The 5 Minute Guide to Affordable Startup Health Insurance
A good job comes with great health benefits...
Imagine that you've just accumulated enough sales/revenue to justify your first hire.... A good job comes with great health benefits, right?
Not so fast... that's not the case anymore. Today, nearly 60% of small businesses do not offer health insurance due to:
- Firm Size
- Employee Turnover
That's more than 3,000,000 U.S. small businesses that do not offer health benefits today.
Even so, a health benefits package can be the deciding factor for a potential new hire.
About 45 percent of “microbusiness” owners who responded to a survey by the National Association for the Self-Employed agreed it is necessary to offer a health insurance benefit to find and hire qualified people. More than 80 percent maintained small businesses don’t have access to the same health insurance options as large companies.
So, you're faced with a tough decision: To offer health benefits or not to offer health benefits?
To answer this question, you have to understand why most employees value health benefits over salary.
Employees value health benefits over pay because health benefits are tax deductible
The history of employers providing workers with health insurance goes back for decades. In the early 1940s, the federal government changed the tax laws to allow businesses to provide health insurance coverage as part of an employee's compensation package 100% tax-free.
The primary reason companies offer health insurance today is because:
- It is tax deductible to the business
- Employees get the benefit 100% tax-free
As a result of this enormous tax advantage, $1 in health benefits may be worth $1.50 - $2.00 in pay to an employee depending on his or her family's tax bracket.
Additionally, the $1 in health benefits costs the company less than $1 in pay. (Remember, it's tax deductible to the business so the company does not have to pay payroll taxes!)
The first mistake many startups make is assuming that they can not afford to offer health benefits due to costs.
Here's a fresh perspective: if you can afford to hire an employee, you can afford to offer health benefits.
The real question is how do I structure the compensation and health benefits package for maximum value to the employee and minimal cost to the company?
It's not a question of whether to offer health benefits - It's a question of how to offer them
Depending on a number of factors (e.g. your age, your health and your prior experience with health insurance), you may have pre-conceptions of a small business's health insurance options.
For example, many startup owners incorrectly believe traditional group health insurance is the only way to offer employees proper health benefits. Consequently, many startups rule out employee health benefits altogether due to the costs associated with traditional benefit programs.
Don't take my word for it. The NASE survey (reference above) found that 46 percent of small business owners say they don’t have access to health-insurance options that fit their startup company’s needs.
Thanks to health care reform, startups and small businesses now have a new option : Defined Contribution Health Benefits.
How Every Startup Can Offer Health Benefits: Defined Contribution
With a defined contribution health plan, the company gives each employee a fixed dollar amount (a "defined contribution") the employees choose how to spend. Employees then use their defined contribution to reimburse themselves for out-of-pocket health insurance costs or other medical expenses 100% tax-free.
The reimbursements are:
- Tax deductible to the business
- 100% tax-free to employees
As a result, $1 in defined contribution health benefits may be worth $1.50 - $2.00 in pay depending on the employee's tax bracket.
Additionally, the $1 in defined contribution health benefits costs the company less than $1 in pay. (Remember, it's tax deductible to the business so the company does not have to pay payroll taxes!)
As a result, startups can integrate a customized health benefit into a compensation package for any new hire.
Here's how it works:
- The business sets the defined contribution amounts (the amounts can be varied based on employee job classifications, and there is no "minimum contribution")
- The business decides what expenses can be reimbursed by the plan (eligible expenses include health insurance premiums, dental expenses, doctor visits, etc.)
- The business decides who is eligible for the plan (the employer can restrict eligibility based on job classifications, and there is no "minimum participation")
Why don't more startups and small businesses offer defined contribution health benefits? I think it's because they don't know the option exists. What do you think?
Note: This should not be taken as legal or tax advice.