Health insurance options for small businesses

Key takeaways 

• Small businesses can choose from options like group health plans, HRAs (ICHRA, QSEHRA), and association or self-funded plans to balance employee needs and budgets. 
• HRAs provide tax advantages and flexibility, letting businesses reimburse employees for individual insurance or medical expenses. 
• The right choice depends on business size, budget, and goals for attracting and retaining talent. 

Health insurance options for small businesses 

Small group health insurance 

Small group health insurance provides comprehensive coverage for employees, typically for businesses with 2-50 employees. Eligibility requires meeting minimum employee participation rates and business size requirements. Benefits include robust coverage options and potential tax advantages, but costs are often higher than alternative options. 

Individual Coverage Health Reimbursement Arrangement (ICHRA) 

ICHRA lets businesses reimburse employees for individual health insurance premiums and medical expenses, offering flexibility in budgeting and plan selection. It’s ideal for businesses with diverse workforces, such as those with remote or part-time employees, seeking customizable benefits. 

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) 

QSEHRA is available for businesses with fewer than 50 employees, providing tax-free reimbursements for health insurance premiums and medical expenses. It offers simplicity, lower administrative demands, and a straightforward way to provide health benefits. 

Self-funded health insurance 

Self-funded plans allow businesses to take on financial responsibility for employee health claims, providing cost control and customizable coverage. However, they involve financial risk and require administrative expertise to manage effectively. 

Health stipends 

Health stipends reimburse employees for healthcare costs without requiring a formal plan. While flexible, they are taxable for both employers and employees. Stipends work well for very small teams or businesses seeking a simple solution. 

Association Health Plans (AHPs) 

AHPs enable small businesses to pool resources and purchase health insurance as a larger group, potentially reducing costs. However, regulatory considerations and plan availability vary by state, requiring careful evaluation. 

Direct Primary Care (DPC) 

DPC offers employees access to primary care services for a flat monthly fee, promoting predictable costs and enhanced access to care. While beneficial for primary care, DPC requires supplementary insurance for specialized or hospital services. 

Health Savings Accounts (HSAs) 

HSAs, paired with high-deductible health plans (HDHPs), provide tax advantages for both employers and employees. Businesses can use HSAs to enhance their benefits strategy by helping employees save for out-of-pocket healthcare expenses. 

Voluntary Employee benefits 

Voluntary benefits like dental, vision, and disability insurance are employee-paid options that expand benefits without significant employer costs. They provide employees with greater flexibility to tailor coverage to their needs, enhancing satisfaction. 

Comparing health insurance options 

Key decision factors: 

When comparing health insurance options, businesses should consider: 

• Cost: Evaluate premiums, administrative fees, and potential tax savings. 
• Employee demographics: Consider age, family status, and workforce diversity to meet employees’ healthcare needs. 
• Administrative ease: Assess the complexity of managing the plan and the potential need for third-party administrators. 
• Flexibility: Look for options that allow customization to align with both employee expectations and business goals. 

Option	Features	Benefits	Drawbacks
Small group insurance	Comprehensive coverage, employer-selected plan	Tax advantages, robust coverage	Higher costs, limited employee choice
ICHRA	Tax-free reimbursements for individual plans, customizable allowances	Flexibility for employees and employers	Requires employee education
QSEHRA	Tax-free reimbursements for small businesses (<50 employees)	Simple setup, cost control	Lower reimbursement limits
Self-funded plans	Employer pays employee health claims directly	Customizable, potential cost savings	Financial risk, administrative complexity
Health stipends	Taxable monthly payment for employees	Flexible, simple to implement	Taxable for both employers and employees

Cost breakdown and examples 

In 2024, the average annual premiums are $8,951 for single coverage and $25,572 for family coverage, reflecting a 6% and 7% increase from the previous year, respectively. Since 2019, family premiums have risen by 24%, underscoring the financial strain of rising healthcare costs on employers and employees. 

Based on data from the Kaiser Family Foundation (KFF), here is a comparison of average annual premiums for employer-sponsored health insurance in 2024: 

Coverage type	Average annual premium	Employer contribution	Employee contribution
Single	$8,951	$7,583 (85%)	$1,368 (15%)
Family	$25,572	$19,276 (75%)	$6,296 (25%)

Based on data from the 2024 Employer Benefits Survey from KFF, here are examples illustrating how small businesses of varying sizes might budget for health insurance options: 

1. Small retail business (10 employees) 

Employer-sponsored insurance: 

• Average Annual Premium per Employee: $8,951 for single coverage. 
• Total Annual Premiums: $89,510. 
• Employer Contribution (85%): $76,083.50 annually. 
• Employee Contribution (15%): $13,426.50 annually. 

2. Medium-sized tech firm (50 employees) 

Employer-sponsored insurance: 

• Average Annual Premium per Employee: $8,951 for single coverage. 
• Total Annual Premiums: $447,550. 
• Employer Contribution (85%): $380,417.50 annually. 
• Employee Contribution (15%): $67,132.50 annually. 

3. Nonprofit organization (25 employees) 

Employer-sponsored insurance: 

• Average Annual Premium per Employee: $8,951 for single coverage. 
• Total Annual Premiums: $223,775. 
• Employer Contribution (85%): $190,208.75 annually. 
• Employee Contribution (15%): $33,566.25 annually. 

Impact on costs 

• Short-term: HRAs and health stipends offer cost control and flexibility, making them ideal for small businesses with limited budgets. 
• Long-term: Small group insurance and self-funded plans may reduce turnover and enhance employee satisfaction but require higher initial investments. 

By balancing current costs with future goals, businesses can choose an option that supports their employees and fits their financial strategy. 

Tax incentives and credits 

Offering health insurance provides tax advantages, such as deductible premiums and potential eligibility for the Small Business Health Care Tax Credit, which benefits employers with fewer than 25 employees. HRAs and HSAs add further tax benefits, allowing businesses to reimburse medical expenses tax-free and helping employees save pre-tax for healthcare costs. 

To maximize incentives: 

• Work with a tax advisor to ensure eligibility for credits and deductions. 
• Utilize HRAs or HSAs to lower taxable income. 
• Keep detailed records of expenses and contributions to streamline tax filings. 

Common pitfalls to avoid 

• Underestimating total costs: Beyond premiums, account for administrative fees, unexpected claims, and other hidden expenses that can impact your budget. 
• Misaligned plans: Selecting a plan that doesn’t meet employee needs or preferences can reduce satisfaction and participation in the benefit. 
• Poor communication: Employees may not fully utilize benefits if they don’t understand what’s available or how to access it, leading to frustration and missed opportunities. 
• Non-compliance: Failing to meet ACA requirements or adhere to state laws can result in penalties and legal issues for your business. 

Avoiding these pitfalls ensures smoother plan implementation, employee satisfaction, and legal compliance. 

Choosing the best plan for your business 

• Evaluate Your Budget: Set a clear budget, factoring in premiums, reimbursements, and potential tax credits. 
• Understand Workforce Needs: Assess employee demographics and gather feedback to identify priorities like family coverage or remote worker options. 
• Compare Options: Review plans like small group insurance, HRAs, or stipends, ensuring they align with business goals and compliance requirements. 
• Implement Effectively: Communicate plan details clearly and use experienced administrators to streamline management. 

Bringing it all together 

Health insurance is vital for attracting and retaining talent while supporting employee well-being. Small businesses can choose from various options, such as group plans, HRAs, and health stipends, to fit their budget and workforce needs. Carefully assess your goals, compare options, and consult an expert to make the best decision for your business and employees. 

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