Why do employers offer health insurance?

Health insurance is one of the most sought-after benefits an organization can offer. But few know why employers started providing health insurance in the first place.

Employer-sponsored health insurance became widely adopted during World War II. It enabled employers to better compete for talent among labor shortages and came with tax benefits for employers, maintaining its place as a popular option for today’s workforce.

The U.S. healthcare system is an intricate web requiring employers, insurance companies, doctors, consumers, and the federal government to work together. But when they do, employees reap the reward of staying healthier, happier, and more productive at work.

This blog walks you through the main reasons why an employer may offer health insurance at their company.

Five reasons why employers offer health insurance

The reason why an employer offers health insurance will vary depending on the organization. But there are five main reasons why most businesses today offer some kind of health benefit. Let’s take a look at them below.

1. Employer-sponsored health benefits have tax advantages

To understand this first reason, we need to go back to the 1940s. The high demand for military service members created a labor shortage in 1942. In the resulting competitive labor market, businesses were hesitant to raise salaries as it would create a spike in inflation.

Additionally, the government disallowed further wage increases to counteract a possible spike, meaning companies had to leverage benefits to attract new workers.

In 1943, the Internal Revenue Service allowed employers to provide tax-free health insurance to their employees. Not only was this a tax break for employers, but employees could receive employer contributions to their health insurance premiums free from income taxes—making it the cheapest and most accessible way to get health coverage at the time.

The new tax benefits regarding health insurance prompted more employers to offer the benefit, and more U.S. workers began getting coverage. And that continues to this day.

A few tax advantages that come with providing health insurance include:

• Generally, 100% of employer payments made to employee health insurance plans as part of a compensation package are tax deductible on federal business taxes.
• Self-employed individuals may be able to deduct 100% of their health insurance premium costs as a business expense if they meet certain criteria.
• Employers experience reduced payroll taxes.
• Employers can deduct health savings account (HSA) contributions from their business taxes.

Lastly, workers with health insurance may experience lower monthly premiums because employer-sponsored health plans spread the risk among the group, meaning plans can sometimes be cheaper than individual coverage. Also, an employee’s tax liability may lessen as group plan policy premiums are paid for with pre-tax money.

If you’re a small business owner, you may be eligible to receive a tax credit for enrolling in small business health insurance¹. The federal government designed the tax credit to encourage small employers to provide employer-sponsored health insurance to their workers.

To qualify for the Small Business Health Care Tax Credit, an employer must meet all of the following requirements:

• Your business must have fewer than 25 full-time or full-time equivalent employees (FTEs)
• Your business must pay an average salary of less than $56,000 each year per employee
• The average salary is updated annually and adjusted for inflation
• You must pay at least 50% of your qualified employees’ health insurance premiums.
• You must purchase your group health plan through the Small Business Health Options Program (SHOP) Marketplace or from an agent or broker who can enroll you in a SHOP health policy.

If you qualify, the Small Business Health Care Tax Credit is available for two consecutive years.

2. They’re an applicable large employer (ALE)

Another reason an employer may offer health insurance is because of their business size. Due to the Affordable Care Act (ACA) and the employer mandate, employers with 50 or more FTEs must offer health insurance that is affordable, provides minimum essential coverage (MEC), and meets minimum value.

Employers that meet the 50 FTE threshold are called applicable large employers, or ALEs. If an ALE doesn’t offer appropriate health insurance, they’ll be subject to an employer-shared responsibility payment (ESRP), which is a tax penalty.

Other important details that ALEs need to know are:

• When calculating FTEs, eligible employees who work 30+ hours per week are considered “full-time.”
• If an employer had an average of 50 FTEs during the previous calendar year, they still qualify as an ALE for the current calendar year.
• Employers must offer health coverage to at least 95% of a company’s full-time employees and their eligible dependents.
• According to the mandate, health coverage is affordable if the lowest-cost self-only coverage doesn’t exceed a set threshold of the employee’s household income.
• Minimum value means the health plan has to cover at least 60% of average costs for a standard population, which is the actuarial value for bronze plans sold on the individual market.

An employer with fewer than 50 FTEs isn’t considered an ALE. Therefore, they aren’t required to provide health insurance to their employees, and they won’t be penalized. However, employers with fewer than 50 FTEs may choose to offer health insurance for other reasons.

3. An employment contract requires health insurance coverage

While this may not apply to most employees, some workers enter an employment contract when they start a new job. This contract may guarantee certain aspects of employment, including health insurance benefits, meaning the employer must follow through.

A great example of this is union employees. Union employees have collective bargaining agreements negotiated by their union which determine their wages, benefits, work hours, paid time off (PTO), and more. If one of their benefits in the agreement includes healthcare coverage, the employer must meet those arrangements.

Due to collective bargaining agreements, union workers tend to receive health benefit plans more often than non-union employees.

4. They want to attract and retain top talent

A business looking to be more competitive may see offering health insurance benefits as mandatory. Employer-sponsored health benefits go a long way toward boosting morale, creating a strong company culture, and showing your workers that you care—which are all positive signs that potential candidates want to see.

Talented job seekers know they’re in high demand. And they’re more likely to value companies that provide excellent health benefits. If you’re growing your business or competing with others in your industry, health insurance can be the deciding factor to win over great candidates.

Additionally, health insurance benefits aid in retention and reduce costly turnover. A Society for Human Resource Management (SHRM) survey² found that 56% of workers with employment-based insurance said that how much they like their health coverage is a critical factor in deciding to stay at their current job.

Luckily you have options when determining what health benefit to add to your compensation package. Outside of traditional employer-sponsored insurance, there are customizable benefits options like health reimbursement arrangements (HRAs), health stipends, or even wellness stipends that are sure to offer enough flexibility for job seekers and current employees alike.

5. They care about their employees’ health and wellbeing

This may not come as a surprise, but healthier workers are much more effective in the workplace than unhealthy workers. They’ll be more productive, less likely to need sick days, and experience less stress than others. Simply put, having an employer-provided health benefit is necessary to keep your workforce running at full capacity.

Qualified health plans must offer preventative care as an essential health benefit. Employees with access to preventive care can ensure they stay healthy by preventing more serious illnesses. Without access to necessary medical care, you could end up with lengthy medical leaves or even high turnover if your employees have to deal with a chronic condition.

If they experience a health problem, providing affordable coverage to employees allows them access to health services at a more reasonable price than they would experience if they were uninsured and subject to pricey out-of-pocket costs. This saves them from financial distress of expensive medical costs that could take a toll on their physical and mental health.

While all these factors play a part in the productivity of your business, there’s a larger benefit. Caring about your employees’ overall well-being by providing health insurance increases job satisfaction, improves employer loyalty, and shows your staff that their health is a priority.

Conclusion

Employment-based insurance now covers almost 159 million Americans. From its tax benefits for employers to its attractiveness to job seekers and employees, health insurance is a great way to build a competitive company with a positive workplace culture.

And luckily, there are now more alternative health benefit options to traditional group health insurance than ever before. No matter your organization’s size or budget, a personalized health benefit like an HRA can meet your and your employees' needs.

Contact us at PeopleKeep if you’re ready to add HRAs to your employee benefit package!

This article was originally published on April 27, 2012. It was last updated on May 12, 2023.

1. https://www.healthcare.gov/small-businesses/provide-shop-coverage/small-business-tax-credits/

2. https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/health-benefits-foster-retention.aspx