Health insurance is a key employee benefit your business can offer that can help you with recruiting, retaining talent, and saving on taxes. Group health insurance is the employer-provided benefit that is most commonly sought by employees.
Group Health Insurance
With a group health insurance plan, your company pays premiums to an insurance company using a combination of company funds and money withheld from your employees’ paychecks. In exchange for these premiums, the insurance company helps your employees pay for the cost of medical care.
In most states, a business needs at least 2 people, including the owner or founder, to form a group qualifying for group health insurance. However, a few states allow single-person companies to qualify for group health insurance. Additionally, most states require that 70% or more of employees in the group be enrolled in the health insurance or be covered from another source such as a spouse’s health insurance plan, Medicare, or a personal health insurance plan.
Companies with less than 50 employees are not required to offer health insurance to their employees. However, companies with 50 or more employees are required by law to offer a qualified health insurance plan to eligible employees and their families. Additionally, these companies must ensure that the plans are affordable for employees, and file IRS forms 1094-C and 1095-C to report their compliance.
Why should my business offer health insurance?
Although offering health insurance is optional for many smaller businesses with fewer than 50 employees, there are several important reasons your business may want to offer health insurance.
Employee surveys consistently show that employer-sponsored health insurance is the most popular benefit for employees. Offering a competitive health insurance plan can help you attract and retain talented employees. As the centerpiece of your company’s employee benefits package, group health insurance can help make your company an attractive place to work by showing concern for the well being of its people.
Group health insurance also has important tax benefits for your company. Any premiums that your company pays for health insurance are deductible on your income taxes as a business expense. Additionally, employees can use pre-tax dollars to pay for health insurance, which lowers their taxable income, leading to lower payroll taxes for your business.
Small companies can qualify for a small business health care tax credit of up to 50% of premiums paid if they meet the following criteria:
- Your business covers at least 50% of your employees’ premium costs.
- You have fewer than 25 full-time equivalent employees with an average annual salary of under $50,000 per year.
- As a business owner, you purchase your own health insurance coverage through the same plan that your employees use.
Employer-sponsored health insurance also provides a tax benefit for your employees, as they are able to use pre-tax dollars to pay their health insurance premiums, which reduces their taxable income.
Purchasing Health Insurance
Group health insurance is available through two major sources: an insurance agent or broker, or a professional employer organization (PEO).
Insurance agents or brokers can help you compare different insurance plans, provide pricing information, and help you complete paperwork and other necessary steps to set up health insurance coverage for your company. Insurance brokers are usually compensated with a commission they earn for selling a health insurance plan, although a few brokers also charge additional fees that they should disclose in advance.
With a professional employer organization (PEO), your company can outsource management tasks related to providing employee benefits. The cost of using a PEO’s services is about 2% of an employee’s payroll on average. However, using a PEO can sometimes provide cost savings on your insurance plan, as PEOs are able to pool together employees from multiple companies, forming a larger group that can negotiate better rates from insurance companies. PEOs can also help your company with payroll, HR and payroll tax compliance.
Health Insurance Definitions
Before diving into the types of health insurance plans, it’s helpful to understand a few key concepts so that you can evaluate the pros and cons of each type of plan.
Health insurance plans have networks of doctors and other medical service providers. The health insurance plan will help pay for medical care that you receive from these networks of healthcare providers. When a provider belongs to a network, that provider is considered to be in-network.
Some health plans also provide out-of-network coverage. When a plan provides out-of-network coverage, the plan will help pay for medical care from any medical professional or healthcare facility. However, seeking care from an in-network provider will be cheaper for the patient than going to an out-of-network provider.
Premiums are the cost that employees and employers pay to the insurance company to purchase insurance coverage. Premiums can be paid from the employers’ operating funds, or from payroll deductions from employee paychecks. Usually, both employers and employees contribute to health insurance premiums.
Some health plans have deductibles, which are medical expenses that a patient is responsible for paying before the insurance plan begins to pay for expenses. In the health insurance context, deductibles are cumulative for the plan year. For example, if your plan has a deductible of $1,000 for the calendar year 2018, then the patient would be responsible for the first $1,000 of medical expenses that year before the insurance coverage starts to help pay for expenses.
A copayment is a fixed dollar amount a patient is responsible for paying when receiving a medical service. For example, if your plan has a copayment of $20 for visiting a primary care doctor, then the patient would have to pay $20 per visit, and the insurance company would pay the rest of the cost of the visit.
Coinsurance is a percentage of the bill a patient is responsible for paying when receiving a medical service. Coinsurance usually applies to specialists, hospital visits, and other higher dollar medical care. For example, your plan might have 20% coinsurance for a hospitalization. If the hospital visit costs $2000, the patient would be responsible for paying $400, and the insurance company would cover the remaining $1,600.
The out-of-pocket maximum is the maximum amount that a patient will have to pay for medical care in a plan year, including all copayments and coinsurance. If a patient requires care that costs more than the out-of-pocket maximum, the insurance company will cover all of the expenses that exceed the maximum, and the patient won’t have to pay any more copayments or coinsurance for the rest of the plan year.
Higher deductibles, copayments, coinsurance percentages, and out-of-pocket maximums lead to lower premiums.
Types of Health Insurance Plans
There are five major types of health insurance plans that offer different types of coverage, ease of use, and pricing. These broad categories cover most plans, but each insurer may have customizations and different types of coverage, so it’s important to consult the policy details or discuss with a broker to fully understand the insurance coverage.
Health Maintenance Organization (HMO)
An HMO is a type of health plan that limits where a member can receive care. HMOs usually have limited networks of medical providers and usually require a member to receive a referral from a primary care doctor in order to see a specialist. Usually, HMOs do not provide any coverage for out-of-network care. However, seeing an in-network provider usually has a low copayment, which can even be $0 in some cases. HMOs usually offer the lowest premiums out of the five types of health insurance plans.
High Deductible Health Plan (HDHP)
An HDHP is a health plan with a large deductible and high out-of-pocket costs. For example, an HDHP may have a deductible of $3,000, which means the member is responsible for paying all of her own medical expenses up to $3,000 in a year before receiving any coverage from the insurance plan.
HDHPs are usually paired with a tax-free savings option such as a health savings account (HSA) which allows employees to save pre-tax dollars to pay for out-of-pocket costs. With a HDHP, members usually have access to a wide network of medical professionals or may be able to see any doctor that they want. Usually, HDHPs do not require referrals to see specialists. HDHPs have higher premiums than HMOs but usually lower premiums than PPOs.
Preferred Provider Organization (PPO)
PPOs are health insurance plans with very expansive networks of medical providers, with no referrals required. Additionally, it’s possible to see out-of-network providers with a PPO and still be covered. PPOs usually feature some out-of-pocket costs for members, such as deductibles, copays, or coinsurance. PPOs are plans with the broadest coverage, but the highest premiums.
Point of Service (POS)
With POS plans, members have a choice between providers that are in-network or out-of-network. The network of POS plans is usually more limited than that of a PPO. Members of a POS plan will usually have some out-of-pocket costs such as a deductible or copayment. If a member chooses to go out-of-network, they will pay more than if they choose to stay in-network. Premiums for a POS plan are usually higher than an HMO but lower than a PPO.
Exclusive Provider Organization (EPO)
EPO plans feature large networks of medical providers, with no referrals needed. However, unlike PPO or POS plans, out-of-network medical care is not covered, except for emergencies. Since EPOs offer larger networks than HMOs, premiums are also higher than HMOs. However, since out-of-network care is not covered, premiums are usually lower than a PPO.
Healthcare Savings Accounts
In addition to health insurance plans, you can also offer health care savings accounts to your employees. These optional accounts allow your employees to use pre-tax dollars to pay for healthcare expenses. These accounts can be offered in conjunction with a traditional health plan. For companies with less than 50 employees that can’t afford or don’t want to offer a traditional health plan, the FSA and HRA can be offered on a standalone basis.
Flexible Spending Account (FSA)
The FSA is a pre-tax, employer-sponsored account that is funded by regular deductions from an employee’s paycheck. Any funds saved in the FSA can be used by the employee to pay for healthcare expenses. An FSA doesn’t roll funds over from year to year, so an employee has to use up all the FSA funds in the same year the contributions are made. The FSA is owned by the employer, so if an employee leaves a company during the year, he forfeits the funds in the FSA.
In 2018, employees can contribute up to $2,650 per year to an FSA account.
Health Savings Account (HSA)
An HSA is a different kind of pre-tax healthcare savings account that is only available when it is paired with an HDHP. Employees can contribute to their HSA through pre-tax payroll deductions, and an employer can match employee contributions. Employees can use these funds to pay for medical expenses and deductibles, which is handy for an HDHP because these plans feature high deductibles before insurance coverage kicks in. HSA accounts are owned by employees, so if they leave your company, they can take their HSA savings with them.
For 2018, the maximum HSA contributions allowed (including both employee and employer contributions) are $3,450 for an individual and $6,900 for a family.
Health Reimbursement Account (HRA)
An HRA is a type of healthcare savings account that is entirely funded by an employer. It allows employees to be reimbursed by their employer for medical expenses by submitting their invoices and receipts.
When establishing an HRA, it’s important for the company to have an outside broker or a HIPAA certified HR manager administer the program. Since employees will be sharing confidential medical information with the company, the HRA can lead to privacy problems. If information about an employee’s health status affects their career, such as being passed over for a promotion because the company knows you are sick, it can expose your company to lawsuits. These problems can be avoided by properly designing the program to protect employee privacy.
For 2018, the maximum an employer can contribute to an HRA is $5,050 for individual coverage and $10,250 for family coverage.
Pairing Healthcare Savings Accounts with Insurance Plans
Healthcare savings accounts work best when they are combined with health insurance plans. A few possible combinations include:
- An HSA with an HDHP. Since an HDHP has high deductibles, it will have high out-of-pocket costs for members. With an HSA, employees can save funds on a pre-tax basis to cover their costs until they meet their deductible.
- An FSA with an HMO, PPO, POS, or EPO. Having an FSA can help plan members pay for any copayments, coinsurance, and any other out-of-pocket costs using pre-tax dollars.
Costs of Health Insurance
As an employer, you can set up and offer health insurance to your employees, but you are not obligated to pay for the cost of the health insurance premiums. However, companies that do offer health insurance are required by law to offer plans that are affordable to employees, which is defined as less than 9.5% of a full-time employee’s salary for single coverage. Employers that offer insurance plans that are not affordable may face penalties under the Affordable Care Act.
According to the Kaiser Family Foundation, in 2017, the average cost of single coverage was $6,690 per year. The average employer contribution was $5,477, and the average employee contribution was $1,213. For family coverage, the average cost was $18,754, with $13,049 being contributed by employers, and $5,714 contributed by employees.
Factors Affecting Cost
As an employer, you have a number of choices about the health insurance that you offer that can influence the premiums you and your employees pay. Furthermore, your premiums can be affected by your location, as prices vary by city and state.
The most important factor affecting the cost of insurance is your choice of benefits to offer, and type of plan. Plans that provide more benefits, such as PPOs, will cost more than plans with narrower networks, such as HMOs. Furthermore, choosing plans with higher copays, deductibles, coinsurance, and out-of-pocket expenses will lead to lower premiums. However, reducing benefits will increase expenses for your employees when they seek medical care.
Another major decision affecting insurance costs is what portion of the health insurance costs you will cover. Some employers choose to cover a percentage of the premiums, usually ranging from 50-100% of the premiums. Sometimes employers will pay a portion of premiums for the employee only, and leave the employee responsible for the cost of any family coverage. Another approach is to provide a flat dollar amount for the coverage, with employees responsible for the remainder, which could vary based on whether they cover their spouse or dependents.
As an employer, you also have a choice on who can be covered by the insurance plan. You can offer coverage just to the employee, to the employee and spouse, or family coverage. Offering coverage to spouses and families may cost more if you help pay for the coverage, but it can be an important way to attract and retain employees with families.
Additionally, you can choose whether to extend coverage to full-time employees only, or to part-time employees as well. Many companies choose to extend coverage only to full-time employees working 30 hours a week or more.