As a business owner, you’re always looking for ways to keep costs down, but you’ve also got to manage to keep both your customers and your employees happy, right? Offering health insurance for employees is a big determining factor in both employee satisfaction and retention, but it’s expensive! You’re probably wondering how much health insurance for employees costs. That’s what this post breaks down for you.
The latest data from the Kaiser Family Employer Health Benefits Survey shows a 5% increase in health insurance premiums, passing $20,000. On average, employees pay $6,000 of that total, with employers covering the remaining $14,000.
What determines health insurance group rates?
One of the first questions you likely have when researching small business health insurance options is how much it will cost. Group rates are mostly determined by the Affordable Care Act (ACA) guidelines.
Rate restrictions vary from state to state. However, under the health care law, insurance companies can account for only 5 things when setting premiums.
Typically, you will find that these criteria will determine health insurance group rates:
- Age of enrollees: base rates are set for a 21-year-old individual, and increase with age
- Tobacco usage (except in states where this is banned): rates can increase up to 50% for tobacco users
- Location of business: cost of living in your area, state and local rules account for this discrepancy
- Individual vs. family enrollment: covering a family/dependents costs more
- Plan categories/tiers
If your head is spinning with all of this information, take heart! There are alternatives to the historically chosen group plans. Some of the latest and greatest alternatives are called health reimbursement arrangements. HRAs have been around for a few years now but are really gaining traction as more and more businesses catch on to the beauty of these tax-free health insurance options.
What is a health reimbursement arrangement?
A health reimbursement arrangement allows employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want.
How it works is pretty simple. You choose a monthly budget that works for you, your employee signs up for a health plan that works for them, then you outsource the rest to an HRA administrator (like Take Command Health!) so you don't have to worry about things like compliance or forms during tax time.
We often get asked if business owners have to pre-fund their account or send money to our account so we can distribute it to their employees. The answer is no to both questions—the money stays with the employer until an employee makes a claim that qualifies for reimbursement. If employees never make claims or don’t claim the full amount, the employer keeps it all!
The two types of HRAs that business owners need to know about
Let’s look at them briefly. (If you’re looking to take a deeper dive into these, all that info is at the bottom of this post!)
The individual coverage HRA has several advantages over traditional group plans that may be appealing to some employers. For instance, the reimbursement model (sometimes called a “defined contribution”) gives employers greater ability to control costs and provides employees with more options to choose from. Key advantages of the ICHRA include:
- Customizable classes
- No reimbursement limits
- Works for businesses of any size
- Can reimburse both premiums and expenses
The qualified small employer HRA allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. Key advantages of the QSEHRA include:
- Optimized benefits
- Tax efficiency
- Flexible design (vary by family size or age)
- Budget control (choose the budget that works best for you
- Works for small businesses with less than 50 employees
- Can reimburse for premiums and expenses
- Note the reimbursement limits
What's my next step?
While we always advise our clients to speak with their CPA before jumping in, we are ready to chat on our website if you have any specific questions about your business and how HRAs could help. We have also put together a really helpful ICHRA Guide and Small Business HRA Tax Strategy Guide as well as our wildly popular ICHRA FAQ post.