If your business has over 50 employees, you are legally required to provide health insurance to employees due to the Affordable Care Act (ACA). If you have fewer than 50 employees, you'll need to make the decision whether to offer your employees health care benefits. We examined every major decision point to help you make the right decision for your business.
Are You Legally Required to Provide Health Insurance for Employees?
If you have more than 50 full-time and part-time employees, you are legally required to provide group health insurance to your employees. If you fall into that bucket, you'll need to make sure you offer coverage to at least 95% of your full-time employees and their dependents. Full-time employees are those who work more than 30 hours per week.
If you have less than 50 employees, you aren't obligated to provide such benefits, but we'd highly encourage you to at least consider it. A strong benefits package can go a long way in terms of attracting and retaining talent, and the government also provides various incentives to help make this easier. If interested, we recommend SHOP, which we go into more detail on below.
How Does Health Insurance for Employees Work?
Health insurance plans for employees are commonly referred to as group insurance plans. Group health insurance is a single plan that provides coverage for (usually) all employees. Plans are typically paid for on a monthly basis, and those monthly premiums are dependent upon your location, the number of employees covered and the ages of your covered employees.
In addition, there are different types of insurance plans. The four most common types of plans are:
- Preferred Provider Organization (PPO): PPOs are often seen as the most lenient type of plan, since referrals aren't mandatory and the plan will at least partially pay for out-of-network services, but they also tend to carry the most expensive premiums. Also the most common group insurance plan.
- Health Maintenance Organization (HMO): HMOs tend to have lower monthly premiums, but employees will need to receive primary care physician (PCP) referrals for any special services.
- Exclusive Provider Organization (EPO): EPO plans only pay for services from a select list of providers.
- Point of Service (POS): POS plans are similar to HMOs in that you are required to get a referral for certain services, but a POS will still pay for certain out-of-network services.
Each plan will have a monthly premium, a deductible that has to be met before the plan kicks in, and copays that the covered individual might have to pay for particular services.
We strongly caution against instantly choosing the cheapest plan available without looking into the details. Those plans are often cheap for a reason. We took the time to go through the process of finding a group insurance plan, and we found that many of the cheapest plans also came with significant drawbacks, including -n-network providers that were far away, providers that were open only during normal working hours and more. As cumbersome as it may be, it'll be in your best interest to carefully review the details of each plan and network.
How Much Does Health Insurance Usually Cost?
The Kaiser Family Foundation found that on average, employers pay $5,700 per employee for single coverage plans and $14,000 per employee for family coverage plans per year. Insurance premiums have been outpacing inflation year over year, so you'll also have to keep that mind if you're planning on offering health insurance benefits for the long run. Also, the Bureau of Labor Statistics (BLS) reports that health insurance benefits account for roughly 8% of employees' total compensation across the U.S.
Employers aren't required to pay 100% of the premiums for employees. In fact, only 27% of small firm workers are in a plan where their employer pays for the full monthly premium. According to the IRS, employers with more than 50 full-time employees must "offer affordable health coverage that provides a minimum level of coverage to their full-time employees and their dependents." Minimal level of coverage is generally defined as 60% of health care costs for the standard population. You can also use the Employer Coverage Tool to determine if your plan meets requirements.
Taxes
You are able to claim however much you pay for your employees' monthly premiums as business expenses. This means that the monthly premiums you pay are 100% tax-deductible at both the state and federal level.
In addition, small businesses may qualify for the Small Business Health Care Tax Credit, which can allow for up to 50% of your health care expenses to be claimed as credit. In order to qualify, your business must meet the following conditions:
- Have 25 of fewer full-time employees
- The average employee salary paid is $50,000 or less
- The business covers at least 50% of employees' premiums
- All full-time employees are offered health care through SHOP
Tax deductions reduce your taxable income and can lower your tax bracket. The amount of money you save is dependent on your tax bracket. Tax credits, on the other hand, directly reduce the amount of taxes you owe on a 1:1 basis. If you owe $10,000 in taxes and receive a $1,000 tax credit, you'd then owe only $9,000 in taxes.
Ways to save on Employee Health Insurance
Paying for group insurance can be daunting, but there are a few ways you can creatively reduce those costs.
Share costs with employees: Providing health insurance benefits for your employees isn't an all-or-nothing effort. Most employers share premium costs with employees. Common ways to save here are to have employees pay higher premiums or to shift employee costs at the copay level and negotiate lower premiums with your insurance provider.
Create your own health insurance group: If you feel that your employees are quite risk-averse and healthy, you may want to consider creating your own health insurance group. Rather than signing up for health insurance, you set aside partof your own budget for emergency health care services. This means the risk of paying high health care costs falls on you as the employer. This may save money in the short term, but it only takes one expensive health care bill to completely use up the entire budget.
Where to Find Health Insurance Plans
First, we highly recommend assessing what benefits your employees are looking for. If a high percentage of your employees, for example, are looking for strong dental benefits, you'll want a plan that emphasizes that. If your employees want cheap, minimal insurance that they'd only use for emergencies, that's helpful to know as well.
Benenson Strategy Group reported that out of the 1,000 employees surveyed, most said that they'd opt for better health insurance rather than a 10% pay raise. In other words, it's a big deal to employees.
After assessing their wants and needs, you can now enter the insurance market with a comprehensive list of the services you'd like covered and your budget, two of the most helpful initial filters.
Small Business Health Options Program (SHOP)
SHOP is a federal marketplace for small-business owners seeking health care plans. Each state maintains its own SHOP marketplace, but they're all similar. In order to qualify to use SHOP, businesses must generally meet the following requirements:
- Have one to 50 employees
- Offer health care benefits to all employees who work over 30 hours a week
- 70% of your employees must enroll
- Have an office or employee in the state whose SHOP you'd like to use
Employers have the opportunity to select from three tiers of health insurance based on price and coverage. Once a tier is selected, employees can then go into SHOP on their own and can select their own individual plan based on the tier the employer selected.
Private Health Insurance Marketplace
You can also find health insurance through private health marketplaces. The quality and availability of plans will vary based on your location, but we'd recommend exploring these as well in order to choose the best option for your employees. Here are the top four biggest private exchanges:
- Aon
- Mercer
- Via Benefits
- Right Opt
Similarly to SHOP, employers select a predefined contribution, which designates what plans employees have access to choose from. Employees then select the individual plan they'd like and the employer receives a single comprehensive bill for every employee. The marketplace would typically provide administrative support services like call centers and online support.
Use a Health Insurance Broker
If you don't have time to manually compare plans side by side, you should consider hiring a broker. You can find a trusted broker through friends and peers or through SHOP. A good broker should be able to clearly break down more challenging aspects of picking a health insurance plan, such as the value of different networks or the quality of various providers.
Professional Employer Organization (PEO)
PEOs are separate from traditional insurance carriers and often leverage their large economies of scale to provide cheaper HR services to small businesses and startups. Often times, PEOs like Justworks provide health insurance benefits at the same or cheaper rates that traditional health insurance providers charge.
Self-Employed Options
If you're self-employed, consider the Health Insurance Marketplace that's available to those who don't have any employees. You'll likely receive tax credits based on your income and household size to help lessen the costs.
The benefit of the Health Insurance Marketplace is that with a single application, you'll be able to see what tax credits and plans you qualify for. Like most other marketplaces, the Health Insurance Marketplace also groups their plans based on tiers.
Common Terminology You Should Know When Shopping for Health Insurance
We've consolidated the most common terms and phrases used by health care providers.
- Premium: The monthly amount to be paid to the health insurance provider that is often split between the employer and employee. This doesn't include copays or deductibles.
- Deductible: The minimum amount of money the insured individual must spend before the health insurance coverage activates. The deductible amount varies from a few hundred to several thousand dollars from plan to plan. The deductible resets every calendar year.
- Copay: Most insurance plans will require the insured individual pay a copay of $10-$50 on top of their monthly premiums at each doctor visit, and they're often paid at the time of visit. Copays can sometimes go toward the annual deductible.
- Out-of-Pocket Maximum: Most insurance plans come with a ceiling of the maximum amount the insured individual will spend before the insurance plan covers 100% of services, including copays. This amount is typically much higher than the annual deductible.
- Primary Care Physician (PCP): HMOs and similar plans that require referrals in order to see specialists ask insured individuals to designate a PCP. The PCP is then the person who refers individuals to specialists if needed.
- Network: Almost every insurance plan will operate within a network or select group of providers called a network. Insurance plans will typically provide different coverage if the provider is "in network" or "out of network." It is the responsibility of the insured individual to ensure their doctors are in network if those services are more comprehensively covered by the insurance.