It’s no surprise that health insurance consistently ranks as the top benefit employees in the U.S. value most. That’s why offering a quality health benefit is an essential strategy for recruiting and retaining top talent in any industry—especially for small employers.
While there’s no right or wrong way to go about finding and enrolling in a health plan for your employees, it’s important to understand your options so you can make sure the plan you choose is the best fit for your organization.
In this article we’ll cover three of the most common ways small employers can offer health benefits to their employees:
- Small group health insurance
- Health reimbursement arrangements (HRAs)
- Salary bonuses
Small group health insurance
Let’s start off with small group health insurance. This is the most popular type of health plan employers generally offer. In fact, the Kaiser Family Foundation (KFF) finds that nearly half of Americans have insurance through an employer-sponsored group health plan.
Organizations with at least 2 full-time employees, but no more than 50, are eligible to enroll in a small group health insurance plan for their employees. These plans cover all of the essential health benefits outlined by the Affordable Care Act.
Pros of small group health insurance
Given the popularity of group health insurance plans, many of your employees, if not all of them, will already be familiar with them, so there’s not as much effort involved for you to educate them on how they work.
What’s more, the popularity of group health plans also makes it easy to find an insurance broker that can help you purchase a policy. Brokers are generally knowledgeable about insurance and can walk you through your enrollment documents.
Finally, employees like the cost-sharing of their monthly premium between them and their employer. The required employer contribution for small group plans is generally 50%, but the KFF finds that the average percent of health insurance paid by employers was much higher—82% for single coverage and 70% for family coverage in 2019.
Cons of small group health insurance
The biggest downside of group health insurance for employees is the one-size-fits-all nature of the plans. Group health insurance is chosen by the employer to be offered to all employees—both young and old, healthy and high-risk. This means employees don’t get any say in the plan chosen, and it may not fit their unique healthcare needs. Likewise, they don’t get to choose what network they’ll have available, the deductible they’ll need to meet, or the premium they’ll have to pay.
For the employer, group health plans are costly, which can be a particular burden for small employers. The average cost of group health insurance has increased in recent years, and is expected to continue to rise. Not to mention employers are subject to annual rate hikes every year the plan is due for renewal.
Lastly, group health plans often come with minimum contribution and participation requirements. That means if you don’t have the budget to meet the full 50% contribution that’s required of you, or if you don’t have enough employees who are interested in enrolling, you won’t qualify to offer a group health plan.
Health reimbursement arrangements (HRA)
Next, let’s look at HRAs. An HRA is an IRS-approved, employer-funded health benefit used to reimburse employees for out-of-pocket medical expenses and personal health insurance premiums.
Unlike traditional group health insurance, an HRA allows small employers to control their benefits costs by setting their own budget. Employers give their employees a monthly allowance of tax-free money, and employees are reimbursed for any qualifying healthcare purchases and premiums on an individual health insurance plan that works for them.
PeopleKeep offers three HRAs that cater to any organization size or budget:
- Qualified small employer HRA (QSEHRA)
- A simple, controlled-cost alternative to group health insurance for employers with fewer than 50 full-time employees.
- Individual coverage HRA (ICHRA)
- A flexible health benefit solution that can be used alone or alongside group health insurance for organizations of all sizes.
- Group coverage HRA (GCHRA);
- A group health supplement to help employees with out-of-pocket expenses.;;
Pros of health reimbursement arrangements
For employers, the biggest perk of offering an HRA is its affordability. An HRA allows you to personally decide how much of an allowance to offer your employers, giving you a fixed cost you can consistently rely on and budget for every year—with no annual rate hikes!
In addition, HRAs are easy and inclusive. Whether your organization is big or small, has a tight budget or a flexible one, there’s a unique type of HRA for every employer. When you use an HRA administration software like PeopleKeep, you’ll only need about five minutes a month to administer the benefit.
Employees benefit from an HRA by getting a personalized, flexible benefit that meets their unique healthcare needs. Unlike a group health plan, an HRA allows each employee to use the benefit differently and personally choose an individual insurance plan that works for them.
Cons of health reimbursement arrangements
Because group health plans are the traditional choice, your employees may be unfamiliar with reimbursement models like HRAs. It will be your responsibility to inform your employees about how an HRA works, what expenses qualify, and where to shop for individual insurance.
By partnering with PeopleKeep, we help you every step of the way. We’ll send documentation to help your employees understand their new benefit, talk them through which expenses qualify for reimbursement, and even help them find an insurance plan that meets their specific needs.
On the employer’s side of things, some organization owners aren’t able to participate in their own HRA. This will depend on what type of organization you run. For example, C-corporation owners are able to fully participate in their HRA, but S-corporation owners are not.
Some smaller employers who don’t offer any health benefits consider giving employees a raise or salary bonus as an informal strategy for employer-provided health benefits. The extra money offered through employees’ pay is intended to cover their health needs that aren’t being formally covered by the organization.
Pros of salary bonuses
The appeal of offering a salary bonus instead of a formal health benefit is that it’s a shortcut. You simply bump your employees’ pay, and you avoid having to put in the time or energy in choosing a plan, working with brokers, and administering the benefit compliantly.
Your younger and healthier employees might also be tempted by this option, because they aren’t required to use their extra income on health insurance. By choosing to go uninsured, they could pocket the extra money and use it on other things.
Cons of salary bonuses
For your employees, one of the biggest disadvantages of this option is that it’s generally not what they expect or want. According to data from the Bureau of Labor Statistics, 89% of state and local government workers and up to 94% of private employees in the U.S. were offered health plan benefits by their employer in 2020.
What’s more, Glassdoor’s Employment Confidence Survey found that four out of five employees would rather have new or additional benefits than receive an increase in pay. By not offering a formal health benefit, it will be that much harder for you to recruit and retain employees.
Another downside is that you miss out on the tax savings associated with offering pre-tax contributions to your employees’ HRA allowance or covering a portion of their group health insurance premium. Small employers can even qualify for the small business health care tax credit in some cases—but not if you don’t offer a formal health benefit.
In addition, since a salary bonus isn’t a formal health benefit, it doesn’t satisfy the employer mandate. While small employers with 50 or fewer employees aren’t legally required to offer health insurance, you will be if your organization grows. If you continue to only offer a salary increase instead of health insurance, you’ll be found out of compliance and have to pay a penalty.
Whether it’s your first time offering health benefits to your employees, or you’re looking to change up your strategy, prioritizing the time to fully understand your healthcare benefit options is an important first step to finding a plan that’s right for your organization. The energy you put in now will more than pay for itself in the employees you’ll be able to recruit and retain through your quality health benefits package.