Employee happiness is at historic lows, and roughly 40% of the workforce is living paycheck to paycheck. Employers as a whole currently have the upper hand, but as layoffs continue in an era of record high profits, small businesses have a unique opportunity in employee recruiting and retention.
What is the opportunity? As a small business owner, you may worry that you can’t pay as competitively as the mega corporations, but it turns out that general well-being is the number one concern among younger employees, meaning that offering a positive work environment paired with meaningful benefits (like health insurance coverage) can make you just as attractive as the big players, if not moreso.
That said, offering health insurance to employees was historically too complex, cumbersome, and unaffordable for many small businesses. But there is a new option on the market which is not (a) skipping the option of offering health insurance, (b) giving employees cash in place of benefits, or (c) just another old school group health plan.
This new option is called the Individual Coverage Health Reimbursement Arrangement (ICHRA), a pre-tax health benefit that makes insurance far more obtainable for small companies.
The new option has only been around in recent years, it’s called ICHRA (Individual Coverage Health Reimbursement Arrangement) and is a pre-tax health benefit that makes insurance a more reasonable option for small businesses.
A quick overview of ICHRA
Individual Coverage Health Reimbursement Arrangement (ICHRA) is a federal regulation passed in 2019, allowing employers to contribute to employees’ individual health insurance premiums and medical expenses without being forced into intricate group health plans.
The healthcare world is filled with confusing terms and endless acronyms, but in the following, we will decode ICHRA so employers and employees can better understand this newest, and perhaps most attainable option on the market.
Why is health insurance such a struggle for small businesses?
When calculating the costs of health insurance, smaller companies typically get the short end of the stick, especially when there are fewer than 20 employees.
There are generally three main challenges faced by small businesses:
- When purchasing traditional small group plans, the process to buy and onboard is painfully time consuming, often taking over six weeks and more than 30 hours of employers’ time just to get set up. This doesn’t even account for the countless hours researching current options.
- Small businesses buying into a group plan face participation criteria that requires at least 70% of all employees enroll, otherwise the company won’t qualify for coverage. This is a huge challenge for smaller businesses.
- Let’s say a small company has the wherewithal to investigate time researching and negotiating group plans, and gets enough team members to enroll, the final challenge remains the actual cost, which tends to be prohibitive for smaller companies. In the past decade, average premium costs have increased a whopping 25%, such that individual health coverage has risen to nearly $8,000 annually for an individual, and $23,000 for a family. Ouch.
These challenges combine to create a scenario where smaller businesses simply cannot obtain health insurance for their team members, even if they’re well meaning and wish to. The state of affairs right now is shocking, with data from the last 12 years hitting an all-time low, with only two in five companies with less than 10 employees offering comprehensive healthcare benefits.
The impossibility feels daunting for employers, so how exactly can an existing talent pool be retained, and new recruits attracted, without offering a traditional group health insurance plan? Some will simply offer cash in lieu of insurance, but a third option exists to bridge this painful gap - ICHRA, the pre-taxed benefit program.
Let’s dig into the pros and cons of each health insurance option for small businesses in New Jersey.
#1: Pros/cons of traditional group health insurance plans
When we think of health insurance, what typically comes to mind is traditional group health insurance plans. How this option works is a company finds an insurance broker who researches options based on budget, the type of business, and basic employee info (like age and geographical location).
With this option, smaller companies tend to lean toward choosing one plan for all employees, and larger companies may have the luxury of choosing multiple plans with varying deductibles, premiums, and copays.
The upsides of old school group plans:
- Lowered risk: With traditional group health plans, insurance companies carry the risk if total claims exceed the premiums, so the playing field is leveled a bit between small and large companies if any employees fall ill and require in-depth care.
- Standards: Group plans are regulated by the state, and insurance companies are required to provide a certain standard of benefits so all employees have ongoing access to the insurance they’ve been sold.
- Competing for talent: Because benefits are a part of any employee’s salary package, a strong candidate could choose one company over another based on the insurance coverage offered. In a complex hiring environment, offering health insurance is a strong way to compete in the workforce, no matter the size of a company.
Downsides of traditional insurance plans:
- Expensive: Group plans can be expensive and they typically come with the highest premiums.
- Participation rates: Because group plans ordinarily require at least 70% of all employees to enroll, small businesses are often without insurance because of this hurdle.
- Limited choices: Small businesses get to choose from just a handful of pre-designed plans and can only offer one of those plans for all employees.
- Budgeting nightmares: If even one employee at a small business becomes ill, higher premiums can follow in the next year, meaning less predictability for budgeting.
- Huge time suck: Setting insurance up for a company can take over 30 hours, spanning several weeks to manage. And this process repeats annually.
#2: Pros/cons of giving employees cash in lieu of benefits
Due to the aforementioned cost, complexity, and burden, many small business owners throw up their hands and give up on offering insurance. But because so many still want to do right by their employees, they offer extra cash to employees via their paycheck in place of health insurance benefits.
This kindness is often misunderstood, and typically overlooked, rarely translating into the intended value.
Advantages of money in place of health insurance:
- Straightforward: Giving cash in place of insurance, an employer simply adds extra money to paychecks, a step so simple that even a two-person company can implement overnight.
- Control: The cash option is supremely helpful for budgeting, and allows employers to give exactly what is affordable to them, rather than a predetermined number from some insurance company.
Disadvantages of just giving employees cash:
- It can be invisible: Employees don’t always know or understand that they’re receiving money in their checks for insurance, and it can blend into their wages.
- Taxes consume a considerable chunk: Because this benefit is given akin to a wage, it is completely taxable. New Jersey residents enjoy up to a 10.75% income tax, so combined with the 15.30% taken out for FICA, and another 22.00% for federal income taxes, NJ residents may see just a hair over over half of the amount an employer attempts to give them.
- Employees may end up without insurance: There is no way to know if employees use this cash benefit as designed, and it is possible that many may go without insurance anyways. Lower wage employees living paycheck to paycheck may have no choice.
#3: Pros/cons of ICHRA, the pre-tax fixed health benefit option
ICHRA (Individual Coverage Health Reimbursement Arrangement) is the newest health insurance option for small businesses, and it answers to most of the negatives of the options we’ve been limited to for generations.
Instead of offering a traditional group plan, employers can give money to employees to go toward their health insurance premiums, but the catch is that it’s BEFORE a single dollar is taken out for taxes. Beautiful.
This is a simple option, but is relatively new and is just now starting to catch on and gain traction in the business world. The pre-tax benefit option became possible in 2020 because of a new IRS legislation, but when it was announced, a global pandemic shoved it out of the headlines, so it is understandable that many folks still don’t know of this option.
Adoption has been gradual, but there are significant changes underway.
Pros of ICHRA for New Jersey small businesses (there are a lot):
- Employee choice: ICHRA allows employees to choose their own individual health insurance plan to align with their personal requirements (which are none of an employer’s business anyhow).
- A more clear benefit: Employees understand that this contribution is specifically for health insurance, and they also know the exact dollar amount being contributed, so it’s less hazy than group plans or cash in lieu of benefits. The perception of the benefit is more clear between all parties.
- Privacy for employees: Employees can select their own coverage under ICHRA, keeping employers out of the awkward position of standing between an employee and their doctor.
- Predictability for employers: Costs from year to year are unpredictable with group plans, but ICHRA allows a business to choose the amount of the pre-tax contribution to put toward their employees’ individual health insurance expense.
- No participation requirements: Because ICHRA has no minimum participation requirement, if as few as one employee opts in, the option remains on the table.
- Part timers can benefit, too: A truly outstanding feature of ICHRA is that it is the only option on the market that allows employers to give different amounts to full- or part-time employees. This makes it more appealing to employers, thus more likely to be obtained by employees.
- Easiest option for employers: ICHRA lets employers avoid researching a broker, learning a bunch of medical lingo, vetting various companies and options, then dedicating countless hours to managing the entire process.
Disadvantages of money instead of insurance:
- Burden on employees: Because employees can be overwhelmed by the selection process and intimidated by the language and fine print, they may struggle to make an informed choice. ICHRA can put the burden of research on employees. Small businesses can choose to educate employees on the basics of health insurance, but the regulation places no requirement on this.
- Expectation gap: Job seekers and employees may be accustomed to group plans or full coverage at big companies, so the options available through the individual marketplace may come with less frills than expected.
How employees obtain ICHRA benefits in New Jersey
When employees are offered the pre-tax, fixed health benefit of ICHRA, they must choose a qualified health insurance plan that meets the Affordable Care Act (ACA) requirements.
The ACA law passed in 2010 also established a national health insurance exchange, as well as protections for consumers such as maternity care, some prescription drug coverage, and covering of preexisting conditions. All health insurance plans listed on the marketplace are considered qualified.
By 2015, over 8 million Americans used the exchange, but by 2022, that number spiked to 14 million. In that time, the number of carriers and types of plans has also expanded. In that period, there were more options added, so what is available to employees in New Jersey?
Health insurance options in New Jersey
Several health insurance companies offer coverage on the New Jersey state-based marketplace called Get Covered NJ. These include:
- Aetna CVS Health
- Ambetter from WellCare of New Jersey
- AmeriHealth Insurance Co.
- Horizon Blue Cross Blue Shield of NJ
- Oscar Insurance Corporation (NJ)
- United Healthcare Insurance Company
Note: The set of insurers changes by county - see all plans and prices in your county here. Going forward, we’ll use Middlesex County as an example.
Average costs of health insurance coverage in NJ, and how to choose a plan
It can be confusing, but when searching through any exchange, the industry names all plans after metals - gold, silver, and bronze.
The higher-tiered plans will have higher monthly premium (the amount you pay for insurance monthly) but have lower out-of-pocket expenses like copays, co-insurance, and deductibles (the amount you pay for covered health care services before your insurance plan starts to pay).
Lower-tiered plans have less expensive premiums but may come with higher out-of-pocket costs.
Next, let’s discuss how to select which option makes the most sense for you.
Gold health plans: Best when you know you’ll have medical costs
As an example, the least expensive gold plan in Newark (Essex County), New Jersey is Ambetter -- Gold 1008 - EPO (~$596/month).
Quick tip: Gold plans may have higher monthly rates, but usually come with lower deductibles and copays. This is hugely helpful for people that know they’ll require frequent medical services.
Silver plans: Best for average medical costs
For example, the most affordable silver plan in Newark (Essex County), NJ is Aetna -- Aetna Whole Health Network ($438/month).
Heads up: Silver plans are the middle ground between the other two types of plans, and they combine lower premiums with lower out-of-pocket costs.
Bronze health plans: Best for healthy folks with savings
To illustrate, the bronze plan that costs the least in Newark (Essex County), New Jersey is AmeriHealth Caritas -- Next Bronze Classic ($363/month).
Remember: Bronze plans will have the lowest monthly premiums but come with substantially higher deductibles and co-pays, meaning if you need medical care during the year, you pay more out of pocket before insurance coverage kicks in.
Let’s look at health insurance costs in NJ
Because healthcare is priced on an individual’s age and location, they vary wildly, but here is an overview of the most affordable plans in Essex County by plan tier and individuals’ age:
Finding the best health insurance option for your New Jersey small business
In short, health insurance isn’t fun. Especially for small businesses. But ICHRA is a new pre-tax fixed health benefit that empowers employees in New Jersey. ICHRA is a clear winner for businesses burdened with traditional group health plans and employees that want choice and privacy.
If you’re looking for guidance on ICHRA pre-tax fixed health benefits, reach out to StretchDollar or get started here. We’d be honored to guide you along the way.