Small businesses are getting increasingly squeezed by the rising cost of providing health insurance plans to their employees and their families. Fortunately there are several strategies that may help you alleviate some of those costs while still providing for the healthcare security your workers and their families need.
Health Insurance Plans for Small Businesses – 2024 Guide
If you’re a small business owner with anywhere from 2 to 10 employees, this article is specifically for you.
In this post, we’ll discuss the problem small employers face in providing healthcare security to their workers while still remaining competitive in their industries.
Then we’ll look at some smart alternative strategies that many employers are using to manage those healthcare costs while still attracting, retaining, and taking care of talented employees and their dependents.
While traditional health insurance is often a good solution, many small employers are realizing significant savings and high employee satisfaction by thinking “out of the box” and employing some imaginative and effective strategies to manage their employee benefits.
The Problem with Health Insurance Plans for Small Businesses: High & Rising Costs for Employee Health Care
Despite the passage of the Affordable Care Act a little over a decade ago (and, in part, because of it!), the cost of providing much-needed health benefits for workers and their families continues to steadily accelerate.
2022 saw average employee health care costs reach a new record of $15,013. And costs are projected to increase another 5.4 percent in 2023.
In prior years, employers responded to health insurance cost increases via increasing “cost sharing” with workers. This is a euphemism for passing more and more costs onto workers themselves:
- Workers had to take on an increasing share of health insurance premiums
- They had to take on more risk in the form of higher deductibles
- They had to pay more in co-insurance, co-pays, and other costs
And in some cases, employers don’t provide any health insurance coverage at all. For example, rank and file employees in unskilled labor-intensive businesses like restaurants receive little or nothing at all in the form of health benefits.
Others rely on part-time workers and don’t extend health benefits except to the inner core of ownership/management.
But those options aren’t realistic in today’s tighter and more competitive labor market. The best talent has options, and they are demanding more in terms of health benefits.
It is very difficult for small employers to recruit and retain the help they need without offering a competitive health benefits package.
Compare Pricing on the Best Healthshare Plans Available
Health Insurance Plans for Small Businesses Option 1: Small Group Health Insurance Coverage
This is still the most common option with most small business owners. And for many, it’s the path of least resistance. It’s much easier to just let an existing health plan renew than to do deep research into other options. And so many employers just renew their existing health plan each year.
Advantages of Staying With Traditional Group Health Insurance
The advantage is convenience. It saves the time and effort of looking for a new healthcare plan, educating employees about how it works, and enrolling everybody into the new plan.
Traditional health insurance plans are also good for employees with one or more pre-existing conditions. This is because health insurance must by law provide coverage for group health enrollees’ pre-existing conditions from day one.
Disadvantages of Staying With Traditional Group Health Insurance
The chief disadvantage of traditional insurance is cost: The Affordable Care Act requires all qualified health insurance to provide at least ten “minimum essential coverages” – whether your employees want the coverage or not.
This “one-size-fits-all” approach results in bloated, inefficient insurance policies. It also penalizes responsible people, and drives up costs substantially.
These higher costs get passed on to workers and employees alike in the form of higher premiums, higher coinsurance amounts, and higher deductibles.
Mitigating the High Cost of Group Health Insurance
But even if you stick with providing a traditional group health insurance plan, there are several things you can do as a small employer to help limit your costs:
1. Offer High Deductible Health Plans (HDHPs)
Offer a high deductible health plan (HDHP) to employees and encourage them to consider it.
As of 2023, high deductible health plans have a minimum deductible of $1,500 for self-only HDHP coverage (up from $1,400 in 2022) and $3,000 for family HDHP coverage (up from $2,800 in 2022). That means employees will be taking on more out-of-pocket risk. But it also results in significantly lower monthly premiums for both the worker and the employer.
2. Encourage Health Savings Accounts (HSAs)
Just as importantly, when a worker joins a high-deductible health plan, he or she becomes eligible to make pre-tax contributions to a health savings account, or HSA.
And as an employer, you can take some or all of the premiums that you save by switching the employee to an HDHP and contribute to the employee’s HSA on his or her behalf.
HSAs are one of the most powerful types tax-advantaged accounts in the tax code:
- Contributions to HSAs are pre-tax. So the employee saves on income tax, and both the employer and the worker save on FICA taxes.
- Assets in the HSA grow tax-deferred for as long as they’re in the account.
- Workers can tap HSA money tax-free and penalty-free at any time to pay for qualified health expenses.
- If the worker doesn’t need the money for health care, they can use the money penalty free to supplement retirement income starting at age 65. So in effect, an HSA may eventually get treated similarly to an IRA or 401(k) account later in life.
HSAs have no “use it or lose it” benefits, as is the case with Flexible Spending Accounts (FSAs).
As of 2023, the maximum allowable contribution to an HSA is $3,850 for individuals with self-only HDHP coverage (up from $3,650 in 2022), and $7,750 for individuals with family HDHP coverage (up from $7,300 in 2022).
If your employee enrolls in a group HDHP, you can make direct contributions to your employee’s HSA on their behalf, up to the annual limit.
Employer contributions to HSAs are fully deductible as a compensation expense.
Many employers find that when employees fully understand the power of the health savings account, together with the advantage of lower monthly premiums that their HDHP brings, more of them sign up.
This lowers overall health care costs and improves tax efficiency for both employers and workers.
3. Shop Around
Employers should also get quotes from competing insurance carriers on a regular basis. So you can be confident that your current insurance company is treating you and your workers fairly, and to take advantage of any savings opportunities.
Also, unlike HMOs and PPOs, which are two very common options in the group health care market, HSAs don’t impose a limited care network. Your workers can use their HSA money with any provider.
This helps empower your employees and their families to choose their own doctors for many procedures, and help them realize a vastly superior healthcare experience compared to what they may receive if they were limited to your plan’s HMO-approved network of lowest bidders.
The Small Business Health Insurance Tax Credit
Another advantage to offering a group health insurance plan is the Small Business Health Insurance Tax Credit. This credit can be worth up to 50% of the costs of your health plan (35% for not-for-profit employers).
So in effect, the Small Business Health Insurance Tax Credit may subsidize your employee health care costs by up to fifty cents on the dollar.
As an employer, you must meet all these criteria to qualify for the Credit:
- You must have fewer than 25 full-time equivalent (FTE) employees
- Your average employee salary is must be about $56,000 per year or less
- You must pay at least 50% of your full-time employees’ premium costs
- You must offer SHOP coverage to all of your full-time employees. (You don’t have to offer it to people working fewer than 30 hours per week nor to families to get the Credit.
If you’re a small employer, you can have an HSA for America Personal Benefits Manager help you design your company health plan from the bottom up, and help collect quotes from multiple quality carriers doing business in your state.
The bottom line for small employers sticking with a traditional health insurance plan:
- It’s a valuable benefit that’s completely tax-deductible to employers and tax free to employees.
- Immediate coverage for employees and family members with pre-existing conditions. No waiting periods.
- Potential benefit from the Small Business Health Insurance Tax Credit.
- Very high monthly costs, especially if you don’t get the Credit.
- HDHPs can lower premiums, and enable HSA contributions.
Compare Pricing on the Best Insurance Plans Available
Health Insurance Plans for Small Businesses Option 2: Small Group Healthsharing
A second strategy is to migrate workers and families out of traditional health insurance programs and into lower-cost health sharing plans.
Health sharing plans represent a much more affordable alternative for most individuals and health benefit group sponsors.
Healthshare Plans vs. Insurance
Healthsharing plans are not the same thing as insurance. Instead, healthshareing plans are voluntary associations of like minded people who agree to share each other’s medical expenses. And they’re available at just a fraction of the cost of a traditional (unsubsidized) health insurance policy.
About Healthsharing Plans
By law, healthsharing plans must be run by non-profit, 501(c)(3) organizations called Health Sharing Ministry Organizations. And they must all have a statement of values, faith, or principles that all members must agree to.
Like traditional health insurance plans, healthsharing plans help spread the risk of unexpected large medical expenses across large groups of people.
Healthsharing organizations aren’t subject to the same regulations and rules as traditional health insurance plans, however. For example:
Healthsharing Plans and Pre Existing Conditions
While group health plans must accept beneficiaries with pre-existing conditions (as long as the new member enrolls during Open Enrollment or during a special enrollment period that may be triggered by qualifying life events.
Healthsharing plans, on the other hand, may impose a waiting period before costs related to pre-existing conditions become fully shareable.
Healthsharing plans also don’t have limited enrollment periods. You and your workers can sign up for a group or individual healthsharing plan at any time.
Healthshare plans tend to attract healthier members. And because they can and do limit benefits for pre-existing conditions, employers can sign employees up for excellent healthshare plans at just a fraction of the cost of a traditional group health insurance plan.
Example: In contrast to the $15,013 per year average premium for members of a traditional health insurance group plan ($1,251 per month), employers can routinely purchase an excellent healthshare plan that provides employees with no pre-existing conditions with very similar protection for roughly half that amount, or even less.
The downside: Healthsharing plans do not generally qualify for the Small Business Tax Credit.
But that may not be a problem if your business is not yet profitable or in a down cycle.
Healthsharing Plans have no minimum contribution rules
Unlike ACA-qualified SHOP insurance plans, which require employers to pay at least 50% of plan premiums, healthsharing plans have no minimum employer contribution.
As an employer, you are free to pay all the costs of healthsharing plans for your employees, none of them, or anything in between!
So you don’t have to paint yourself into a corner by committing to a minimum required premium contribution per employee, like you are with a traditional group health insurance program.
Many employers find that migrating workers from a traditional group health plan to healthsharing still appreciably reduces costs, even accounting for the Small Business Health Insurance Tax Credit and other tax incentives in the Affordable Care Act.
Employees also like the fact that if they leave the company, they can take their healthshare plan with them.
Request a Group Quote for Your Small Business
Health Insurance Plans for Small Businesses Option 3: Offer an HRA to Help Employees Buy Their OWN Health Coverage
A second popular and effective strategy is to opt out of providing a group health plan at all.
Instead, you can provide a tax-free benefit to help your employees purchase their own coverage, or pay for their own medical costs.
Introducing Health Reimbursement Arrangements (HRAs)
Business owners can do this by establishing a health reimbursement arrangement, or HRA. These allow employers to provide tax-free assistance to employees to pay medical expenses.
Employees can also use their HRA money to pay health insurance premiums for their own families, as well to help with deductibles, co-insurance, and co-pays under their health insurance plans.
Small employers like this strategy because it takes the pressure off. An HRA is much easier and less expensive for employers to administer than a complicated group health insurance plan.
By offering an HRA and empowering employees to purchase their own coverage, separate from the company, management can devote their time to more productive pursuits like product development, customer service, marketing, and sales.
Meanwhile, depending on how your plan is structured, your workers benefit by being able to use their HRAs to help them buy a Marketplace plan of their own choosing, rather than a one-size-fits-all policy dictated by their employer, which may not be a good fit for them.
With HRAs, you as the employer choose how much you want to contribute to the program. There are no minimums or maximums.
Types of HRAs
There are two primary types of HRAs: Individual Coverage HRAs (ICHRAs) and Qualified Employer HRAs (QSEHRAs).
Most small employers with 2 to 10 employees will focus on the QSEHRA option.
QSEHRAs are designed to allow employers who don’t offer a traditional group health insurance plan of their own to offer HRA benefits to help employees buy the plan of their choice on the open market – or pay for any other out-of-pocket medical expenses.
Only small employers with fewer than 50 employees and who do not sponsor a group health insurance plan may use QSEHRAs.
This strategy gets employees out of the health insurance business. They pay the benefit to employees, and the employee chooses their own plan. It also frees up employers from the administrative and recordkeeping responsibilities of running an entire group health plan.
The QSEHRA benefit is tax-free to employees, though if they buy an ACA-qualified Marketplace health insurance plan, the amount they receive via the QSEHRA may reduce the amount of subsidy they receive under the Affordable Care Act.
In effect, you, as the employer, pay most of the ACA subsidy, rather than the taxpayer.
QSEHRA Advantages and Disadvantages.
But this arrangement is still frequently much more economical to the employer than sponsoring a full-fledged group health insurance plan of their own!
Workers and their families benefit because they can choose any health insurance plan available in their state that offers the ten minimum essential coverages (MECs) required under the Affordable Care Act. They are not limited to the health plan their employer selects for them.
The disadvantage with QSEHRAs is that employees may not use the money to buy a healthshare plan, even though it would usually be more affordable for those without pre-existing conditions. QSEHRA rules require them to enroll in a fully ACA-qualified plan with all ten minimum essential coverages.
Unlike Individual Coverage HRAs, or ICHRAs, QSEHRA contributions have a cap: As of 2023, the max annual allowance amounts are $5,850 for single employees, and $11,800 for workers with families.
Employers may not discriminate based on employee class with QSEHRAs: They must provide the benefit to all full-time employees.
Individual Coverage HRAs (ICHRAs)
Another alternative available to businesses of all sizes is an Individual Coverage HRA, or ICHRA. Like QSEHRAs, these arrangements provide tax free assistance to workers and their families to help them pay out-of-pocket medical expenses.
There are some important differences, however:
ICHRA contributions are not capped. So ICHRA may be a good option for businesses with a higher wage work force for whom the QSEHRA limits may not be enough.
Unlike QSEHRA beneficiaries, employees who receive ICHRA assistance are not eligible for premium tax credits under the Affordable Care Act. But for higher-wage employees, this may not be a concern, as they wouldn’t receive an ACA subsidy anyway.
ICHRAs also give more flexibility to employers who want to discriminate based on employee class than QSEHRAs. They just have to provide the same ICHRA benefit to all employees in the same class.
Employers who offer a traditional group health insurance plan can also offer an ICHRA. They just can’t offer both the group insurance plan and the ICHRA to the same class. It’s one or the other.
Example: Suppose you want to offer a traditional group plan to management, and an HRA to hourly rank and file workers. You would have to use the ICHRA. This is because employers who have a group health plan cannot offer a QSEHRA at all.
Also, even if they had no group health plan, QSEHRAs have to be available to all full-time employees. Employers cannot discriminate based on class with QSEHRAs.
In either case, it’s often much more efficient for employers to provide an HRA and empower workers to buy their own health plan than to offer a group health plan that may not be a good match for a diverse group of employees.
For example, a worker that is eligible for health benefits via his or her spouse’s employer may much prefer an HRA benefit, which they can use to pay deductibles, co-insurance, and other out-of-pocket costs that the spouse’s plan doesn’t cover. Merely offering another group health plan may simply duplicate benefits.
In these situations, HRAs are additive, not duplicative!
Health Insurance Plans for Small Businesses Option 4: Provide a Pay Raise In Lieu of Insurance
Another option for small employers is simply to pay employees more money! Employers can use the extra money to pay for health insurance or healthsharing plans of their own!
This option provides the powerful advantage of simplicity. Company leadership can focus on high-payoff tasks rather than spend valuable time administering a health insurance or HSA plan.
Companies with fewer than 50 workers don’t pay a penalty for dropping group health insurance under the Affordable Care Act. Smaller employers aren’t required to provide a group health plan at all.
It’s still tax deductible to employers as a compensation expense. The tax disadvantage is that these benefits are generally taxable to the employee, instead of tax-free like an HRA.
Moreover, the tax isn’t limited to ordinary income tax: Any extra pay may be subject to FICA taxes, FUTA, and state income taxes, as well.
But employees who enroll in a high deductible health plan, or HDHP, can get a tax deduction for contribution to an HSA, while saving money on their health insurance premiums.
This option may also preserve the employee’s eligibility for a subsidy for buying an ACA marketplace plan – though naturally, the bigger the pay increase you give them to buy their own coverage,
This can be a great option for an economically diverse workforce: Lower-wage workers can still take advantage of subsidies. And higher-wage workers who don’t get a health insurance subsidy under Obamacare are free to use the extra money to buy a healthshare plan.
They can also use some of the savings from choosing a healthshare plan rather than a traditional unsubsidized insurance policy and purchase additional benefits, such as a direct primary care plan (DPC), for even more savings! View the Direct Primary Care story.
Or either of them could purchase a high-deductible health plan and use the pay raise to fund an HSA.
Health Insurance Plans for Small Businesses Option 5: Combine Options
Many employers provide a combination of options. For example, you can roll out a group healthsharing plan for a fraction of the cost of providing a full-fledged employee health plan. This is a great option for workers and families where there are no pre-existing conditions.
Employees with family members with pre-existing conditions can buy a Marketplace plan that will cover their preexisting conditions right away, and still get a subsidy under the ACA, depending on their incomes and the size of their households.
You can offer an HRA on top of that to cover out-of-pocket costs, like premiums or healthshare plans’ initial unshared amounts.
And you can layer additional benefits that make these plans even more effective, such as Direct Primary Care, critical illness insurance, disability insurance, and more!
In each case, you as the employer have complete flexibility over how much to budget for healthsharing, HRAs and direct primary care benefits, and how to handle cost sharing between your company and your employees.
Small employers have tremendous flexibility in plan design. But it usually requires some expert help.
Health Insurance Plans for Small Businesses FAQ
Q: What is a small business health insurance plan?
A: A small business health insurance plan is a type of insurance plan designed specifically for small businesses to provide health coverage for their employees. This could be a group plan, or individual health insurance plans for each employee. It could also include membership with a local direct primary care (DPC) doctor, or may be a health sharing plan (not technically insurance).
Q: What are the benefits of having health insurance plans for small businesses?
A: The benefits of having a small business health insurance plan include attracting and retaining employees, tax deductions, and improved employee health and well-being.
Q: How do health insurance plans for small businesses differ from individual health insurance plans?
A: Small business health insurance plans often offer more comprehensive coverage, more cost-effective options and tax benefits compared to individual health insurance plans. However, group insurance plans can be costly, which is why many small businesses turn to alternatives like HRAs and health sharing plans.
Q: What factors should a small business consider when choosing health insurance?
A: A small business should consider factors such as cost, coverage, employee needs and preferences, and the company’s budget when choosing a health insurance plan. If you are considering a health sharing plan, remember that waiting periods may apply before pre-existing conditions are covered.
Q: How can small businesses get started with health insurance plans for their employees?
A: The best way to get started is by submitting a census to request a quote. One of our Personal Benefits Managers will help you analyze your options, to find the solution that will provide you with the best benefits package that works financially for the business and employees.
What To Do Now
If you’ve had it with bloated and inefficient Big Insurance plans, and you want to offer a great benefits package while not paying ridiculous and climbing health insurance premiums, you can make a change.
For a free, no-obligation, confidential advanced plan design consultation, contact an HSA for America Personal Benefits Consultant today.
There’s no charge for this service. It will help if you have an employee census handy during the appointment, along with dependent information and any key decision-makers, so we can get you a more accurate estimate of your savings and answer all your questions.
Here are some additional articles on health insurance plans for small businesses: Small Business Health Insurance Reviews: How to Find the Best Plan for Your Small Company | Best Health Insurance for Small Business Owners: 5 Plans for Self-Employed Entrepreneurs in 2023 | Health Care for Small Business: Best Strategies for 3-20 Employees
Here are some additional pages related to this article: Health Insurance for Small Business Owners: A 2024 comprehensive guide to getting health insurance for small business owners | 2024 Complete Guide to Small Business Healthcare Plans
Mike Montes is a Personal Benefits Manager at HSA for America. His aim is to help you make smart and informed healthcare coverage decisions that will fit your needs and budget. Read more about Mike on his Bio page.