Should Your Small Business Offer Health Insurance?

Health insurance is expensive—and getting more so all the time. Does it make more sense for a small company to provide coverage (with employees paying some of the premiums) or let them get a policy on their own through the Affordable Care Act?

Not long ago, it could be difficult and often very expensive for individuals to buy their own health insurance, while the tax code gives an advantage to group insurance provided through the workplace. To keep employees happy and maintain a stable workforce, companies that could afford to offered group insurance.

Now Obamacare, as the law is known, has changed the calculus. Individuals these days can buy insurance with regulated benefits and premiums, and most are eligible for big subsidies. And while companies with the equivalent of at least 50 full-time employees must offer health insurance to those full-time workers or pay penalties, the ACA has no such requirement for smaller businesses.

The upshot is that in many cases, particularly when employees are relatively low-paid, both the company and its employees might be better off if workers buy their own insurance.

"Eighty percent of the time, we find an individual plan to be cheaper than a comparable group plan,” says Abir Sen, chief executive of Gravie, an employee benefits manager that seeks to wean companies from offering group health.

Plus, there's the virtue of allowing employees to choose insurance that best fits their own needs, rather than cookie-cutter coverage designed for a "typical" but perhaps nonexistent employee.

Gravie and at least one health insurance agency, HealthMarkets.com, offer software that incorporates the many moving parts of the equation. But if you have the patience to do a little digging, here's the back-of-the-envelope approach to this very important decision.

Start with the group plan. You'll probably want to settle on a network structure, like a preferred provider organization (PPO) or health maintenance organization (HMO). The first tends to cost more but gives you a greater range of physicians, and the second is cheaper and restricts your physician choice more.

Then you'll have to decide how much of medical costs should come out of the patient's pocket, through deductibles and other charges. The ACA uses four metal tiers, as they are called, with different cost-sharing levels, ranging from low-premium, high out-of-pocket bronze plans to steeper premium, lower personal outlay platinum plans. You can choose a specific plan through a broker or directly from a carrier.

You can also compare plans through your state's government-run small business health insurance, or SHOP, exchange, though your options will be more limited. To get a quote, you'll need to know the age, smoking status, and location of each employee and dependent you might offer coverage to.

Very small businesses paying modest wages are eligible for a three-year tax credit equal to as much as 50% of premiums paid for group insurance purchased on a SHOP exchange. The tax credit phases out as the number of full-time employees rises to 25 and average income increases to $50,000. You can estimate your tax credit at healthcare.gov.

Calculate the total cost for individual insurance. There are three components to the cost of a worker's individual insurance: how much the plan costs him or her (the premium), how much federal subsidy is available, and how much an employee has to pay out of pocket.

To compare, pick an individual plan with the same network type and cost-sharing as the group plan. You can get successive quotes for premiums for each employee and family through your insurance exchange or through an online broker like eHealth. If you are shopping outside the ACA’s open enrollment period, which runs from this coming November through January 2017, the employee must have a “life event," such as gaining a new child or getting married, to join an Obamacare plan.

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How big will the federal subsidy be? You find out by comparing the cost of a specific health plan against the worker's income, and the worker's income against the federal poverty level. The Kaiser Family Foundation offers an easy-to-use subsidy calculator. You also need to know each employee's household income and family size.

Subtract the subsidy from the premium and you have the employee's cost. But the employee will have to pay that out of taxable income. Calculate the pre-tax wages your worker will have to earn to make that after-tax payment. IRScalculators.com has a useful state and federal tax bracket calculator that spits out a combined marginal tax rate.

Be sure to add 15.3% for Social Security and Medicare (both the employer and employee share) to the combined marginal rate before doing your math.

Now compare—with caveats. Health insurance coverage is a good way to keep your current employees. That’s one big argument for offering group insurance, even if it's much more expensive. Weigh how difficult it is to train employees or to replace them if they leave.

On the other hand, if you can't afford to contribute to family coverage and your workers aren't likely to afford it on their own, don't offer it. If you offer family members insurance, they will be barred from getting a federal subsidy to buy their own insurance through the ACA, even if your offer is unaffordable to them. And if your insurer requires you to offer dependent coverage, switch to another carrier or drop out altogether.

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If you decide to drop out and your employees tap the ACA, don’t think you can easily give them a backdoor subsidy to help them satisfy their premiums. Lawyers say the Internal Revenue Service won’t let an employer condition a raise on the worker buying insurance—employees have to be free to spend the money as they see fit. You can, however, tailor the additional compensation to the cost of the individual's insurance. And that might be a good idea, since older people pay more for insurance.

Finally be wary of organizations, most prominently Zane Benefits, that say you can reimburse employees for a health plan they take out. Although Zane insists the subsidy is not taxable income to your people, the IRS has warned repeatedly that employers using those plans could be subject to penalties—up to $36,500 a year per affected employee.

Whether you offer a group plan or help employees navigate the ACA, seeing that they are covered ultimately is good business.