to improve an already overburdened healthcare system. Remember that because all of your employees will be in the same risk pool, one sick employee implies higher pricing.
#2. Self-funded Plans
As the cost of healthcare continues to grow, some firms are considering self-funding as a way to save money. Self-insured employers, in contrast to paying a predetermined premium to a carrier for a small group plan, pay for claims out of pocket when they happen. This sort of plan, also known as a self-insured plan, is typically used by major corporations to control their health insurance spend and manage their own risk pool.
How does a Self-funded Plan work for a Business?
When a business chooses to self-finance their employees’ health insurance, they normally set up a dedicated trust fund to set aside money to pay incurred claims later. If the employee does not want to keep claim processing in-house, a third-party administrator (TPA) is hired to process claims and may also provide additional services such as premium collection, generating claim utilization reviews, contracting for PPO services, and providing overall service for the selected employee benefit plan. The risk is assumed by the employer in this scenario.
Where can I get a self-funded plan?
Allowing yourself some time to move from a standard group plan to a self-funded plan is important when setting up a self-funded plan. You’ll need to prepare ahead for several steps. Many carriers provide administrative service contracts directly. You can also cooperate with and hire a third-party administrator to develop plan documents. Consider bringing in partner fiduciaries, CPAs, and brokers to assist with the setup process. Ensure that ERISA, HIPAA, and other regulatory requirements are met. Purchase a stop-loss policy and consider ERISA bonds or Fiduciary Liability Insurance to reduce risk. If you do not want to outsource, create an administrative service agreement with your TPA or in-house plan administrator. To all covered employees, publish and distribute a summary plan description (SPD) and a summary of benefits and coverage (SBC).
Advantages of a Self-Funded Plan
The advantages of this form of the plan are that it is more adaptable to your team. You have authority over the healthcare reserves, allowing you to optimize your interest income. It is less affordable per enrolled business employees than typical health insurance. There is no health coverage pre-funding, and you are not subject to state health insurance premium taxes (usually around 2 to 3 percent ). They are also subject to fewer rules and allow employers to tailor their healthcare insurance plan to their own business requirements. And, because the business is only paying for their own employees’ health insurance costs, there may be money left over at the end of the year that may be used toward other business requirements.
Disadvantages of a Self-funded Plan
While self-funded plans allow a company to potentially save the profit margin that an insurance carrier adds to its premium, the potential risk is much higher because the company is responsible for paying out the actual claims—especially in the event of catastrophic claims that could bankrupt a company. To offset this risk, many businesses obtain stop-loss insurance. Because self-funded plans are not managed by an insurance carrier, the employer is responsible for guaranteeing Minimum Value Coverage.
#3. HRA for Health Insurance.
A health reimbursement arrangement is an affordable cost, a tax-advantaged alternative to traditional insurance in which business owners reimburse their employees on a pre-tax basis for individual insurance premiums and medical expenses (if applicable).
In contrast to Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), which are accounts, HRA stands for Health Reimbursement Arrangement, which means that the model is based on reimbursements. Employees will pay the insurance company or doctor’s office directly and then file a claim to be tax-free paid for their expenses.
The utilization of innovative HRA reimbursement models places employer reimbursements on roughly the same tax playing field as traditional small group plans, but without the difficulties and limitations. Previously, a significant benefit of group plans was that they were deductible expenses for companies. They were deducted from employee paychecks on a pre-tax basis. Employers can use an HRA to make reimbursements without having to pay payroll taxes. Employees also do not have to pay income tax. Furthermore, reimbursements paid by the corporation are tax-deductible.
How HRA’s Health Insurance work for a Business
The reimbursement concept is straightforward. An employer decides how much money to contribute each month, gives standard information to employees about how the HRA works, and outsources some administrative functions, such as coverage verification. The employee selects a plan that meets their needs, produces receipts for premium payments and medical expenses (if any), and is reimbursed.
HRAs that are most effective for small business health insurance
There are a few different types of HRAs to be aware of.
- QSEHRA: To cut through the insurance jargon (it stands for “Qualified Small Employer Health Reimbursement Arrangement,” by the way), a QSEHRA allows small employers (those with fewer than 50 FTEs) to set aside a fixed amount of money each month (up to $441.67 per month for individuals and $891.67 for families in 2021) that employees can use to purchase individual health insurance or use
The amount of reimbursement varies according to age and business size.
How to Create an HRA
Because of HIPAA, it is not suggested to operate your own HRA. Thus you will need to go through a third-party administrator.
The Advantages of Health Insurance Reimbursement
- Benefits that have been optimized
- Efficiency in Taxation
- Design Flexibility
- Budgetary Management
- Employers are able to exit the health insurance risk management game.
Conclusion
Remember that what is best for one company may not be best for another. To pick the appropriate insurance plan for your business benefits, examine your firm’s specific mix, company size, whether or not you want to participate in the health plan as an owner, and market conditions in your locality.
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