How Much Should Businesses Pay for Insurance Premiums?
2020 Impacted Workers' Access to Health Care
Health insurance can be an effective tool for attracting qualified workers to your company. It can also help with employee retention as workers are more likely to remain with their employer if they're happy with their health insurance.
While popular with workers, health insurance is a relatively expensive benefit for employers to provide. In March of 2020, health care constituted 8.2% of U.S. workers' total compensation. For businesses with fewer than 25 full-time employees and that meet a couple of their criteria may be able to qualify for tax credits can help defray the cost of health insurance.
Tracking trends and price changes, and navigating health insurance options can be frustrating. Learn what the health insurance landscape looks like in 2021 for small businesses, what the typical portion of health insurance employers pay, and what options you have to offer your employees.
Employer Health Insurance Trends
In 2019, about 30.8% of businesses with fewer than 50 workers provided employee health insurance. The percentages varied from state to state, from a high of 78.4% in Hawaii, where employee coverage is mandated by law, to a low of 17.9% in Arkansas. At companies with 50 or fewer workers, 97.1% provided employee health insurance.
The events of 2020 had a major impact on workers and their access to health care. To increase access to services, the federal government, many states, and numerous insurers took steps to expand telehealth. The demand for telemedicine increased rapidly throughout 2020 and will likely continue.
Many workers were overwhelmed with childcare responsibilities, remote work hassles, and financial difficulties in 2020. To help their workers cope, some employers are expanding their health and well-being benefits to include one or more of the following:
- Reimbursement for work-from-home expenses
- Flexibility with child care responsibilities
- Flexible work schedules
- Access to mental health care
- Support for physical health through technology such as wearables
While businesses with fewer than 50 full-time workers are not required by the Affordable Care Act (ACA) to provide employee health insurance, any coverage they do provide must meet the law's requirements.
Average Cost of Employee Health Insurance
If you decide to offer your employees health insurance, how much will it cost? Small companies paid an average annual premium of $7,483 per worker for single coverage and $20,438 for family coverage in 2020, according to the Kaiser Family Foundation (KFF). The cost of insurance varies depending on the type of plan, the age of your workers, your industry, and your geographic location.
Insurers expect demand for health care services to rise in 2021 but they don't know when demand will return to normal. Consequently, most have made only moderate rate changes for 2021, increasing or decreasing rates by a few percentage points, according to KFF.
How Much of the Premium Should Employers Pay?
Workers contributed an average of 17% of the premium for single coverage and 24% of the premium for family coverage, according to a KFF study about premiums. Consequently, employers paid an average of 83% of the premium for single coverage and 76% for family coverage.
The following chart demonstrates how much of their premium that employees of small businesses paid toward individual and family plans:
Distribution of Premium Paid by Covered Workers at Small Companies
|Paid 0% of their premium||Paid up to 25% of their premium||Paid 25%-50% of their premium||Paid more than 50% of their premium|
|Employees with individual plans||27%||48%||22%||3%|
|Employees with family plans||10%||33%||29%||28%|
How Small Businesses Afford Health Insurance
As a small business owner, you have several options for securing employee health insurance at a reasonable price.
- Contact health insurers directly: Discuss plan options and prices or enlist an insurance broker to shop for coverage on your behalf. Insurers may have low-cost plans they don’t advertise on their websites.
- Utilize the Small Business Health Options Program (SHOP): SHOP is an insurance marketplace created by the ACA that enables small businesses to obtain affordable medical or dental coverages for their workers. It's available to businesses that have 50 or fewer workers and meet certain requirements. Businesses with fewer than 25 full-time equivalent employees may be eligible for a tax credit worth up to 50% of their premium costs.
- Participate in an Association Health Plan (AHP): Trade associations or other groups of employers band together to participate in this type of insurance. To offer a health plan, the association must have a "commonality of interest," meaning they share a common trade, industry, line of business, or profession. Because an AHP is a pool of many employers, it can negotiate better rates and terms from insurers than employers can obtain on their own.
Alternatives to Group Health Insurance
If you're a small business owner who would like to provide health benefits but can't afford group insurance, you should consider offering a health reimbursement account (HRA).
One type of HRA is a qualified small employer health reimbursement arrangement (QSEHRA). This option is available if you employ fewer than 50 workers and don't provide any type of group insurance.
A QSEHRA allows you to make tax-free reimbursements to employees for eligible health care expenses like health insurance premiums and coinsurance. You specify the maximum reimbursement you will provide up to the federal limit, which (in 2021) is $5,300 for an employee only and $10,700 for an employee and their household. Reimbursements you make aren't subject to payroll taxes.
Workers covered by an HRA are eligible for tax-free reimbursements only if they maintain "minimum essential coverage" as that term is defined by the ACA. Otherwise, reimbursements they receive are taxable.
Another type of HRA is an individual coverage health reimbursement arrangement (ICHRA). This option is available to employers of any size that have at least one employee who isn’t a self-employed owner or the spouse of a self-employed owner. You choose maximum reimbursement amounts (which aren't limited by the federal government) and then reimburse workers for eligible medical expenses.
If your ICHRA offer qualifies as "affordable" under the ACA's rules to any worker, that worker will be ineligible for a premium tax credit when buying health insurance in the federal Marketplace (or a state equivalent). If your offer doesn't qualify as affordable and the worker rejects it, the worker may be eligible for a premium tax credit.
- Health insurance is highly valued by employees but can be costly to provide.
- The average small business pays 17% of the premium for single coverage and 35% for family coverage. Employees pay the rest.
- Many small businesses can obtain employee health insurance through SHOP, a government-run insurance marketplace, or by joining an Association Health Plan (AHP).
- Businesses that can't afford group health insurance can consider offering a health reimbursement account (HRA).