Employee health insurance: Options for small businesses

Many small business owners want to offer health benefits to employees, but they often skip coverage due to cost or confusion about their choices. Here, we offer clarity about both so you can make the best decision for your small business.

Small businesses most commonly offer health benefits by purchasing a group plan, which provides insurance for a group – your employees (and typically their families). Small business owners generally qualify as employees, so if your business has at least one employee in addition to yourself, you qualify for group coverage in most states.

In general, there are two types of group plans:

  1. ACA Plans must meet certain coverage standards, such as including essential health benefits. These include emergency services, doctor services, maternity care, mental health services, and more. They must also include coverage for pre-existing conditions.
  2. Non-ACA Plans provide limited coverage, often at a comparatively lower cost. They often exclude health services such as maternity care, mental health coverage, or pre-existing conditions.

How to choose? A company with mostly young, male workers, such as an auto repair shop, may not want to pay for maternity coverage and opt for a limited benefits plan. On the other hand, a company with a mix of men and women in their 30s and 40s, such as a law firm, might desire the more robust coverage offered by ACA plans. (Note: While the ACA requires everyone to carry a minimum level of health coverage, the December 2017 tax bill reduced the penalty for going uncovered to zero.)

Alternatives to a group plan

If a group plan isn’t right for your business, there are other options to consider.

Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) allow employers who don't offer group health insurance a way to help employees prioritize health. With a QSEHRA, a small business can reimburse workers, tax-free, for health insurance premiums, dental and vision costs (and other IRS-eligible expenses). Businesses must follow somewhat strict rules to provide QSEHRAs, however.

Another option is a Personal Care Account (PCA), also known as a Health Reimbursement Account (HRA). This pre-tax, employer-funded account can be used to pay for a wide range of qualified healthcare expenses, like vision, dental, and prescription drug costs. While a PCA is usually paired with a health plan, a Limited PCA (PCL), which covers vision, dental, and/or preventative services (defined by the employer), may be offered without a health plan.

Before you decide which approach is right for your growing business, consult your accountant to help you weigh your options and costs. This makes financial sense when you consider that employers can take a deduction for health insurance premiums they pay, and when employees use pre-tax dollars to pay for their health insurance it lowers their taxable income, which, in turn, lowers your business payroll taxes.

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