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Small Business Employee Benefits and HR Blog

Switching to Employer-Funded Individual Health Insurance - 5 Ways This Saves Money

Cost savings by switching to individual health insuranceWhen it comes to offering health benefits, there are a few different contribution strategies a business can take. In other words, there are different ways to structure and pay for the plan.

To achieve lower financial risk and better control costs, many smaller companies choose to switch employees to individual health insurance and offer employee health benefits with a defined contribution strategy - where the company reimburses premiums instead of paying for them. This strategy is also called employer-funded individual health insurance.

So, how does this approach create cost-savings and reduce financial risk? There are five key ways. Let’s take a look.

#1) Your Company Controls the Contribution Amount

With an individual health insurance and defined contribution strategy, the company sets up a formal, tax-free reimbursement plan to give employees a monthly contribution amount to use towards premiums.

There are no requirements on how much the company can provide monthly - the contribution amount is completely up to the company.

Additionally, companies can use Employee Classes to  provide different amounts to different types of employees (this is allowed as long as the differences are based on bona-fide job criteria). This is important because it allows a company to direct limited resources to its most valuable employees.

To decide how much to offer employees, some companies look at how much they can afford and split up contributions accordingly. Other companies, especially those currently offering health insurance coverage, look at how much individual health insurance policies will cost employees and provide a similar contribution percentage. Which brings us to reason two.

#2) On Average, Individual Health Insurance Premiums Cost Less

One of the big reasons this approach creates costs savings is, on average, individual health insurance premiums cost less. This might go against what you have heard. Many people think employer-provided insurance is less expensive. When you look at the data, however, just the opposite is true.

Here is the data (national averages) for 2014:

 
Individual Health Insurance
(Without Premium Tax Credits)
Individual Health Insurance
(With  Premium Tax Credits)
Group Health Insurance
Single
$346/month
$82/month
$502/month
Family
$667/month
(Data not available)
$1,403/month

See also: Why Individual Health Insurance is More Affordable Than Group Health Insurance

#3) No Annual Renewal Increases

If you currently offer traditional employer-provided health insurance, you know the drill. A couple months before your plan renews you get notice about how much your premiums will cost for the new year. Most companies (90 percent according to one survey) are seeing annual increases this year, with nearly a quarter seeing increases in the double digits.

With individual health insurance and a defined contribution, however, there are no annual renewal increases.

The only time the maximum cost will increase is if the company decides to increase the contribution amounts, or if additional employees are added to the reimbursement plan.

For companies used to dealing with annual renewal increases, having full control of the budget in the short term and in the long term is revolutionary.

#4) Contributions are Notional, and Owned by the Company

The fourth way this approach creates cost savings and control is because contributions are notional - the company reimburses employees directly after an employee’s health insurance premium expense is verified. For companies with tight cash flow, this can be beneficial because there is no requirement to fund third-party bank accounts.

Additionally, all contributions are owned by the company and employees are only reimbursed for eligible expenses, up to the amount in their healthcare balance.

If an employee receives a $300/month contribution and his or her premium is only $250/month, then he or she is only reimbursed $250/month. And, any unused funds stay with the company at the end of the plan year or when an employee is terminated.

#5) Employees Save Money, Too

The last cost saving benefit is that employees save money, too. This is especially important in today’s market as the increasing cost of healthcare has caused many employers to shift premium and out-of-pocket costs to employees.

Employer-funded individual health insurance saves employees money because:

  • As we discussed earlier, individual health insurance costs less. Employees will generally pay less for the same or better quality coverage on the individual market, and the employer contribution will go further.

  • Eligible employees may access premium tax credits through the Marketplaces. Being offered this type of reimbursement plan (a Section 105 Healthcare Reimbursement Plan) does not disqualify employees from receiving premium tax credits. Employees may be eligible if they make less than $47,080 in 2015 (single) or $97,000 (family of four).

Related: How to Calculate Cost Savings: Group Health Insurance vs. Premium Reimbursement

Conclusion

To achieve cost savings and to lower financial risk - as well as to offer quality benefits - smaller employers are switching employees to individual health insurance and offering a defined contribution. This approach works because your company -  not the insurance company - controls the cost of health benefits. Additionally, individual health insurance costs less and there are built in cost controls in how the plan is structured.

Because of these cost saving features, it’s not a surprise that some industry experts predict a significant shift in the years to come from employer-provided health insurance to employer-funded individual health insurance.

What questions do you have the cost savings of switching to individual health insurance? Join the conversation with a comment or question below! 

An HRA can help you fix your costs.