Every small business is different, but in the U.S. at least, all small businesses have one big, seemingly impossible challenge in common: how to affordably offer health insurance. Since 1986, "the cost of health insurance" has consistently ranked as the number one issue for U.S. small businesses in an NFIB (National Federation of Independent Business) survey.
While an outside observer might assume that businesses with under 10 employees would have it easier than bigger small businesses—what with having fewer people to insure—the challenge actually hits businesses of this size harder. A JPMorganChase analysis found that businesses with under 10 employees have the highest premiums of any business size.
Why Traditional Health Insurance Is So Inaccessible for Very Small Businesses
Business owners with less than 10 employees generally care about all of their employees and want them to be well taken care of. With a business of that size, everyone tends to be close—you don't want Jo in accounting to feel like she can't go to the doctor without being buried in medical bills. That's not just bad for your employee, it's bad for the business too.
Most of these business owners want to provide health insurance, but quickly get overwhelmed when they start to look into it. And that's for good reason, a few main challenges make providing health insurance to a small group of employees impractical:
- Limited insurer options: Several of the nation's biggest insurers—including Humana, Aetna, Cigna, and Oscar—have left the small group insurance market. That leaves even fewer options available in what was already a limited market.
- Excessive administrative burden: If there's anything small business owners have less of than extra money, it's extra time. The process of getting set up with a small group health plan can take over 30 hours total, spread out over several weeks. How many small business owners have you met with 30 hours to spare?
- High costs: On top of all that trouble, premiums for traditional small group plans are usually higher than a business with under 10 employees can reasonably manage. And because the system is so unfair to very small businesses in particular, your premium costs are higher than those of big businesses.
- Minimum participation numbers: Even if you can handle the significant time and financial commitment, many small businesses have a tough time hitting the participation requirements—often requiring up to 70% of employees to join. If you have 6 employees, and 3 of them prefer to stick with a spouse's insurance plan, you won't qualify.
Stack up all those challenges and it's no wonder that so many small businesses give up.
Best Health Benefit Options for Small Businesses
Before you despair that you'll never be able to offer employees health benefits, there are other options. Traditional small group plans aren't the only game in town:
The best option for business with under 10 employees: ICHRA
ICHRA (Individual Coverage Health Reimbursement Arrangement) is a relatively new option that lets businesses offer employees pre-tax money they can use to buy their own health insurance plans. ICHRA comes with a few benefits that make it the best choice for most businesses with under 10 employees:
- Pre-tax: Employer contributions aren't taxed, meaning your employees get to use the full amount of money you offer.
- Employee choice: While you help cover the costs, each employee has the power to choose the plan that makes the most sense for them.
- Employer control: While employees can choose their own plan, you get to determine the amount you're comfortable contributing. You can keep your health insurance budget predictable year over year.
- No participation requirements: Each employee can decide for themselves whether to take advantage of your contribution, without it having any impact on the others.
- Fast and easy: Getting your business set up with ICHRA typically takes minutes, rather than weeks. And for employees, finding and signing up for a plan is easy too.
In short, ICHRA makes providing a health insurance benefit much more accessible for small businesses with just a few employees. But if ICHRA doesn't sound like the best choice for you, there are a few other options that may be worth looking into.
Runner up #1: Fully-insured small group plan via SHOP
We've covered some of what makes traditional small group plans so inaccessible to most small businesses, but there is a government program designed to help make this option work better for you. SHOP (Small Business Health Options Program) is most often available to businesses with under 50 employees (although the particulars can vary by state) and gives you access to a marketplace for small business plans that's similar to the individual marketplace.
Businesses with under 25 employees that use SHOP may qualify for the Small Business Health Care Tax Credit .Notably, the SHOP tax credit can cover up to 50% of the money you spend on employee health insurance, and businesses with under 10 employees reap the biggest benefits. And with SHOP, you have some control over what coverage you offer and how much you contribute to employee premiums.
But this option doesn't avoid all the issues that come with traditional small group insurance. To qualify, you have to offer health insurance to all your full-time employees and, in most states, at least 70% have to sign up. So we're back to the dreaded participation rates problem. Plus, there are more complexities to figuring out what you qualify for and what your options are, so you're back to spending a lot of time jumping through hoops to understand your options and get signed up.
But if you want to stick with traditional small group insurance, SHOP could be a way to make it more affordable.
Runner up #2: Level-funded health plans
If your workforce is fairly healthy, you may want to consider level-funded health insurance. With traditional plans, your premiums are essentially "use it or lose it," so if employees don't end up needing much health care that year, it can feel like you've paid for nothing.
With level-funded health insurance, you'd still pay a set monthly amount toward each employee's health insurance, in this case an amount based on an estimate of your employees' likely claims for the year. That money is pooled and used to pay any claims employees make throughout the year.
But here's the downside: if your employees do end up needing a lot of health care, your plan could either be cancelled outright, or your costs could go up next year— potentially by a lot. And the thing about health is that it's unpredictable. Even if all of your employees are perfectly healthy today, there may be an injury or sickness the next year that makes this option a lot less of a good deal. With health care costs trending upward every year, the odds aren't necessarily in your favor.
To qualify, you'll also need to complete a process called underwriting, which evaluates the health of you and your employees. This usually involves a survey where employees answer questions about their weight, height, and smoking habits. While necessary, this process can sometimes feel a bit awkward for employers.
Runner up #3: Health stipends
So many of these options come with complications that you may be thinking: can't I just give employees some extra cash and let them figure out health insurance for themselves? That's probably the easiest possible option. But it comes with some big drawbacks.
The biggest: taxes. Unlike ICHRA, health stipends are taxable. And those taxes can add up to around 35% of the cash you offer. That's over a third of the money you try to give your employees that essentially vanishes.
That in itself is probably a good enough reason not to go this route, but you also face the issue that employees may not see the extra cash as a health benefit. If it's just extra money added to their paycheck, they may come to see it as extra salary. And you don't have any control over whether they spend it on health care or not.
Health stipends are a nice idea that don’t always work as intended in practice.
How to Make Health Benefits Easy and Affordable
You don't have to choose ICHRA, but for most businesses with under 10 employees, it really is the easiest and most affordable option. And if you partner with StretchDollar, it becomes even easier to set up. StretchDollar is entirely free for businesses to use and takes only minutes to get started with. And in addition to helping employers get everything set up and ready to go, we also offer a platform and resources to help your employees choose the right plan for them quickly and easily. We make small business health insurance simpler for everyone.
