If you don't offer health insurance, should you? If you do, but the costs are killing you, what can you do? How do you find a health plan that won't make your company sick?
By Chris Freeburn

Perhaps the most burdensome issue facing small business owners today is health insurance. As costs continue to spiral and coverage options become more and more complex, many small business owners find the challenge of providing employees health insurance while keeping the company's bottom line healthy too daunting a task.

A 2005 Kaiser Family Foundation study revealed that just 60 percent of US business offered employees health insurance, down from 69 percent in 2000. The study noted that the decline came almost entirely from small businesses. Indeed, a July 2006 survey by payroll provider SurePayroll, found that 11 percent of small businesses currently offering employee health insurance were seriously considering dropping that coverage in 2007. "Small businesses don't want to be in the business of working their tails off simply to meet health care costs," says Michael Alter, president of SurePayroll.

Keeping this in mind, here are some important questions to ask as you evaluate your company's employee health insurance coverage.



Should I offer health insurance to my employees at all?
For many small businesses, whether to cover employees at all is the most pressing question. And a very difficult one. Cost is usually the primary issue in the decision. There's no getting around the fact that health insurance is expensive and is getting more expensive each year. According to the aforementioned Kaiser study, health insurance premiums rose an average of 9.2 percent in 2005, almost three times the increase in workers' wages, and more than twice the rate of inflation. Nevertheless, there are very good reasons for providing health insurance to your employees, despite the cost.

The first and most important benefit is that health insurance will attract better employees. Health insurance costs are not only an issue for business owners; the premiums for individual and family health plans are rising quickly as well. Consequently, few workers want to finance their own health plans. Since most large companies provide health insurance, skilled workers will tend to gravitate away from small businesses that don't offer some form of health insurance. So while you may save money in the short term by forgoing health insurance for your employees, you are also limiting the pool of talent from which you can hire, which can potentially limit your business's chances for growth in the future. "Competent, skilled workers are crucial to any business," says management consultant C. Davis Fogg. "Health insurance is so expensive outside an employer-provided plan, that few really talented workers were willing to work at companies that don't offer it."

Health insurance also serves as an incentive for your current employees to value their jobs, since they may not get health insurance from your competitors. This can boost both employee retention-employees are less likely to leave your firm if they receive benefits they may not get elsewhere-and employee productivity. Employees who value the health insurance coverage will be more motivated to work diligently for the firm, thus showing their worth as employees. Also, health insurance will allow employees to deal with any medical issues they face, leading to healthier, more productive workers.

How does offering health insurance benefit my business beyond attracting good employees?
Actually, company health insurance isn't only about your employees. If your business doesn't have a group insurance plan, it's likely that you're paying for your own family's coverage. Individual and family health insurance is usually significantly less expensive when purchased as part of a group plan compared to similar coverage purchased on an individual basis.

Also worthy of consideration are the tax benefits offered by a company-sponsored group health plan. Insurance premiums are usually 100 percent deductible against business taxes, and if the health insurance is offered as part of a compensation package, it can be used to lower payroll taxes. This also benefits your employees who can pay for their part of the monthly insurance premium with pre-tax dollars.

Have I looked at lower cost alternatives to group health plans?
The dramatic escalation of health insurance costs has caused much pontification as well as some real action in Washington. In 2003, Congress created Health Savings Accounts (HSAs)-which went into effect in 2004-as an alternative to traditional medical insurance. HSAs are offered only in conjunction with a High Deductible Health Plan (HDHP). Sometimes called "catastrophic health plans," HDHPs generally cost a great deal less than traditional health insurance plans, but feature minimum deductibles for 2008 of $1,100 for individuals and $2,200 for families, with maximum out-of-pocket expenses of $5,600 for individuals and $11,200 for families. Though HSAs and HDHPs can be set up by individual consumers, they can also be offered through employers. If you offer an HDHP plan, all full-time employees must be treated equally under the plan. Deposits into employee HSA accounts are made on a pre-tax basis, with the maximum deposit being $2,900 for individuals and $5,800 for families. Funds deposited into HSAs are the property of the employee making the contributions and any unused funds are carried over from year to year and continue to earn tax-free interest on behalf of the employee. Funds in an HSA can be withdrawn without advance approval to cover any qualified medical expense, including deductibles for HDHP coverage and expenses not covered under the insurance plan, such as dental, vision, chiropractic services, and over-the-counter medications. Some HSAs offer a debit card to pay for such expenses, others offer checks or reimbursements; most offer a variety of ways to access the funds in the HSA. HSAs are fully portable, meaning the funds remain the property of the employee even if he or she leaves the firm or changes health plans.

Similar to HSAs are Health Reimbursement Arrangements (HRAs), which can be used in conjunction with HDHPs or other traditional insurance plans. An HRA is an employer-funded account that reimburses employees for medical expenses as they are incurred. The advantage to the employer is that such funds are expended only if they are needed, meaning that the healthy employee, who requires little or no care beyond an annual physical, will save the company money, making the HRAs of employees in genuine need that much more affordable. Unused funds remain the property of the employer.

What advantages do HSAs and HRAs offer small business owners who want to provide health insurance to their employees?
HSAs and HRAs, when coupled with HDHPs, offer a significant cost savings to employers via substantially reduced permiums. Small business owners who have traditional group health plans could save anywhere from 20 to 60 percent of their current annual health insurance costs. They also motivate employees to be more selective in their use of health care in the interest of keeping their out-of-pocket expenses within the funds available through the HRA or HSA. (This feature is the reason these plans as a group are often referred to as Consumer-Driven Health Plans.) The significant savings possible with HSAs and HRAs make them particularly attractive to small businesses who have never offered their employees health insurance before as well as to those facing bottom-line breaking premium increases.
What are the disadvantages of HSAs and HRAs?

The primary drawbacks are the high deductibles imposed by the HDHPs needed to create them, which may leave HSA and HRA holders facing the possibility of fairly significant expenses if they have serious medical bills, albeit less than they would incur with an HDHP without an HSA or HRA. An aditional disadvantage of the HRA is that all unexpended funds in a given year remain the property of the employer and do not carry over to the following year. For an employer, the lower premium costs of HDHPs must be balanced against the increased costs that may be borne by employees, who may value such coverage less than a traditional insurance plan.

Is there any way I can offer my employees insurance outside of an insurance plan?
Section 105 of the IRS tax code permits employers to reimburse employees for medical expenses. Each year, you can decide how much your business is willing to reimburse your employees, and then the employees use that money to purchase individual health insurance policies on their own. The money contributed to these plans by the employer is tax-free for the employee and is tax deductible for the employer. This offers small companies the chance to give their workers some form of health benefit without the complications of paperwork and hefty insurance premiums. Employers can also choose to contribute to employees' HSAs as mean to assist them with their medical costs, thereby providing their employees with available funds that will remain with them from year to year.

Does my insurance provider offer programs geared to help lower costs for traditional group health plans?
Many major insurance providers have designed group health plans specifically to meet the needs and financial concerns of small businesses. Talk to your agent or broker about the options or go to any of the web sites mentioned in our resource box at right.

What steps can I take to reduce overall costs on my existing group health plan?
There are several methods of reducing costs on existing health plans. But not all will be popular with your employees. Reducing benefits (eliminating dental or vision care coverage, for example) and increasing the co-payments employees must pay when visiting physicians will lower costs, as will increasing the co-payments for prescription drugs. Most importantly, small businesses should shop around for the lowest cost plan. "There are many health insurance providers out there," advises Todd McCracken, president of the National Small Business Association (NSBA). "Small business owners should consider a range of offers from as many companies as possible." Working with an insurance broker can bring you a much greater range of possible providers than trying to solicit offers on your own.

Can I lower the percentage of the premiums I pay per employee? Is there a minimum I have to pay?
It depends on the state in which your business is located. Many states have no legal minimum for employer premium contribution. Others, like California, demand some employer contribution, but none more than 50 percent of the premium for each employee. Typically, small businesses will cover about 30 percent of an employee's individual premium, while leaving the employee to cover the entire premium for his or her family. But there is no firm rule. While this places considerable discretion in the hands of employers, a higher employer contribution to insurance premiums can mean happier employees. Generally, it's a matter of how much the business can afford to cover.

Do I know what plan fits my employees best?
Before you select a plan, you may want to discuss the matter with your existing employees to determine what medical services they would want to be covered and how much they would be willing to contribute toward that coverage. Such a discussion would also be a good time to acquaint them with the cost of health insurance to the business. But you should also keep in mind that the insurance you ultimately choose may also help attract high-quality future employees, a consideration that will also influence how much you are willing to spend on health insurance.


When considering insurance providers for your small business's insurance plan, you may receive a number of proposals and quotes from your insurance broker, or from different insurance companies directly. When evaluating the offers, here are some important questions to ask.

1. Is the insurance provider financially sound and does it have a good reputation? The larger, well known insurance companies are typically multi-billion dollar corporations, but many smaller, less sound, providers exist, often offering discount insurance. If you are uncertain of the company's stability, it's best to look elsewhere.
2. How is the plan administered? How much paperwork will be required for your business? Does the insurance provider offer an easy way to contact its representatives if you have a question or problem?
3. How often will the policy be renewed? Some policies are renewable annually, others every six months.
4. How quickly will claims be paid? This can be a critical issue since slow claims payment can result in major hassles for you and your employees, including collection actions by physicians demanding payment.
5. What's in the small print? Be careful of penalties and any "hidden deductible" that may be written into the policy, but not highlighted by the insurance provider. Make certain that these have been fully explained before signing a contract with the provider.

Chris Freeburn is an associate writer for Business 24/7 magazine