Today, fewer than 50% of small businesses offer employees traditional health insurance, largely because of the cost. Instead, they are adopting reimbursement models to provide a more affordable health benefit. This article covers the basics of employer reimbursement of health insurance premiums, including what it means and why small businesses are quickly adopting this model.
Employer Reimbursement of Health Insurance Premiums - The Basics
With an employer reimbursement model, the business sets up a reimbursement plan to help employees with their individual health insurance premium costs.
There are three primary ways a business can go about this:
Taxable Stipend - The business provides employees a taxable stipend to use on health insurance. The employees' insurance costs are not substantiated.
Taxable Health Care Allowance - The business reimburses employees for their substantiated individual health insurance costs on a post-tax basis.
Tax-free Healthcare Reimbursement Plan - The business uses a Section 105 Medical Reimbursement Plan to reimburse employees for their substantiated individual health insurance costs on a pre-tax basis. This type of plan must be designed to comply with the Affordable Care Act's Market Reforms.
Why Small Businesses are Adopting Reimbursement Models
Employers are adopting employer reimbursement of health insurance premiums for three key reasons:
1. Controllable Costs
Group health insurance costs are on an unsustainable course. Costs have become unaffordable for small businesses and their employees. Many have already canceled policies because of costs, or have never been able to afford a group policy to start with.
Reimbursing employees for individual health insurance allows the employer to control costs because the employer defines how much to contribute to the reimbursement plan. Unlike traditional group health insurance, there are no minimum contribution requirements.
2. Individual Health Insurance Costs 20% to 60% Less
On a similar note, individual health insurance costs 20 to 60 percent less than group health insurance for the same or better coverage (see this state by state comparison of health insurance rates).
And, this does not include the application of premium tax credits. For eligible employees, premium tax credits lower the cost even more.
What this means for employers is that a contribution of $200/month per employee, for example, goes farther with individual health insurance than it does with group health insurance.
3. Individual Health Insurance is Better for Employees
Lastly, individual health insurance is now just as good for employees - if not better - than group health insurance. Once educated, employees prefer individual health insurance to group health insurance because of two key advantages:
- Choice – Employees choose the coverage and doctors that best fit their family’s needs and budget.
- Portability – Employees keep their health insurance when they leave the company because the individual health insurance policy belongs to the employee and is independent of employment.
Questions about employer reimbursement of health insurance premiums? Leave a comment below.