A Savvy Way to Afford Employee Health Benefits

Written by: Christina Merhar
Originally published on May 11, 2015. Last updated November 10, 2021.

Affording employee health benefits is a common human resources challenge for small and growing businesses. On one hand, we value the role health benefits play in compensation, recruiting, and retention. On the other hand, the cost is prohibitive even for the most profitable businesses.

Across the U.S., millions of small businesses are in this predicament. As a result, only 54% of small and medium sized firms (with fewer than 200 employees) offer traditional health insurance today.

Under the Affordable Care Act, small businesses are not mandated to offer health insurance to employees, but most small businesses would offer benefits, if they could find an affordable model. Which is why savvy small business executives are leading the way with a new health benefits approach.

A Savvy Employee Health Benefits Approach

A new way to think about health benefits is to offer employees an allowance for a personal health insurance policy, instead of offering a specific health insurance plan.How_to_Afford_Employee_Health_Benefits-1

With this type of “pure defined contribution” model, employees purchase any individual health insurance policy. Using their defined contribution allowance, employees are reimbursed by the company. Think of it like a business expense account for health insurance.

The immediate cost savings are a driving force behind this type of health benefits model. On average, individual health insurance costs less than traditional group health insurance. So right off the bat, healthcare dollars are stretched farther for both the business and employees.

Additionally, it creates a predictable, fixed-cost model because the business, not the insurance company, sets and controls all annual costs.

Yes, it is a major shift in how we’ve offered employee health benefits in the past, but employees seem to be on board.

According to a recent Kaiser Family Foundation survey, 75% of employees working for small businesses not currently offering health benefits would prefer $2/hour more in wages than health insurance. A defined contribution model lines up with these values; “Here is $250 a month - go purchase a health plan of your choice!”

How to Afford Employee Health Benefits

The steps to adopt defined contribution employee health benefits is easy. And know this - if you want to contribute any amount to employees’ health insurance, you can afford employee health benefits. Here’s how it works:

Step 1 - Set a budget for health benefits.

Step 2 - Give employees monthly healthcare allowances to spend on health insurance; whether this be tax-free via a Health Reimbursement Plan (HRP) or a taxable stipend.

Step 3 - Allow employees to purchase health insurance via the Health Insurance Marketplaces, a broker, or online. Reimburse employees for their healthcare expenses.

Tip - To comply with various federal rules for reimbursing employees’ individual health insurance, and to make the reimbursement process easy, use a defined contribution software provider.


To recruit and retain the best employees, small businesses need affordable health benefits. As such, savvy executives are the first to adopt an individual health insurance and defined contribution model. With this “name your price” approach to health benefits, businesses can achieve predictable costs and employees receive great health benefits.

What questions do you have about how to afford employee health benefits at your small business? Leave a question. We’ll help answer.

Topics: Health Benefits
Originally published on May 11, 2015. Last updated November 10, 2021.


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