Offering Health Insurance – The Small Business Owner’s Guide

After reading this article you will have a solid understanding of the primary options for offering health benefits to your employees. This is the first in a series of articles, the purpose of which is to simplify your post Obamacare health insurance options.

A Summary of Your 3 Broad Options For Offering Health Benefits

Most small business have absolutely no legal obligation to provide health insurance, since only businesses with the equivalent of 50 full-time employees need to offer health benefits. That being said, you may want to offer health insurance in order to attract and retain great employees.
There are three main options that you should consider as you begin exploring your health insurance options:

1. Increase employee compensation – Give your employees a raise so they can purchase their own health insurance.
2. Offer a “cafeteria” plan - A special account your employees can use to pay their health insurance premiums with pre tax income, and that you can make tax deductible contributions to.
3. Offer small group health insurance – How health insurance has typically been offered by employers.

What We Recommend

The right recommendation is going to depend on the size of your company, the salary levels of your employees, and how many of them are not already getting their insurance through some other means (such as a spouse).
Because there is no one size fits all solution, we recommend taking the following steps to decide which option is best for your business:

1. Talk to your employees to gauge interest in health insurance. Find out who is being covered by a spouse, who is purchasing their own insurance, and who is uninsured.
2. Talk to a health insurance professional. Ask them whether an employee raise, a cafeteria plan, or a small group plan would be best for your unique situation. Get quotes for different plans, as well as a firm understanding of the tax implications for each option. Ask them how complicated each option will be to manage and administer.

Not all insurance professionals are created equal, so make sure you have a basic understanding of the ins and outs of each option (detailed below). This way you will understand enough about your options to know whether or not the insurance broker you are speaking with knows their stuff.
If you are looking for a good starting point we recommend speaking to Jonathan Pocius of Payroll Services LLC who was a source on this article and we found highly knowledgeable. He can be reached at 240-215-4438 or via his website at www.payrollservicesllc.com
Here is a more detailed overview the ins and outs of each option:

Increase Compensation

Offering health insurance can be extremely complicated, so one option is to completely avoid getting involved, and just give everyone a raise that they can use to buy their own plan.

Pros:

1. Fixed costs: You are in complete control of compensation, so you can set the exact amount you want to spend on health insurance and easily stick to your budget.
2. Tax deductible: Salaries are tax deductible as business expenses.
3. Greater employee choice: Employees can shop around on the individual exchanges for the plan that best suits their needs.
4. Customizable incentives: You can offer different amounts to different employees, which helps you attract and retain valuable employees.
5. Cheaper plans and subsidies: In most cases, plans purchased through the individual marketplaces are cheaper than the equivalent costs when paid as part of a small group plan. Furthermore, many of your employees may qualify for health insurance subsidies through the Obamacare health insurance marketplaces (discussed in more detail below).
6. Ease of use: Letting your employees select and manage their own plans means one less thing for you to worry about.

Cons:

1. No tax deductions for employees: Employee salaries are taxable, so they will pay tax on any additional compensation that you provide to help them purchase health insurance. Group health plans, on the other hand, allow employees to contribute towards their their insurance premiums using “pre-tax” income. The portion of premiums which is paid by the employer is also not taxed as income to the employee.
2. You Have To Pay Payroll taxes: Even though you can deduct salaries as a business expense, you will still be on the hook for the payroll taxes on the additional salary you are paying.
3. No control over employees’; use of funds: There is no way for you to compel your employees to use their extra income to buy health insurance. You can encourage them to buy insurance, but there is no way to guarantee that they won’;t use it for a vacation instead.

More Details:

Increasing employee’;s compensation so they can buy their own health insurance allows your employees to shop around for the plan that works best for them, and saves you a huge administrative hassle.

If your employees make less than 400% of the federal poverty line ($45,960 in 2014), they may qualify for government subsidies on health insurance plans offered through the individual Obamacare marketplaces. These subsidies could further reduce your employees’; health insurance costs, but they won’;t qualify if you offer a group plan.

This means that the only way to ensure your employees will have access these subsidies is to not offer group health insurance. Furthermore, plans purchased on the individual market are generally cheaper than equivalent group plans, so going the individual route is often the best bet.

Before 2014, not offering group health insurance was seen as a serious drawback, since people with preexisting or chronic health conditions could be denied individual health insurance, or charged extremely high premiums. This made it important for people to get health insurance through their employer, where they could be sure to find coverage at a reasonable cost.

The Affordable Care Act (Obamacare) changed all of this, however, by making it illegal for insurance companies to deny anyone coverage. This relieves some of the pressure on small business owners to provide group health insurance, since you know that all your employees will be able to access quality, affordable health insurance on the individual marketplaces. Many experts believe the Affordable Care Act will make small group health plans obsolete, and encourage small business employees to go to the individual exchanges.

The downside of increasing compensation to help your employees pay for health insurance is that you give more money to the government this way. Because the extra money is being paid out as salary the business must pay payroll taxes on the money, and the employee pays their normal income taxes on the additional income.

A Cafeteria Plan

Cafeteria plans can be a good way for small business owners to avoid paying additional payroll taxes, while also giving their employees the ability to buy insurance using pre-tax income.

Pros:

1. Fixed costs: You are in complete control of how much you contribute to your employees cafeteria plan, so you can set the exact amount you want to spend on health insurance and easily stick to your budget.
2. Tax advantaged: Contributions are tax deductible as business expenses and exempt from payroll taxes.
3. Employees use pre-tax income: Employees are not taxed on any contributions that they make to their cafeteria plan.
4. Greater employee choice: Employees can shop around for the plan that best suits their needs.
5. Customizable incentives: You can offer different amounts to different employees, which helps you attract and retain valuable employees.
6. Cheaper plans: In most cases, individual plans are cheaper than small group plans.

Cons:

1. Complexity: Setting up and administering a cafeteria plan is complicated, and the rules and regulations can be difficult to understand.
2. No subsidies: Employees are not eligible for government subsidies when purchasing through a cafeteria plan.

A cafeteria plan is a form of “Section 125″ plan that allows employees to set up health spending accounts that allow employees to contribute a certain amount of their income to a designated account before taxes are calculated. Employees can then use this account to pay for insurance premiums and other medical expenses.

Cafeteria plans can help you avoid paying FICA taxes, and lets your employees pay for medical expenses using pre-tax income. This can save you both a lot of money.

There are two primary downsides to using cafeteria plans as part of your business:

1. They are tricky to setup and administer.
2. Individuals cannot use cafeteria plans to purchase health insurance that is part of the affordable care exchanges, and are therefore not eligible for government subsidies.

There is also a lot of confusion, even among insurance professionals, as to whether or not Obamacare allows cafeteria plans to be used when purchasing off exchange health insurance plans.

This is why if you are going to explore this option we recommend working with a knowledgeable professional.

Group Health Insurance Plans

When people think about health insurance, they are most likely thinking about an employer-provided group plan.

Pros:

1. Easy for employees to understand: most people are already familiar with the concept of employer-based health insurance, and view it as the most important job related benefit. Offering a group plan will almost certainly increase your appeal as an employer.
2. Tax benefits: the money you spend on providing health insurance counts as a business expense, which means it is tax deductible. Employees are also able to pay for their share of health insurance premiums out of their pre-tax income, which decreases their overall tax obligation.
3. Tax credits: If you purchase your group plan through one of the Obamacare exchanges, you may qualify for a tax credit worth up to 50% of your contribution towards your employees’; premium costs. While this sounds enticing, unfortunately the requirements to receive the tax credit generally make providing group health insurance too expensive for the average small business, even with the tax credit. To qualify for this tax credit you must pay at least half of your employees’; health care premiums and have 25 or fewer full-time equivalent employees who earn an average of $50,000 or less per year. The tax credits will be available to small businesses for 2 consecutive years, and more information is available from the IRS here.
4. Share the premium payment: Offering a group plan doesn’;t necessarily mean that you need to pay the whole cost of the premium. Employers typically pay 50-80% of the premium cost, but small business can generally make smaller contributions and defer the rest to the employee. Depending on your particular circumstances you may end up paying anywhere from 0% to 100% of the premium cost.

Cons:

1. Cost: Providing group health insurance can be expensive. In 2012, the average cost to all employers was $4,226 per employee. In addition to this, employees paid an additional $1,118 on average (See this report for state averages).
2. Changing prices: Health insurance premiums often change from year to year depending on the costs of medical procedures, physician pay, prescription drugs, and administration. The complex calculations underlying health insurance premium makes it difficult to fully anticipate changes and budget accordingly. If you commit to a group plan, you may end up on the hook for a larger expense than you anticipated.
3. Minimum requirements: In order to qualify for most group plans, you have to give all your full-time employees the option of enrolling, and at least 70% need to actually opt in. The exact requirements will vary depending on the insurance company and plan, but group plans generally give you less flexibility than simply increasing compensation, which you can do on a case-by-case basis.
4. Administrative hassle: With a group health insurance plan, its up to you to select and manage the plan you offer. The administrative responsibilities associated with this can take up a lot of time, and keep you from more important aspects of your business. It can be difficult to choose a one size fits all plan that will satisfy all your employees and meet their diverse needs.

As with a cafeteria plan, we also recommend that you only shop for a small group plan with an experienced health insurance professional. Using a broker won’;t cost you more than shopping on your own, and they will be able to explain to you the benefits and options of various plans.

When you talk to an advisor, ask about traditional small group plans, the Obamacare SHOP plans, and getting group coverage through a Professional Employer Organization (PEO). They will be able to give you exact quotes, and help you understand the costs and tax implications of each option.

 

Conclusion

Here at Fit Small Business we always try to give business owners all the information they need to accomplish a specific task, without any outside help. In this instance however, we strongly recommend that you seek professional advice in order to find the best solution for your business. Trying to navigate the post Obamacare health insurance marketplace on your own is simply not worth the time, hassle, or risk.

The goal of this article was to arm you with enough information so you can vet a potential insurance professional and know if they are worth their salt. If you don’;t already have an insurance professional to talk to, we recommend speaking with Jonathan Pocius of Payroll Services LLC, who was a source on this article and we found highly knowledgeable. He can be reached at 240-215-4438 or via his website at www.payrollservicesllc.com

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