When group insurance can be a smart move for your small business
Most small business owners are familiar with individual health insurance plans because they purchase this type of coverage for themselves (and their families). But when it comes to group insurance, they’re unsure how to navigate, or even if it’s an option. Here's some insight to help you understand if and when group coverage makes sense for your business.
Qualifying for group insurance coverage
Group coverage (also known as company-sponsored coverage) is purchased by a company for its employees. Generally, owners are considered employees, so if you have at least one employee in addition to yourself, you qualify for group plans in most states. Typically, a partnership—even one without any employees—also qualifies for group plans because a partnership has at least two partners, both of whom are “employees" of the company.
Determining when group coverage is a good option
Small employers (those with less than 50 full-time employees) are not required to provide health insurance. Whether you should or not depends on your recruitment and retention needs, the composition of your workforce, and cost.
In competitive industries benefits are an important part of compensation. If workers are hard to find, once you invest in training them you don't want to risk losing them. It’s typically about one-fifth of an employee's salary to replace him.1 For an employee earning $50,000 that’s $10,000, compared to $6,690, the average cost of an annual health premium.2
In contrast, health benefits may not be as big a concern for companies with a majority of workers on the low or high end of the age scale. Younger workers – those under 26 – likely have coverage through their parents’ plans. And as more people work past age 65, they're eligible for Medicare benefits and don't need an employer-sponsored plan.
Doing the math for group coverage
In 2017, the average premium cost for individual coverage was $5,712 per year3 compared to $6,690 for single coverage in a group plan.4
Although group coverage premiums can be higher, employers and employees typically share their cost. If an employer contributes 50% towards the premium (the average is 82%), the half covered by the employee would be more affordable for her than what she would pay for an individual plan.5 (And the employer’s contribution is tax deductible.)
While there’s no single answer for how much a company should contribute, here are two rules of thumb:
- Keep annual premium costs to around 10% of an employee’s income. If the average salary at your company is $40,000/year, aim for a premium around $335/month per employee, adjusting up/down based on how much the company will contribute.
- Keep the cost of benefits within 10 to 20 percent of your overall revenue. According to Antara Dutta, a mentor for SCORE, a small business counseling organization, “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."
Your accountant can help determine how much you can afford to contribute and explain how deductions offset the cost.
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