Do I need to provide health insurance to my employees as a small business owner?

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There are certain federal mandates that dictate whether or not you need to provide healthcare insurance for your employees. Here's everything you need to know about offering healthcare as a benefit.

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As a small business owner, whether you need to provide health insurance to employees comes down to how many full-time workers you have on payroll.

Federal law mandates that if a small business has at least 50 full-time employees it must provide health insurance to employees. The government’s definition of full-time is based on working an average of at least 30 hours a week for at least 120 days a year.

If you’ve grown that big and don’t provide health insurance, you will be hit with penalties under the Affordable Care Act.

Even if you aren’t required to provide health insurance to your employees, you may find you nonetheless need to offer coverage to attract and retain staff, or perhaps you have made the decision that providing this much-sought-after benefit is just something you want to include in your benefits package.

Here’s what to consider if you are interested in providing health insurance to employees:

Share the expense of providing health insurance.

The cost of a classic group health insurance plan is often a major hurdle for small business owners. The average premium cost in 2019 was around $20,000 for a family plan and more than $7,000 for a group plan. But it is now common for employees to contribute to the cost of their coverage. Typically what an employee pays under a group plan will still be less than the cost of buying individual coverage.

Factor in tax breaks for providing health insurance.

The share of premiums paid by the employer is a deductible business expense.

Employers with fewer than 50 employees that offer a plan through the ACA marketplace’s Small Business Health Options Program (SHOP), may also be able to qualify for a tax credit for the first two years. (In California, Colorado, New York and Vermont a small business with fewer than 100 employees can offer a plan through SHOP and potentially qualify for the tax credit.)

Consider a cost-effective high deductible plan.

Businesses can control their health insurance costs by choosing to include (or solely offer) a High Deductible Health Plan (HDHP) in their group insurance coverage. The upfront premium cost – for employers and employees — for an HDHP Plan is significantly lower than for the popular Preferred Provider Organization (PPO) plan.

Moreover, employees in eligible HDHPs can also set aside money in a Health Savings Account. (HSA). An HSA is in itself another valuable benefit for employees. Money an employee contributes to an HSA is pre-tax; effectively reducing a worker’s taxable income for the year. And when an employee uses the money to cover qualified out-of-pocket medical expense there is no tax due. (Employers can contribute to worker’s HSA accounts, but there is no requirement to provide any match.)

Employees can use HSA funds to pay for current medical expenses, or they can roll over money from year to year. There is no use-it-or-lose-it rule with HSAs. Employees aware that even with Medicare they will face sizable out-of-pocket medical costs in retirement may be interested in saving in an HSA today with the intention of having tax-free dollars they can use to pay health care bills down the line.

Subsidize employee health insurance with a health reimbursement arrangement specifically for small businesses.

If a group health insurance plan is too big a stretch for your business’ budget you might find that offering a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a way to provide a health care benefit, without taking on the full price of classic group insurance.

With a QSEHRA a business doesn’t provide a group health insurance plan. Instead, employees arrange for their own coverage – such as through the ACA marketplace — and receive a stipend of sorts from their employer to help cover their health insurance costs. The IRS sets the rules on QSEHRAs. In 2020 small businesses can reimburse up to $5,250 for an employee with individual coverage and up to $10,600 for an employee with family coverage. The money an employer pays in a QSEHRA is exempt from payroll tax. If the employee enrolls in a health insurance plan that meets federal Minimum Essential Coverage (MEC) rules, there will be no income tax on the amount reimbursed.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.