Are you ready to offer small-group health insurance?

Owners of America’s small businesses have plenty on their plates to worry about – marketing costs, tax compliance, and their competition, just to name a few – and yet millions of these entrepreneurs also the devote time, energy and money necessary to provide health benefits for their employees.

If you’re thinking it’s because small-business owners have no choice, you’d be wrong: they actually aren’t required by federal law to do so. The nation’s smallest businesses – with fewer than 50 full-time equivalent (FTE) employees – are exempt from the law’s employer mandate. That means they’re not required to offer health insurance coverage, and not subject to a penalty if their employees buy subsidized coverage in the exchange.

So why do these small-business owners go to the trouble of setting up small-group coverage?

4 reasons to look at small-group coverage

1. Attracting a talented workforce

Offering health benefits has been one of the ways historically that businesses of all sizes have attracted and retained talented workforces.

Employees are drawn to businesses that offer health benefits. Being able to simply enroll in an employer’s health plan is easier for most people than having to shop for coverage on their own. And the employer contributions to the premiums are an added benefit that employees wouldn’t have if they worked for an employer that didn’t offer health benefits.

In fact, a 2015 survey by the Employee Benefit Research Institute revealed that workers “overwhelming consider health insurance to be the most important workplace benefit.

The same survey also noted that 60 percent of workers reported they would work longer in order to keep receiving employer-sponsored benefits – and also revealed that most employees would actually stay with an employer longer to hold on to health benefits.

It almost goes without saying, then, that if you can afford to offer coverage, it will help your small business stand out from other businesses that are competing for your employees.

2. Tax incentives

At the same time, dedicating funds to employee coverage will likely be less expensive than simply using the same money to provide higher wages.

Health insurance is a form of compensation, but payroll and income taxes are not assessed – on you or your employees – on money that employers use to purchase health insurance (and in most cases, taxes are also not assessed on the portion of premiums that employees pay).

In contrast, if you were to not offer coverage and instead give your employees a raise equal to the amount you were paying in health insurance, payroll taxes and income tax withholdings would apply. This makes group health insurance an attractive way to optimize compensation while minimizing the tax hit for both employers and employees.

3. Costs that are split with your employees

Employers certainly don’t have to bear the whole burden of paying for the coverage. Most health plans require employers to pay at least 50 percent of each enrolled employee’s premiums, although employees can be asked to pay up to the full cost of adding family members to the plan.

For perspective, a 2018 Kaiser Family Foundation survey found that across firms of all sizes, employers pay more than 71 percent of total family premiums for their employees, leaving the employees to pay just 29 percent of the cost. But compared with large businesses, small businesses (which the Kaiser survey defines as having up to 199 employees) are more than twice as likely to require employees to pay the full premiums associated with adding a spouse and/or kids to the plan.

4. Healthier, happier employees

Subsidizing health coverage is a logical step toward improving the health of employees, who may be more likely to embrace preventive screenings and care. It also stands to reason that healthier – and insured – employees are less likely to be burdened by financial stress.

Those positive effects, in turn, are likely to boost attendance, productivity, and profits for your small business.

How to decide whether to provide benefits

Deciding whether or not to provide small-group coverage for your employees is not a “no-brainer.” Here are some factors to look at as you make your decision:

1. Look at the costs now.

The first step is getting a realistic picture of how much it would cost, by obtaining a variety of premium quotes for your group. A local broker will be able to show you a variety of options and help you work out how much you’d have to pay and how much your employees would pay under various contribution splits. From there, ask yourself whether you can afford the coverage.

2. But also consider future coverage costs.

You’ll also want to consider whether continuing to offer coverage is likely to be a viable option for your business in the long run. Will you still be able to afford to offer coverage as premiums rise with time? (Keep in mind that there are cost-saving measures available, including switching plans, increasing out-of-pocket costs, or requiring employees to pay a larger share of their premiums).

3. Check up on your competition.

Do other similarly sized employers in your industry tend to offer coverage? If they do, you may need to offer coverage in order to remain competitive.

4. Get feedback from your employees.

HR leaders at large organizations routinely survey their employees to determine their level of satisfaction with their overall benefits package. Seeking feedback from your employees is a good place to start, and can give you an idea of their willingness to join an employer-sponsored plan, the type of coverage they’d like to see, and the amount they’d be willing to pay for it.

5. Consider the ‘family glitch’

Some employers pay the entire premium for their employees’ coverage, but that’s the exception rather than the rule. Employer-sponsored health insurance premiums are typically funded via a combination of employer contributions and employee contributions, with the latter being deducted from each employee’s paycheck.

If you’re a small-business owner and you’re setting up a group plan for your employees, you’ll want to understand the ramifications of who pays what. This includes an understanding of how the family glitch works. Here’s the basic info you need to know:

• As a small-business owner, you’re not required to offer coverage to anyone.
• No employers – large or small – are required to pay for coverage for employees’ spouses and/or kids.
• However, if you offer coverage to your employees and their families, and pay for all or most of your employees’ premium – but require them to payroll deduct the full premium to add their families to the plan – you may inadvertently be consigning them to the family glitch. That’s because the determination of whether an employer plan is affordable is based only on the employee’s premium, but that affordability designation carries over to any family members who are eligible for the plan. The cost to add family members to the plan is not taken into consideration. And yet, if your employees’ family members have an option to get coverage through your plan – even if they have to pay the full cost for it themselves – they will be ineligible for premium subsidies in the exchange if your employees’ coverage is considered affordable.

If your employees’ families end up impacted by the family glitch, they may not have an affordable coverage option at all. That’s not to say that small businesses should overextend themselves by paying for employees’ family premiums, but employers should be aware of the family glitch and understand how it works.

A few more small-group pluses

1. Buying options.

You can buy a small-group plan can directly from an insurance company, via a broker or private exchange, or from the SHOP exchange in your state. You may qualify for the Small Business Health Care Tax Credit, if you buy a SHOP plan. In states that use Healthcare.gov, as well as several of the states with their own health insurance exchanges, SHOP plans are now purchased directly through the insurance companies, or with the help of a SHOP-certified broker.

Use our tool to get a small-group coverage quote.

2. Plans are ACA-compliant.

Regardless of where you get the plan, all new small-group plans effective since January 2014 are compliant with the ACA. (In most states, small-group rules apply to groups with up to 50 employees, but in four states – California, Colorado, New York, and Vermont – they apply to groups with up to 100 employees).

3. Medical history isn’t a factor.

Insurers cannot use the group’s medical history to set premiums for ACA-compliant small-group plans, and premiums for older employees cannot be more than three times those for younger employees.

4. Clearly defined benefits.

ACA-compliant small-group plans have to fit into one of the four metal levels and cover the ACA’s essential health benefits.

Association Health Plans

Depending on the rules in your state, you may be able to join an association and gain access to an association health plan (AHP) for your employees. The Trump Administration implemented new rules in 2018 in an effort to expand access to AHPs. However, a federal judge ruled in March 2019 that several key aspects of the new rules are unlawful. The Trump Administration could appeal that ruling, but the judge also gave them the option to revise the new AHP rules.

Several existing AHPs across the country had already begun offering plans under the terms of the new regulations, but they had to be offering fully-insured plans. The new rule was going to allow new AHPs to form and offer self-insured coverage starting in April 2019, but the judge’s ruling invalidated the new AHP rules as of March 2019.

It’s not entirely clear how the lawsuit will affect existing AHPs that had already begun offering plans to sole proprietors (as allowed under the Trump Administration’s rules) and small businesses prior to the March 2019 ruling on the AHP regulations. According to websites for some of these plans, the coverage was still being marketed as of April 2019.

In addition to the federal lawsuit (in which 12 state attorneys general were the plaintiffs), some states have also pushed back on their own against the Trump Administration’s efforts to expand access to AHPs, over concerns that the coverage won’t be a good and worries that greater access to AHPs could destabilize the ACA-compliant individual and small group markets. For now, expanded AHPs are very much in limbo.

What if you decide to not offer benefits?

ACA introduced viable alternatives

Prior to 2014, individual health insurance (the kind people buy on their own) was medically underwritten in most states, so pre-existing conditions were an obstacle when people had to obtain coverage on their own. And the tax code didn’t give people a way to deduct individual insurance premiums unless they were self-employed or spent more than 7.5 percent of their income on health insurance and medical care (this threshold reset to 10 percent in 2019, under the terms of the ACA and the GOP tax bill that was enacted in late 2017).

In those days, there were some clear advantages to a small-group health insurance plan: the premiums were paid pre-tax, and coverage was guaranteed-issue, regardless of the group’s medical history (states could allow premiums to be based on a group’s medical history, but under HIPAA, small groups could not be declined altogether as long as the group met minimum participation and contribution requirements, and individual employees could not be singled out for higher premiums due to pre-existing conditions).

But under the ACA, the playing field has been leveled to some degree. Coverage in the individual market is now guaranteed-issue and premiums no longer depend on applicants’ medical history. (Note that coverage in the individual market is only available during open enrollment or a special enrollment period triggered by a qualifying event – as is the case for employees seeking coverage under an employer-sponsored plan. But employers can purchase a plan to cover their business at any time during the year).

In addition, premium tax credits (subsidies) in the exchange provide a tax advantage for low-income and middle-income people who purchase their own coverage; this makes the tax system a little more equitable in terms of how individual and group health insurance premiums are treated.

Reimbursing employees for coverage is an option: QSEHRAs or ICHRAs

Under 2013 ACA implementation guidelines established by HHS, the IRS, and the DOL, employers of any size were banned from reimbursing employees for the cost of individual market coverage. The penalty for non-compliance, which was delayed until July 2015, was $100 per day, per employee – a significant deterrent, for sure.

But in late 2016, Congress passed the 21st Century Cures Act with strong bipartisan support. Among many other things, the legislation allows businesses with fewer than 50 full-time equivalent employees to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRA). And starting in 2020, new regulations finalized by the Trump Administration will allow employers of any size to use Individual Coverage Health Reimbursements (ICHRA) to reimburse employees for individual market coverage.

For a small employer that doesn’t offer group health insurance benefits, QSEHRAs allow the employer to reimburse employees, tax-free, for some or all of the premiums they pay for coverage purchased in the individual market, on or off-exchange. Note that if the coverage is purchased on-exchange, the QSEHRA doesn’t necessarily make the employee ineligible for an exchange premium subsidy, but the QSEHRA is taken into consideration for determining affordability, and the amount of the exchange subsidy is reduced by the amount that the employee receives via the QSEHRA.

A premium subsidy is available as long as the QSEHRA doesn’t constitute affordable coverage (explained here, in Question 65). If the QSEHRA benefit (for employee-only coverage, regardless of whether the employee enrolls in a self-only plan or a family plan) makes the net cost of the second-lowest-cost silver plan in the exchange equal to or less than 9.86 percent of the employee’s household income in 2019, the employee (and family members, if applicable) would not be eligible for a premium subsidy in the exchange.

But if the employee would still have to pay more than 9.86 percent of household income for the second-lowest-cost silver plan in the exchange even after applying the QSEHRA benefit, the employee would still be eligible for a premium subsidy in the exchange. But that premium subsidy would then be reduced by the amount of the QSEHRA benefit (this is explained in more detail here, starting with Question 66).

Note that this is complicated by the fact that HealthCare.gov does not do the calculations for employees in terms of reducing premium subsidies by the amount of the QSEHRA benefit. Instead, the employees will have to pay back the excess premium subsidies when they file taxes, although there are limits on how much excess premium subsidy has to be repaid (see Table 5, page 16 of the instructions for Form 8962). To avoid this situation, the employee can request that the exchange simply reduce the amount of premium subsidy that is paid on their behalf each month, to account for the QSEHRA benefit and avoid having to pay back excess premium subsidies at tax time.

The maximum amount that an employer can reimburse via a QSEHRA in 2019 is $5,150 for a single employee’s coverage, and $10,450 for family coverage (this is indexed annually; the 2019 limits are a little higher than the limits that applied in 2018, and those were higher than the initial limits that applied in 2017). The limits are also prorated across the year, so an employee who is hired mid-year would only be eligible for a portion of the maximum annual reimbursement. [the new rules for ICHRAs, finalized in 2019 and effective in 2020, do not limit how much employers can reimburse for employees’ health coverage, although QSEHRA contribution limits will continue to apply for employers that opt for QSEHRAs.]

The IRS has published a comprehensive list of FAQs regarding QSEHRAs, which will be helpful if you’re considering this approach for your small business.

If you want to create a particularly competitive benefits package as a means of attracting and retaining a top-notch workforce, a small-group plan will likely be a better option than a QSEHRA, as there’s currently no upper limit on how much an employer can contribute – tax-free – towards their employees’ group health insurance premiums. (This could change in 2022 if the Cadillac tax is implemented as currently scheduled).

With average group premiums reaching nearly $6,900 in 2018 for a single individual, and more than $19,600 for a family, employers who wish to cover the full cost of a highly comprehensive health insurance plan for their employees will generally need to establish a group health insurance plan, as the QSEHRA limits aren’t enough to fully cover the cost of a robust individual market plan in most areas. But as of 2020, these employers might opt for Individual Coverage HRAs instead, as these will not have limits on how much can be reimbursed.

What if you have a very small business?

In most states, the term “small group” applies to groups of 2 to 50 employees. And in California, Colorado, New York, and Vermont, it includes groups with up to 100 employees. Businesses that fall into the small group category all have the same coverage options available in the small group market, and the rules in terms of pricing and coverage availability are the same regardless of whether you have two employees or 42.

But a very small group might have different needs and goals in terms of health coverage. If you’ve only got two or three employees, you may have closer personal relationships with them than you would if you have dozens of employees, and your employees may have expressed their own health coverage needs with you as well. That may help you to better tailor your coverage offerings to exactly what your employees need, but you may also find the cost of health coverage to be more prohibitive than a larger small business would, given the tight margins that many very small businesses face.

If you want to offer group health insurance, you can select from among the same small group coverage options as any other small employers in your area. But you may find that it’s not possible to offer multiple coverage options, as the private exchanges that offer that sort of choice generally require employers to have several employees in order to be eligible to offer multiple plan options to employees (this was the primary value of the small business exchange, but in most states, including all the states that use HealthCare.gov, small groups now enroll directly with an insurer, rather than using the exchange site and having employees select from among the available plans).

If your employees have varying health care needs and are confident that the plans available in the individual market will meet their needs, a QSEHRA (described above) might be a great option for your business. And it’s also likely to be well received by your employees.  A person who is hired by an employer with 45 other employees might very well expect that the employer will offer coverage (even though an employer that size is not required to offer coverage under the ACA’s employer mandate), but employees of very small businesses are less likely to expect their employer to provide health benefits.

So your employees might see the QSEHRA as above and beyond what they expect, and it will also give them the flexibility of being able to pick whichever individual market plan best fits their needs. Some very small employers also choose to make contributions to their employees’ health savings accounts (HSAs), if the employees enroll in HSA-qualified high deductible health plans (HDHPs). You can do both — QSEHRA benefits and HSA contributions — as long as the QSEHRA only reimburses employees for health insurance premiums and/or for “disregarded coverage” such as accident insurance or dental/vision coverage, but not for other medical expenses (see questions 74-78 of the IRS series of FAQs related to QSEHRAs).

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Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.