As the year draws to a close, small business owners face many important decisions. For small businesses, virtually every decision ends up playing a role in the success of the business.
Company-provided health insurance is a prime area for potential improvement, as it is often the largest overhead expense, other than payroll. When determining if you need to change your health benefits in 2016, it’s important to understand your options, at least on a basic level. Here’s a look at the pros and cons of group health insurance and defined contribution health plans.
Group Health Insurance
Group health insurance is selected and purchased by you, the employer. Typically, the premium cost is divided between the company and the employee and there is a minimum percentage rate that you must contribute to the premiums.
- Most employers and employees are familiar with how group health insurance works and are therefore more comfortable with this option because it typically requires less change and education.
- With the increase in new group health insurance plans available to small employers through the SHOP Marketplace, you have a number of plans to choose from. The SHOP Marketplace can be an attractive option, especially if you qualify for the small business healthcare tax credits.
- For large companies, group health insurance can make a lot of sense. Because the risk is spread across numerous employees, typically that drives down premiums.
- Employees with large families can benefit from traditional group insurance because they do not have to pay a separate cost for each member of the family.
- This number fluctuates, based on many variables. However, for the most part, businesses that offer traditional group insurance to their employees and their families find themselves investing a significant amount of time into administrative work.
- The one-size-fits-all nature of group health insurance plans is hit or miss. The plan chosen by an employer likely will end up meeting one employee’s unique needs perfectly but frustrating others who would have benefited much more from other types of plans.
- In the traditional model, a business offers group health insurance to employees and their dependents. Typically the business and the employees split the bill, with the employees paying all or most of what it costs to add family members. Financially, there are drawbacks to this system. Most notably, premiums rise from year to year based mostly on the healthcare costs of the entire staff, yet the premiums rise equally for every employee rather than on a person-by-person basis.
- Initially researching and comparing group health insurance plans from multiple vendors is a lengthy process. The nuances between each plan are numerous, and, of course, you want to carefully explore those nuances so your informed decision will maximize the company’s and employee’s financial contributions.
Defined Contribution Health Plan
With a defined contribution health plan, you offer your employees a fixed healthcare allowance that they can spend on purchasing individual health insurance. The employee is reimbursed for their health plan costs—up to their available healthcare balance that was predetermined by you.
- On average, individual health insurance costs 20 percent less than traditional group plans.
- With help from premium tax credits — exclusive to people with individual health plans — and employer-provided defined contributions, many small-business employees can have 100 percent of their premium covered.
- Employees can select the plan that best fits their individual needs. They can do as much research as they deem necessary before selecting the type of coverage that fits well with their health history, future goals, and preferred payment strategy.
- With individual health plans, employees have options. There are four levels of coverage from which to choose. Within each tier, they can pick their coverage by insurance company, doctor network and deductibles.
- As the employer, you have the luxury of total cost predictability, and there are no minimum or maximum contribution amounts.
- Eligible employees can tap into discounts on their premiums through the premium tax credits.
- Individual health plans demand significant upfront involvement from employees as they are the ones selecting the plan that best fits their needs. While many find the ability to select their own health insurance refreshing, others may be overwhelmed by the process. Education from the employer is crucial for successful adoption of this new form of health insurance, so Defined Contribution Health Plans do involve more time from employers initially than some alternate health insurance options.
- A defined contribution health plan is a payroll function, which is different than what many companies would expect when managing health insurance for their employees. Many employers see this as a drawback as they are not as familiar with the process of managing the plan.
- Employees have to pay for their health care upfront, before being reimbursed by their employer. This can make employees uncomfortable if not properly educated about the process.
- Change is difficult for employers and employees, and if you are currently offering group health insurance, the transition may be difficult to embrace.
There’s no one health insurance solution that works for every company. As the employer, you are given the responsibility of determining what is best for your employees and your company as a whole. While group health insurance and defined contribution health plans aren’t the only two options for you to select from, the more educated you are about these two options and other solutions available to you, the better able you are to make an informed decision.
If you have a question about the finer points of these plans, please leave a comment below.