Many small businesses feel confused and overwhelmed by health insurance options. Under the Affordable Care Act, small businesses (with fewer than 50 employees) are not mandated to offer traditional health insurance coverage, but there is still great value in offering employees access to quality health insurance.
Small businesses have five main options for health insurance:
Individual Health Insurance (with or without premium reimbursement)
Private Small Group Plan
The first option is a relatively simple approach, yet it achieves results: direct employees to the Health Insurance Marketplace in your state to purchase an individual or family health plan. Eligible employees can access discounts on their premiums via the premium tax credits. Or, employees can purchase an individual health plan “off” the Marketplace, through a broker or online.
If the small business would like to contribute to employee's health insurance expenses, they can use a premium reimbursement arrangement to reimburse employees for the unsubsidized portion of their premium. Premium reimbursement allowances can be given evenly to all employees, or provided based on job criteria (e.g. $300/month to managers and $200/month to entry-level).
For many small businesses, this is the most cost-effective health insurance solution because:
The business can contribute any amount to the healthcare allowances, and
Individual health insurance costs, on average, 20% - 60% less than small group plans.
This option is ideal for businesses who have been priced out of group health insurance, want to offer health benefits for the first time, or who do not want the administrative hassle of a group health insurance plan.
The small business SHOP Marketplaces are new state- or federally-run exchanges for small businesses. Small group health plans are available on the SHOP Marketplaces for small employers with 50 or fewer employees, however there are eligibility requirements. For example, in Massachusetts employers participating in the SHOP must contribute at least 50% of the premium amount, employers with 1-5 employees must have 100% of the employees enrolled, and employers with 6-50 employees must have at least 75% enrolled.
For eligible small businesses, the SHOP Marketplace gives access to the small business tax credits, which since 2014 are only available through the SHOP.
With a private exchange, the small business gives employees a set contribution to use towards a menu of plan options. The plan options can be individual - or group-based. Private exchanges are a type of “defined contribution” strategy.
Joining a co-op for health insurance is another option for small businesses, and a more traditional one. The co-op exists to increase buying power and spread the risk among a larger group. Each co-op is structured differently, so the co-op may offer better insurance rates than a group policy or a SHOP plan depending on regional insurance underwriting laws and the co-op itself.
Purchasing a traditional private small group health insurance plan is also an option for small businesses. Small businesses may find more options and carriers to choose from on the private market as compared to the SHOP, where some states only have one or two plans to choose from.
As many business owners know firsthand, traditional group health insurance is largely broken - it’s too expensive and it no longer works or employers and employees. The lack of portability, rising costs, and existing alternatives are all contributing to the mass abandonment of traditional group health insurance. Individual health insurance with premium reimbursement or private exchanges paired with individual health insurance are the future of small business health insurance -- and are the best options for all small businesses.