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Small Business Employee Benefits and HR Blog

Small Employers Dropping Group Health Insurance to Help Pay for Individual Coverage

stipend_for_health_insuranceThe cost of group health insurance is becoming unsustainable for small business owners. Dropping healthcare benefits altogether is not a feasible option for most small employers, as offering healthcare is a crucial part of employee recruiting and retention. The Associated Press (AP) released an article today about the growing trend of small employers dropping their group health plans to help their employees pay for individual health insurance plans.

Group Health Insurance Is Too Expensive for Small Employers

The heavily syndicated AP article featured a small business owner from Greensboro, North Carolina, Monty Hagler, who “joined a growing number of small business owners who are forgoing coverage and paying staffers more to compensate for the lost benefits.”

Hagler cancelled his group health insurance when he realized that his premiums could rise as much as 38 percent. When exploring the alternative plans from different insurers, Hagler either found them too expensive or not comprehensive enough. Hagler pointed out that “Unless we dramatically changed our plan and went with the most basic plan,” Hagler said “this is not sustainable.”

More Small Employers Are Helping Employees with Individual Coverage

The AP article cited a survey by the Society for Human Resource Management, which revealed that nearly 3 percent of 1,600 small businesses surveyed plan on giving employees a stipend to purchase their own health insurance coverage next year.

Small employers are not subject to the employer shared responsibility, and are therefore, not required to provide health insurance to their employees. The AP points out that employees may get a better deal on the health insurance Marketplace, especially if they qualify for a premium tax credit.

The AP also quoted Ashley Hunter, owner of HM Risk Group, who helps workers find new health insurance when their employers drop group coverage. Hunter remarked, “we explained to them, you are probably going to come out ahead. You will get a stipend and a subsidy and coverage will be better than what you were going to get with the group plan.”

The Drawback to Offering Employees a Stipend

As the article mentions, small employers are dropping group coverage to offer a taxable stipend, with the intention that employees will use the extra funds to purchase healthcare. This arrangement is typical for employers who want to offer health benefits for recruiting and retention, but cannot afford group health insurance.

While this may seem like a beneficial arrangement for both parties, there are several problems with this solution. First, there is no guarantee that the employees will actually spend the money on health insurance with a stipend. Additionally, many employers will lose their desired, top-tiered candidates to employers with formal health benefits in place. While a stipend may be somewhat appealing to candidates, most would prefer a formal, tax-advantaged health benefits program.

Another Option for Small Employers Dropping Group Health Insurance

Rather than offering a stipend, a better health insurance option for small businesses is individual health insurance and a premium reimbursement plan.

With this approach, employers give employees a tax-free healthcare allowance to spend on individual health insurance - instead of purchasing a group health insurance plan. Employees use their healthcare allowance to purchase an individual health plan of their choice and those eligible can access the premium tax credits.

Click here to read the full article at the Associated Press.

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