Should SMEs Offer Employee Health Insurance?

Employee benefits have always made a job position better than another. Above all, health and medical care benefits are the crown jewel. Their benefits aren’t only for employees but also for companies as well. 

Employee health insurance provides health and financial protection to them and their families. This boosts their productivity, morale, and engagement at work, helping shape a positive company culture. 

However, for small companies, do employers still need to provide employee health insurance? Let’s figure it out here. 

Employee Health Insurance Isn’t Legally Required 

Regardless of company size and business industry, employers aren’t required to provide employee health insurance. There’s no United States (US) federal law that mandates them to do so. 

Most big companies only opt to provide employee healthcare benefits for their workers’ wellness and to avoid paying hefty penalty taxes. This is part of the Patient Protection and Affordable Care Act (PPACA or ACA in short)’s aim to solve the state’s healthcare system’s availability, affordability, and quality issues. 

The ACA imposed a “pay-or-play” provision, a penalty tax particularly applicable to “big” companies. By “big,” it should have at least  50 employees. Under the provision, big companies should either choose between the following: 

• Offer employee health insurance to at least 95% of their full-time workers (or part-time equivalents) and their dependents; or
• Face a fine ranging from $2,880 to as high as $4,320 (adjusted penalty amount as of 2023) for every employee annually.
  

Like any insurance, the costs of employer-sponsored health insurance vary widely. In 2022, its average annual premium was $7,911 for single coverage and $22,463 for family coverage. Employers share 83% for single coverage and 73% for family coverage on average. This brought the average employer-sponsored health insurance cost to $6,584 and $16,357, respectively. 

The good news is that there are several strategies employers can take advantage of to lower employee health insurance costs. Here are some ways: 

• Encourage 65-year-old employees (or older) to enroll in Medicare;
• Make a life insurance rate comparison and see whether adding a medical rider to it is cheaper;
• Opt for Health Maintenance Organizations (HMOs);
• Increase deductibles;
• Limit coverage; 
• Offer a base health insurance plan to employees, providing employees with upgrade options that allow them to buy up to better coverage at their own expense and 
• Negotiate with the insurance companies for a better rate. 

Additionally, employers’ spending on their employees’ health insurance premiums is exempt from taxation. Considering all the cost deductions and tax breaks, big companies can save more on offering employer-sponsored health insurance than paying for ACA’s penalty tax. 

How About Small Businesses? 

Small and mid-size enterprises (SMEs) aren’t obligated to provide healthcare and medical benefits and face ACA’s penalty tax. However, as mentioned, offering them can have a positive impact on their retention, well-being, and overall morale.

Employee health insurance is a powerful tool for attracting and retaining top talent. Many job seekers view the benefits package offered by an employer as a crucial factor in their decision to accept a job offer. This initiative also distinguishes your business from other competitors in the market.

For example, medical coverage provides employees financial security, protecting them from the potential burden of significant medical expenses resulting from minor injuries or major illnesses. Even as a small company, guaranteeing manageable medical costs is a meaningful way to demonstrate sincerity and care for employees.

Offering employee health insurance also provides financial advantages to SMEs. In most cases, their rates for a group plan are usually more affordable. Their premiums are reportedly 7% lower per individual and 31% lower for individual deductibles on average. 

It comes with tax savings as well, not only for employees but also for employers. For example, a Health Savings Account (HSA) is known for its “triple tax advantage,” allowing employees to realize tax savings in three key ways:

• HSA contributions are entirely tax-deductible.
• Funds in the HSA are tax-free as long as they’re used for qualified medical expenses.
• All interest earned within the HSA is entirely tax-deferred.

Many workers are willing to accept slightly lower paychecks in exchange for the security of having health insurance coverage. This is because they stand to gain tax advantages and find convenience in having their premiums deducted directly from their paychecks.

Employers, in contrast, can benefit from pre-tax contributions. To leverage this, they need to establish an HSA program within a cafeteria plan. This encourages employees to make pre-tax payroll contributions to their HSAs, lowering employers’ tax liability.

Final Thoughts

SMEs aren’t legally required to provide health insurance to their employees, but doing so has many advantages. It doesn’t only bring tax savings to both employers and employees. It also has a substantial positive impact on employee retention and satisfaction and the company’s productivity and profitability. This, in turn, enhances the company’s brand reputation and competitive position in the market.