Summary: Small business health insurance boosts employee retention and morale but comes with challenges like higher costs and limited options. Affordable solutions include SHOP marketplaces, HRAs, and PEOs, offering tax advantages and simplified administration.
If you want to attract and retain top talent, you need to offer something other small businesses don’t. After salary, one of the first things most applicants weigh is whether or not an employer offers benefits.
As a small, growing business, competing with larger companies can be challenging. However, there are affordable options for small business health insurance. Each one can potentially boost team productivity, morale, and loyalty while boosting your reputation. It can even lead to long-term cost savings by increasing staff retention.
In this guide, we’ll answer common questions about health insurance for small businesses. Continue reading to learn how to offer a benefits package, even with limited resources.
Is Business Health Insurance for Small Companies More Expensive?
Small companies have a few disadvantages when offering small business group health insurance. For example, they might have a small (or non-existent) HR team, making the process of sourcing plans a burden. This can eat up administrative resources, reducing efficiency.
Finding affordable plans for small businesses can also be a challenge. Small companies can’t leverage economies of scale to negotiate lower premiums. Furthermore, smaller risk pools make insuring small businesses unattractive to many insurance companies.
While it’s possible to offer a plan, there will be fewer options. Ultimately, the cost per employee might make it seem unattractive. That can lose you qualified talent or decrease team morale.
With that said, if you prioritize employee health, small business insurance is a must. There are several affordable options that can make offering health insurance more practical.
The Power of Health Insurance Marketplaces
Small business owners should look into the Small Business Health Options Program (SHOP). SHOP is a marketplace designed to help small businesses provide health insurance to their employees. It is part of the U.S. Affordable Care Act.
Not only can you compare and select health insurance plans on SHOP, but you can manage coverage using a single platform.
Furthermore, small businesses may potentially qualify for tax credits to offset the cost of providing insurance. For example, certain small businesses may qualify for the Small Business Health Care Tax Credit. That can account for up to 50% of premium costs for for-profit businesses.
While affordability is the primary factor for most employers, choosing SHOP insurance comes with other benefits. These include:
- Flexible coverage levels
- Simplified online administration tools
- No extensive paperwork
This can save your small business money in the long term.
Who is Eligible for SHOP Health Insurance for Small Businesses?
To qualify for SHOP insurance, your business must:
- Operate in a state that offers SHOP
- Offer coverage to all employees who work 30+ hours per week
- Employ fewer than 50 full-time equivalent employees (or up to 100 full-time equivalent employees in certain states)
Likewise, a minimum of 70% of your employees must enroll in your SHOP plan. However, this is flexible during the open enrollment period.
If your state does not offer SHOP, it may direct businesses to insurance brokers or state-specific marketplaces.
Alternatives to SHOP for Small Businesses
In some states, SHOP may not be a feasible way to offer small business health insurance to your team. Instead, consider one of the following alternatives.
Health Reimbursement Arrangements (HRAs)
HRAs allow you to control costs, offer flexibility, and provide health benefits without committing to a full group plan. Employees can choose an individual health insurance plan that fits their needs. That eliminates or significantly reduces the administrative burden. However, you will likely need to educate your employees about HRAs upfront, as they may be unfamiliar.
Essentially, HRAs offer tax-free reimbursement to your team for qualified medical expenses, including health insurance premiums. The IRS sets annual contribution limits, and employers determine the fixed reimbursement amount.
Professional Employer Organizations (PEOs)
PEOs offer comprehensive HR outsourcing, including payroll, compliance, and employee benefits. They pool employees from multiple businesses, allowing them to leverage economies of scale. Thus, smaller businesses can gain access to benefits typically only available to larger companies.
While your business will manage employees day-to-day, the PEO will become the employer of record. This provides administrative relief, allowing small business owners to focus on what matters. They tend to be compliance experts and can handle backend tasks competently.
With that said, there is a cost to work with a PEO, which can be prohibitive for some small businesses. It also requires small business owners to give up some direct control over HR management. Ideally, you should only work with a PEO if you truly wish to outsource your HR department. It may not be ideal as a health insurance solution.
Small Business Health Insurance Costs
According to the Kaiser Family Foundation, small businesses see an average monthly premium of $703 for single coverage. The study found average monthly premiums of $1,997 for family coverage.
Remember, most small business owners pay at least 50% of the monthly premium for their employees. For small businesses, this can add up. However, most employees agree that the benefits are worthwhile.
With that said, employers can deduct the amount they pay toward health insurance premiums. They should record it as a business expense on their federal taxes. This deduction reduces taxable income, potentially saving thousands of dollars annually.
Likewise, employer-paid premiums are not considered taxable income for employees. That can enhance the perceived value of the benefit. It also increases take-home pay without additional tax liability.
Master HR Skills with Small Business University
HR management can be complex, especially if your expertise lies elsewhere. Our free Small Business University webinars break down these concepts for business owners. Browse our webinar library to grow your knowledge today.