Employers of all sizes evaluate different strategies to offer and pay for employees' health insurance. Employer paid health insurance is the most valued fringe benefit, and is an important tool for recruiting and retaining top employees.
There are several different approaches to take for employer-provided health benefits. The strategy an employer takes depends on several factors such as employer size, budget, personnel resources, health benefits goals, and knowledge of different options.
Here are the three most popular strategies for employer paid health insurance in the "post-ObamaCare" landscape, and how these strategies align with current small business market trends.
Employer Paid Health Insurance Strategy #1: Purchase a Group Health Insurance Plan
Group health insurance plans are a form of employer paid health insurance. With a group health insurance plan:
The employer selects and purchases the health insurance plan (usually through a health insurance agent or broker).
Costs are typically shared between the employer and the employee, and coverage may also be extended to dependents.
There is a minimum amount the employer must contribute toward the total premium (ex: 50% or 75%).
- Premium contributions an employer makes are tax-deductible and premium contributions employees make can be made pre-tax.
There are various types of group health insurance plans. The plan can be structured in different ways (ex: fully-insured vs. self-insured), and there are many types of health insurance plans (ex: PPO, HMO, HDHP).
Small Business Market Trends: Currently, group health insurance plans are the most popular type of employer paid health insurance. However, in 2013 only 57% of employers offered traditional group health insurance, down from 69% in 2010. Micro employers (fewer than 10 employees) are far less likely to offer traditional group health insurance, with only 45% of micro employers offering group health insurance in 2013, down from 59% in 2010 (source).
There is a measurable shift away from group health insurance in the small and medium sized employer markets. The driving force of this shift is cost.
Among small and medium sized employers (with fewer than 200 employees), 50% say the main reason is “cost”, 16% say that the “firm is too small”, and 15% say that “employees are generally covered by another plan” (source).
Employer Paid Health Insurance Strategy #2: Set Up a Reimbursement Arrangement
Health Reimbursement Arrangements (HRAs) are a different type of health benefit in which the employer offers a fixed monthly contribution to an employee, rather than making contributions to a specific group health insurance policy. The employee can then access the funds to reimburse health insurance premiums and qualified medical expenses. With an HRA:
The employer sets up an HRA (usually through a health insurance agent or broker and/or a defined contribution software provider).
The employer allocates fixed monthly allowance amounts to each employee (there are no minimum contribution requirements).
Employees purchase any individual/family health insurance policy (with the help of an agent or broker and/or through the new health insurance marketplaces).
Employees are reimbursed on payroll for approved health insurance premium expenses, up to the amount available in their balance.
As long as the employer uses a compliant HRA, such as the Small Business HRA, reimbursements the employer provides are tax-deductible. And, reimbursements employees receive are tax-free.
Small Business Market Trends: This type reimbursement model, in which employees can select any individual or family health insurance policy that provides minimum essential coverage, is the biggest health insurance trend with small employers (fewer than 50 employees).
Small employers want to offer health benefits for the same reasons as larger employers, but as seen in the market analysis above, are priced out of the market more and more each year. The primary driving force for small employers adopting HRAs is affordability and cost predictability. Employers define any amount they can contribute to employees' health insurance expenses and predictably forecast costs month to month, and year to year.
Additionally, this approach gives eligible employees and their families access to the individual health insurance tax credits, and allows employees to have more control over their health care.
Employer Paid Health Insurance Strategy #3: Give Bonuses to Employees for Their Health Insurance (Not Recommended)
Some smaller employers who do not offer health benefits consider giving employees a raise or salary bonus as an informal strategy for employer paid health insurance. Employers take this approach because they want to contribute to health insurance, but:
They cannot afford group health insurance,
They cannot meet minimum participation requirements of a group health insurance plan, and/or
They do not know about small businesses health insurance alternatives such as a defined contribution health plan.
On the surface, this strategy to give raises or salary bonuses to employees for health insurance may seem cheaper and simpler than reimbursing health insurance premiums through a defined contribution health plan. But, there are two major considerations favoring defined contribution health plans: Tax savings and compliance. By offering an HRA instead of giving raises to employees for health insurance, both the employer and employees save money.
Small Business Market Trends: As HRAs become more mainstream with health insurance brokers and employers alike, it will become far less common for businesses to take this approach.
What strategies for employer paid health insurance did we miss? Leave a question or comment below.