How to Make Small Business Health Insurance Simply a Payroll Function

Written by: Christina Merhar
Originally published on February 24, 2014. Last updated July 9, 2015.

For small businesses and startups with limited staffing, offering health insurance brings major benefits with recruiting and retaining top employees.

But, administering traditional health insurance is a significant time investment. With very small businesses, administering health insurance often falls on the owner, and the time and cost investment can be a significant barrier to offering health benefits. small_business_health_insurance_a_payroll_function

Which leads small business owners to a common question: "Isn't there a simpler and more affordable approach to small business health insurance that yields the same (or better) benefits to our business and employees?"

Simplifying Small Business Health Insurance with a Pure Defined Contribution Health Plan

The easiest and most cost-effective way to offer small business health insurance today is with "Pure" Defined Contribution Health Plan, where employees are offered a stipend for health insurance rather than a specific health insurance plan. 

One of the driving forces causing small businesses to adopt Defined Contribution Health Plans is cost. With Defined Contribution Health Plans, the small business sets any budget for health benefits and has predictability and control over the cost year to year.

Another driving force causing small businesses to adopt Defined Contribution Health Plans is quick administration time. Once the plan is set up online and employees are enrolled, administering health benefits takes 5 minutes each month online. The small business simply records reimbursements for approved health insurance premiums via their existing payroll process.

What the small business owner doesn't spend time doing with a Defined Contribution Health Plan is: researching different health insurance plans, communicating with the health insurance company, making plan and cost decisions each renewal period, and filling out paperwork. Employees are happy with a Defined Contribution Health Plan because they select the health insurance plan that best fits their needs, including which doctors to see.

With this approach, small business health insurance simply becomes a payroll function.

4 Steps to Making Small Business Health Insurance a Payroll Function

There are four steps to making small business health insurance a simple payroll function:

  • Step 1: Do not offer a group health insurance plan.

  • Step 2: Define any amount you can afford for health benefits. Use Defined Contribution Software to set up formal plan documents and give each employee a fixed allowance amount to use for individual health insurance.

  • Step 3: Select an Insurance Professional, and/or provide information about the new Health Insurance Marketplaces to help employees shop for and purchase individual health policies (typically, this saves the employee 20%).

  • Step 4: Use Defined Contribution Software to reimburse employees via payroll.

See also: How to Set Up a Defined Contribution Health Plan.

Do you have questions about how small business health insurance simplifies using a Defined Contribution Health Plan? Leave a comment below.


Originally published on February 24, 2014. Last updated July 9, 2015.


Additional Resources

View All Resources