As small and medium sized businesses consider health insurance options, many find themselves wondering, “How can our small business help with employees’ personal health insurance?”
In light of the Affordable Care Act changes, and opportunities, the best health insurance option for small businesses is personal (individual) health insurance and a premium reimbursement program.
With this approach, your business gives employees a healthcare allowance to spend on their personal health insurance - instead of purchasing a group health insurance plan. This article outlines three easy steps for small businesses to help reimburse employees’ personal health insurance.
Step 1: Cancel Your Group Health Insurance Plan
The first step in helping employees with their personal health insurance is to cancel your existing group health plan, if you have one. One of the primary reasons small businesses are canceling group health insurance in favor reimbursing employees for their personal health insurance is that personal health insurance costs up to 60% less. See this state by state comparison of rates.
Most group health insurance plans are "unilateral contracts". This means you can cancel a policy at any point during the year. While most carriers “request” 30 days notice, this is not always required.
When you cancel your group policy, all those covered will be eligible for a special enrollment period for personal health insurance. This means they’re eligible to purchase personal health insurance outside of the annual open enrollment period.
Step 2: Set Up a Formal Premium Reimbursement Program
Small businesses have different options for reimbursing employees for personal health insurance. The first option is to offer employees a taxable personal health insurance allowance. With this approach, the employer reimburses employees, up to a specified allowance, for their personal health insurance premium costs on a post-tax basis. The lack of tax advantage is one major constraint with this approach.
The second approach for businesses who want to help employees with their personal health insurance is a tax-free personal health insurance allowance, as opposed to a taxable healthcare allowance. With this approach to personal health insurance reimbursement, the business can implement a formal, self-insured medical reimbursement plan under Section 105 of the IRC. This type of plan allows employers to reimburse their employees tax-free for their substantiated personal health insurance premiums.
With either of these plans, employees use their healthcare allowance to purchase a personal health plan of their choice and those eligible can access the premium tax credits. Using premium reimbursement software helps businesses with the administrative tasks of the premium reimbursement plan and ensures compliance.
Step 3: Educate Employees
The last step is to educate employees about how premium reimbursement of personal health insurance works, and how it benefits employees and their families. To ensure a smooth transition, educate employees about:
- How the premium reimbursement program works
Why the business has decided to offer health benefits in this way (remember, it is better for them too!)
The benefits of personal health insurance such as plan choice, flexibility, and cost-savings
How to purchase personal health insurance for themselves and their family
How to request reimbursement for their premium expenses
FAQ: Can’t Our Small Business Just Pay for Employees’ Personal Health Insurance?
No. An employer should never pay directly for an employee’s personal health insurance. When an employer pays directly for a personal health insurance plan, they effectively endorse each employee's personal insurance plan as part of an employer-sponsored group health benefit offering. According to federal law, the employer is treating the personal health insurance plan as part of an employee welfare benefit plan regulated by ERISA. Because most personal health insurance plans do not meet minimum ERISA group plan requirements, the employer is out of compliance.
In addition, an employer is not allowed to know the details of employees' HIPAA-protected medical expenses, including personal health insurance. In other words, if an employer tries to pay directly for an employee’s personal health insurance, they are putting themselves out of compliance with federal ERISA and HIPAA regulations.
For more help on transitioning employees to a premium reimbursement plan, download this guide to premium reimbursement.
Do you have any questions about premium reimbursement? Leave a comment below.