A big milestone for any small businesses is offering small business health insurance for the first time. Your small business is off the ground, you're looking to hire your first employee, or perhaps you need a health benefits package to retain a key employee.
So, where do you start when you're ready to offer employee health benefits? Here are 5 quick tips to offering health benefits for the first time.
Tip #1: Understand the advantages (and value) of offering employee health benefits
Most small business owners are familiar with the reasoning: Offer the right health benefits, and jump-start your business's growth. When you give employees health benefits they value, they'll be more satisfied, miss fewer workdays, be less likely to quit, and have higher commitment to helping your business grow. Here are three key advantages of offering health benefits to your employees.
Recruitment & Retention of Key Employees: Employee health benefits are a valuable tool in recruiting key employees and retaining your top talent. While the importance of this for your small business may depend on industry competition in your area and the age and demographics of your workforce, it will be an important factor in your overall compensation package.
Tax advantages: By offering a traditional group health plan or an alternative solution such as a defined contribution health plan, you can offer employees a tax-advantaged health benefit. These tax advantages increases your overall compensation package and allows you an income tax deduction for the contribution. In other words, your business expense is less than the value of the health care benefit to the employee.
Employee wellness: Insurance coverage keeps employees healthy and working. Preventive care and more affordable access to health care prevents your employees from taking extended periods of sick leave, allowing your small business to be more productive and profitable.
Tip #2: Analyze the risks (and costs) of offering employee health benefits
As a small business, you must assess costs and risk of any new expenditure. Likewise, it is important to understand the risks and costs of offering employee health benefits.
Cost: The cost will vary depending on the type of employee health benefits you choose (more on your options in tip #3). For example, health insurance premiums rise every year. The uncertainty of rate renewals with a group health insurance plan makes financial planning difficult. Small businesses can have more control over costs with a defined contribution health plan.
Administrative Commitment: Budget for the administrative time of offering employee health benefits. With a traditional group health insurance plan, your small business will spend time choosing the coverage and then spend regular time filling out forms, remitting premiums, and acting as intermediary between employee and insurer. With a defined contribution health plan, administrative time is reduced. For example, you will spend time at the front-end of setting up the defined contribution health plan and then spend 5-10 minutes each month adding reimbursements to payroll.
Tip #3: Research your employee health benefits options
Today there are new options for small business health benefits. The two main types are a traditional group health insurance plan and a defined contribution health plan.
Group Health Insurance Plan: Also called "employer-sponsored" health insurance, a group health insurance plan covers all employees and their family members. These plans are generally uniform in nature, offering the same benefits to all employees or members of the group. Unlike individual health insurance, group health insurance is purchased by an individual (or family member) indirectly through the individual's (or family member's) employer. Group health insurance is dependent on an individual's (or family member's) employment.
Defined Contribution Health Plan: Rather than paying the costs to provide a specific group health insurance plan (a "defined benefit"), employers can fix their costs on a monthly basis by establishing a defined contribution health plan. Defined contribution health plans are an affordable alternative to employer-sponsored group health insurance plans. Defined contribution health plans by themselves are not health insurance plans, rather you offer employees a tax-free allowance to spend on their own personal policies and other medical expenses. A defined contribution health plan is like a business expense account for health care.
Within these two types, there are several more options to consider. See: Small Business Health Insurance Options.
Tip #4: Work with a trusted insurance broker
To help navigate your best options, work with a trusted insurance broker who is knowledgeable about small business health insurance options, defined contribution health plans, and health care reform.
Tip #5: Understand how health care reform impacts your small business employee health benefits
There are three key health care reform regulations every small business should know about health care reform:
Individual Mandate: Starting in 2014, health care reform requires everyone to obtain minimum essential coverage for themselves (and their dependents) or pay a penalty.
Employer Mandate ("Play or Pay"): Beginning in 2014, all applicable large employers (50+ FTE employees) must offer "minimum essential coverage" that is "affordable" to their employees. Applicable large employers who fail to offer minimum essential coverage that is affordable will be required to pay a "penalty" on their tax return. Less than 50 FTE employees? This does not apply to your small business.
Health Insurance Exchanges: Starting in 2014, health insurance coverage for individuals and small businesses will become available through new state Health Insurance Exchanges (aka "Marketplaces"). The new tax credits (e.g. the small business healthcare tax credits) and tax subsidies (e.g. individual health insurance tax subsidies) will only be available for coverage purchased via a state health insurance Exchange. Additionally, all plans become guaranteed-issue.
How do the exchanges fit into your employee health benefits decision? As a small business, you will be able to shop for a group health insurance plan through the exchange. Or, if you decide on a defined contribution health plan, employees can shop for personal policies through the exchange, likely receive a subsidy discount for their policy, and be reimbursed for the non-subsidized portion through their defined contribution allowance.