Employer contributions toward health coverage help spread out the cost of health insurance between employees and employers so it’s easier for both sides to handle.
Employers choose a health insurance plan and then determine the amount they’ll cover—for instance, 75 percent for an employee’s single coverage (as in an individual plan), and perhaps a percentage toward family coverage. Your employees will be responsible for the remaining healthcare costs for themselves and their dependents on their employer-sponsored health insurance.
What does the Affordable Care Act require?
The Affordable Care Act (ACA) states that employers with 50 or more full-time employees need to offer coverage that meets the minimum value standard. (Full-time equivalent employees are factored into that amount. For example, two part-time employees working 20 hours each would be the equivalent of one full-time covered worker.) This means employers with large firms that meet that minimum number of employees have to provide group health insurance that’s economical, comprehensive, and covers (on average) at least 60 percent of their employees’ medical care.
Plans also have to “substantially” cover physician and inpatient hospital services.
A plan with minimum essential coverage, or a “qualified health plan,” meets all ACA affordability requirements—including covering essential health benefits and following limits on cost-sharing.
What percentage of health insurance do employers have to pay?
As an employer, the amount you have to contribute to your employees’ group health plan varies by insurance company. Insurance carriers generally require that companies contribute to at least half of employee premiums. A few states allow you to contribute whatever you would like, going as low as 0 percent contribution, although they may offer health insurance programs for small businesses that could have minimum requirements for employer contributions. Look closely at any programs you’re considering, and check your state laws, too.
Despite that rule, many employers decide to take care of even more of the health insurance cost. However, remember that contributing extra is totally up to you.
The Kaiser Family Foundation (KFF) found that in 2022, employers of small firms with 3 to 199 workers contributed less toward their employees’ premiums for family health insurance coverage when compared to employers of large firms of 200 people or more. Employer contributions for their employees’ single coverage were similar, on average, for small and large firms.
You may be able to contribute 100 percent towards your employees’ group health plan, but the implications of that decision vary by insurance carrier. Some carriers say that if you contribute 100 percent, you also have to have 100 percent enrollment in the plan. Some carriers don’t have that stipulation.
When it comes to contributions, it’s important to consult with your broker so that you follow all regulations and also pick an amount that is right for your business if you offer health insurance.
What does an employer contribution look like?
Imagine that Jillian is one of your employees at your toy store. She has a gold HMO, and her premium costs $250 a month. This is how one situation could play out:
- Monthly health premium for Jillian: $250
- Your toy store pays: $220 (88 percent)
- Jillian pays: $30 (12 percent)
That means that for each pay period, Jillian will have $30 subtracted pre-tax for her health premium.
Let’s say you have four employees on your team. Your company pays a chunk of the insurance bill for the entire team each month:
- Monthly premium for Jillian, Jack, Joe, and Jerrold: $1,000
- Your toy store pays: $880 collectively (88 percent)
- Jillian, Jack, Joe, and Jerrold each pay: $30 (12 percent)
Keep in mind, if Jack has a higher premium than Joe—for example, if he’s older or a smoker and your insurer prices policies individually—the exact costs would adjust slightly based on the percentage you chose to contribute.
How are contributions to health insurance premiums taxed?
Money that an employer spends on their employees’ health insurance premiums is not considered wages and is exempt from federal income tax and payroll taxes. (Fine print: S corp employees who own more than 2 percent of the company will have health insurance benefits included in their federal wage calculations. Always check with your CPA!)
Small firms with fewer than 25 employees with an average employee salary of less than $50,000 (adjusted for inflation) per year may also be eligible for a federal tax credit. They must share at least 50 percent of the cost of health insurance premiums for a qualified health plan offered from the Small Business Health Options Program (SHOP) Marketplace and SHOP coverage must be offered to all full-time employees. In some cases, money paid towards employee wellness programs can also be included in the calculation for a credit.
Head over to the IRS website for details and requirements before filling out IRS Form 8941: Credit for Small Business Health Insurance Premiums. Also, be sure to read the Form 8941 instructions for the important fine print—e.g. there are exceptions for employers in some counties and a waiver for Hawaii that prevents small businesses in Hawaii from claiming a credit for health plans after 2016.
For small businesses that are tax-exempt, the maximum credit is 35 percent of employer funds paid towards qualified employee healthcare premiums—and the credit can be claimed on Form 990-T. For non-tax-exempt small businesses, the maximum credit that can be claimed is 50 percent of employer funds paid towards qualified employee healthcare premiums. The credit usually gets claimed on Form 3800 as a general business credit and offsets regular and/or alternative minimum tax. And what if your small business didn’t make a profit this year? The credit can typically be rolled forward to the next year, or result in a refund.
Some states also offer a deduction or credit. Check your state laws for details.
What about QSEHRA contributions?
That’s a great question for small business owners who may find it cost-prohibitive to offer group health insurance but may want to offer an alternative employee benefit to remain competitive. A Qualified Small Employer Employer Health Reimbursement Arrangement (QSEHRA) is an arrangement in which an employer reimburses an employee for qualified health care expenses, such as premiums and/or out-of-pocket medical costs like copays. It’s not insurance per se—it’s a reimbursement arrangement—and the good news is that reimbursements are typically tax-free at the federal level. Learn more about setting up a QSEHRA budget for details about how it works, contributions, and taxes.