How Much Does It Cost To Offer Health Insurance To My Employees?
You already know the benefits of offering a group health plan, but if you’re here, you are understandably worried about the cost. While health insurance is the most sought-after benefit among workers, it is also the most expensive.
Complete Payroll Solutions designs health benefit plans for employers of all sizes and industries throughout the Northeast, specializing in finding affordable coverage. In this article, we’ll explain the factors that impact the cost of health insurance so you can understand what will drive up your expenses as well as share potential ways to save.
After reading, you’ll understand what you can expect to pay for coverage so you can decide if offering a group plan will fit your needs and budget.
First, Do Employers Have to Offer Health Insurance?
It may surprise you to know that we get asked this question all the time. Health insurance is a big expense. The good news is that you may not have to offer it.
The requirements for offering health insurance differ based on your size.
- Small Employers: If you have less than 50 full-time equivalent employees, you’re not required to offer health insurance.
- Large Employers: If you have 50 or more employees, you technically don’t have to provide health insurance; however, if you don’t, the Affordable Care Act (ACA) requires you to pay a tax penalty. In 2020, the penalty amount is $2,750 for each full-time employee (less the first 30 employees) if you fail to offer coverage to 95% of full-time workers and their dependents and any worker receives coverage from an ACA marketplace.
There may be other situations that may require you to offer health insurance. For example, if an employee’s employment contract or union agreement guarantees it.
However, even if you’re not required to provide health coverage, you may want to offer it on a voluntary basis for a number of reasons:
- Enhanced Employee Satisfaction: It’s no secret that a good benefits package is important to employee engagement. Since health insurance is the benefit that matters most to employees, by offering it, you’ll be in a better position to keep workers content.
- Tax Savings: As an employer, your contributions for group health insurance are tax-deductible and you’ll pay less in payroll taxes. Employers with fewer than 25 employees who provide health coverage may also be eligible for a Small Business Health Care Tax Credit.
- Greater Productivity: Health coverage encourages employees to stay on top of preventative care and, according to the CDC, there’s a direct link between health and productivity. As you might imagine, healthier employees are less likely to call in sick.
- A Competitive Benefits Package: Prospective employees will likely be looking at other jobs and will want to see how your benefits stack up. Since 56% of small firms and 99% of large firms offer health benefits to at least some of their workers, offering coverage will keep your program competitive.
Is An Employer Required to Pay for Health Insurance?
If you decide to offer health insurance to your team, in many cases, your responsibility doesn’t end there. In the majority of states, carriers will require you to cover 50% of the premium cost for employees. This requirement, however, only applies to premiums for the employee, not their covered dependents. For other tiers of coverage, such as employee and spouse, employee and children, or family, the insurers want employers to pay 33%.
Many employers even choose to contribute more than this amount. In fact, last year, on average, covered workers contributed only 17% of their premium for single coverage and 27% for family coverage. One reason for this, especially in companies with lower-wage workers, is that large employers covered by the ACA must offer affordable coverage or be penalized. For 2020, the affordability threshold is 9.78% of an employee’s income.
How Much Does Health Insurance Cost a Company Per Employee?
Health insurance costs vary widely but the average annual premiums for employer-sponsored coverage in 2020 were $7,470 for single coverage and $21,342 for family coverage. When you take into account the average contributions by workers, that brings the employer costs to $6,227 and $15,754 respectively.
The actual amount you’ll pay is based on a number of different factors, which we’ll cover next.
What Factors Impact the Cost of Health Insurance?
While the costs we just described are averages, there are many factors that go into calculating your company’s actual premium costs. The 9 biggest components of your premium are:
- Age: The average age of your group is probably the most significant factor impacting your premiums. Generally speaking, the base rate is based on a 21-year-old, with rates going higher for those who are older. However, these increased rates can’t exceed a 3:1 ratio. That means the rate for a 64-year-old can’t be more than three times that of a 21-year-old.
- State Mandates: Insurance in some states costs more because of state laws that require employer-sponsored insurance to include certain coverage. For example, many states mandate fertility and reproductive health benefits.
- Group Size: The total number of people in your group – which includes covered family members – can impact your cost. For example, the larger your group, the lower your rate will likely be because your health risk is distributed among more people, which can offset the costs of those with a disproportionately higher number of claims.
- Health Care Inflation Factor: This component of your premium is based on the cost of healthcare services used by all members. The number of total claims and how costly they are will determine adjustments to your premium each year, meaning, medical issues that lead to frequent or costly visits may drive it up.
- Location: In some places, the cost of obtaining healthcare – meaning, the cost of a physician visit or procedure – is simply more expensive so premiums will be higher.
- Insurer’s Administrative Costs: Each year, your premium may be modified based on what it costs the insurance carrier to administer coverage under the plan, operate the company and set aside reserves.
- Changes in the Law: Sometimes, federal or state law will dictate changes in coverage or rating rules that will affect your premiums.
- Industry: Your insurance carrier may assign a different risk based on the type of work your employees perform. For example, office workers face lower risks than those who work in a factory so a company with a lot of office workers will cost less than a company with a lot of factory workers.
- Plan Design: The type of insurance coverage you decide to offer can impact your costs. For example, richer coverage with lower out-of-pocket costs will be pricier. Managed care options are typically the cheapest.
How Can I Lower My Company’s Health Insurance Costs?
If you’re like most employers, the high cost of insurance premiums is a big concern. You may be wondering if there’s anything you can do to help control your expenses. Fortunately, there are some strategies that can lead to lower costs:
- Encourage those 65 and older to enroll in Medicare. By having qualified workers secure Medicare coverage, it will lower the average age of your group.
- Increase deductibles. To lower your premiums, shifting more costs to employees by raising deductibles can lower the employer portion of health insurance costs.
- Choose managed care. Premiums for Health Maintenance Organizations (HMOs) usually cost less than for a PPO.
- Limit coverage to employees. While coverage for children up to age 26 is required, spousal coverage is not. Some companies are cutting premium costs by no longer covering employees’ spouse or imposing a surcharge for spouses who could obtain coverage through their own employer.
- Offer wellness programs. Healthy workers have fewer claims so promote workplace exercise and other opportunities like gym discounts. Encourage wellness participation with rebates for proactive health initiatives.
- Ask your broker to negotiate. For large groups, insurance rates are negotiable so make your broker work for you by advocating for a better rate. This is especially true if you haven’t negotiated in the past and have been with the same provider for a while.
- Consider alternative plan designs. Think about options like a high-deductible plan coupled with an HSA, HRA, or limited network plan to save money. You can even customize your plan to bring rates down such as raising co-payments for costly services like emergency room visits.
- Provide upgrade options. You may want to offer a base health insurance plan then give workers the option to buy-up to a richer plan at their own expense.
- Self-insure. Depending on the health of your group, meaning, if you have below normal claims activity, you may look to self-insuring. With this option, your rates are underwritten based on the health of your employees rather than other factors that weigh in with traditional health plan options.
By combining some of these strategies, you could see a double-digit reduction in your premium costs.
How Do I Select The Right Health Insurance for My Business?
Now that you understand the different factors that affect the cost of employer-sponsored health insurance, you’ll want to start by doing your research to find coverage that best fits your company’s needs. For example, a higher deductible plan may be best if you have young employees while a PPO would be good for employees with college students who are out of state.
With multiple carriers and product options, learn more about how Complete Payroll Solutions can build you an affordable program that provides exceptional coverage. If you’re still weighing your options, learn more about what you should consider when choosing a broker.