Health Insurance for Small Employers: Group Plans vs. Stipends
In today’s competitive employment market, health insurance is no longer just a “nice to have” benefit. It’s a “must-have” for employers to be able to attract qualified and competent employees.
Yet offering health insurance as a benefit is an investment – especially for small employers who must now offer higher wages to be competitive as well.
“Employers have options and all those options can be confusing. It’s important to look at all the angles, get firm numbers and understand tax implications,” said Jordan Anderson, Vice President of Sales for Avera Health Plans.
For small employers of less than 50 employees, the many options fall into two general categories:
Small Employer Health Plans
You may think that “group” coverage involves dozens of employees when in actuality, in South Dakota, two employees – even the owner plus one employee – can be a group. For small group plans, typically employers cover at least 50% of the premium for their employees.
Small group insurance plans that are compliant with the Affordable Care Act cover 10 essential health benefits with no annual or lifetime coverage maximums. Differences in premium are based on the amount of the annual deductible, coinsurance and co-pays – basically the out-of-pocket costs that employees will experience. A plan that has a preferred or narrow network can reduce premium.
Employees pay their premium share with pre-tax dollars. Employers can rest assured that their participating employees have good coverage and won’t experience financial hardship if they or family members have a major health care event.
Small businesses can deduct premium costs from their business taxes and may be eligible for special small business health insurance tax credits. Businesses can set up a small group plan year around.
“The employer share of premiums can be considered as one aspect of your expense of having a qualified employee, in addition to wages, payroll taxes, retirement and other benefits,” Anderson said. “If it results in an employee who feels taken care of and develops loyalty to your company, it’s well worth the investment.”
Individual & Family Health Insurance Stipends and Reimbursements
Employees who do not have access to employer-sponsored health insurance coverage can go to healthcare.gov and purchase individual or family coverage.
Employers can offer a stipend to help cover premium costs. This is simply extra money in an employee’s pay, hopefully to cover health insurance premiums, however employees can spend it however they choose. Employers can’t require employees to spend it on health insurance, or to provide proof that they purchased a health insurance policy.
A stipend is taxable income for the employee, and employers must also pay payroll taxes on the stipend.
Employers can also look into setting up a qualified small employer health reimbursement arrangement (QSEHRA). This IRS-approved benefit allows small employers to offer a tax-free reimbursement to their employees for their health insurance premium and other qualifying health expenses.
There’s more administration and oversight for the employer. For example, employees pay their health insurance premium out of pocket, then submit proof of payment to be reimbursed.
One favorable aspect of the stipend option is that employees can go to the federal Marketplace at healthcare.gov and choose whatever plan suits their needs. Since the stipend is not tied directly to the payment of health insurance premiums, employees may be eligible for a premium tax subsidy that could significantly reduce the premiums for Marketplace plans.
Unless employees have a life-qualifying event like getting married, a change in employment or having a baby, they can only get coverage during annual open enrollment, which occurs at the end of the year though dates may vary.
Talk to the Experts
Along with an insurance agent, it is important to talk to legal and tax advisors for your company.
“Health insurance is a valuable investment for both employees and employers,” Anderson said. “A knowledgeable agent can sit down with you, help you weigh all the costs and benefits, and give you the information you need to make the best decision.”
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