Health care benefits are generally optional for smaller employers but are of critical importance to most employees. Employers of all sizes should be aware of the pros and cons of offering health benefits to their employees.
Benefits are a critical piece of an employee compensation package, and health care benefits are the crown jewel. Health care benefits, along with time-off benefits, are the most popular of benefits to employees. Every employer must at least consider whether to offer these types of benefits and in some cases, employers must offer health care in order to remain competitive with other businesses for the most talented employees and avoid penalties imposed by health care reform. Another reason why many employers choose to offer health care benefits is so that they themselves can take advantage of less expensive health insurance than they could get on their own as well as tax breaks for the contributions made by the business.
If you do make the decision to offer health insurance benefits, be aware that you call into play a whole series of laws that will tell you what coverage you have to offer and how you have to offer it. Therefore, the first decision to make is whether to offer health insurance at all.
When do employers have to offer health insurance?
Employers with 50 or more full-time employees, or a comparable combination of full-time and part-time workers, are obligated by the Affordable Care Act (also known as "ACA" or "Obamacare") and associated laws to either fulfill specific minimum requirements outlined in the ACA or to make a tax payment referred to as the employer shared responsibility payment (ESRP).
It is important to mention that the threshold number for employers may vary depending on the state. For instance, in Hawaii, all employers must offer Prepaid Health Care Act coverage to their eligible employees in Hawaii, regardless of whether they are full-time or part-time, permanent or temporary, as long as they are not in an excluded category.
In addition, having employees in another state (whether onsite or working from home) can trigger other compliance obligations. These can include having to meet payroll, foreign qualification, and other requirements.
Pros and cons of offering health care benefits
Advantages of offering health care insurance
There are a number of advantages to offering health benefits to your workers. Here are a few of the major ones:
- Attract and retain the most qualified employees. Whether health insurance is absolutely necessary to attract and retain the most qualified employees will depend upon factors such as whether your competitors or other similarly sized employers in your area are offering health insurance.
- Gain tax advantages. You can offer employees something that increases their compensation package and yet allows you an income tax deduction for the contribution so that your out-of-pocket cost is less than the value of the benefit to the employee. Self-employed individuals may be able to deduct 100 percent of their health insurance premium costs as a business expense. You can always deduct 100 percent of premiums for your employees. If the business is incorporated, all costs for your own insurance, as well as your employees, are deductible.
- Take advantage of the small business health care tax credit. Small businesses with fewer than 25 full-time employees may be eligible for a tax credit for purchasing health insurance for their employees.
- Avoid having to owe an employer shared responsibility payment. Employers that have a considerable workforce (typically those with 50 or more full-time employees) have the obligation to either provide their full-time employees with affordable minimum essential coverage that meets the minimum value standard (and includes coverage for their dependents) or face the possibility of incurring an employer shared responsibility payment.
- Offer employees group purchasing power. Even if you decide not to contribute anything toward your employees' health insurance, you can offer them the opportunity to obtain group rates through your business. In addition, small businesses (generally, those with 50 or fewer full-time employees) may purchase health care coverage through a government-run insurance marketplace established specifically for them — the Small Business Health Options Program (SHOP).
- Ensure the wellness of your workers. Insurance plans offer preventative care that can keep employees healthy and working. If employees don't get preventative care and yearly physicals (which they might not do if they don't have insurance), you could end up having more employees out for long periods of time with serious illnesses.
Disadvantages of offering health care insurance
There can be a downside to offering health benefits, too. Some of the cons of offering health benefits are:
- The costs. Health care costs have risen enormously in recent years. As a result, not only are the costs draining valuable resources from many small employers, the uncertainty makes financial planning extremely difficult.
- The sometimes tense business of cost-sharing with employees. There is a way for a small employer to control costs and return certainty to the process: push any additional costs on to employees. While that may solve the financial problems, it creates many others. Even if you don't want to push all the costs on to employees, pushing some of the costs on to them is inevitable.
- The administrative hassles. Even though the insurance company from whom you purchase the health insurance will usually act as plan administrator, you will have to choose the insurer and then spend part of your time filling out forms, remitting premiums, and acting as intermediary between employee and insurer, among many other tasks.
- Employee turnover: Small businesses may experience higher rates of employee turnover compared to larger businesses, resulting in increased administrative costs related to managing employee enrollments and terminations in health insurance plans.
Whether a small business should offer health care benefits to its employees depends on various factors such as budget, industry, and employee expectations. It is ultimately up to the business owner to weigh the costs and benefits and make an informed decision.
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