Business is good, revenue is steady, and your business is ready to offer employee health benefits. This is big. Health benefits are important to attract and keep a top-notch workforce, but even more importantly, you can now help your loyal employees with healthcare costs.
So, how do you proceed? It’s likely employees have coverage they purchased on their own, and it’s also likely employees are receiving discounts on their health insurance premiums. Yes, purchasing a group health insurance policy is the traditional way to go about small business health benefits, but it may result in higher costs for both the business and employees.
It’s a dilemma, but there is a simple, win-win solution.
Premium Tax Credits Eligibility
Under Obamacare, significant federal discounts (called the premium tax credits) are available to employees - but only for individual health insurance, and only if your small business does not offer traditional group health insurance coverage.
In fact, by just offering group health insurance to employees and their families, you are disqualifying them from receiving $2,000 to $12,000 per year toward their health insurance.
How to Offer Health Benefits and Not Disqualify Employees
As your business considers health benefits, ask around. Many employees may already have great coverage and be paying very little a month because of the premium tax credits.
If this is the case, as it is for most small businesses, it may be a wise move to set up a formal health benefits program to reimburse employees for their individual health insurance premiums (a “premium reimbursement plan”).
With premium reimbursement, the small business contributes to a formal reimbursement plan instead of contributing to a group health insurance policy.
Employees purchase individual health insurance, have access to the tax credits, and can be reimbursed for the non-subsidized portion of their premium on a tax-free basis.
Related: Can Employees Access a Health Reimbursement Plan and Federal Subsidies?
Example
One of your employees (“Joe”) lives in Dallas, Texas, earns $60,000/year, and has a family of five.
With a group health insurance plan option, the business would pay the full $500/month for Joe. However, Joe would pay out-of-pocket to cover his additional four family members at a monthly cost of $1,200/month. That’s $14,400/year Joe would pay to have the entire family of five covered by the company’s group plan.
Alternatively, on the Texas Health Insurance Marketplace (www.HealthCare.gov), Joe could purchase individual coverage for all five family members for $899/ month - before any tax credits are applied.
That’s $10,788 /year ($899 × 12) for the same coverage and a savings to Joe of over $3,600/year ($14,400 - $10,788).
But here’s the kicker. With the tax credits, Joe saves even more. By not offering group health insurance, Joe and his family have access to the premium tax credits. Based on income and family size, Joe is eligible for a federal subsidy of $580/month, reducing Joe’s monthly premium to $319/ month for all five family members.
With the tax credits, Joe pays only $3,828/year ($319 x 12) to cover his family of five.
By not offering group health insurance and allowing Joe to access the tax credits, you save Joe $10,572/year ($14,400 - $3,828).
Conclusion
Offering health benefits is an exciting time for small businesses. It means revenue is stable and you are ready to contribute to employees’ healthcare.
As the business evaluates health benefit options, crunch the numbers. Most small businesses find that offering employees a premium reimbursement plan saves the business and employees money, and allows employees to keep their current coverage and discounts.
Do you have questions about small business health benefits and premium tax credit eligibility? Leave a comment below. We’ll help answer.
