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Small Business Employee Benefits and HR Blog

Using Individual Insurance Plans to Yield Lower Costs and Better Benefits

February 29, 2016
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Every day I hear from small business owners about how their health insurance Using Individual Insurance Plans to Yield Lower Costs and Better Benefitsoptions are limited, time-consuming, and expensive. In fact, nearly half (2.7 million) small and medium businesses do not offer health insurance coverage to their employees today. As a result, smaller businesses are unable to keep their valued employees because they are not meeting employee benefits expectations.

The future, however, looks brighter.

Small business owners are building employee benefits using individual insurance plans - not group-based insurance plans - to yield lower costs and build better benefits. This article outlines the strategy of using individual insurance plans and why it can be a cost-effective strategy for small business health benefits.

Note - This blog post is based off our new infographic, 7 Truths About The Cost of Health Insurance In America. Check out the full infographic here.

The Rise of Individual Insurance Plans

For decades, the most common business strategy has been for employers to purchase a group health insurance policy, or policies, to cover eligible employees and their dependents. Even today, the majority of Americans are covered under employment-based health insurance policies. But perhaps not for long.

Within the next decade, leading industry experts predict a significant transition to individual and family policies. That’s because with the passage of the Affordable Care Act, individual policies are much more similar to employment-based coverage - and less expensive.

For example, like employment-based coverage, individual policies now cover everyone regardless of medical conditions and must cover essential health benefits. Unlike employer-based coverage,individual plans costs less, are not connected to employment, and offer employees more coverage choices. 

Cost Comparison

Many business owners I talk to are surprised to hear individual policies cost less. Here are the national stats for 2015. 

On average, individual health insurance policies cost 43 percent less for single coverage and 39 percent less for family coverage. Factor in the federal insurance subsidies for individual coverage, and the cost difference is 60 percent less for single coverage and 68 percent for family coverage.

7 Truths About The Cost of Health Insurance In America

Source - Zane Benefits

For an employer, this mean a contribution toward an individual health insurance premium goes farther than toward a group health insurance premium. As I wrote about recently, the average employer could fully fund an individual family policy for less than they could fund a portion of that family's coverage under a group policy.

An Employer Contribution

I know what you are thinking - can an employer help employees with their individual health plan premiums?

It is true employers should not pay for employees’ individual health insurance policies, nor should they reimburse employees’ directly. These types of non-compliant employer payment plans can result in steep penalties

That being said, it is also true there is a compliant and tax-free way to offer a formal contribution to employees’ premium costs: a Healthcare Reimbursement Plan (HRP)

An HRP is a formal benefits plan, allowed under Section 105 of the tax code, that employers may use to reimburse employees for their individual health insurance policies, tax-free. Like all benefit plans, the HRP needs to follow new and existing federal rules. To help, there are online software solutions available to make set-up and administration painless. (For more details on how an HRP works and is set up, see: The Painless Guide to HRPs.)

Conclusion

Health benefits are a vital component of compensation offered to employees, and yet with escalating costs, meeting the expectations of employees is increasingly difficult. One solution particularly well-suited for smaller employers is to implement an individual health insurance reimbursement program. With this approach, employers are realizing lower, predictable costs and employees receive modern benefits customized to their health and financial needs. 

What do you think? Leave a question or comment below.

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