How do I know when I can afford to offer health benefits?
The vast majority (87 percent) of small employers believe offering health insurance is somewhat or very important in recruiting or retaining top quality employees, according to the National Small Business Association.1 But adding group health insurance can be a sizable expense, and employers aren't always sure they can afford it, and wonder what happens if the company has a bad year and can no longer afford the outlay.
Here are a few things to consider when you're contemplating group health insurance:
How long have you been in business?
While there’s no hard and fast rule for when a small business can offer benefits to its employees, according to Antara Dutta, a mentor for SCORE, a small business counseling organization, experts often recommend a company be in business for a minimum of two to three years before adding group benefits. This gives a small business owner time to establish the business as well as get an idea of his annual profits before adding a large outlay. Dutta recommends that the cost of benefits not exceed 10 to 20 percent of your overall revenue. She explains, “Anything more than that, and you could bankrupt out because your year-over-year inflation of healthcare may be larger than your year-over-year revenue growth."
How many employees do you have?
“It's scalability math," says Dutta. “The more people you have, [the better the] chances you're generating more revenue." If your company is just you and one other person, for instance, you're often not making enough money to cover extra expenses like health benefits.
Have you spoken to your accountant?
Employer contributions to healthcare costs are typically deductible. Your accountant can explain how deductions offset the cost, potentially making benefits more affordable than you may think.
What kind of model are you considering?
If you're following the traditional insurance model—where the employer covers a portion of employee premiums—costs can be somewhat unpredictable year to year. But there's also a defined contribution model, where a business gives employees a fixed dollar amount that they can put toward health insurance costs. This model lets companies forecast benefits costs more accurately. And since employees are responsible for costs beyond the employer contribution, they have some skin in the game. If you’re looking for greater cost stability, a defined contribution model may make group insurance more feasible for you.
Keep in mind, one of the best ways to manage costs is to shop for health coverage every year to see if you can find a better price. “Businesses should always be shopping for everything, because everything you lower the cost on, you improve your bottom line," Dutta says. “This is no different."
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