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How much does not offering health benefits cost me?

Health Benefits • July 19, 2021 at 9:00 AM • Written by: Gabrielle Smith

When it comes to government regulations on employer-sponsored health benefits, applicable large employers (ALEs) with more than 50 full-time equivalent (FTE) employees are legally required to offer their employees health insurance that meets minimum value. This requirement, also known as the employer mandate, is what ensures health coverage for millions of employees nationwide.

However, the employer mandate only applies to ALEs. Given that small employers are the exception to the rule, it can be tempting for small business owners to forego the rising costs of offering health benefits altogether.

While organizations with 50 or less FTEs suffer no legal consequences from not offering health benefits, failing to provide the top most requested benefit in the U.S. is still a costly mistake.

In this article, we’ll examine all of the financial repercussions that come with failing to offer health benefits—from higher turnover to decreased productivity—as well as explore how alternative health benefits options can solve these problems without the burden of traditional group health insurance.

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Your employees want benefits—and they’ll leave if they don’t get them

Hiring and keeping talented employees is vital to your success as an organization, and offering health benefits is a proven way to do it. A Glassdoor survey finds that offering a great benefits package is a stronger tactic to getting more employees to come aboard and stay longer than offering higher salaries.

What’s more, the Society for Human Resource Management (SHRM) finds that more than half of U.S. adults with employer-sponsored health benefits say that liking their health coverage is a key factor in deciding whether or not they would stay at their current job.

So what happens when your organization doesn’t offer a benefits package? In short, you start losing talent to other organizations that do.

Although there’s no one industry standard on calculating the cost of employee turnover, SHRM predicts that every time you replace a salaried employee, it costs the organization 6 to 9 months of their salary, on average.

To give you an idea of what that looks like in dollars, an employee making $60,000 could cost your organization between $30,000 and $45,000 in recruiting and training expenses to replace them.

Lack of benefits leeches productivity

A high turnover rate isn’t the only consequence of not offering employee health benefits—lowered productivity also comes into play. Before employees make the ultimate decision to leave your organization, they’re likely spending work time dealing with the financial stress of going without benefits. These lost hours also add up.

According to John Hancock Retirement’s annual Financial Stress Survey, more than half of respondents worry about personal finances at work at least once a week, causing workplace distraction and loss of productivity.

They predict that this loss of productivity, combined with more frequent absenteeism from financial stress, has a major impact on employers, costing more than an estimated $1,900 per year, per employee, and totaling an estimated annual loss of $1 million for mid-sized employers.

The survey also finds that 49% of respondents feel they would be at least somewhat more productive at work if they didn’t have to worry about finances while at their jobs. This is especially true among younger employees—Millennials (22%) and Gen Xers (18%) are more likely than older generations (11%) to say they would be much more productive without financial worries.

An informal benefits solution comes with tax consequences

Faced with the dissatisfaction of their employees, many small businesses compensate for not offering group health insurance by cobbling together an informal solution, such as a taxable wage increase.

With a taxable wage increase, employers give each employee a flat salary raise and encourage them to spend it on individual health insurance. This solution allows employers to control their costs and frees them from the administrative time they may have spent on a formal solution.

However, giving employees a raise not only fails to alleviate the original problem—most employees don’t consider extra cash a “benefit,” and therefore rarely put the funds toward their health needs—it also costs your organization more in payroll taxes.

Let’s assume that you decide to give each of your 40 employees an extra $3,000 a year in hopes they’ll purchase health insurance. In addition to the base salary increases, you’ll also be paying 6.2% of every dollar to Social Security and 1.45% to Medicare.

In total, that’s an additional $9,180 in payroll taxes alone for your organization to provide the increase to your 40 employees, and they will have to pay income tax on that money as well.

How to offer health benefits on a budget

Now that you know the high cost of failing to offer health benefits, you may still be concerned that offering health benefits is out of the question for your organization’s budget. Luckily, there are health benefits solutions that are specifically designed with small and medium-sized organizations in mind, like the qualified small employer health reimbursement arrangement (QSEHRA).

A QSEHRA, also known as a small business HRA, allows employers with less than 50 FTEs to reimburse their employees—tax-free—for individual insurance premiums and over 200 qualifying medical expenses.

Under a QSEHRA, you offer a monthly allowance, and your employees will purchase their own health insurance and submit reimbursement requests to the organization. They can be reimbursed for individual insurance costs and out-of-pocket expenses for themselves and their families. You’ll reimburse their health expenses up to the amount of their monthly allowance, and any unused funds at the end of the year stay with you.

Watch our product demo to see how a QSEHRA can work for your organization


Not offering health benefits can seem appealing when faced with the daunting expense of traditional group health plans, but this choice is dogged by hidden costs. From high turnover, decreased productivity, and spikes in payroll taxes, going without a formal health benefit just isn’t worth it for small and medium-size businesses. Instead, looking to alternatives like a QSEHRA is the smarter way to avoid these problems and deliver what your employees really want: formal, affordable health benefits.

This article was originally published on May 30, 2017. It was last updated July 19, 2021.

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Gabrielle Smith