“If you haven’t got your health, you haven’t got anything.”
– Count Rugen
Even Count Rugen (Inigo Montoya’s nemesis from The Princess Bride) knows that health is of the utmost importance, but it seems like health insurance gets more and more complicated every year. Who has the time to figure all of this stuff out?
Though we at TL;DR: Accounting are not health insurance advisors, we can give you some basic information that will help you prepare for a conversation with a health insurance advisor or broker.
Before we get started, please note that this article is meant for businesses with fewer than 50 full time-equivalent (FTE*) employees. In this article, we will use the term small business employer to mean employers with fewer than 50 FTE employees. Health insurance requirements change significantly when you get past that 50 FTE mark — at that point, it’s probably worth hiring or at least outsourcing an experienced HR professional to keep track of everything.
* The way to calculate FTE is like so: Every full-time employee counts as 1 FTE — easy enough. Every part-time employee counts as a fraction of an FTE. For example, a 30-hour-per-week employee counts as 0.75 FTE. Someone who works 15 hours a week is 0.375 FTE. Add all your employee FTE portions together and cross your fingers!
Before we dig in and take a look at the options available to employers, let’s briefly talk about whether you need to have a health plan for your business.
Does Your Business Need a Health Plan?
As a small business employer, you are not legally required to offer health insurance to your employees. If you have a very small crew and none of them need insurance, that may be just fine. For example, maybe your employees qualify for reduced-cost coverage through the Washington State Health Exchange, or maybe they have insurance through their spouses or parents.
Before we get into health plan types, let’s define a few terms:
Premium: This is the flat monthly cost of a health plan. There is often a portion the employee pays and a portion the employer pays. Premiums often depend on the age of the insured person, increasing as the person gets older.
Deductible: The deductible is how insurance companies ensure that the employee has “skin in the game.” Before insurance will pay a dime for a medical procedure, the employee must have satisfied their policy’s deductible.
Copay: A copay is a flat fee for certain medical services. For example, your insurance might have a flat $50 charge, or copay, every time you see your doctor, in addition to any other charges.
Coinsurance: After the employee pays the full deductible, the insurance “kicks in” and will pay a percentage of the remainder of the bill. If coinsurance is 30% after deductible, a procedure costs $5,000, and there is a $2,500 deductible and a $250 copay, this means that insurance will pay $1,750 and the employee will pay $3,500 for the procedure.
Out-of-pocket maximum (OPM): At this point you might be thinking, “What’s the point of insurance if you have to pay a premium, a deductible, and a copay before the insurance pays a single dime, and even after that I have to pay coinsurance?!”
We share your frustration — it seems that as insurance gets more expensive, insurers find more and more ways to pay less and less of the bill. A major saving grace for insurance is the out of pocket maximum, which refers to the insured person’s pocket.
So, let’s say you hit the out-of-pocket maximum. That means you don’t have to pay the insurer or the hospital any more money, right? Nope. You still have to pay monthly premiums, and some insurance plans will still charge you copays even after you hit the OPM.
Again, we share your frustration. Insurance is very expensive, and it seems to cover less and less every year. Fortunately, the OPM can stave off medical bankruptcy.
Traditional Group Plans
Group health insurance is the “traditional” method of insuring your employees (not to be confused with the defunct non-profit organization Group Health, which was bought by Kaiser Permanente in 2017). Group health plans cost a monthly premium, and will cover employees and may cover their dependents for medical expenses during the year.
Traditional group plan fast facts:
- Group plans are funded by premiums, deductibles, copays, and coinsurance. Some employers pay all or some of the premium, but the employee generally pays all other expenses.
- Monthly premiums are steep, often exceeding $1,000 per month per employee.
- The most important way to defray premium costs is to choose an insurance plan with a high deductible. Of course, this makes it less likely that the insurance company will disburse funds. Remember that they don’t pay until after the deductible is met.
- Though the Affordable Care Act (ACA, also known as Obamacare) requires certain minimum levels of coverage for group health plans, there is lots of variation in what is covered. Make sure you read the fine print of any policy you’re considering.
- Group plans are popular due to the ease of setting them up through an insurance broker, as well as public familiarity with such plans.
Health Savings Accounts (HSA) and Flex Spending Accounts (FSA)
In response to rising deductibles and complex disbursement schemes, lawmakers took action by creating more complexity in the health insurance market.
HSA and FSA are accounts meant to supplement group health plans. They enable employees to sock away cash for deductibles, copays, and coinsurance (but not premiums). The advantage of these accounts is that you can put your cash into them pre-tax, reducing an employee’s payroll tax and income tax. HSA and FSA plans can also help “smooth out” health expenses by making them a regular monthly expense instead of an infrequent unexpected expense.
There are disadvantages to these kinds of accounts though. First, they add complexity to your company’s benefits package, and it can be difficult for your employees to understand how all of their benefits work and how they interact with each other. Second, the nature of these accounts restricts how the money can be used.
You can only use HSA and FSA monies on health expenses (though, technically, you can use HSA funds on other expenses after incurring a 20% penalty). Because these accounts work like savings accounts, you and your employees are put in the awkward position of trying to estimate unexpected medical expenses in order to determine how much money to put away each month.
Do-It-Yourself Health Insurance
There are different terms in use for the DIY method of health insurance. We’ll use the term “self-insurance” to describe employers who do insurance this way.
Would you like to put on an insurance administrator hat to collect premiums from your own employees and setting aside some company cash for health expenses? This also involves writing up your own policy for what kinds of limits there are for employees using this pool of funds.
Pros and cons of self-insurance
- You can save a lot of money in a good year. Insurance premiums are excruciating these days, and a year with no medical incidents can save you and your employees thousands of dollars.
- The power is yours. Avoid lengthy disputes between your employees and providers about whether a procedure is covered, and simply make the decision yourself. We can’t stress this enough though: Be consistent with how you treat your employees with regards to what you cover! If you cover one employee for something but don’t cover a different employee for a similar procedure, there may be a lawsuit.
- Once your policy is written and everything is set up, you can save a lot of time and headache by not having to deal with rising premiums, towering deductibles, changes in coverage, enrollment errors, and all the other issues of dealing with insurance providers.
- Large medical expenses can sink your entire company. You should absolutely know what you are doing and what the risks are, and consider paying for “stop-loss insurance” (aka “excess insurance”), which is basically very-high-deductible medical insurance for the business itself.
- You need a bullet-proof policy. If you wrinkle your nose at the hundred-page plan agreement with your insurer, keep in mind that it’s a hundred pages for a reason. The lawyers who write insurance policy are savvy enough to think about every kind of contingency or rare scenario and make sure that a procedure is in place for it.
- Consider paying for a TPA (Third-Party Administrator) to handle claims if you self-insure.
- Overall, self-insuring is likely more trouble than it’s worth unless you have dedicated HR employees as well as lawyers (employee or outsourced) at hand.
While it may have seemed crazy 30 years ago, premiums have gotten so high that self-insurance appears to be on the up-tick.
Health Reimbursement Accounts: Just Right?
Group health plans are crazy expensive. On the other hand, self-insuring can be downright terrifying. What’s a small business to do?
Let’s take a look at Health Reimbursement Accounts (HRA). If you remember the talk about HSAs and FSAs above, the HRA works in a similar way — like a bank account that accrues pre-tax dollars and is used for medical expenses. The difference is that the HSA and FSA generally involve employee deposits, whereas the HRA only takes employer deposits.
Our example HRA: The QSEHRA
You may have heard of the QSEHRA before, or the Qualified Small Employer HRA which was legislated into existence in 2016. The QSEHRA is only available for small business employers without group coverage. Recall that this means you can only have a QSEHRA if you have less than 50 full-time-equivalent employees.
The way a QSEHRA works is like so:
- The employer sets a dollar amount of tax-free money to make available for each employee. This amount is $437.50 for an individual or $883.83 for a family (in 2020).
- Employees can choose how to use their QSEHRA dollars, as long as it is an approved use. Approved uses can include medical expenses at a hospital; copays, coinsurance, and deductibles for a group plan; and prescription drugs (or non-prescription with a doctor’s note).
- Employees submit a receipt to the company, and the expense is reimbursed.
- Reimbursements must be declared as taxable income if the employee does not have an insurance plan.
There are other HRA plans beyond the scope of this article. For example, a new Individual Coverage HRA (ICHRA) looks to be more flexible than the QSEHRA. Talk to an insurance advisor for details.
TL;DR: Unless all of your employees are otherwise covered, strongly consider finding a way to insure them. Group plans are the standard but are often exorbitant in cost. Fortunately, group plans can be supplemented by an FSA or HSA. Self-insuring is risky but can be incredibly inexpensive if you had a good year. HRAs might be the Goldilocks solution for your small business. Contact an insurance advisor today to implement a plan that works for your business!