Researching small business health benefits often starts with group health insurance quotes, reviewing different carriers, coverage levels, and costs. But if you’re in sticker shock or if a group policy simply is not a good fit, what are your options? Here’s a savvy approach many smaller employers are taking: don’t offer group health insurance coverage. Rather, offer a formal benefit program to reimburse employees for individual health insurance policies.
This approach is a viable solution for smaller companies because employees gain access to quality, customized health insurance coverage and the company controls costs by setting a monthly contribution amount toward qualified premiums. In fact, the average employer could fully fund an individual family policy for less than they could fund a portion of that family's coverage under a group policy.
However, I may be getting ahead of myself. In this article, I’ll first walk through the average cost of individual health insurance, then I’ll cover how to offer a compliant employer reimbursement (a “contribution”), and lastly I’ll boil down the employer cost.
Note - This blog post is based off our new infographic, 7 Truths About The Cost of Health Insurance In America. Check out the full infographic here.
Individual Health Insurance Costs 43% Less
To understand why a reimbursement approach works so well, consider this - on average, individual health insurance policies cost less than a small group health insurance policy. Let’s look at the national data.
For single coverage, an individual policy costs $3,587 a year on average - a 43 percent savings compared to average group coverage at $6,251 a year. Factor in the tax subsidies available for individual coverage and the savings increase up to 60 percent annually.
For family coverage, an individual policy costs $10,739 a year on average - a 39 percent savings compared to average group coverage at $17,545 a year. If eligible for tax subsidies, savings for individual family coverage average 68 percent.
Unfamiliar with how group health insurance and individual health insurance stack up? Here’s a helpful chart:
How to Reimburse Employees for Individual Health Insurance
You may have heard you no longer can reimburse or pay for employees’ individual health insurance policies. In some cases, this is true. As part of healthcare reform, there are new penalties for non-compliant reimbursement or payment plans. However, there are also two compliant ways to help employees with the costs of individual health insurance.
The first way is for the company to set up a tax-advantaged Section 105 reimbursement plan to give employees a healthcare allowance to use on health insurance premiums. Think of it like a business expense account or gift card for health insurance.
Here is how it works:
- Step 1: Company establishes a formal reimbursement plan, setting eligibility criteria and monthly healthcare allowances.
- Step 2: Employees purchase their own health plan, with their own money.
- Step 3: Employees submit a reimbursement request, usually to a third-party or online software platform.
- Step 4: The reimbursement request is reviewed and substantiated (again, usually by a platform such as PeopleKeep) and the company reimburses employees for approved expense via payroll, check, or direct deposit.
The second way is to offer employees’ taxable raises or stipends to cover health insurance. However, because of the tax-advantages associated with a formal reimbursement plan, most companies and employees prefer this route.
The Employer Cost
The beauty of individual health insurance reimbursement is the contribution amount is completely set and controlled by the company.
As discussed earlier, individual health insurance costs about 40 percent less than comparable group health insurance premiums so the company’s healthcare dollars are stretched farther. And unlike traditional group coverage, there are no minimum contribution amounts.
Exact rates will vary by location and employee demographics. Below is an example
of typical cost savings (based off 2014 health insurance costs for the state of Illinois). In this example, a 45-person company saved $275,058 annually (61 percent) with individual health insurance reimbursement.
Health benefits are a vital component of compensation offered to employees, and yet with escalating costs, meeting the expectations of employees is increasingly difficult. One solution particularly well suited for smaller employers is to implement an individual health insurance reimbursement program. The cost? Whatever the company allocates. Bottom line? The average employer could fully fund an individual family policy for less than they could fund a portion of that family’s coverage under a group policy.
What questions do you have about individual health insurance, reimbursement, or the cost to employers? Leave a question below. We’d be happy to help answer.