Question: Our business has 30 employees. Our current group health insurance premium was increased so much this year that we cannot continue to offer coverage. If we were to drop our insurance and agree to pay workers an amount equal to what we pay for the insurance, would it be cost-effective? What are the implications of such a move?
Answer: This is a question that a lot of small business owners are asking these days, according to insurance and tax professionals around the country. That’s probably because providing health insurance is so costly—and the Affordable Care Act may give your employees better options.
Providing health coverage costs an average of $9,300 annually per employee, according to TriNet, a human resource and payroll provider, with employers picking up $6,700 of that cost each year, on average, the company says.
Small business owners, in particular, have long been worried about escalating health insurance costs, and the Affordable Care Act has raised their concerns, says Steven J. Friedman, co-chairman of the employee benefit practice group at the law firm of Littler, Mendelson. “There is widespread fear that the ACA will have a significant cost impact,” he says.
Unfortunately, it’s not easy to answer your question, because there are so many potential consequences of dropping insurance coverage, chief among them damage to employee morale and retention. That’s probably why most small businesses seem to be sticking with the status quo, Friedman says: “No employer wants to be the first to declare they’re going to cut health-care coverage and give people a stipend.”
Let’s unpack some of the issues you raise. First, because you have fewer than 50 full-time employees, your company is not required to offer health insurance. Your employees, however, are required to have coverage or pay a penalty under the ACA. If they buy insurance though the Obamacare exchanges, they could get government subsidies to help them with the cost. More than 80 percent of the individuals who enrolled for 2014 were eligible for such subsidies, according to the Kaiser Family Foundation.
That means low-income to moderate-income employees may be able to get better coverage for less. Subsidies are available for individuals making up to $45,960 in annual income and up to $94,200 for a family of four.
Also consider the demographics of your workforce. Older individuals buying individual coverage for the first time may be hit with sticker shock, because insurers charge more to cover older people. That could create problems if you’re concerned about retaining your long-term, more experienced employees. “To go to your employees and say we’re throwing you out into the Wild West, go out and find your own coverage—even if you’re subsidizing—may not go over well, especially [among] older employees and those who will get zero subsidy,” says Hugo R. Sibrian, chief executive officer and president of Benefits & Risk Solutions, an employee benefit consultant.
There are tax consequences, as well. Right now, what you pay for your group plan is tax-deductible, and employees’ contributions to their health premiums are made pretax as well. That lowers your total cost of compensation and thus the total amount you pay in payroll taxes for each employee. You’ll lose both those advantages if you drop your group plan, and federal and state taxes will be deducted from the additional money you give employees to buy their own coverage—causing another potential pain point.
Still, the strategy you’re contemplating is increasingly discussed among employers and insurers. “Once the snowball starts rolling down the hill, it may be that employers in lower-paying industries start shedding group coverage, and it works out better for them and their employees in the long run,” Friedman says.
There’s also a whole industry of private exchanges that let you contribute a fixed sum to employees’ premiums and allow them to choose from a menu of different plans. Intuit Online Payroll offers a health benefit marketplace service that lets you contribute as much or as little as you want to each employee’s cost for health insurance. That amount is then automatically added to every paycheck, says the company’s senior tax analyst, Mike D’Avolio.
Before you make a decision, investigate whether your state offers a small-group insurance option through the Small Employer Health Options Program (SHOP) marketplaces, advises Linda Blumberg, senior fellow at the Urban Institute’s Health Policy Center. You can browse plans and order coverage through a broker on the federal site at healthcare.gov, and 15 states are up and running with their own SHOP exchanges.