For small businesses, providing health insurance to employees can be a significant expense. The average annual health insurance premium for small firms, according to a 2020 Kaiser Family Foundation report, was:
$7,483 for single coverage, of which employers contributed $6,297, or 84%.
$20,438 for family coverage, of which employers contributed $13,618, or 67%.
The report defined “small firms” as those having from three to 199 employees.
Of businesses with fewer than 50 employees, which are not legally required to offer health insurance, 53% offered health insurance in 2020. Among businesses with three to nine employees, 48% did.
While costly, offering health insurance to your employees can help you stay competitive as a business, retain workers and take advantage of tax benefits. Here’s what to know.
How does small-group health insurance work?
Businesses with fewer than 50 full-time equivalent employees may choose to provide health insurance to their employees using small-group health insurance plans. Small-group insurance providers assesses risk for a pool of employees rather than any one individual. This allows them to offer lower premiums than many employees would be able to get if they purchased health insurance independently.
What factors affect the cost of small-business health insurance?
Employer contribution requirements
Insurers often require employers to pay at least half the insurance premium for their employees. Paying 50% of employee premiums is also a requirement if you want to claim the federal small-business health care tax credit.
You can use that 50% requirement as a quick way to estimate how much it will cost you to offer health insurance. For example, using the average annual cost of health insurance for an individual, $7,483, you would have to pay $3,742 a year for a single employee.
Under the Affordable Care Act, the cost of small-group insurance premiums cannot be affected by employees’ medical history and pre-existing conditions. Premiums can be affected only by the following factors:
The age of your employees and their dependents.
Employees’ tobacco usage habits.
Where your employees live.
If most of your employees fall into a certain age group or if many of them use tobacco, for example, you could face higher premiums as an employer.
The type of plan you pick
Under the ACA, insurance plans are divided into four tiers: bronze (least expensive for employer), silver, gold and platinum (most expensive for employer). These tiers are based on how much the insurer contributes to the plan, not the quality of care. With a platinum plan, for example, the insurer would pay an average of 90% of the cost of care and the employee would pay an average of just 10%. With a bronze plan, the insurer would pay 60% on average while the employee would pay an average of 40%.
Based on your budget, you can offer your employees a single silver plan, for example, or the option to pick from silver and gold plans based on their individual health care needs. The per-employee amount you pay stays the same in both cases. The metal tiers apply to common types of health insurance plans, such as preferred provider organizations and health maintenance organizations. PPOs tend to be more expensive than HMOs, but they also provide access to a larger network of doctors.
Where can you buy small-group health insurance?
You can purchase small-group health insurance for your employees in the following ways:
Directly from an insurance provider in your state.
Using an insurance broker. The broker will shop for policies tailored to your business. They’ll charge a commission (typically a percentage of the premium), and may also charge a broker’s fee. Some payroll products, such as Gusto and QuickBooks Payroll, allow you to buy health insurance from brokers on their platforms.
Using the Small Business Health Options Program: SHOP is the federal government’s insurance marketplace; it’s an option for businesses with fewer than 50 full-time equivalent employees. Most states require at least 70% of your eligible employees to participate in the SHOP health plan you offer.
Using a Professional Employer Organization. A PEO is a company you can hire to administer benefits on your behalf. PEOs can legally become the co-employer of your employees. By serving as co-employer for multiple small companies, PEOs have a combined employee pool equivalent to that of a larger company. This gives them access to more competitive insurance rates than small businesses can typically get on their own.
When you shop for a small-group health plan for your employees, the insurance provider will give you quotes based on the state your business is located in and the number of full-time equivalent employees you have. You can calculate the number of full-time equivalent employees you have using this HealthCare.gov calculator.