Small Business Guide to Health Insurance

• Small business owners should focus on coverage, the number of employees, employee premiums and shopping when looking for an insurance provider.
• Offering health insurance to employees can help to attract and retain top talent and provide tax benefits for your business.
• There are several ways to find insurance, including contacting providers directly and using a broker.
• This article is for small business owners who want to learn more about small business health insurance and how to get it for their own business.

Navigating small business health insurance can be one of the hardest parts of running your small business, as there are many options and rules to figure out, and if your small business doesn’t have a full human resources department, you’re left to work it out on your own. Use this guide to help you learn about how small business health insurance works, why you should offer it and what types of health insurance are available for small businesses.

How does small business health insurance work?

There are four main elements you, as a small business owner, should be aware of concerning small business health insurance: coverage, number of employees, employee premiums and shopping for coverage.

1. Coverage. First and foremost, if you are eligible for a small business health insurance plan, your coverage is generally guaranteed to be issued by the insurance company. This means that you, your employees and your dependents cannot be denied coverage based on pre-existing medical conditions, and that all eligible employees and their dependents can enroll in the new plan regardless of their medical condition(s).
2. Number of employees. To qualify for small business health insurance coverage, you must have at least one employee on your payroll. However, some states allow you to count yourself as both the business owner and an employee.
3. Employee premiums. You must pay at least 50% of the monthly health insurance premiums for your employees. The minimum percentage may vary depending on your state or insurance company.
4. Shopping for coverage. As a small business owner, you can shop around for health insurance coverage at any time, without needing to wait for your current plan to expire or for a special open enrollment period. However, once you buy a plan, you are typically locked in for at least a year, during which you can add new employees and dependents or drop coverage for former employees. Once your contract is up, you have the option to renew or shop for a new plan. [Read related article: Open Enrollment: What Small Businesses Need to Know About the Affordable Care Act]

Editor’s note: Looking for the right PEO service for your business? Fill out the below questionnaire to have our vendor partners contact you about your needs.

Is a business owner required to provide health insurance?

Small businesses with fewer than 50 employees are not legally required to offer health insurance to employees under the Affordable Care Act (ACA). Of course, that means businesses with 50 or more employees are legally required to provide affordable health insurance.

For the health insurance to be considered “affordable,” the employee’s annual cost must be no higher than 9.12 percent of their annual income. Not offering health insurance subjects you to a penalty of $2,880 per full-time employee, excluding the first 30 employees.

Why should you offer small business health insurance?

Starting and running a small business is expensive and it can be easy to dismiss health insurance as an unnecessary cost to help stay within your budget. However, health insurance is a vital part of running a successful business that people want to work for.

Here are a few reasons why you should offer health insurance to your employees:

1. Group coverage may cost less and cover more.

Whereas an individual plan offers coverage for only you or your family, group health insurance is insurance that businesses purchase and offer to eligible employees and their dependents. Group insurance offers certain advantages over individual health insurance, including generally being more affordable and offering more extensive coverage.

2. You may qualify for a tax credit.

The purchase of health insurance for yourself and your employees can help you qualify for tax credits if you purchase a plan through the Small Business Health Options Program (SHOP) Exchange, an insurance portal created by the ACA. You must meet the following requirements:

• Have fewer than 25 full-time employees.
• Offer health insurance to all full-time employees.
• Pay salaries of less than $50,000 per full-time employee, on average, each year.
• Front at least 50 percent of the premium cost.

As a small employer, you can receive up to 50 percent of your contributions toward employee premiums, which can significantly reduce the costs of providing health benefits to your employees.

3. It can increase job satisfaction and recruiting success.

Offering a health insurance option can greatly increase your chances of attracting and retaining top talent, as it shows that you care for and value your employees.

Healthy employees are productive employees, and the best way to ensure your employees remain so is to provide comprehensive health insurance. Employees without insurance are less likely to receive annual checkups or visit the doctor when they’re sick, which can cause them to become sicker and take time off work.

If you’re self-employed with no employees, health insurance is a necessity that can help you protect yourself, your dependents and your business against a potentially disastrous illness.

Average cost of health insurance for small businesses

Because the costs of health insurance depend on your specific business, it can be difficult to estimate how much health insurance will cost. According to the Society for Human Resource Management (SHRM), healthcare insurance costs are expected to rise about 5.6 percent per employee in 2023. For reference, last year the average employer health insurance premium per employee in California was $8,083 for single coverage and $22,818 for family coverage.

When choosing health insurance for your employees, it’s important to consider the financial cost but also the work that goes into selecting benefits, educating your team on their options, and administrative work to support the plan.

Monetary costs

The monetary costs of providing health insurance depend on the type and number of benefits you plan on providing, who you are covering (employees only, or employees plus dependents) and the percentage of the monthly premium that you are going to cover as your employer contribution. If you plan to use a broker, a professional employer organization (PEO) or another third party to find health insurance coverage options for your business, prepare to factor in those fees as well.

PEOs manage payroll and benefits administration on your behalf. Technically, a PEO service employs your teams on its own books, shifting the burden of administration away from your business so you can focus on operations.

Time costs

Time costs are often not considered, but they are an important part of finding a health insurance plan. You will be spending a considerable amount of time searching for providers, understanding your employees’ needs, setting up the insurance carrier plan, educating your employees about the plan options, looking over your health insurance plan every year for open enrollment, and ensuring it’s properly maintained.

Health insurance costs for employees

On the employee side of things, insurance costs will look substantially different. For the most part, these costs can be split into three categories: premiums, deductions and out-of-pocket costs.

Premiums

Premiums are the regular payments made to the insurance company. For employee health insurance, premiums are typically deducted from every paycheck. This is a fixed price that does not depend on how much the employee works or earns. It is easy to think of premiums as a monthly subscription cost for being on the insurance plan.

Deductions

Deductions are where things get complicated. Every policy has a deductible. This is the amount of money the employee pays for medical expenses before insurance benefits kick in. To make things more complicated, every policy has exceptions to this rule. For example, it’s normal for a policy to include a free annual check-up that doesn’t require the deductible to be met.

When large medical expenses crop up, however, the deductible can be a little bit easier to understand. Say the deductible is $5,000. If an employee incurs a $10,000 medical bill, they will have to pay $5,000 toward the bill from their own pocket before the insurance will pay. After the deductible is met, the insurance coverage will pay for bills as outlined in the policy — usually a percentage of the total bill.

Out-of-pocket expenses

Out-of-pocket expenses are expenses not covered by insurance. The employee is on their own to pay these expenses, which can include deductibles. They can also include copays, which is where matters again can be complicated. With a copay, the insurance policy sets a specific price that comes out of the patient’s pocket for a given service or medication. For example, an eye insurance policy might have $10 copays for eye appointments. The $10 refers to the out-of-pocket expense the employee pays toward the appointment. The rest of the visit may be covered by the insurance company.

Types of health insurance for small businesses

There are four main types of health insurance that small businesses can choose from: PPO plans, HMO plans, HSA-qualified plans and indemnity plans. Here are some of the pros and cons of each type of plan.

1. PPO (preferred provider organization) plans

PPO plans are the most common type of health insurance. Employees covered under a PPO plan can choose either in-network or out-of-network doctors and hospitals, but selecting from the insurance company’s list of preferred (in-network) providers means the insurance company covers a larger percentage of each claim.

Pros:

• A PPO plan allows participants to seek care from doctors, hospitals and specialists both within and outside the network. Participants are not required to choose a primary care physician (PCP).
• PPOs cover a wide range of services, including preventive care, hospitalization and emergency care, medications, outpatient surgery, and specialist treatments. These plans follow participants wherever they go, meaning they can seek medical care even if they’re traveling and be covered.

Cons:

• With a PPO plan, participants are responsible for a copayment of around $10 to $15 any time they visit an in-network doctor, and copays are higher if they visit a doctor outside the network. For some categories of service, participants must also meet an annual deductible before the plan pays for those services.
• Plan participants are responsible for filing their own claim paperwork if they visit a doctor outside their network, which can be a hassle.

2. HMO (health maintenance organization) plans

HMO plans offer a wide range of healthcare services through a network of providers that are exclusively contracted with the HMO or that agree to provide services to members. Employees who are on this type of plan generally must select a primary care physician who will provide the majority of their care and will refer them to a specialist if needed.

Pros:

• A primary care physician can be an excellent medical resource, since they get to know the plan participant, their medical history and their health goals through consistent care.
• HMOs tend to offer lower-cost healthcare because they only cover in-network treatment and can negotiate lower prices with their provider networks.

Cons:

• Participants must choose doctors and facilities within the HMO network.
• Participants must get a referral from their primary care physician before they see another doctor, even for routine care. (Emergency healthcare is an exception.)

3. HSA-qualified plans

HSA-qualified plans are PPO plans designed specifically to be used with health savings accounts (HSAs). An HSA is a bank account that allows participants to save pretax money specifically to be used for future medical expenses.

Pros:

• The No. 1 advantage of an HSA is its triple tax benefits: Participants contribute to their HSA with pretax dollars, pay medical expenses with pretax dollars, and earn compound profits tax-free.
• Any unused balance in an HSA automatically rolls over year to year, so participants don’t lose their money if they don’t use it in a given year.

Cons:

• To be eligible for an HSA, participants must have a high deductible health plan (HDHP) with a deductible of at least $1,350 for single coverage or $2,700 for group coverage.
• The high deductible of HSAs may lead participants to not seek medical care when they need it.

4. Indemnity plans

Indemnity plans allow members to direct their own healthcare and visit any doctor or hospital they want. The insurance company pays a set portion of the total medical charges. Employees may be required to pay for some services upfront and then apply for reimbursement from the insurance company.

Pros:

• Indemnity plans give a cash payment to the member in the event of a qualifying incident like an accident or a critical illness, which means they receive quick and easy money to cover medical costs.

   

  Some indemnity plans may include additional wellness benefits, such as telemedicine, so that members can access medical care 24/7 at no additional cost.

Cons:

• Members with preexisting conditions likely won’t be covered within the first 12 months of coverage.
• Indemnity plan benefits are tied to particular incidents, such as admission to the hospital or a doctor visit, so they don’t provide comprehensive coverage.

Where can you find affordable small business health insurance?

Shopping for small business health insurance is a tough and time-consuming process, but there are many ways you can accomplish your goal of providing health insurance to your employees. Keep in mind that you can outsource much of the process to third parties, but that will eat into your business’s budget.

If you have between two and 50 full-time employees, there are five main ways to find insurance coverage: 

1. Contact health insurance companies directly.

If you have already done your research and have a good idea of which insurance companies and plans best fit your business’s needs, then you can contact those providers directly. Some insurance companies may work only through brokers, but some, such as Aetna and United Healthcare, work directly with business owners.

Going directly to the companies may help you get better rates than going through a third party. You can use consumer review sites, such as the National Committee for Quality Assurance, to find companies you are eligible for.

2. Hire an insurance broker.

Hiring an insurance broker may be an expense, but it can save you significant amounts of time and effort in searching for an insurance plan that works for you and your business. An insurance broker will help you with paperwork, ensure your business is compliant with relevant laws, get you plans with up-to-date policies, and help with implementation and renewals.

Brokers will earn a commission once they find a plan that works for you, but they should not ask for money upfront; avoid any brokers that do.

3. Partner with purchasing alliances or associations.

Also referred to as private health exchanges, purchasing alliances are miniature marketplaces that bring small businesses together and allow them to purchase health insurance as a group, which decreases costs for everyone. This option allows you to offer your employees multiple choices, rather than a single one-size-fits-all plan.

While purchasing alliances can be great for providing employees with more options, you as the business owner will not reap the benefits of wide selection and tax credits that come from purchasing insurance through SHOP, the government’s health exchange.

4. Use a PEO service.

PEOs are similar to purchasing alliances in that they also group together multiple businesses to decrease costs. However, PEOs are different because in addition to health insurance, they tend to offer other services, such as payroll, recruiting and tax filing services. With a PEO, you’re likely to get a better rate than if you were to go directly to a broker or an insurance company.

Interested in working with a PEO service? Check out our picks for the best PEO services out there, including those that excel at benefits administration such as health insurance plans.

5. Use SHOP.

The Small Business Health Options Program (SHOP) is the federal health insurance exchange database. It can help you get healthcare tax credits of up to 50 percent of premiums, which can save your business a lot of money on health insurance.

You can use a SHOP plan to locate health insurance in your state and choose from several tiered plans, with easy-to-use comparison charts and standard benefits such as coverage for medications and hospital stays.

Health insurance requirements are an important consideration

If you are a small business owner with 30 full-time employees or more, you are obligated under federal law to offer health insurance benefits that meet certain regulatory standards. Failure to do so can result in fines, and lack of benefits can also carry other consequences like low employee morale and high employee turnover. Choosing a health insurance benefits plan doesn’t have to be difficult, though. You can work with a PEO service to outsource the task, or you can hire an insurance broker to find you the best plan for your team. Health insurance can be a daunting subject, but with these tools and partnerships, your business can offer benefits to your employees with ease.

Tejas Vemparala contributed to this article.