Offering Health Insurance as a Small Business: What Are the Pros and Cons?

Want to offer health insurance as a small business? We’re here to help you weigh your options.

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There are many things for SMBs to consider before offering healthcare coverage

The pressure is on businesses large and small to offer healthcare coverage for employees. More than any other benefit, medical coverage can attract and retain talent for any size organization. By offering healthcare coverage to staff and their dependents, businesses increase their ability to hire the best talent in their area.

In today’s competitive talent market, every advantage a business can leverage is worth considering.

Employees and job seekers are demanding healthcare coverage; in many cases, they are forcing SMBs to weigh the benefits versus costs of offering this much-wanted perk.

There are pluses and minuses to both sides of the equation: whether or not you can afford to offer medical coverage may include more than just the cost of monthly premiums. As SMBs, there are many things to consider as you weigh your options.

Pros: The case for offering healthcare benefits

Attracting employees and holding on to them

The first benefit of offering healthcare benefits, of course, is to attract and retain talent. The evidence is overwhelming that candidates and workers look primarily to their employers to get access to healthcare insurance.

Studies reveal 88% of job seekers believe the quality and options of a health insurance plan are important when determining whether or not to accept a job. When it comes to finances, 80% would accept a job with benefits over an identical job that offered 30% higher salary but no benefits. When it comes to retention, an SHRM study found 72% of employers believe their healthcare coverage is a key tool in engagement and retention.

Employees and job seekers are demanding healthcare coverage; in many cases, they are forcing SMBs to weigh the benefits versus costs of offering this much-wanted perk.

However, healthcare coverage is more than a tool for attracting and retaining talent — it provides businesses with other benefits.

Overall wellness

Healthy employees are simply more productive. But in addition to being more healthy on the job, access to healthcare resources can reduce or improve in 2 significant categories.

Absenteeism/presenteeism 

American workers take over 3 billion sick days per year, costing businesses untold billions of dollars in lost productivity. On the other side of the coin, the cost of presenteeism (coming to work sick) adds billions in lost performance costs.

When employees have access to healthcare coverage, they’re more likely to access the services available to them. They can get to the doctor sooner (before an illness gets out of hand), receive and take medicine, get healthy, and come back to work sooner.

Presenteeism does more than hurt businesses with low productivity. A single sick employee has the chance to infect everyone around them. The ripple can mean a wave of illness that sweeps through a company for weeks, adding more absences and illness.

Multiple tax benefits

Tax benefits are another pro in favor of offering healthcare benefits to employees. Every dollar you invest in employee healthcare coverage is 100% deductible under federal and state tax law. These business expenses can be significant, so the government is happy to support employer contributions with tax incentives.

If your business has less than 25 employees, you may be eligible for the Small Business Health Care Tax Credit if you purchase coverage for yourself and your employees through the SHOP (ACA) marketplace.

If your employees earn less than $53,000 per year, you can earn a tax credit of up to half the employer portion of the premium paid. If, for example, your company offers to pay half of the employee premiums per month, your tax credit could offset your half, reducing the employer portion to one-fourth the cost. In addition, that portion would be deductible under the tax code.

Another benefit of offering healthcare to staffers is a savings in payroll taxes. Healthcare premiums are deducted from an employee’s salary on a pre-tax basis. Any portion of the premium your staff members pay reduces their taxable income. This results in a savings of your business’s FICA tax contribution.

In addition to providing a much-desired benefit to employees, businesses must consider the following advantages:

  • Pluses of attracting and retaining talent
  • Increases in productivity
  • Tax benefits
  • Savings far outweigh the cost of coverage

Cons: the case against offering healthcare benefits

There are many reasons SMBs either put off thinking about providing healthcare coverage for staff or rule it out completely. The most prohibitive is typically cost, but there are other considerations as well.

Cost

The first concern for businesses when considering providing healthcare coverage for staff members (and often for themselves or families) is the cost. One study found the cost for family plan employer-sponsored healthcare at nearly $20,000 per year, with single employee coverage nearing $7,000 per year.

Even with potential tax benefits and savings, that amount can be a difficult hurdle for many businesses. The cost of healthcare is also generally expected to rise every year for the foreseeable future.

Plan administration

The task of administering healthcare coverage can be daunting. Employers worry about the duties they’ll be responsible for and resources they’ll need to invest when offering coverage to staff members.

In addition to explaining benefits and signing up employees initially and at annual enrollment, premium payments must be deducted and paid monthly. When employees have problems and concerns, they often land on a small business owner’s desk. Often, these owners don’t have the answers, which can mean they spend a lot of time trying to find solutions or carrier representatives that can help.

Group size

The size of the employee group can be another factor in the negative column when it comes to considering healthcare coverage. Typically, the smaller the group, the higher the price and/or the more limited the coverage that’s available. There are some options to help offset these, like tax breaks, but group size is a high consideration for SMBs.

Who should be included?

Another factor that SMBs have to consider is who to enroll in coverage. While many employers limit healthcare benefits to full-timers, some find part-timers and contract workers are as difficult (or even more difficult) to recruit and retain. Offering the benefit could be a boost to these metrics, but it can be hard to justify the cost involved.

Healthcare coverage options for SMBs to consider

When trying to determine whether or not your business can afford the cost and administration of healthcare coverage, here are some other options to consider.

Deferring coverage to the exchanges

For some businesses, reimbursing employees who purchase coverage under the ACA is an option. The IRS allows businesses to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) to reimburse employees who purchase healthcare coverage through the government exchanges created under the Affordable Care Act. By simply reimbursing your employees for the coverage they purchase as individuals, you could find the best of both worlds: coverage for them and fewer headaches for you.

Another option may be Association Health Plans, a new offering offered by the U.S. Department of Labor. AHPs allow businesses in similar industries or geographic areas to band together forming larger insured groups. These larger groups can help lower healthcare premium costs — as risk is distributed among more workers — and may offer better benefits.

If you can’t find an AHP in your area or a QSEHRA isn’t an option, consider a third-party benefits provider, like Zenefits, to reduce risk over a larger insured pool.

This could reduce the overall cost and help with:

  • Payroll deductions
  • Plan administration
  • Enrollment

By joining a larger pool, employees may enjoy better or increased coverage or coverage options.

The choice of providing healthcare coverage weighs heavy on SMBs. Considering all the available options and balancing cost versus benefit can help determine whether your organization can provide coverage for yourself and your staff.

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