How Does Small Business Health Insurance Work?
One of the benefits of working for a company is group health insurance. Such insurance is usually purchased by an employer and offered to the employees. Frequently, this group health coverage is also offered to immediate family members of the employee. As a small business owner, you may be questioning the necessity—and the cost—of health insurance for your employees. Is it necessary? How does it work? In this article, we walk you through small business health insurance and the options available to you.
Am I Required to Provide My Employees Health Insurance?
As of right now, most small businesses are not required to offer group health insurance. Individual insurance companies apply their own set of underwriting rules based on the number of employees and other factors. State and federal laws apply to varying degrees. These are based on factors including the number of employees, the type of business, and whether an insurance company is providing the coverage.
However, the Affordable Care Act requires that any business with more than 50 full-time employees is required to provide affordable health insurance. If you have both full and part-time employees you have to calculate your FTE or full-time equivalent number. This is calculated by taking the total hours worked by part-time employees each week divided by 30, plus the number of full-time employees. This equals your FTE number.
Benefits of a Health Insurance Plan
One benefit of small business health insurance is the requirement known as guaranteed issue. The federal HIPAA law mandates that no matter what pre-existing health conditions small employer group members may have, no small employer or an individual employee can be turned down by an insurance company for group coverage. Some states and policies may have an exclusionary period for coverage of a pre-existing condition of generally six to twelve months. But this means that you can't be denied health benefits for your employees.
How Much Does Group Health Insurance Cost?
In the majority of states, the law allows small group health insurance companies leeway to determine their initial premium rates for each company using a process known as medical underwriting.
The remaining states make small group health insurance companies use processes known as community rating or modified community rating to come up with initial rates. Additionally, coverage options and variables will also be a factor in determining the cost for the group health insurance policy.
According to research published by Kaiser, “The average annual premiums for employer-sponsored health insurance in 2019 are $7,188 for single coverage and $20,576 for family coverage.”
Laws about how coverage can be issued to large groups are different than laws regarding the same coverage for small groups, and the way that premium rates are determined is also different. The requirements for sole proprietors purchasing health insurance coverage also vary on a state-by-state basis.
Depending on the size of your business, you can also qualify to receive tax credits. You have to purchase group health insurance through the Small Business Health Options Program (SHOP) Exchange to qualify as well as these other requirements:
- Have fewer than 25 full-time employees
- You must offer health insurance to all of your full-time employees
- The average employee salary must be $50,000 or lower
- The employer must pay 50% or more of the insurance premium
While the amount varies, you can get up to a 50% tax credit for what you contribute. This helps to reduce your costs while providing a valuable necessity for your employees. You can also write off the portion of the health insurance premiums that you pay as a tax deduction.
How a Small Business Pays for Group Health Insurance
The employer usually pays a significant portion of the premium for its employees' coverage in the group health plan, and the employee then pays the difference, generally as an automatic deduction from the employee’s paycheck.
Types of Small Business Health Insurance Plans
There are three common ways that a small business can provide health insurance for its employees.
Small Group Health Insurance
Small group health plans used to be the best option for any businesses with up to 50 people employees. Members of these types of plans usually get reduced rates for premiums. This type of insurance is purchased by the employer and offered to the employees. Most insurance companies require 70% participation for the plan to be valid.
This type of plan is tax-free and businesses are usually offered good health benefits options. offering a health insurance plan is also an effective way to retain employees. These plans can be expensive and don't involve employees in the decision-making process. Group health insurance plans and coverage vary from state to state because the insurance industry is regulated by the individual state.
Self-Funded Insurance Plans
Self-funded insurance plans can seem complicated. This is an option where you as the employer pay claims that may arise. Most employers set up a trust fund where the money is pooled and earmarked if claims arise. They can use a third-party administrator to process claims, collect premiums, and help service the employee benefit plan. The employer assumes the risk. If you choose to go this route, you’ll need to obtain Fiduciary Liability Insurance. This type of insurance plan is customizable to your company, is more affordable than traditional plans, and is less regulated than traditional policies.
Health Reimbursement Arrangements (HRAs)
Health Reimbursement Arrangements (HRAs) allow employees to purchase their own insurance plans. The employer then reimburses the premiums and claim costs on a pre-tax basis. An employer usually allows a fixed amount to contribute per employee. The employee submits receipts for premiums and claims to the employer and gets reimbursed.
Common Types of Health Insurance Products
A few common types of health insurance a small business can utilize include HMOs, PPOs, and POS plans.
Health Maintenance Organization (HMO)
A Health Maintenance Organization (HMO) is a great option to keep costs low with lower standard rates across the board. However, HMOs usually have a limited network of providers. You can often be stuck handling the costs for specialists or anyone considered out of network.
Preferred Provider Organization (PPO)
A Preferred Provider Organization (PPO) is a more flexible type of insurance with larger networks and access to specialists. However, this ease of access usually comes with higher premiums, deductibles, and costs.
Point of Service Plan (POS)
A POS plan is a sort of combination of HMOs and PPOs. You need referrals to specialists, but costs for using them would be lower than what you’d pay with an HMO. Costs tend to fall in-between those of HMOs and PPOs.
How to Get Health Insurance For Your Small Business
There are a few ways you can go about getting insurance for your business:
- Contact insurance companies directly. If you know what you’re looking for, some insurance companies allow you to contract with them directly.
- You can hire an insurance broker to help manage the process. This can be the easier route if your time is more valuable than the cost to pay for help.
- Partner with purchasing alliances/associations. Did you know that marketplaces exist to allow multiple small businesses to group together to purchase insurance coverage?
- Use a professional employer organization (PEO). Similar to a purchasing alliance, these also allow multiple businesses to group together. PEOs can also handle other administrative tasks.
- Each state has a health insurance exchange, commonly referred to as a “SHOP” (small business health options program) that makes it easier to purchase group health insurance.
What you need depends on your company size and what health insurance plans work best for your business.
Get More Information on Small Business Health Insurance
Do you need help gathering information or have questions? Let us help you! Our goal at Tivly is to help small businesses get the coverage they need. Complete the form at the top of the page or call us at 877-907-5267 for more information.