Understanding Your Small Business Health Insurance Options

Entrepreneurship is highly valued in American culture, but despite the proliferation of startups and small businesses in the last decade, the U.S. has yet to establish a uniform or streamlined process for small companies to follow in securing health insurance coverage for their employees. Finding and getting affordable small business health insurance can often post as one of the biggest challenges for entrepreneurs hoping to find healthcare for their employees.

What You Need to Know

Under the Affordable Care Act (Obamacare), companies with 50 or more full-time equivalents must provide healthcare for their employees, or pay a tax penalty.

Many businesses use professional employer organizations or an agent or broker to find and set up their health plans.

Small-business owners have many options to shop for health insurance on their own, including SHOP. But each has its pros and cons.

How the ACA Affects Small Businesses Insurance Options

Under the Affordable Care Act (Obamacare), companies with 50 or more full-time equivalents must provide healthcare for their employees, or pay a tax penalty. The full-time equivalent is used to determine employer size under the ACA. Any employee working at least 30 hours per week is considered full time. In addition, part-time employees are counted using the full-time equivalent method of adding the total number of hours worked by all part-time employees in a month, and dividing by 120. This is commonly referred to as the Employer Mandate or Employer Shared Responsibility Fee.

While the ACA may have given some small employers (under 50 full-time employees) an incentive to drop their group plan and encourage employees to purchase individual policies, in many cases, their employees can obtain cheaper premiums with the addition of a subsidy, not available through a group plan.  The law also expanded coverage options for small employers and their employees. Even with expanded options, however, the small business health insurance landscape is confusing and hard to navigate. For this reason, many business owners choose to outsource the job of finding and offering healthcare coverage to professional employer organizations (PEOs) and licensed insurance brokers or agents. 

Enlisting Professional Help

1. Using a PEO to Find Small Business Health Insurance

Professional employer organizations (PEOs) are third-party organizations to which companies can outsource internal HR functions, such as managing payroll and administering employee benefits. For small businesses with fewer than 50 employees, PEOs can be an especially attractive option when it comes to securing small business insurance for employees. PEOs may help small businesses gain access to competitive health insurance plan rates normally reserved for larger companies. However, it is important to understand the cons of using  PEO:

The Loss of Independence

• Even though you will still be running your small business and making day to day decisions, the PEO will become the co-employer of your staff. As the business owner, you may also become an employee of the PEO, meaning you will have to disclose your salary along with your total company payroll. 
• If your employees are mostly family or friends, then it might be hard to let a large corporation have this sort of insight into your personal information. 
• If your company is becoming too much of a liability burden for the PEO, the Professional Employer Organization could move you to a higher “risk category” than originally placed, making their price for services higher.
• Because the PEO is a business as well and has to meet its own deadlines, they may request certain payments upfront. This may mean a fundamental shift in your cash flow because there will be consequences for being a week late with your payroll taxes. 

2. Using an Insurance Broker or Agent to Find Healthcare

Using an insurance broker costs less than contracting with a PEO, brokers, and agents may be a better option for some companies – particularly fast-growing businesses that are nearing the 50-plus personnel mark.  Agents/Broker commissions are included in the premiums you pay, it is simply a pass-through. You are going to pay the same premium regardless if you use a professional agent/broker. 

Considering our shifting healthcare policy landscape and changing regulations within the insurance industry, brokers and agents are especially useful in helping small business owners understand and identify their best coverage options. Many agents/brokers provide the same comprehensive services as a PEO. Hiring a broker is often the fastest and easiest way to find a good health insurance plan quickly, and at the best price possible.

There are plenty of compelling reasons to work with a broker when you’re looking for health insurance. They can help you with the mountains of paperwork, make sure your business is compliant with all relevant laws, ensure you land on plans with the most up-to-date policies and help with implementation and renewals. Because it doesn’t cost anything to meet with a broker – they can get quotes from several insurance providers, free of charge – using a health insurance broker can help company founders begin the process of finding insurance for their employees.  Important to know that agents/brokers are required to carry ‘errors and omission’ insurance, continuing education and must be licensed in the respective states in which they do business. 

Where to Shop for Small Business Insurance

1. Obamacare Exchanges: SHOP (Small Business Health Options Program)

The Small Business Health Options Program (SHOP) Marketplace was a well-known government resource for small businesses who wanted to provide health and dental insurance to their employees, from 2014 through 2017.

Few businesses actually used the SHOP Marketplace, and the direct enrollment portal for small businesses was closed in 2018. SHOP was more popular among small businesses in states with their own exchanges and a significant percentage of small businesses have used SHOP to buy employee healthcare.

SHOP plans still exist, but you can only deploy them with the help of a broker or by contacting an insurance company directly.

Pros of using SHOP

1. SHOP plans are high-quality options from private insurance companies.
2. SHOP offers a degree of choice and flexibility. Businesses can:
   • Choose to offer their employees one plan, or let them choose from among several plan options;
   • Choose whether to provide employees with only health coverage, health and dental coverage, or only dental coverage;
   • Determine how much they want to contribute toward their employees’ premiums and whether they want to extend coverage to their employees’ dependents;
   • Define the length of the initial enrollment period and determine if–and for how long–employees must wait before they’re eligible for coverage; and
   • Start offering SHOP insurance to their employees at any time of year; they don’t have to wait for an open enrollment period
3. Businesses can either:
   • Use their own agent or broker to assess their SHOP options;
   • Work with any SHOP-registered agent or broker; or
   • Contact their preferred insurance company directly.
4. Businesses with fewer than 25 employees may qualify for a Small Business Health Care Tax Credit worth up to 50 percent of plan premium costs.

Cons of Using SHOP

1. The cost of small group health insurance plans on the SHOP Marketplace may be prohibitive for some organizations.
2. Critics say that SHOP fails to address core problems small businesses face with group health insurance, including cost, participation requirements, and marketplace instability.
3. Businesses can no longer register for SHOP without an intermediary.

2. Working with a Private Health Exchange / Purchasing Alliance

Also called purchasing alliances, private health exchanges are mini-marketplaces that offer several different small business health insurance options for your employees to choose from.

Instead of offering just one coverage option to your employees, a private health exchange provides a few different small business insurance choices—and employees can select whatever plan works best for their healthcare needs and financial situation. Shopping on a private health exchange is advantageous because it allows your employees to customize (to a certain degree) their health insurance package; they aren’t forced to go along with whatever plan their company’s founder picked.

If you opt to offer coverage via a purchasing alliance, your employees will pay different premiums and copay amounts, depending on the specific coverage they select–though the cost to the business is the same.

In order to get coverage through a purchasing alliance, businesses will choose a private health exchange to work with and pay a set amount per employee, depending on what percentage of employee medical costs they want to cover. Employees of your company will get to pick the specific plan coverage they want, choosing from whatever plan options are offered through the purchasing alliance.

Pros of a Private Health Exchange

1. Purchasing coverage through a purchasing alliance will provide employees with greater choice, flexibility, and administrative help than they would have otherwise with coverage purchased directly from an insurer.

Cons of a Private Health Exchange

1. They’re not always the most cost-effective solution for small businesses. Businesses can often find cheaper insurance options by dealing directly with insurance providers.
2. Private health exchanges do not offer small business tax credits and lack the large plan selection offered on the SHOP marketplace.

3. Buying Small Group Health Insurance (Directly from an Insurance Provider)

Purchasing a private small group health insurance plan is also an option for small businesses and startups. Whether or not it’s practical to buy insurance directly from a provider depends on where a particular business is located. Small businesses may find they have more options and insurance providers to choose from on the private market as compared to SHOP, where some states will only have one or two insurance plans at their avail. If you choose to purchase insurance directly from the insurance provider, the premiums remain the same, should you buy it direct or through a licensed insurance agent/broker.   

Pros of Buying Direct

1. More providers and plan options to choose from (relative to SHOP).
2. Currently, group insurance premiums are cheaper than individual health premiums

Cons of Buying Direct

1. While contacting insurers directly gives business owners all (or most) of the decision-making power, it can get very overwhelming very quickly. If you choose this option, it can be difficult to understand all your options.
2. It’s important to note that some insurers don’t sell direct–so your selection may be more limited than you’d think. Again, this will depend on your business’ location.
3. If you decide to get small group health insurance from an insurance company, be prepared to deal with a lot of paperwork and administrative responsibility. Your company will need to set up and organize initial enrollments, as well as process all billing and claims paperwork in-house. As a result, buying directly from a provider can be inefficient, and the process only becomes more cumbersome as your business grows and hires more employees.
4. Using a professional agent/broker they will ensure you have a seamless, easy adaptation of the new health plan.

4. Health Reimbursement Arrangement (HRA)

For many small businesses, health reimbursement arrangements (HRAs) are a particularly cost-effective solution, as these arrangements offer businesses the flexibility to contribute any amount toward their employees’ healthcare, up to federally defined limits. Brokers can be involved to facilitate the setup of the HRA (usually, via an online platform).

As of December 13, 2016, The 21st Century Cures Act included a new HRA called, Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). One of the chief benefits of offering a personalized benefits solution like the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), or Small Business HRA, is its potential to save small businesses money.

As of January 1, 2020, employers can offer employees an individual coverage Health Reimbursement Arrangement (ICHRA) instead of offering a traditional group health plan. This type of HRA is an alternative to traditional group health plan coverage to reimburse medical expenses, like monthly premiums and out-of-pocket costs such as copayments and deductibles. Due to the fact, ICHRA is considered a group insurance product, meets all of the ACA requirements, it is considered an offer of employer coverage.  If the ICRA meets affordability, individuals currently on Marketplace plans with a tax subsidy, will lose their tax subsidy.

However, it is critically important to comply with both the IRS and the Department of Labor rules regarding written plan documents for the Small Business HRA. These legal plan documents are required to cover a variety of subjects, including the amount of monthly allowances, eligibility for reimbursement of expenses, and other policies. Companies that fail to follow the rules face significant penalties, so don’t neglect this step.

Pros of HRAs

1. HRAs are a good choice for businesses priced out of group health insurance policies;
2. They provide a solution for organizations that are ineligible for group health insurance;
3. HRAs give businesses that lack the administrative capacity to handle the paperwork and logistical organization of a group health insurance plan a way to offer some form of health benefits to employees.
4. ICHRA’s satisfy the requirements of offering group insurance for employers over 50 and therefore satisfy the employer penalty.  

Cons of HRAs

1. Compliance issues can arise if businesses aren’t careful;
2. It doesn’t always provide comprehensive coverage for employees.
3. Cash-flow issues can arise.
4. ICHRA’s require a 90-day notice to employees prior to any change.  When implementing an ICHRA, effective January 1, final individual rates are not always submitted or published by State or Federal exchanges.

5. Co-Ops (Consumer Operated and Oriented Plan)

Co-ops – or the Consumer Operated and Oriented Plan (CO-OP) program – were established by a federal grant and loan program under the Affordable Care Act. Created by the Affordable Care Act, the CO-OP program was designed to help create nonprofit, member-controlled health insurance plans that would offer ACA-compliant policies in the individual and small business markets.  Co-Ops, at least in theory, aimed to stimulate competition and lower prices, but this “alternative” way for individual and small businesses to get coverage has become increasingly unstable.  While most Co-Ops have dissolved, four of those CO-OPs have been fairly stable for the last few years, however, and appear to have staying power:

• Community Health Options in Maine
• Mountain Health CO-OP (Montana Health CO-OP) in Montana and Idaho
• New Mexico Health Connections in New Mexico
• Common Ground Healthcare Cooperative in Wisconsin

Co-ops differ from traditional insurers in their nonprofit status, consumer focus and organizational structure. In addition, they are governed by boards composed of policyholders. The cooperative structure could also generate savings on administration and marketing costs for these nonprofit businesses.

Theoretically, cooperative health insurers (or co-ops) are still an option for small businesses seeking health coverage (if a co-op is operating in your state).   A concern of choosing a CO-OP is if your business opts into and later ceases operations during the plan year, health plan participants may have to select a new healthcare plan or go without coverage.

6. Association Health Plans (AHP) are on hold.

A rule by the U.S. Department of Labor (DOL) would allow small businesses to band together and purchase health insurance without some of the regulatory requirements that the individual states and the Affordable Care Act (ACA) impose on smaller employers.

Update: On March 28, 2019, a federal district judge struck down a Department of Labor’s final rule that had relaxed restrictions on association health plans. The DOL could seek a stay and appeal the decision, or revisit the rule.

Certain industries, such as agriculture and foodservice, are seeing a dramatic rise in the availability of association health plans as of 2019.

AHPs are run by a private insurance company or third party administrator “TPA”. However, they are largely funded and governed by a group of employers that share similar characteristics, like industry or location. Pooling health insurance costs with like-minded employers may be one way to avoid expensive coverage requirements from larger health plans while still minimizing cost risks.You can learn more about association health plans while looking for any that appear in your area.