Small businesses that offer health insurance can do more harm than good

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October 15, 2014 by Tony Novak

Although it seems counter-intuitive, small business employers need to pay attention to the potential financial damage they can do to their employees by offering a group health insurance plan.

Under the Affordable Care Act lower income workers qualify for subsidized health insurance and some qualify for coverage of expenses not covered by insurance. Those benefits disappear when the employer offers health insurance even if the employee does not enroll in the employer’s plan. The financial damage is compounded if the employer requires the employee to contribute to the cost of insurance at rates that can run up to 9.5% of the employee’s income under the law.

Employee expenses not covered by insurance also need to be considered. Post-reform health insurance is required to cover only 60% of an employee’s expected medical expenses and often leaves large deductibles and co-payments before insurance benefits even begin to pay. It is actually these frequently encountered “up front” medical costs that take the largest toll on an employee’s budget. Formerly popular plans like HRAs and FSAs do not offer the same advantages for covering this category of medical expenses as in the past.

In practice, I see more examples of small business health insurance plans that raise barriers to coverage rather than expand coverage to employees. It’s an unfortunate unanticipated reality of health care reform implementation.

In many cases a small business employer (for this discussion meant to mean less than 100 employees in 2015 and less than 50 employees in 2016) who has many lower wage employees, like restaurants and retail stores, it pays to allow employees to find their own primary health insurance through the exchange and then have the employer pay part or all of the cost of supplemental insurance instead. Supplemental insurance is not regulated in the same manner so it may be provided on a tax-free basis without regard to the restrictions that apply to other types of health plans. Formerly popular plans like HRAs and FSAs do not offer the same advantages as in the past.

Higher income employees can still get employer-paid health insurance through the individual insurance exchange, the only difference is that the payment is now taxable the same as wages under post-reform tax regulations.

Of course, each employer is entitled to a unique perspective on the objectives of an employee health plan. Business owners who are looking for ideas on the design of non-traditional employee health plans may wish to consider the sample small business health plan design at This plan incorporates flexible benefit design options, including employer-paid supplemental insurance and taxable premium reimbursement plan. I also offer a limited free telephone consultation to small businesses considering these health plan options that are designed to weigh the advantages and disadvantages in each individual businesses.

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