Small Business Health Insurance: The State of the Market and What Small Businesses are Doing About It - Capstone Brokerage

By: Amy Pennza, Zane Benefits, April 2018

Whether a business is large or small, business owners know that the best way to hire and keep top talent is by offering the benefits employees want most. Research shows that today’s workers place a high value on company-provided health benefits: 82 percent say health insurance is “very” or “extremely important” when choosing to stay with their current company versus search for a new job.

Unfortunately, it’s harder than ever for small businesses to offer traditional group health insurance. For one, it’s too expensive. Rising costs and shrinking offer rates mean that few small companies can afford to offer health benefits. When small businesses can’t afford a group plan, they must choose between ceasing benefits altogether or offering an alternative—like a taxable wage increase or tax-free personalized benefits.
The state of the health insurance market
You don’t have to look hard to find evidence that group health insurance has become prohibitively expensive for small businesses with fewer than 50 full-time employees. As we’ve reported in the past, annual group health insurance premiums in 2017 for small businesses were $6,486 for single coverage and $17,615 for family coverage.

Additionally, traditional group health benefits come with other costs that can stretch a company’s budget. The cost to administer group health benefits adds up to over $12,000 each year. With figures like these, it’s no wonder that the number of small businesses offering group health insurance has declined by 25 percent since 2010. Currently, less than half of small businesses offer any kind of health insurance to their workers. To learn more, check out our eBook on personalized benefits.

Besides high premiums, expensive administrative costs and minimum participation requirements, there is also the fact that traditional group benefits are too one-size-fits-all. This means that some employees may end up with benefits they don’t need, while others may lack critical benefits. Another downside is that group plans aren’t portable—when an employee moves on, their benefits stay put.

Health insurance solutions for small businesses

When small business owners realize traditional group benefits are too expensive, they have a few different small business health insurance options to choose from.

The three main options include dropping coverage altogether, offering a taxable wage increase, or offering personalized health benefits like the qualified small employer health reimbursement arrangement (QSEHRA) or a health savings account (HSA). Before small businesses run with one of these alternatives, however, it’s important for them to understand the potential risks and rewards.

Dropping coverage

In the face of rising health costs, some small businesses may consider dropping health benefits entirely. This is certainly problematic for employees, but it’s also a bad—and often expensive—option for businesses.

Employee surveys consistently reveal that today’s workers value health benefits more than ever. According to the Society for Human Resource Management, which summarized a survey conducted for America’s Health Insurance Plans (AHIP), 56 percent of workers said their satisfaction with their health benefits is a key consideration in their decision to stay with their current employer or look for another job. Another 46 percent of employees identified health insurance as the “deciding factor” or “a positive influence” in staying with their current employer.

Simply put, small businesses that opt to forgo health benefits risk major problems with employee retention. When you consider the high cost of employee turnover, dropping health coverage is an expensive choice.

Offering a taxable wage increase

Rather than dropping coverage entirely, some small businesses choose to increase their employees’ wages so they can afford to purchase a health plan. On the company side, business owners don’t have to worry about playing middleman between the insurance company and their employees. It’s a win-win, right?

As it turns out, not so much.

The problem with simply raising wages is that most employees don’t think of a bump in pay as a “benefit.” Few employees will turn up their noses at seeing extra money in their paycheck, but they won’t necessarily equate more cash with health benefits.

Furthermore, employees have to pay income tax on this extra money. Likewise, the company is subject to payroll taxes. While increasing employees’ pay is typically more affordable than offering group health insurance, it is still an expensive option—and one that doesn’t actually solve the problem.

Personalized health benefits

Small businesses also have the option to offer personalized health benefits through a QSEHRA or HSA. By offering tax-advantaged personalized benefits, employers save money while giving their employees freedom of choice. As far as small business health insurance options go, personalized health benefits save money and ease worry for businesses and workers alike.

With the QSEHRA, for example, small businesses set the allowance. Then, rather than being locked into a one-size-fits-all group plan, employees have the freedom to choose the health insurance plan that fits their needs. As they incur qualified health expenses, they submit them to their company or a personalized benefits automation software. From there, the expense is reviewed, assuming it qualifies, is reimbursed free of payroll tax for the business and free of income and payroll tax for employees (as long as they have major medical insurance).

For small businesses, health insurance doesn’t have to be a this or nothing proposition. If your business is struggling to afford group health insurance, personalized health benefits like the QSEHRA could be an affordable, flexible alternative that fits your budget and gives your employees the high-quality health benefits they want. Get in touch with a trusted personalized benefits advisor to learn more.

Zane Benefits