Should Small Businesses Offer Employee Health Insurance

Business Management

In the United States, there’s no federal law that requires companies to offer health care coverage to their workers. If employers refuse or choose not to provide medical insurance, it’s legally fine. 

However, many “big” companies opted to provide healthcare benefits to avoid paying hefty penalty taxes. It’s based on the “pay-or-play” provision imposed by the Patient Protection and Affordable Care Act (PPACA, more commonly known as ACA). 

The “Pay-or-Play” Provision 

Formerly known as Obamacare, the ACA expects employers to share responsibilities to solve and improve the US healthcare system’s availability, quality, and affordability issues. This responsibility is shared also by citizens and federal and state governments. 

Under the “pay-or-play” provision, big companies have to pay a penalty tax if they don’t offer health care insurance coverage to 95% of their full-time employees or their part-time equivalent. In 2023, companies can face fines of up to $4,320 per employee per year. 

Note that it’s only applicable to big companies. The ACA defines an applicable large employer (ALE) as a company with at least 50 full-time workers or its part-time equivalent. Moreover, the health coverage provided should be of minimum value and affordable. 

How About Small Businesses? 

Small and mid-size enterprises (SMEs) aren’t required to offer medical insurance to their employees. However, offering healthcare benefits can help stay competitive. Specifically, it promotes employee retention, wellness, and morale. 

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Additionally, small businesses can have financial advantages if they provide healthcare benefits to their employees. Specifically, it gives them tax relief through tax deductions and tax credits. Let’s learn more about these later. 

Medicare and Employer Health Insurance 

If a small business has Medicare-eligible employees, they’re generally recommended to enroll in Medicare and drop their employer coverage. Otherwise, they’ll likely face penalties, such as higher Medicare premiums and late enrollment fees.

However, Medicare-eligible employees can still freely choose from the following options:

  1. Stay in employer coverage and delay Medicare enrolment;
  2. Drop employer coverage and rely on Medicare; or 
  3. Have both employer coverage and Medicare.

Their choice typically depends on how small their company is. 

  1. For companies with 20 workers or lower – Medicare-eligible employees must sign up for Medicare Parts A and B and make it their primary plan. In this case, the employer’s plan will be secondary. 

If they don’t enroll in Medicare, they won’t be covered. Although they can still opt for their employer’s coverage, many employers will likely reject them since being the primary payer for Medicare costs them more money. 

  1. For companies with more than 20 workers – According to the Medicare Secondary Payer (MSP) rule, the employer coverage will become the primary payer, while employers’ group plans will be secondary. 

As the primary payer, companies can’t reject Medicare-eligible employees. Conversely, in this case, Medicare-eligible employees can have more options. For example, they can choose to have both employer coverage and enroll in Medicare at the same time.

Health Insurance Tax Benefits for Small Businesses 

Group health insurance plans for small businesses have lower per-person costs. In most cases, if small businesses get quotes for a group plan, their rates are usually more affordable. Specifically, according to one report, small business health plans have:

  • 7% lower premium per individual on average, and
  • 31% lower individual deductible on average. 
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The  Small Business Administration (SBA) added that group insurance plans have more stable average costs. The idea is that group plans mean insurance companies have more resources to get from when an insurer needs medical care. 

Additionally, any expense companies incur related to group health insurance plans is 100% tax-deductible on both state and federal income taxes. In other words, they’re considered ordinary business expenses, which will offer workers pre-tax benefits. 

Small companies can deduct workers’ share of the group health insurance premium from their paychecks before calculating and deducting state and federal taxes. This increases their take-home pay while reducing their taxable income.

Moreover, ACA also offers healthcare tax credits up to 50% of premium expenses to small businesses, helping them offset insurance costs. To qualify, they must have 25 or fewer full-time equivalent workers with an average income of $50,000 or lower per year. Small employers should also pay at least half of their workers’ healthcare premiums to qualify for the tax credit. 

Employers can also enjoy tax relief themselves. Their healthcare premiums can be tax-exempt if they offer medical insurance to their employees. This significantly offsets their tax obligations, allowing them to save more money. 

Other Benefits of Health Insurance for Small Businesses 

The most apparent benefit of providing health insurance to employees is better access to health care that may otherwise be unaffordable. It also includes preventive services to prevent medical issues from progressing. 

Health coverage also gives workers financial security against burdensome debts from minor injuries or major illnesses. Despite being a small company, ensuring medical costs will be manageable is a good way to show sincerity to your workers. 

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With improved access to care, employees are likely to maintain their health actively. This will result in better employee retention. Besides making workers stay in a company, it also promotes productivity and higher engagement levels, leading to higher revenue.

Employee retention can also lower your hiring costs. Scouting, hiring, and training new workers takes time, effort, and money. It may also slow down production, especially for small businesses. 

On the other hand, offering health insurance reduces absenteeism and decreases risks associated with employees’ poor health. Additionally, employees are likely to do their jobs well when they are healthy. 

For example, energetic employees are seen to improve interactions with clients, resulting in effective sales conversations. It can also lead to a positive workplace environment, improving effective teamwork.

There’s also higher employee satisfaction if small employers offer health insurance to their workers. Despite accepting slightly lower paychecks, many workers accept them as long as they come with health insurance. After all, they can benefit tax-wise and convenience-wise by having their premiums directly deducted from their paychecks.

Final Thoughts

  • Small businesses aren’t legally required to offer health insurance to their workers. However, doing so offers tax benefits to both employers and employees. It also significantly improves a company’s productivity and profitability, employee retention and satisfaction, and morale, ultimately boosting its brand image and competitive edge in the market. 
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