Small Business Health Benefits: What Options Are Available?

Even if you have just a few employees, a competitive benefits package is critical in today’s tight labor market, and health insurance is one of the most common offerings. In fact, 98% of employers offer some level of health coverage so you may want to consider adding this benefit to better position your company when recruiting. Yet we know it can be challenging to understand what small business health benefits are available to you. While you may be somewhat limited in your choices due to your size, there are still coverage options out there that may work for you and your employees.

In this article, we’ll explain what small business health coverage options you have, their costs, requirements, and the pros and cons of each. After reading this, you’ll be prepared to decide if offering health benefits to your employees will fit your needs and budget.

Does my small business have to offer health insurance?

No company is required to offer health insurance, no matter your size. However, you risk fines under the Affordable Care Act (ACA) if you have 50 or more full-time employees and don’t offer health insurance to 95% of them. In addition, if you have 50 or more full-time employees, the ACA requires that the health insurance offered meet ACA-established minimum coverage and affordability requirements. So if you are growing and nearing that threshold, be sure you pay attention to the ACA provisions and any state mandates in effect to avoid costly consequences.

What small business health benefits are available?

You have several options to choose from for health benefits. The most popular approaches to small business health benefits are:

Individual Health Insurance: If you’re a sole proprietor or self-employed and don’t have any other employees, you can purchase individual health coverage either directly through an insurance company, by using a broker, or in the Health Insurance Marketplace.

Pros: When it comes to selection, you’ll have greater flexibility and choice with private insurance (plan options are more limited in the marketplace). From a cost perspective, there are some opportunities to save with individual insurance. If you’re a sole proprietor with no employees, you can deduct 100% of the premiums for yourself, your spouse, and any dependents under age 27. If you purchase insurance through the marketplace, you may qualify for premium tax credits or other savings on a health plan based on your income and household size.
Cons: The biggest challenge you may face with private health insurance is the cost, both in terms of higher premiums and possible extra fees for pre-existing conditions. You won’t face that issue with marketplace plans since they’re prohibited from excluding treatment based on pre-existing conditions. However, the biggest drawback of an exchange plan is that you can only enroll during open enrollment once a year unless you have a qualifying life event.

Group Health Plan: A group insurance policy is a common choice for many small companies. With this option, you pay a fixed premium for the coverage; however, you can have your employees pay a portion as well as be responsible for copays and deductibles for the services they receive. You can get a group health plan either through the SHOP marketplace if you have 1- 50 employees, directly from an insurance provider, private insurance exchange, or through an insurance broker.

Pros: You get to pick an insurance plan that meets your needs as well as how much you’ll contribute towards your employees’ premiums. In addition, you can start offering coverage at any time during the year. Lastly, if you have less than 25 employees and purchase coverage through SHOP, you may be able to get a small business tax credit of up to 50% of your premium costs.
Cons: In many states, you’ll need to have 70% of employees accept the offer for coverage or be covered by other insurance in order to participate. The other potential drawback is the price of health insurance premiums, which can be significant for small businesses. In fact, in 2021, the cost for family coverage was $21,804, of which employers contributed $13,737. For single coverage, the average premiums were $7,813, with employers contributing $6,485.

Individual Coverage HRA (ICHRA): With an ICHRA, employees can choose any health plan they want through the SHOP marketplace or private insurance exchange and you as the employer reimburse them for their individual health insurance premiums and qualified out-of-pocket healthcare expenses.

Pros: As far as small business health benefits go, this option provides your business flexibility since you’re able to design how your plan will work. For example, you can decide which expenses to allow for reimbursement and the contribution limits. And, since employees can pick any plan they want, they may be more satisfied with the choices and personalization.
Cons: You can’t offer employees a choice between an ICHRA and a traditional group plan. Plus, your business structure may limit your eligibility. Specifically, while C-corp owners can participate in an ICHRA but S-corp 2% or higher owners and sole proprietors may not.

Qualified Small Employer HRA (QSEHRA): A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is also known as a Small Business HRA. It’s designed for employers who have less than 50 full-time employees and don’t offer group health coverage. It allows employers to reimburse their employees for expenses for individual health insurance premiums and for qualified medical expenses such as copays and prescription costs.

Pros: The contributions you make are tax free. There’s also no minimum contribution requirement so you can decide the monthly allowance to offer. Plus, you can design what expenses to allow for reimbursement.
Cons: Since the plans are relatively new, you’ll need to keep in mind that employees may not be that familiar with QSEHRAs so the plans may not be as big a draw as group health insurance. Plus, there’s a cap on how much you can reimburse employees, which may impact their satisfaction. For 2022, the max is $5,450 for self-only employees and $11,050 for families.

Alternative Funding: Sometimes referred to as self-funding or level-funding, with this approach, you pay for the healthcare services your workers receive directly from plan premiums and stop-loss insurance. You either process claims yourself or use a third-party administrator (TPA) for claims processing, reporting, and related administrative tasks. While this option has historically been available for larger organizations, now companies with as few as 2 employees can use alternative funding in some states.

Pros: Self-funded insurance generally costs less than fully-funded plans. And, if your workers are healthy, claims costs will likely be lower than expected and you get to retain those excess premium funds at the end of the year. You also have more flexibility to design a plan that works for your unique needs and those of your employees. In addition, self-funded plans are generally not subject to state insurance laws and mandates.
Cons: One of the biggest potential downsides of alternative funding is that they can be complicated. Even if you use a TPA to do a lot of the administrative tasks an insurer would normally provide you with a fully-insured plan like reporting, disclosures, notices, and other items, you still need someone in house who understands the plan.

How much does small business health coverage cost?

If you decide to offer health insurance, the costs will vary based on the coverage you select.

Individual Health Insurance: The average monthly premium for individual health insurance in 2021 was $438; for families, the average was $1,168.
Group Health Plan: As we mentioned earlier, in 2021, the cost for family coverage was $21,804, of which employers contributed $13,737. For single coverage, the average premiums were $7,813, with employers contributing $6,485. While these are averages, your exact premium costs will vary based on several factors such as the age of your group, size, location, and others.
ICHRA: Since you can design how you want your plan to work, that means you decide on what you want your contribution limits to be. In addition to those expenses, if you choose to partner with a TPA to handle the day-to-day administrative tasks associated with offering an ICHRA, the typical costs you’ll pay an administrator include a set-up fee of anywhere between $150 and $1,500. You’ll also pay $450 to $750 per year for annual administration plus a per employee per month (PEPM) charge of $2 to $5.
QSEHRA: Like an ICHRA, you decide the amount you want to reimburse employees, up to a maximum set by the IRS. And you’ll have to pay a TPA for administrative services as well. You can expect these to be similar to what you’d pay for ICHRA administration.
Alternative Funding: For self-funded plans, there are both fixed (for things like your TPA services and stop-loss insurance) and variable costs (your claims) that you’ll incur. These will vary based on a number of factors so there’s no set range you can expect to pay. For example, stop-loss premiums usually range from $15 per employee per month to $100 depending on your deductible and other factors.

How to Find the Best Small Business Health Benefits

As you can see, you have options when it comes to finding health insurance for your small business. The key is to weigh the advantages and disadvantages of the various types of coverage and the costs to see what will work best for your company. Since the choices can be overwhelming, especially if you haven’t navigated health insurance for your business before, you may want to partner with a broker to help you find the right solution for you and your budget. If you decide to go this route, read our next article on choosing a broker for some helpful tips.