Everything You Need to Know About Offering Health Insurance
Picture this: one of your employees needs to visit the doctor, but they have no employer-sponsored health insurance.
Gusto makes payroll, benefits, and HR actually easy.
They don’t have health coverage through a spouse, and they can’t afford a plan on their own. Without insurance, they could be faced with a significant amount of medical debt.
According to the Kaiser Family Foundation, less than a third of US businesses with fewer than 50 employees provide health insurance to their employees. In comparison, almost 97% of companies with 50 or more employees offer it.
By offering health coverage, you can gain a competitive edge over other small businesses. It also comes with numerous tax benefits.
Maybe you’re already considering offering health insurance. The question is, where do you begin? We know health insurance can be complicated—there are so many laws and options and new lingo to learn! But we’re here to help you sort it out.
In this guide, we’ll walk you through the basics of small business health insurance, the legal requirements you need to know, the types of health benefits to choose from, and how to roll it all out to your team.
Here we go.
Let’s talk health insurance basics
Individual insurance vs group insurance
Before we explore the ins-and-outs of providing health insurance to your team, keep in mind that there are two main types of health insurance: individual and group.
An individual health plan is what you’d get if you went straight to an insurance carrier and bought a plan for just you and your family. You can also purchase health insurance from Healthcare.gov or your state’s health care exchange, if your state has one.
A group health insurance plan is offered by employers and covers many individuals. That’s what we’re going to focus on here.
Am I required to offer health insurance?
It depends on whether your business is considered a large employer or a small employer.
You’re only required to offer health care coverage if you are an Applicable Large Employer (ALE). That is, if you have 50 or more full-time equivalent employees (FTEs). (Use this formula to calculate your FTEs.)
This requirement is known as the Affordable Care Act employer mandate, and you may face a penalty if you don’t comply.
The employer mandate also requires you to cover your employees’ dependents up until age 26. Typically, this means that you need to provide coverage for your employees’ children.
You can also choose to offer coverage for spouses and domestic partners, but you are not required to. According to a 2018 Kaiser Family Foundation survey, 97% of companies with 3-199 employees and 99% of larger businesses that provide health insurance to eligible employees also offer coverage for spouses.
If you run a small business with fewer than 50 full-time equivalent employees, offering health insurance is optional.
Benefits of offering health insurance
Regardless of whether you’re required to do so, offering a health insurance plan can be a win-win for you and your employees.
It provides your employees with an important benefit—having health insurance can reduce stress and give your employees peace of mind knowing that if they have a health emergency, they will be covered.
Offering health coverage also makes you more competitive when it comes to hiring and retaining employees.
According to a 2018 industry study, 46% of surveyed employees said health insurance coverage influenced their decision to work for that company, and 78% said their health insurance coverage impacted their decision to stay in their current job.
Offering group health insurance at your business also comes with several tax benefits.
- Employer-provided premiums for group health plans are tax-exempt, meaning you don’t have to pay taxes on them.
- Your contributions to your employees’ premiums are deductible, meaning you can deduct it from your taxable income, which lowers the amount of taxes you have to pay.
- If you set up a Section 125 premium-only plan (also called a cafeteria plan), your employees can pay their part of the premium with pre-tax dollars. That reduces payroll taxes for both you and your employees!
If you’re a small business with 24 or fewer full-time equivalent employees, the government also has an additional tax perk that your company may qualify for.
The small business health care tax credit can help make health insurance a little more affordable. If your business meets all the criteria and qualifies, you can get a tax credit for up to half of your contributions toward employee premiums.
Yep, offering group health insurance can help keep your employees happy and can significantly lower your business’ tax bill.
All the health insurance choices
Before we get into picking the best plan for your business, let’s take a look at all the different coverage options and how much they’ll cost.
Types of health insurance plans
There are several different types of health insurance plans, each with their pros and cons.
The key differences between the different types of plans are
- The size of the provider network
- Whether out-of-network services are covered
- Whether you need a referral from a primary care provider to see a specialist
- The cost of the premiums
Here’s a breakdown of the common types of plans:
- PPO: A PPO, which stands for a Preferred Provider Organization, generally has the highest premiums. But PPOs also typically have the largest provider networks. In addition, out-of-network coverage is provided, and referrals aren’t needed to see specialists, all of which provides more flexibility.
- HMO: An HMO is a Health Maintenance Organization, and while they typically have the smallest networks and most restrictions, they’re often the cheapest types of health insurance plans. Out-of-network care isn’t usually covered, and referrals are needed to see specialists.
- EPO: An EPO, or an Exclusive Provider Organization, is much like a PPO, except it doesn’t provide out-of-network coverage. This means EPOs are usually more affordable than PPOs, but more expensive than HMOs.
- POS: A POS plan, which stands for Point of Service, can vary greatly depending on the insurance carrier. POS plans are similar to PPOs but usually have smaller networks and more expensive out-of-network care. Referral requirements vary by plan, and premiums are generally in between those of HMOs and PPOs.
|Plan type||Provider network size||Out-of-network coverage||Referral needed for specialists||Premiums|
Finally, there’s one type of special plan that you need to know about: the High Deductible Health Plan (HDHP).
An HDHP offers lower premiums than a traditional health insurance plan, but comes with higher deductibles. “Lower” and “higher” aren’t just subjective terms here, though. To be considered an HDHP, the plan must meet specific criteria that are defined and updated each year by the IRS.
In 2019, an HDHP must have:
- A deductible of at least $1,350 for an individual plan or $2,700 for a family plan
- Out-of-pocket costs that can’t be more than $6,750 for an individual plan or $13,500 for a family plan
It also requires the enrollee to pay 100% of costs until the deductible is hit.
If your employee has an HDHP, they’ll also be eligible to combine it with a health spending account, or HSA. The HSA allows them to set aside tax-free money that can be used for medical expenses and invested for long-term growth.
The cost of group health insurance
All ready to pick a health insurance plan for your team but unsure of how much it’ll cost?
There’s no one simple answer to how much group health insurance plans cost, but we can help you get a general idea.
The cost varies depending on a number of factors, such as:
- The tier of coverage you offer
- Which carrier you use
- How much you contribute to your employees’ premiums
- Whether and how much you contribute to dependent premiums
- The location of your business
- The ages of your employees
- Whether your employees use tobacco (unless using this factor is prohibited in your state)
Prices and regulations also depend on whether you’re buying small group or large group insurance.
- Most states define having 1-50 employees as small group. Anything above that cap is categorized as large group.
- California, Colorado, New York, and Vermont define having 1-100 employees as small group and 101 or more employees as large group.
This definition matters because the ACA limits what can impact the rates for small groups.
- Age of enrollees, tobacco usage, and business location can impact small group rates.
- Medical claims history, the health status of enrollees, and the industry or business type cannot impact small group rates.
That means small group plan prices are the same for all small groups with similar demographics.
On the flip side, prices aren’t set for large groups, so large group businesses can negotiate their rates through a health insurance broker.
Other things to know about offering health insurance
Now that you have a better idea of what goes into health insurance costs, it’s time to evaluate all your options and pick out the best health insurance plan(s) for your business.
Keep in mind that there are certain requirements from the IRS, the ACA, and insurance companies that help determine the types of plans you can offer.
For example, Applicable Large Employers (ALEs) are required to offer affordable plans. The IRS deems a plan “affordable” if it requires an employee to contribute no more than 9.5% of their household income.
If you’re offering small group health insurance, there are also some important things you should know.
Minimum participation and contribution requirements
For small group health insurance, insurers typically require a certain amount of employee enrollment—in other words, minimum participation.
While the percentage of employees that have to participate in the plan varies by your insurer and your state’s laws, it’s usually around 70 percent.
(This minimum typically excludes employees who get coverage through a spouse’s insurance plan.)
Additionally, insurance carriers often require that employers contribute to at least half of their employees’ health insurance premiums. You can certainly contribute more as a benefit to your employees, though.
Small group special open enrollment period
If those minimum participation and contribution requirements have you backing away from the idea of offering health insurance, don’t despair! You can still enroll during the one-month window known as the small group special enrollment period.
During that annual window of opportunity, those restrictions are lifted to make it easier for small businesses to obtain health insurance coverage.
Yep, that means if you set up your group health insurance plan between November 15 to December 15, you can offer health insurance without contributing to employee premiums and even if only one employee wants to enroll in the plan.
How to buy group health insurance
If all of these legal and insurance requirements have you feeling a little overwhelmed, consider using a broker to help make your life easier.
While you’re not required to use one, a health insurance broker can help you choose the right plans for your business and set up health insurance for you.
They work with you to select the plans that make sense for your business and your employees’ needs. A broker can also help you stay compliant and navigate the process of rolling out and managing health insurance for your group.
When you pick a broker, make sure to look for someone who is licensed by your state, is experienced in working with businesses of your size, is savvy with compliance, and can easily communicate with people on your team.
If you’re getting small group health insurance, it doesn’t cost you anything to use a broker. Prices are fixed for small group health insurance, and brokers are paid directly by the insurance companies.
For a large group plan broker, you do have to pay a commission—but your broker can save you money by negotiating rates, which are not set for large groups.
If you’d like, you can also buy group health insurance and set up your plan directly with an insurance company. (This applies to both large and small groups.) Just make sure to collect the right documents and information to ensure a smooth setup process.
If you’re a small group, you can also obtain health insurance through the ACA health care exchange.
Lastly, there’s an option to set up a self-insured group health plan. It’s more popular for bigger companies than it is for smaller businesses.
If you choose this route, you can skip the insurance company, and you as the employer becomes the insurer that pays for your employees’ health care claims. Most businesses that choose self-insurance still use an insurance company to help with administration, though. In these situations, the insurance company helps provide a network, processes claims, and handles other aspects of benefits administration.
Being self-insured is much more complicated than buying traditional health insurance through an insurance carrier. It’s riskier financially and takes more time and effort to manage. So be sure to discuss your options with an expert before making a move.
How to roll out health insurance to your employees
Once you’ve got the setup down, get the ball rolling on offering health insurance plans to your employees.
Decide who’s eligible, and when
First, figure out which individuals on your team are eligible for your group health insurance plan.
Full-time employees are typically included in your plan. In addition, you may be able to offer insurance to part-time employees (those who work less than 30 hours per week) and 1099 contractors if you’d like to and your insurance carrier allows it.
You aren’t legally required to offer health insurance to part-time workers or 1099 contractors, but if you do, those folks would likely be grateful for the benefit.
Just keep in mind that employee eligibility is based purely on the number of hours worked.
You must offer the same benefits to all employees who work the same amount of hours.
In other words, you can put employees in approved classifications such as part-time versus full-time, but you can’t offer disparate benefits or make different employer contributions to employees who are similarly classified.
Besides deciding who you want to offer health insurance to, you also need to determine when you want to offer it. That is, how soon after the hire date you’ll start an employee’s insurance coverage.
The choice is yours as long as it’s in 90 calendar days or less. You can start an employee’s coverage sooner, but 90 consecutive calendar days is the maximum amount of time you can make an employee wait before their health benefits kick in.
One more thing: keep in mind that your employees have the right to decline your insurance coverage. Perhaps an employee gets coverage from another family member, or maybe they prefer an individual health plan that has better benefits for their specific medical needs.
If an employee wants to decline your group health insurance offering, they must fill out a waiver of coverage form. If they have a valid waiver of coverage, your insurance carrier won’t include that employee in your total employee count, so their denial of coverage won’t harm your minimum participation numbers.
Communicate options and open enrollment dates
Once you’re ready to offer health insurance to your employees, work with your broker and health insurance company to determine when open enrollment will be.
Open enrollment is the annual period when your eligible employees can enroll in health benefits and any current enrollees can make changes to their plans. The open enrollment period typically runs from November through January, but the exact timeframe can vary.
Leading up to the period, inform your employees of all of the health insurance options you’re offering them, when the open enrollment period is, and how they can sign up.
Heads-up: If an employee forgets to enroll during open enrollment, they’re typically out of luck until open enrollment rolls around again—unless they’ve had a qualifying life event (QLE). Common QLEs include getting married or divorced, having or adopting a child, aging out of a parent’s plan, or involuntarily losing other coverage (such as a spouse’s plan).
If one of your employees experiences a QLE, they become eligible for a special enrollment period in which they can enroll or change their coverage, which can include adding a spouse or dependent.
Health benefits beyond health insurance
Of course, health benefits aren’t just about the medical insurance plan. Here are some other potential health care benefits to explore:
Dental and vision insurance
While you’re not required to offer dental and vision insurance, it can provide a major benefit to your employees, and it can even benefit your business by keeping your team healthier.
According to a 2014 study by HCMS Group, employers who offer their employees stand-alone vision benefits save money because they:
- Experience reduced health care costs,
- Avoid productivity losses, and
- Reduce turnover rates.
If you decide to offer dental and vision benefits, you’ll need to offer them to all employees within the same group. Dental and vision benefits can also be purchased as standalone group plans.
A broker will be able to set you up with these types of benefits.
If an employee has a High Deductible Health Plan (HDHP), you can also offer them a health savings account (HSA). HSAs help your employees save money for future medical expenses.
Both you and your employees can contribute to their HSA as long as the total amount doesn’t exceed the annual limit. (In 2019, it’s $3,500 for individual-only HDHP coverage and $7,000 for family HDHP coverage).
An HSA has triple tax advantages* for your employees:
- The money put into it is pre-tax.
- The gains from investing that money are not taxed.
- Withdrawals used for qualified medical expenses are also tax-free.
If you contribute to your employees’ HSAs, those contributions are similarly tax-free and can be deducted as a business expense.
*Note: the tax advantages are at the federal IRS-level. Some states do tax HSA money.
Whatever isn’t used in an HSA rolls over indefinitely. And while HSA contributions can only be made when your employee has an HDHP, they can use the HSA funds at any time.
Bonus point: your employee’s spouse and dependents can also use their HSA funds.
In the world of health care acronyms, you should know FSA.
An FSA, or flexible spending account, also allows your employees to set aside pre-tax money for medical expenses (up to $2,700 in 2019). Unlike an HSA, however, your employee doesn’t need a qualifying health plan to have an FSA.
FSAs do have expiration dates, though.
You can elect to have up to $500 of your employees’ FSA funds from a previous year roll into the new year, but the rest of the funds are “use it or lose it.”
Dependent care FSA
If you want to extend the tax benefits beyond your employee’s personal medical expenses, you can also consider another type of FSA.
A dependent care FSA lets employees save pre-tax dollars for qualified dependent care expenses. The funds can be used for childcare costs for kids under 13 and for adult care for eligible mentally or physically incapacitated loved ones.
In 2019, the dependent care FSA contribution limits are:
- $2,500 for married couples filing separately
- $5,000 for married couples filing jointly, unmarried couples, and heads of household
Alternatively, if you want to help your employees with their health care costs in a more direct way, you can explore a Health Reimbursement Arrangement, or HRA. (It’s also sometimes called a Health Reimbursement Account.)
With an HRA, you help your employees pay out-of-pocket medical expenses. As the employer, you fund the account and decide which expenses are eligible (within IRS guidelines), and employees submit receipts and get reimbursed by you without having to pay taxes on the reimbursements.
A traditional HRA must be offered alongside a group health insurance policy.
If you’re interested in offering something like an HRA but can’t offer a group health insurance plan, consider a QSEHRA.
A QSEHRA is a Qualified Small Employer Health Reimbursement Arrangement. It’s compliant with the Affordable Care Act and allows small businesses with fewer than 50 full-time employees to provide HRAs to employees rather than offering traditional group health plans.
A QSEHRA, however, doesn’t replace health insurance. It just allows small businesses to help their employees offset their medical and insurance expenses. Your employees must get health insurance coverage on their own in order to participate in a QSEHRA.
Besides insurance and health reimbursement options, you can also offer wellness resources such as biometric screenings and health risk assessments. These optional benefits can help your employees identify potential health issues.
It’s also increasingly common for employers to offer ongoing wellness programs to encourage healthy living. According to the Kaiser Family Foundation, 53% of companies with 199 or fewer employees and 82% of larger businesses offer smoking cessation, weight management, or behavioral/lifestyle coaching programs.
It’ll be up to you to choose between all these exciting options for helping your employees with their health care needs.
Like with health insurance, offering these additional health benefits may also come with advantages to you as an employer. For example, you can enjoy a tax break if you offer an FSA or HSA. When an employee enrolls in one of these plans, you no longer have to pay the employer portion of Social Security or Medicare taxes on that employee’s contributions.
Other things to keep in mind
Okay, just a few more things you’ll want to know.
Watch out for local legislation
Some states, counties, and cities have additional requirements when it comes to health insurance beyond those of the ACA.
For example, San Francisco’s Health Care Security Ordinance (HCSO), sometimes called Healthy San Francisco, requires both for-profit employers with 20 or more employees and non-profit employers with 50 or more employees to contribute to their employee’s health coverage in some way.
Make sure to talk with an expert, like your broker, about whether your area has additional regulations like San Francisco.
Be ready to handle post-employment benefits
You may not want to think about it right now, but there will likely come a day when an employee leaves your company. And when they do, they might also be losing their health insurance coverage if they were enrolled in your group health plan.
To help make sure your employee has health insurance during their transition period, there’s COBRA insurance. This law allows employees to keep their employer-sponsored health coverage for a temporary period and at their own expense.
Most employers with 20 or more employees must offer COBRA.
It’s available for employees who quit, are terminated for reasons other than gross misconduct, or lose eligibility due to a reduction in working hours. If an employee’s spouse or dependent is covered in the plan, they’re able to keep their coverage with COBRA too.
The health insurance plan administrator, whether that’s you or your insurer, must notify employees of their COBRA rights when they first enroll in the plan. The plan administrator is also required to send COBRA enrollment and payment information within 14 days of being notified of a COBRA qualifying event.
You’re ready to go!
Health insurance can be complicated, and we know there’s a lot of information to digest.
Hopefully, you’re feeling more comfortable with health insurance and are now prepared to make a decision about your company’s benefits package. And if you have any questions or need help making any of these important decisions for your business, we’re here for you.