How Does Health Insurance Work for Small Businesses?

If you’re a small business owner who wants to offer health insurance coverage to your employees, it’s natural to feel overwhelmed with the process. Many variables need to be considered at once, such as types of health insurance plans, the costs associated with each type of plan, and how employees will judge the quality of the plan’s offerings. 

This page provides an overview of how health insurance works for small businesses and allows you to make informed decisions as you go through each step of the process.

  • Health Insurance Requirements for Small Businesses
  • Small Group Health Insurance Plans 
  • Small Business Health Insurance Enrollment Process
  • Purchasing a Plan on the Marketplace

Health Insurance Requirements for Small Businesses

The Affordable Care Act (ACA) states that companies with more than 50 full-time or full-time equivalent employees are required to offer health insurance to their employees. If your small business does not meet this criterion, you are not technically required to offer health insurance to your employees.

With that being said, many small businesses still decide to offer health insurance to their employees, even without being required to. Employees often look for a health benefits package when choosing where to work, so by offering health insurance to employees and their dependents, you make your company more competitive in attracting top talent. 

Small businesses with fewer than 25 employees can also sometimes get access to tax credits by offering health insurance, which often makes doing so far more financially feasible.

Small Group Health Insurance Plans 

There is no one-size-fits-all approach to small business health insurance. You have a variety of traditional plans to choose from. Two popular options are HMOs, which are restrictive but inexpensive plans, and PPOs, which are less restrictive but also more expensive. However, considering the high costs associated with providing traditional health insurance plans such as HMOs and PPOs, many small businesses instead offer one of the more affordable health insurance coverage options described below.

Group Coverage HRA (GCHRA)

With a GCHRA, employees make use of healthcare services on an as-needed basis and receive reimbursement from their employers after the fact. Employees usually have access to a certain amount of funds each month which the small business specifies ahead of time. Reimbursements made under a GCHRA from the employer to the employee are not taxed.

GCHRAs must be accompanied by some sort of group health insurance plan offering. For small businesses, GCHRAs are often offered alongside HDHPs (high-deductible health plans).

Individual Coverage HRA (ICHRA)

An ICHRA is similar to a GCHRA with one key difference. Instead of offering health insurance plans to your employees directly (such as through a HDHP), employees purchase individual plans on the Marketplace. Employers then help offset these costs through an ICHRA. The Marketplace is a health insurance marketplace and enrollment service offered by the federal government via healthcare.gov.

Qualified Small Employer HRA (QSEHRA)

A QSEHRA is another option similar to ICHRAs for small businesses that do not wish to offer traditional group health insurance plans to their employees. The concept of monthly allowance with reimbursement is the same as it is with a GCHRA or ICHRA, except with a QSEHRA, employees can source their health insurance from anywhere, whether that be the Marketplace, a spouse’s group health insurance plan, or somewhere else like through a membership organization. Reimbursements are still not taxed as long as the employee health insurance plan meets the standards for Minimum Essential Coverage.

Self-Funded Health Insurance

A self-funded health insurance plan allows small business owners to take complete control over the specifics of the health insurance that they offer to employees. In self-funded health insurance plans, employers pay for health insurance costs out of pocket instead of paying standard monthly premium costs to an insurance company. Management of insurance services under a self-funded plan may be contracted out to a third party or handled in-house. 

Compare Small Business Health Insurance Options

When deciding on the type of plan you offer to employees, you will need to decide on a balance between costs and comprehensiveness of employee health care coverage. Some of the common costs associated with small business health insurance are listed below.

Monthly Premiums

A monthly premium is a fixed monthly cost that is required to maintain health insurance coverage through a traditional health insurance company. To receive benefits under SHOP, a federal program that allows small business owners to receive tax incentives for offering health insurance, employers are required to pay at least 50% of employee monthly premiums. From a competitive standpoint, small business owners should note that larger companies often pay more than 50% of employee premiums.

Deductibles, Copayments,and Coinsurance

  • A deductible is a variable cost associated with a healthcare service that employees must sometimes pay in addition to their monthly premiums.
  • A copayment is a one-time fixed cost associated with a certain healthcare service, such as a visit to a primary case physician. The copayment cost is the same regardless of what happens during the visit in terms of testing, etc.
  • Coinsurance refers to when a health insurance company starts helping out with healthcare costs only after a certain total deductible has been paid by the employee.

Employers are usually not expected to assist employees with the above costs. However, it’s important to understand these cost factors because a potential employee will often judge the quality of your health insurance offerings by how much they end up paying in relation to these costs as well as premiums.

Medical Provider Networks

Medical provider networks are groups of healthcare professionals that employees can visit. Certain types of plans, such as health maintenance organizations (HMOs), require employers to choose a certain medical provider network. Employees are only fully covered for healthcare services if they stay within the network. If you decide to offer a plan that makes use of a medical provider network, make sure you are giving your employees access to well-reviewed professionals.

Coverage Add-Ons

Coverage add-ons refer to additional services that are not covered under the base health insurance plan you typically offer to most employees. One example of a coverage add-on is prescription drug coverage. 

By providing the option of purchasing coverage add-ons, you can cater to individuals who may have specific needs that are usually not covered in more standard healthcare plans.

Small Business Health Insurance Enrollment Process

The logistics of setting up employee health insurance differs depending on the type of plan you choose. For example, setting up an ICHRA is relatively straightforward. In a general sense, you simply need to decide on employee eligibility, monthly allowances, and the start date, then get to work on making everything official with the help of a local lawyer and finally inform employees of the change. 

Other plans, such as self-funded plans, go beyond the scope of this page due to their complexity. It’s always recommended to contact a lawyer before doing anything due to the many different legal factors involved in health insurance.

Purchasing a Plan on the Marketplace

Small business owners do not need to wait for Open Enrollment and can purchase a group healthcare plan for their employees on the Marketplace at any time. 

Small Business Health Options Program (Shop)  

SHOP is accessible through the Marketplace. SHOP Marketplace group plans allow small businesses to receive tax benefits for offering health insurance to their employees assuming certain criteria are met. Click here to see if your small business is eligible for SHOP.

Takeaway

As a small business owner, you have many variables to consider and options to choose from when deciding on health insurance for employees. Although the process can be time-consuming, health insurance is something potential employees look for when deciding where to work, so ignoring it may result in talent passing on you in favor of a competitor. Use this page as a resource to understand the basics of small business health insurance; once you’re ready to get started, be sure to understand all of the associated costs and federal/state requirements for what you plan on offering so that you don’t experience any unexpected surprises or fines upon implementation.

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