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Small business employee health benefits: Understanding the basics

Small business employee health benefits: Understanding the basics
Related: The Small Business Guide to Offering Employee Benefits

Health insurance has a reputation for being expensive and confusing. We know how daunting it can be to think about offering employee health benefits for the first time. This is especially true for small business owners who aren’t sure whether they even can, or should, offer employer-sponsored health coverage given the small number of employees they have. 

WHAT are employee health benefits?

Employee health benefits refer to all of the health- and wellness-related ways an employer indirectly compensates their employees. Employees receive health benefits in addition to their regular salary. 

The foundation of a health benefits package is health insurance, but employee health benefits can include many other offerings as well — such as dental insurance, vision insurance, employee wellness programs, employee assistance programs, employee healthcare centers, and more. 

In this post, we break down the basics — the who, where, when, and why — of small business employee health benefits. 

If you are a small business owner or decision-maker, we hope that you come away from this post with a better understanding of your options when it comes to small business health insurance. We hope that, armed with this knowledge, you feel empowered to offer employee health benefits for the first time — or to make the switch to a benefits company that better suits your needs. 

WHO should offer employee health benefits?

Any business with 50+ full-time employees is required under the employer mandate of the Affordable Care Act (ACA) to offer health insurance that is both affordable and meets a minimum standard of value to 95% of their full-time employees and their children. If they don’t comply, they face paying a hefty fine to the IRS.

While employers with fewer than 50 full-time employees are not required by law to offer employee health benefits, they have many compelling reasons to consider doing so. 

WHY should a small business offer employee health benefits?

Simply put, small businesses should offer employee health benefits because employees value health benefits — especially employer-sponsored health insurance — so highly. According to a survey conducted by Glassdoor, salary and benefits are almost equally important to workers as they search for a job. And studies consistently confirm that a lack of benefits lends to job dissatisfaction and attrition, while increased benefits boost job satisfaction and employee retention.  

While offering employee health benefits is not cheap and is undeniably an investment, it is one of the most worthwhile investments you can make as a small business owner. In a competitive labor market, it’ll help you stand out from other small employers — and compete for top talent with larger employers. 

And, once you’ve hired them, showing them that you value their health and wellbeing will make them happier, more productive, and more likely to stick around. Given that it costs 100% to 150% of the employee’s salary to replace a technical worker, employee retention is actually a huge budget saver for small businesses. 

There are also tax breaks associated with offering employee health benefits for both you and your employees. 

  • Any expenses an employer incurs related to health insurance for employees and their dependents are completely tax-deductible on both state and federal income taxes. 
  • You can set it up so that your employees can contribute to their health insurance premiums on a pre-tax basis, which lowers their taxable income. 

WHEN should a small business start offering employee health benefits?

For the reasons discussed above, small businesses should start offering employee health benefits as soon as their budget allows. The smaller a business is, the less likely it is to offer health benefits to employees. Small businesses that do not offer employee health coverage cite cost as their limiting factor.

In 2021, these were the rates at which small businesses offered health benefits:

  • 49% of businesses with 3 to 9 workers
  • 65% of businesses with 10 to 24 workers
  • 74% of businesses with 25 to 49 workers

But it is important to recognize that there are lots of ways for those smaller businesses with limited resources to get creative around offering employee health benefits. 

While your options include the legacy carriers that control the lion’s share of the health insurance market, such as Blue Cross Blue Shield and Aetna, your options do not end there. Those insurers tend to be more advantageous to large companies than small businesses, so any exorbitant quotes you might have received from them might not be reflective of what you’d pay if you were to pursue another route. 

WHERE should a small business leader shop for employee health benefits?

There are many places you can go to secure health benefits for your employees. You can use a broker to help you shop for and enroll in plans or do it on your own. If you do decide to work with a broker, choose one who presents you with an array of options, not one who tries to sell you plans from a single insurance company.

Legacy insurance carriers: You (and your broker) can shop for fully funded plans from the traditional insurance carriers mentioned above. These carriers administer your employee benefits, pay out your employees’ claims, and assume the risk of any costs that arise — all in exchange for the monthly premium you pay them. However, to mitigate their considerable risk, they often charge you a far higher premium than the amount they expect to pay for your employees’ claims.

The Small Business Health Options Program (SHOP): SHOP is a health insurance marketplace created under the ACA to make it easier for small employers to compare and select high-quality, affordable health and dental insurance for employees. If you offer a SHOP plan to employees, you can qualify for the small business healthcare tax credit. While it remains a viable option in some states, insurer participation in the program has dwindled significantly since its creation. You can learn more about SHOP here

Professional employer organizations (PEOs): PEOs can save your small business money by grouping you together with other small businesses and then securing large-group insurance rates for the collective. However, if other businesses in the group are less healthy, and therefore more risky, it can negatively affect your premium.

Modern insurance companies geared towards small businesses: Since many of the employee health benefits options out there were not designed with small businesses in mind, a handful of newer, more tech-enabled insurers have entered the scene to fix that problem. Recognizing that fully funded health plans can be out of reach for many small businesses, these modern insurers tend to offer self-funded plans. This means that the insurer administers benefits and pays out claims, but the employer only pays for the healthcare their employees actually use (rather than hypothetically will use). 

Some of these benefits companies, such as Sana, offer self-funded plans with level funding, which means that stop-loss insurance kicks in to protect you if your employees spend more than a predetermined amount on healthcare in a given year. This ensures that your payments remain both predictable and reasonable. 

Now that you’ve mastered the basics of small business employee health benefits, we hope you feel empowered to take the next step, whether that’s exploring your coverage options for the very first time or requesting quotes from different insurers to see if there’s a better plan out there for you. 

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The Small Business Guide to Offering Employee Benefits

Health benefits don't have to be confusing. We'll break down the basics so you can make the right decision for your business.