Is Employee Health Insurance an Option for Small Businesses?
In today’s economy so many large companies are reducing health insurance benefits. Therefore, is there any advantage for a small business (2-50 employees) to offer their employees health insurance? How do you decide when it’s the right time to take this plunge and offer your staff this benefit?
The most obvious advantage would be that adding health insurance benefits to your employee package will make your business more attractive to job seekers and keep your current staff with you longer. Employees look to their employees to help offset the high cost of their health insurance.
Individual health insurance plans are expensive and are usually only affordable if they have a high deductible. Also, pre-existing conditions are not covered through an individual policy, as with group insurance. Another, perhaps even less obvious advantage is the tax savings that some small businesses can qualify for beginning in 2010. (Less obvious, because we are talking about the IRS, of course, and the details can be quite complicated.)
How can I qualify for the health insurance tax break?
Below are the “eligibility rules” set by the IRS for small businesses (for-profit and not-for-profit) to get this break:
- An employer must pay at least 50% of the health coverage premium for each employee.
- The employer must not have more than 25 full-time employees (2 part-time employees make up one full-time employee).
- The credit amount is for up to 35%, for businesses that are profitable and 25% for businesses that are tax exempt. In 2014, this raises to 50% and 35% consecutively.
- The employee’s salary cannot be more than $50,000 annually. However, the credit will be phased out for employers that have 10-25 full-time employees to less than 10 employees. http://www.irs.gov/newsroom/article/0,,id=220809,00.html
This begs the question, should small businesses with more than 10 employees start something that they may not be able to continue? Keep in mind; once you offer a fringe benefit to your employees, it is very difficult to take it away without the employees feeling that they are not important to your company. Perhaps, it would make sense if there was a way to keep the cost low.
What are the options?
In the not so distant past the choices for insurance plans were as follows:
Traditional indemnity plans (Preferred Provider Organizations (PPO): Usually the most expensive because with this plan you can go to any doctor of your choice and you do not need a referral.
Health Maintenance Organizations (HMO): This plan is the most restrictive, because you can only see physicians in your network, you must choice a primary care physician and if you need to go to a specialist, you must get a referral.
Point-of Service (POS): This plan is a mixture of the two plans above. As with the HMO plan, you must do have to choose a primary care physician and get a referral. You can also see physicians out of your network; however it will cost you more money.
These plans are expensive and if your employees use their insurance for big-ticket items, such as surgeries, diabetes treatments and rehabilitation, the premiums will get more expensive when it is time to renew. This can be costly for both the employer and the employee.
There is a new option that exists; the Health Saving Account (HSA) is a less expensive health insurance option that has been available since 2003.
This is how it works!
If you sign up employees through your company, you will have to set up a special banking account where money can be deposited and withdrawn from to use for medical expenses only. Employees pay a small monthly premium and then they can contribute towards the account, which is tax-free.
The HSA plan is a great cost savings for the employer because the premiums for these plans are very low, so the employer’s percentage is very little. However, they are low because the deductibles are very high. This can be an advantage for employees because they can easily manage to pay for their full insurance premium.
The added advantage is that it is tax-deductible. In addition, an employee can add money to the plan (tax-free) which can act as a savings or be invested just like an IRA; the 2011 statutory limits are $3,050 for an individual and $6,150 for a family per year.
When money is withdrawn from the account there are no tax penalties, as long as the money is spent on health related expenses. This can be for such things as regular doctor office visits or surgeries, as well as dental and vision. Often the employer will contribute to the plan as well. Whatever is left at the end of the year is rolled over into the next year. If the employee and their family do not have many doctor visits that year, they can have a nice savings for the next year. The plan is also portable, so if they leave the job for any reason, the money is still theirs to keep.
Well, it can be for some. But of course there are some cons to this plan. The first and biggest hurdle is that there are no co-pays. The employee will have to pay the full amount for any medical service until the deductible is met, which again is high. So if the employee is used to paying twenty dollars for a doctor visit, they will now pay much more.
Usually, the amount is a reduced rate, but they will have to pay the amount in full payment. This is true for all medical services including doctor’s office visits and inpatient consultations, prescriptions, diagnostic, x-rays and surgeries. So if an employee has to get a high cost item in the beginning of the year, they may not have enough money saved up in their HSA savings account to pay the bill and this could lead to more out-of-pocket cost than they can pay for. However, once they meet the deductible they begin to pay a smaller percentage for services.
So far it seems that the HSA plan is only a good plan for employees and their families if they do not have high medical expenses. But it is also good for employees that have many medical expenses. How can that be? Once the employee meets the deductible and reaches the out-of-pocket maximum expense, the insurance pays at 100% of all medical expenses for the rest of that year. This is can amount to great savings if the employee has major medical bills for some unforeseen reason or if they know they will have to have a surgery or even are having a baby.
So is HSA the best option for a small business?
Although, it does have some drawbacks, the high deductible-low premium plan can be a way for a small business owner to afford to offer their employees. The only other option is not to offer anything at all.