3 approaches to handle small business health insurance costs

The premium—the amount paid to the insurance company each month for coverage—is typically shared by the employer and employees. On average, employers contributed 82% of the premium for employee-only coverage, and 66% for family coverage in 2018.¹ Among small firms (3-199 employees), about one-third of workers contributed more than 50% of the total family premium.

(Note: Some insurance carriers or states require employers to cover up to 50 percent of the premium for employee-only coverage. Ask the carrier or agent about minimum funding requirements in your state.)

This model allows employers to set and control health care spending, making it a good option for organizations seeking a low-risk approach with predictable costs. Employers contribute a fixed dollar amount to each employee's health benefits each year. Employees then select their own benefits from the plans and products his/her employer offers, and use the employer's contribution (think of it like an allowance) to offset the cost.

With this approach employers have consistent health plan costs while only paying for the healthcare costs actually incurred by employees. This can be a good option for employers with a relatively healthy workforce. And that’s an important caveat because when employees are healthier than average, payments go down; however, if the group has higher-than-anticipated annual claims, costs will go up.

With level-funded plans, employers pay a "level" (or fixed) amount of money each month to a third-party health services company (often an insurance carrier) to cover both administrative and anticipated employee claim costs. At the end of a year, if an employer's total payments are greater than the actual claim costs, the surplus will be refunded. However, if employee claims exceed what's been paid, embedded "stop loss" insurance covers the difference.

Before deciding which approach may be right for your small business, consult your accountant.

Employer contributions to healthcare costs are typically tax deductible. Your accountant can explain how deductions help offset the cost, potentially making benefits more affordable than you may think.