Small Business Health Insurance Guide

Starting your own small business is no easy feat. Finding the best small business health insurance is probably on that long to do list of yours. This post outlines your options and hopefully saves you a little time and stress in the decision-making department.

There are a lot of what ifs when it comes to starting your own business. First, do you have a great idea for product or service? How will it be marketed? How big is the market you will compete in? What does the competition look like? Should you hire a team to do a spiffy logo and website or should you go the DIY approach?

Then there's the financial piece. How are you going to finance your business? Can you afford to launch a business without a loan? Do you qualify for one? Are you planning on fundraising with potential investors? Do you understand the tax implications of owning a small business (trust us, go ahead and find yourself a good CPA to help guide you through this process).

Now let's talk about the questions you should ask about your small business health insurance, because whether you like it or not, that plays into the financial reality of your business and needs to be a part of your growth plan. More business equals more staff equals a greater need for small business health insurance.

Do I have a plan for small business health insurance if I leave my current business's small business health insurance plan to go out on my own? Does my spouse have a health plan that can cover me? Am I planning on growing? Do I have to offer my staff small business health insurance?

Why small business health insurance for small business is important?

Small business health insurance can be a major financial deterrent when you are considering going out on your own. But it doesn't have to be.

There are tax-friendly tools on the market called health reimbursement arrangements that help new business owners like you afford benefits, either for you personally or your growing team. We'll touch on the subject later on in this post. So keep reading!

If you are planning on growing, having a competitive benefits package is key to recruiting and maintaining the top talent in a tight job market. Your business is only as good as the team you build, and it's just common sense to ensure that those valuable team-members remain loyal. Compensation is a big driving factor, but other things like benefits and culture are also extremely important to today's workforce.

And remember, benefits aren't just important to ensure that your team is happy and covered, if you fail to offer competitive benefits, it can bring some serious financial consequences, not to mention the risk of losing staff you depend on (and information and ideas) to competitors.

A study by the Society for Human Resource Management (SHRM) shares that on average, the cost to hire an employee is $4,129, taking around 42 days to fill a position.

And if you are replacing an employee instead of hiring for a new position, the numbers are even worse.

Another study by SHRM shares that it takes up to 50-60% of a worker's annual salary to find a direct replacement. Turnover can be quite costly, summing up to a total of 90-200% of an employee’s annual salary. That's reason enough to make sure your most valuable staff are 100% satisfied with their job and their compensation packages.

Am I required to provide small business health insurance for my staff?

Under the Employer Mandate, the Affordable Care Act requires that all employers with more than 50 staff must offer small business health insurance that's affordable.

To find out if the rule applies to you, you first have to figure out how many full-time equivalent (FTE) staff you have on your team. Use the formula below to calculate your FTE number. (Total hours worked by part-time staff each week / 30) + # of full-time staff = Your FTE number). If you have 49 FTE, you technically aren't required to offer insurance; If you have 50 FTE, 95% of your full-time workforce must be covered. But there are a lot of other reasons to offer small business health insurance - like keeping your staff healthy and boosting recruitment and employee retention.

Kaiser Family Foundation reports that 56% percent of small firms and 99% of large firms offer health benefits to at least some of their workers, for an overall offer rate of 57%.

How much does small business health insurance for small business cost?

The cost of small business health insurance for small business should be measured in both dollars and in time.

If you are going with a group plan, you'll want to consider the percentage of premiums you are willing to cover, whether or not you are covering staff or their families as well, whether you use third-party services to find insurance for you, since they have a fee as well. But it also takes time to search and compare plans that meet the needs of your business, to educate your team on their plan options, and the administrative burden of setting up and maintaining the plan. And did we mention paperwork? So much paperwork.

More specifically, according to the 2019 Employee Benefits Survey by Kaiser Family Foundation, annual premiums for employer sponsored family health coverage reached $20,576 in 2019, up 5% from the previous year, with workers on average paying $6,015 toward the cost of their coverage. The Wall Street Journal reports that employers shouldered 71% of that cost, while staff paid for the rest. The average deductible among covered workers in a plan with a general annual deductible is $1,655 for single coverage.

Pro tip: The best way to budget for health benefits is either a percentage of your payroll or a monthly per-employee amount.

Your options for small business health insurance for small business

Historically, small-group insurance has been the primary option for many small employers who are looking to offer health benefits for their staff, but that's just not the case anymore.

While these plans are the most widely known and understood, they are not the only option. You actually have THREE options! What works best for you depends on how your business is set up, how individual and group plan costs vary in your geographic area, and the health of the individual market near you. Check out your local market factors with the cool interactive maps that Healthcare Search LLC put together.

Here are your options for small business health insurance for small business:

Small group insuranc
Self funded plans
Health Reimbursement Arrangements (HRAs)

It's that last option we are jazzed up about. But first, let's drill out the details in each option just to cover all of the bases.

Option 1: Small group insurance

What is small group insurance?
Historically speaking, small-group insurance—or fully-funded insurance—has been the primary option for many small employers who are looking to offer health benefits for their staff. It is geared toward businesses with less than 50 full time staff everywhere except four states where it applies to businesses with up to 10 staff.

According to Kaiser Family Foundation, 56% of small businesses with 3 to 199 staff offer health benefits. 81% of those companies offer one type of plan.

Group Insurance health plans provide coverage to a group of members, usually comprised of business staff or members of an organization. Group health members usually receive insurance at a reduced cost because the insurer’s risk is spread across a group of policyholders.

How small group small business health insurance works

Small group small business health insurance plans are purchased by employers, and then offered to staff. Plans can only be purchased by groups, not individuals, and they usually require at least 70% participation in the plan to be valid. In most states, you need at least one employee to qualify, you must contribute to employee premiums, and you can sign up any time of year instead of just during open enrollment.

The cost of a group health plan is technically shared by everyone in the group, and by the employer and staff. These plans can cost less because the risk pool is bigger. But in many markets, the difference in cost is negligible. (You can see how they stack up against individual premium prices in this post from Healthcare Search LLC).

Employers who own small businesses can put most or all of the cost of their group small business health insurance over onto their staff, but it’s better for attracting and retaining talent if they pay a portion of the premiums.

Once the business chooses a plan, group members are given the option to accept or decline the coverage. In some areas, plans may come in tiers ( like gold, silver, bronze) that offer basic coverage or advanced insurance with add-ons.

The premium costs are then split between the business and its staff based on the specifics of the plan. Another thing to consider is whether or not insurance coverage will be extended to dependents of group members for an extra cost.

There are lots of options out there; you can choose between managed care (HMO, PPO, and POS), indemnity fee-for-service, and high-deductible health plans. Check out our small business health insurance 101 post for more information on decoding all of the confusing insurance jargon. Remember that not all plans are created equal!

Where to buy small group insurance

As am employer, you can buy small-group plans directly from an insurance business, via a broker or private exchange, or from your state’s SHOP Exchange. You can sign up any time, not just during open enrollment.

Benefits of small group insurance

These ACA-compliant plans are well known, tax-free, have solid product options, and are proven to be an effective retention strategy. Coverage is generally guaranteed, meaning that anyone who applies and meets the criteria will be accepted to the program. Purchase of a SHOP plan may qualify the buyer for the Small Business Health Care Tax Credit. For your staff, they might have access to a wider network of doctors than if they were on an individual plan.

Where small group insurance falls short

The shortcomings can be detrimental to small business owners' budgets; small group plans are expensive, one-size-fits-all, with unpredictable premium increases year over year and participation rate requirements. The traditional small group plan also separates patients from the process; they simply swipe their card and aren't empowered to make financially savvy decisions. We'll go out on a limb and say that this attitude doesn't help an already expensive healthcare system. And remember, since your staff will all be in the same risk pool, one sick employee means higher prices.

Option 2: Self-funded plans

What is a self-funded plan?
With the cost of healthcare continuing to rise, some employers are looking to self-funding as a means to save on costs. Technically speaking, self-insured employers pay for claims out of pocket when they arise as opposed to paying a predetermined premium to a carrier for a small group plan. This type of plan, also known as a self-insured plan, is usually seen with a large enterprise as a means to control their healthcare spend and manage their own risk pool.

How a self-funded plan works

When an employer opts for self-funding for health benefits for their staff, they usually set up a special trust fund that earmark money to later pay incurred claims. If the employee chooses not to keep claim processing in house, a third-party administrator (TPA) is engaged to process claims and may also offer additional services like premium collection, generating claim utilization reviews, contracting for PPO services, and offering overall service for the chosen employee benefit plan. In this model, the employer assumes the risk.

Where to buy a self-funded plan

To set up a self-funded plan, you’ll want to allow yourself some time to make the transition, especially if you are switching from a traditional group plan. There are several steps you’ll need to plan for. Many carriers offer administrative service contract options directly, or you can coordinate and engage a third-party administrator to draft plan documents. Also consider bringing on board partner fiduciaries, CPAs, and brokers to help manage the set up process. Make sure that ERISA, HIPAA, and other regulatory mandates are met. Acquire a stop-loss policy and consider ERISA Bonds or Fiduciary Liability Insurance for risk mitigation purposes. Create an administrative service agreement for your TPA or in-house plan administrator if you choose not to outsource. Publish and distribute a summary plan description (SPD) and Summary of Benefits and Coverage (SBC) to all covered staff.

Benefits of a self-funded plan

The benefits of this type of plan are that it's more customizable to your workforce, you have control over the health plan reserves so you can maximize your interest income, it’s more affordable per enrolled employee than a traditional plan, there's no pre-funding of health coverage, and you aren't subject to state small business health insurance premium taxes (usually around 2 to 3%). They’re also subject to fewer regulations and allow employers to customize their healthcare plan to meet their unique business needs. And because companies are paying only for the healthcare costs of their own staff, there may be money left over at the end of the year that can go toward other business needs.

Where self-funded plans fall short

While self-funded plans allow the business to potentially save the profit margin that an insurance carrier adds to its premium, the potential risk is much higher since the business is responsible for paying out the actual claims—especially in the event of catastrophic claims which could potential bankrupt a business. Many companies choose to purchase stop-loss insurance to mitigate this risk. Since self-funded plans are not managed by an insurance carrier, the responsibility of ensuring Minimum Value Coverage falls in the hands of the employer.

Option 3: Reimburse for small business health insurance with an HRA

What is an HRA?
A health reimbursement arrangement is an affordable, tax-advantaged alternative to traditional insurance where employers reimburse their staff for individual insurance premiums and medical expenses (if applicable) on a pre-tax basis.

Unlike Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) that are accounts, HRA stands for Health Reimbursement Arrangement, meaning that the model operates on reimbursements. Staff will pay the insurance business or doctor’s office directly and then submit a claim to get reimbursed for their expenses tax-free.

The use of new reimbursement models of HRAs put the employer's reimbursements on nearly the same tax playing field as traditional small group plans, but without all the hassles and requirements. Before, a big advantage for group plans was that they were deductible expenses for employers and were taken out of employee paychecks on a pre-tax basis. With an HRA, employers can make reimbursements without having to pay payroll taxes and staff don’t have to recognize income tax. In addition, reimbursements made by the business count as a tax deduction.

How an HRA works

The reimbursement model is simple: An employer decides how much money to contribute each month, provides their staff with standard information about how the HRA works, and outsources some administrative functions like verifying coverage. The employee chooses a plan that works for them, submits receipts for premium payments and medical expenses (if applicable), and gets reimbursed.

HRAs that work best for small business health insurance for small business

There are a few different kinds of HRAs that are worth noting.

QSEHRA: To cut quickly through the insurance jargon (it stands for “Qualified Small Employer Health Reimbursement Arrangement” by the way), a QSEHRA allows small employers (businesses with less than 50 FTEs) to set aside a fixed amount of money each month (up to $437.50 per month for individuals and $888.33 for families in 2020) that staff can use to purchase individual small business health insurance or use on medical expenses, tax-free.

This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and staff can choose the plan they want.

Reimbursement amounts can vary based on age and family size.

ICHRA: The individual coverage HRA has all the same benefits as QSEHRA, but with no maximum contribution limits and no business size limit. In addition to the flexibility of varying rates based on age and family size like QSEHRA, the hallmark feature of ICHRA is that benefits can be scaled across different classes of staff. That means an employer can offer one reimbursement amount to seasonal workers, another amount to part-time, and varying amounts based on geographic area, allowing further streamlining of total benefit spend. An ICHRA can also be integrated with a group plan, which is another distinction.

How to set up an HRA

It’s not advisable to administer your own HRA because of HIPAA, so you’ll want to go through a third-party administrator (like Take Command Health!). You can sign up any time, and a new HRA offering qualifies staff for a special enrollment period so they can sign up for their individual plan without waiting for open enrollment.

Benefits of reimbursing for small business health insurance

Optimized Benefits
Tax Efficiency
Flexible Design
Budget Control

Allows employers to get out of the small business health insurance risk management game.

What's best for my business?

While we always advise our clients to speak with their CPA before jumping in, we are ready to chat on our website if you have any specific questions about your business and how HRAs stack up against group plans in your area. Setting up a small business HRA or setting up an ICHRA is simple and quick, and our team is here to help if you need it.

And remember, what's best for one business isn't necessarily best for another. It is important to consider your business's unique makeup, your business size, whether or not you want to participate in the health plan as an owner, and your location market conditions to determine what the best plan will be for your business benefits.