We’ll say it upfront: Health insurance isn’t a simple topic for the employer or employee. Considering and choosing what kind of health insurance plans to offer to your employees presents a sizeable task, not to mention getting your workers enrolled smoothly. Nevertheless, 56 percent of small companies and 99 percent of large companies currently offer health insurance, according to the Kaiser Family Foundation. So if you don’t offer group health insurance yet, it’s something to seriously consider.
We’ll take a look at company health insurance options, what other employers like you are choosing and why, and the tax incentives and pre-tax benefits available to micro-businesses that offer health insurance. If you choose to start offering insurance, you do have some HR work ahead of you—but we’ll also address how to launch your health benefits offering headache-free.
Group health insurance
All businesses with 50 or more full-time employees (FTEs) are required to offer some kind of group health insurance plan to their workers, or they will be hit with a tax penalty. The coverage must extend to at least 95 percent of your employees and their dependents.
As far as company size, this may sound like a clear line in the sand, but when you hire seasonally, for example—and you only have 25 employees for part of the year—that line becomes fuzzy. The IRS offers a helpful guide for determining if you qualify for having 50 or more FTEs.
Companies with fewer than 50 employees are not discouraged from providing health insurance, however, and there are aids and programs that can make it easier, which we’ll cover below.
Benefits of offering health insurance
There are financial incentives to offering health insurance coverage for employees whatever the size of your business. For those known in the Affordable Care Act as Applicable Large Employers (ALEs), which are generally those with 50 or more employees, the immediate financial benefit comes in the form of dodging a penalty.
Businesses with 50-plus full-time employees that opt not to offer any health insurance—with even just one of their employees subsequently buying tax-subsidized health insurance through the marketplace—will be looking at a tax penalty that is directly proportionate to the size of your business.
For small businesses that have the option and choose to provide insurance, you can deduct the cost of healthcare on your federal income taxes. There’s also a tax credit that you may qualify for if you do choose to offer insurance, which we’ll discuss more below.
As for the “softer” benefits to offering employee health coverage, there are many. Today health benefits are key in recruiting and retaining top talent for your business, as employees have come to expect some kind of health insurance coverage. According to the Society for Human Resource Management’s Employee Benefits 2019 survey, healthcare continues to be the number one-ranked benefit by employees.
Of course, better healthcare ideally means fewer sick days and a more productive workforce. And investing in good health benefits is a great way of establishing a strong, supportive company culture.
Popular types of insurance plans
There’s no single best health insurance option for all small to mid-size businesses, but doing your homework can certainly help the answer become clearer.
A great first step is to look at what other businesses are doing. The Kaiser Family Foundation (KFF)’s Employer Health Benefits 2019 survey and the SHRM survey cited above provide a solid basis of facts about group health insurance coverage and reveal the most commonly chosen plan types by U.S. companies.
Offering more than one plan type
Note that many businesses offer more than one type of health insurance plan. The KFF survey found that more than a third of small companies with 3 to 199 workers offered two or more plan types, while two-thirds of large companies with 200 to 999 workers did so.
The Preferred Provider Organization (PPO) offering, the most robust in terms of provider options, was the most offered plan in 2019. The SHRM survey and report showed 85% of U.S. employers offering PPOs to their employees. KFF’s 2019 survey responses were broken down by company size, with 49% of all small companies including PPOs in their plans, and 78% of large companies.
HDHP / SO
High Deductible Health Plans (HDHPs) with or without health savings accounts or health reimbursement arrangements were very commonly offered by companies of all sizes as well. The SHRM survey showed HDHPs coming in at 59 percent for all businesses surveyed, while the KFF showed that HDPDs were offered by 27 percent of small firms and 57 percent of large firms.
The Health Management Organization (HMO), with typically lower premiums and deductibles than the PPO, was a very popular plan as well, according to both surveys. The Kaiser survey saw HMOs following on the heels of HDHPs with an average of 26 percent of all firms choosing them, and SHRM’s survey found 33 percent of all firms offering HMOs to workers.
The Point of Service plan, often considered the least financially taxing for employees, was the fourth most popular, according to both surveys. SHRM’s survey showed 18 percent of companies offering POS plans, while Kaiser survey found that 14% of workers at companies offering health insurance had the choice of a POS plan. To put this plan type into perspective, however, Kaiser found that only 7 percent of workers were covered by POS plans in 2019.
Declining in Popularity
Additional plan types include conventional plans, also known as indemnity or fee-for-service, and Exclusive Provider Organizations (EPOs). These have both seen diminishing popularity in recent years, according to SHRM, as has the Point of Service (POS) plan type. Kaiser’s survey simply rolls EPOs in with HMOs, and indemnity plans with PPOs.
Pros and Cons of Most Popular Health Plan Types
We want to provide a high-level snapshot of the pros and cons of the top three health insurance plan types, and we think it only makes sense to start each with a quick definition.
What is a PPO?
PPOs are plans that allow beneficiaries, a.k.a. employees, a larger choice of doctors to see, and that tend to have higher premiums than other plans.
Pros and cons of PPOs
- Flexibility to choose from more doctors both in- and out-of-network
- Patient doesn’t need to choose a primary care physician (PCP)
- Ability to visit specialists without a referral
- Higher premiums and usually has deductibles
- Generally higher out-of-pocket costs
What is an HMO?
These are plans in which a group of doctors agrees to join a particular network and see patients for a set cost. Many HMO doctors are paid on a per-member basis regardless of how many times each member visits them, which keeps out-of-pocket costs low for employees. The downside is that employees are limited to seeing in-network doctors for their care, except in the case of emergencies.
Pros and cons of HMOs
- Patient has a primary care physician to advocate for them
- Lower premiums and out-of-pocket costs for care and prescriptions
- Usually has no deductibles
- Employee must choose a PCP and seek referrals for specialists
- If an employee’s existing primary doctor isn’t in-network, he or she must pick a new one
- Does not cover non-emergency out-of-network services
What is an HDHP / SO?
On the rise in popularity, an HDHP is a high-deductible health plan that is typically paired with a savings account option. Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs) are the savings accounts sometimes offered in tandem with the HDHP. More rarely, HDHPs are offered without savings accounts.
Pros and cons of HDHPs
- Low premiums in exchange for similar benefits to HMOs and PPOs
- Employees can save pre-tax healthcare dollars in a combined savings account
- Employers can contribute to HSAs or fund HRAs tax free
- Higher out-of-pocket costs
- Employee must meet a high deductible before care is covered, typically at least $1,000 for single coverage and $2,000 for family coverage
Which health plan is best for my employees?
The main factors to consider in deciding which health insurance plan is best for your workforce are budget and flexibility. You may also decide you want to offer your employees more than one option so they can decide for themselves which type of plan suits them best.
Generally, HMOs and HDHPs are great for budget-conscious employees—HMOs because of their non-existent or low deductibles, and HDHPs because of their tax advantages and low out-of-pocket costs.
PPOs offer much more flexibility in terms of providers. A PPO may be ideal for an aging workforce that needs to see lots of specialists, or a younger workforce in a large city in which your employees would like to visit doctors they have seen in the past, or who are geographically closer to their homes.
Employee healthcare for small businesses
If you are a small company with fewer than 50 full-time employees, you aren’t required to offer health insurance or any kind of health savings account. But if you opt not to, you’ll be in the minority. According to the Kaiser Family Foundation survey, over half of small businesses offer at least one health insurance plan to their employees.
Small-group insurance plans are typically purchased by employers with up to 50 full-time employees and then offered as an option for their employees. Though rules vary state to state—and in some states only businesses with up to 10 employees are eligible for these plans—the basic requirement is that the company has at least one employee.
A small-group health insurance offering can come in the form of an HMO, PPO or POS plan, but small group plans generally stipulate at least 70 percent participation. In most states, employers who buy small-group plans must also contribute to employee premiums. One feature that makes signing up easier is that businesses can choose to offer these plans anytime throughout the year, not just during open enrollment.
SHOP healthcare plans
The government allows eligible small businesses to buy small-group insurance through the Small Business Health Options Program (SHOP). Qualifying companies with up to 50 FTEs (and in some states, up to 100) can purchase insurance through SHOP at any time of the year.
SHOP plans are essentially a selection of small-group insurance plans vetted by the government but offered by private insurance companies. As with other small-group plans, you can choose how much of your employees’ premiums to cover—designated by whether it is a Gold, Silver, Bronze or Platinum plan—and if you want to cover their dependents. SHOP plans cover essential health benefits, and can’t exclude coverage for treatments for pre-existing conditions.
Another perk: Businesses who buy SHOP plans may receive for the Small Business Health Care Tax Credit mentioned above, if they qualify.
Self-funded or self-insured plans are plans in which the employer acts as its own insurance, paying for employees’ medical claims out of pocket rather than going through an outside insurance company.
Typically offered by larger businesses to offset healthcare costs, self-funded plans may be a good option for financially stable small firms that are willing to take on the risk of extraordinary claims.
A different choice for small businesses: QSEHRA
If you are a small company with fewer than 50 full-time employees and can’t afford company health insurance, but want to provide your employees with some help, the federal Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) might be for you.
As we’ve mentioned above, a health reimbursement account (HRA) is one way for employers to help fund employees’ healthcare with tax-free dollars. HRAs involve an employer setting aside an allowance for each employee to use toward premiums or other healthcare costs on individually-purchased plans. Employees collect receipts and submit them to their employer, who reimburses them.
With QSEHRA, employers who meet the standards can reimburse employees for some of their healthcare expenses, up to a certain limit. Employers’ contributions are free of payroll tax—and employees can also avoid income tax on QSEHRA funds as long as they are enrolled in a policy providing minimum essential coverage (MEC). Employees enrolled in this type of HRA are free to seek reimbursement through their allowance for qualified uninsured expenses, like acupuncture or childbirth classes.
Plan payment burden-sharing options
One of the decisions that any company will have to make along with whether to offer health insurance and what kind of plan to offer is how much of your employees’ health insurance costs you want to pay. The ACA states that businesses with 50 or more FTE employees must pay at least 60 percent of their employee’s health insurance costs. The 2019 KFF survey found that on average companies covered 82 percent of premiums for single coverage and 70 percent for family coverage.
Businesses with fewer than 50 employees do not have a minimum requirement. Still, only 3 percent of small firms offering health insurance asked workers to pay more than 50 percent their premiums in 2019, according to the KFF survey.
They are ways to ensure that employees share some of the burden without staggering under huge health insurance costs, the most popular of which we’ve already covered:
- Asking employees to pay a certain portion of the premium is a common practice and should be considered when budget is an issue.
- High Deductible Health Plans with Savings Accounts, which cost both employers and employees less and are ideal for companies with low-earning workforces.
- Health Reimbursement Arrangements (HRAs), which allow employers to limit their costs but still ensuring employees have health insurance coverage and access to care.
Taking stock of your business’s needs
Certainly health insurance must fit into your budget. But if it’s a matter of choosing where your dollars are best spent, consider this statistic: SHRM has reported that the average cost of hiring a new employee is $4,129. This is more than half of an individual’s annual health insurance coverage on average, and if you pay for only sixty percent, it pretty much evens out.
Employees need healthcare, and most employers are offering it. In fact, according to SHRM’s 2019 survey, 20 percent of businesses reported their benefits offerings increasing in the 12 months prior. As we’ve covered, there are many ways to make health insurance workable for you and your employees, but the three main factors to consider when choosing a plan or plans is:
- Affordability – This question will affect both what kind of plan you offer and how much you ask your employees to contribute. Another question is whether you will extend benefits to their spouses and/or dependents.
- Your workforce’s healthcare needs – How many of your employees need coverage or already receive it through spouses? Would your employees prefer to have higher premiums and lower deductibles, or the reverse? What kind of healthcare will they be requiring the most?
- Your competition’s offerings – Who are your peers and who are your competitors when it comes to attracting and retaining top employees, and what are they offering in terms of healthcare? A little sleuthing on Linkedin and Glassdoor can give you insight into this, so you know how you’ll stack up with candidates.
Once you do settle on a plan or a choice of plans that is affordable for you, appropriate for your workforce and in line with what the market is offering, you’ll need to jump through the hoops of open enrollment, determining employee eligibility for your plan, calculating paycheck deductions and more.
The Arcoro Benefits Management software helps you with every step of your health benefits offering, from open enrollment to 24/7 cloud-based employee document access to ACA compliance. Contact us today to learn more.