Small business health insurance costs: What can you expect?

Offering group health insurance is getting more expensive, causing some employers to wonder if offering health benefits will become unsustainable within the next few years. This is especially true for small businesses with tight budgets, fewer resources, and fewer employees to help meet the participation requirements for group health plans.

So, what's a small business owner to do when offering health insurance seems unrealistic given budget constraints? Below, we'll discuss the healthcare costs small organizations can expect when offering employer-sponsored health insurance and how organizations can control costs with a health reimbursement arrangement (HRA).

Takeaways from this blog post:

• Due to rising costs, small businesses are finding it increasingly challenging to offer group health insurance.
• The average annual premiums for group health insurance in 2023 are $8,435 for single coverage and $23,968 for family coverage, according to KFF.
• Small organizations often choose HRAs as a cost-effective alternative for employer-sponsored coverage.

How much do group health insurance premiums cost?

According to KFF¹, annual premiums for group health insurance in 2023 average $8,435 a year for single coverage—roughly $703 monthly—and $23,968 a year for family coverage, which is about $1,997 per month. The average annual premium for single coverage and family coverage each increased by 7% over the last year.

Monthly premiums also run higher for certain types of health insurance, like preferred provider organization (PPO) plans and health maintenance organization (HMO) plans. The average cost for single coverage and family coverage is also more expensive in the Northeast and Midwest regions of the United States and in specific industries like transportation, communications, and utilities.

Organizations can reduce their budget by implementing higher cost-sharing requirements for employees. However, adding these requirements increases the risk that eligible employees will decline participation in the plan.

If too many employees choose not to participate, the organization may not be able to offer the policy at all. A health insurance company typically requires at least 70% of employees to participate in a group health plan.

How much time does it take to administer a group health insurance plan?

While many organizations are aware of the cost of health insurance, they're less prepared for another factor: the cost of the plan's administration time. For most small organizations trying to get as much done with as little staff as possible, the impact of this administration cost might even exceed premium costs.

Let's go over the three most significant factors that make managing a group health plan time and labor-intensive:

• Ongoing regulatory changes the organization must track
• Complicated communication processes
• Painful yearly renewal processes

1. Ongoing regulatory changes the organization must track

For many small businesses, having an entire human resources team to tackle the administrative tasks of offering group health insurance coverage isn't an option. That means an already busy employee must become the go-to person to educate staff on health insurance options, who’s eligible for coverage, what local facilities are in- or out-of-network, and the covered services under the plan. They also must stay on top of rule changes.

Without someone watching these regulations full-time, it's easy for some rules to slip through the cracks, making your plan out of compliance. Noncompliance with the Affordable Care Act (ACA) and the Employee Retirement Income Security Act of 1974 (ERISA) comes with hefty penalties of up to thousands of dollars.

2. Complicated communication processes

Group health insurance plans also require businesses to undergo a complicated communication process between employers, the health carrier, and their employees.

The complexity of these plans often forces employers to become an intermediary between the health insurer and employees, managing tedious and unorganized back-and-forth communication via phone and email updates every time an insurance issue surfaces.

Larger companies may be able to undertake these tasks. But for many small employers, this is time better spent on running their business.

3. Painful yearly renewal processes

Annual benefit renewals for group health insurance plans are complex and require much time to complete. If claims employees made to the insurance carrier were expensive the previous year—if they've filed a higher than usual number of health insurance claims, for example—they'll likely face cost increases or changes in plan terms.

You must then consider whether you will accept the changes, negotiate with the carrier, or work to identify new health insurance options that better match your budget and benefits goals. You may need to meet with new benefits brokers to do this, which takes time.

If small organizations spend just four hours each month of one employee's time managing benefits day-to-day and five days during benefits renewal, that's an additional 88 hours of the employee's time that could have gone to other tasks.

Group health insurance options are limited for small organizations

The annual costs and minimum participation requirements for a traditional group plan leave many small organizations with just one or two policies to choose from for all of their employees. Invariably, this means many don't get the policy they want. Available insurance options may not cover their employees' healthcare needs, or they may be unable to afford a policy that covers them.

Employees in this situation may choose not to participate in the policy, which means your organization may not meet the policy's minimum participation requirements, forcing you not to offer a benefit at all.

However, a PeopleKeep Survey found that 87% of employees say having a health insurance benefit is “extremely important” to them, so you'll want to offer some kind of health benefit to keep turnover low at your organization.

Turnover can be a significant cost, especially for small businesses. Some studies² found that every time an organization replaces a salaried employee, it costs an average of six to nine months' salary to train a new hire.

Therefore, making your compensation package more attractive by including a comprehensive health benefit is worth your time and money. Otherwise, you may have to invest those resources into replacing employees who leave your organization in search of ones that offer health coverage.

How small organizations can control their health benefits costs with a QSEHRA

Unsurprisingly, many small organizations decide they can't afford traditional group health insurance's financial and administrative costs. But simply going without health benefits isn't the answer, as the increase in employee turnover and associated costs are even higher.

Many small organizations find that HRAs are one of the most effective ways to offer a quality health benefit that fits a tight budget. With a tax-advantaged HRA, instead of paying employee premiums, the organization provides employees a set monthly allowance the organization can afford.

You reimburse your employees, tax-free, for individual insurance premiums and qualifying out-of-pocket costs up to a maximum allowance that you determine, enabling you to control your health benefits costs.

Here are a few examples of HRA-eligible expenses:

• Doctor visits
• Preventive care
• Prescription drugs
• Over-the-counter medicine
• Mental health services

Employees can also choose an individual medical plan that works best for them, which can increase their overall satisfaction.

A qualified small employer HRA (QSEHRA) is often the best HRA for small businesses. QSEHRAs are for employers with fewer than 50 full-time equivalent employees (FTEs). As long as employees have minimum essential coverage (MEC), such as an individual health plan from the Marketplace or a spouse’s group plan, they can get reimbursed for their monthly premiums, medical expenses, and out-of-pocket costs tax-free.

Unlike other HRAs, the IRS sets annual maximum contribution limits for the QSEHRA. However, small businesses assume less financial risk since there are no minimum employer contribution limits. But the flexibility doesn't end there.

QSEHRAs don't have participation requirements. So, even if you only have one or two W-2 employees, you can still have a QSEHRA. Also, if you have W-2 part-time employees, they're eligible to use the QSEHRA benefit. However, if you decide to do so, part-time employees must receive the same allowance as your full-time employees.

Best of all, unlike group health insurance plans that require hours of administration, HRA administration software like PeopleKeep enables you to manage a QSEHRA in minutes per month.

Whether it's customizing plan documents, reviewing reimbursement documentation, or navigating tax regulations and compliance, PeopleKeep will guide small employers through every step of managing their QSEHRA benefit.

Other HRAs available for small businesses

While the federal government designed QSEHRAs for small businesses, they may not fit every organization’s needs. For example, suppose you want to offer a greater allowance to your employees than the IRS maximum. In that case, you might want to consider other HRAs.

An individual coverage HRA (ICHRA) works like a QSEHRA, but it has no maximum allowance cap. It also allows you to customize allowances and eligibility with employee classes. However, employees must have individual coverage with MEC to participate.

If you want to offer a high deductible health plan (HDHP) to save money on premiums, you can supplement it with a group coverage HRA (GCHRA). A GCHRA allows you to reimburse employees for out-of-pocket costs your group plan doesn’t cover, such as deductibles.

How to cover medical services using a health stipend

Another option for businesses is a health stipend. With a health stipend, you can reimburse employees for their medical costs and monthly health insurance premiums. It also has fewer restrictions than an HRA, so you can reimburse employees for more things than the IRS allows.

It's important to note that health stipends are taxable. They also don't satisfy the Affordable Care Act’s (ACA) employer mandate for organizations with 50 or more FTEs.

Conclusion

The cost of employer-sponsored health insurance is incredibly steep for small organizations, not to mention the amount of time that goes into administering the benefit. Given this, it's easy to see why HRAs are becoming a popular alternative, as they empower employers to offer a much more flexible health benefit while keeping costs in check.

This post was originally published on November 3, 2020. It was last updated on January 4, 2024.

1. https://www.kff.org/report-section/ehbs-2023-summary-of-findings/
2. https://lrshrm.shrm.org/blog/2017/10/essential-elements-employee-retention