Employer-sponsored health insurance costs can be a significant burden on small businesses, according to a KFF 2022 survey. Annual premiums have seen significant increases of 22% over five years and 47% over 10 years–far more than inflation or workers’ wages have grown over this timeframe.
Even with these cost increases, the Affordable Care Act still mandates that business owners offer coverage to employees or face fines. Here are some factors which affect costs:
Minimum Employer Contribution Requirements
Under the Affordable Care Act (ACA), employers are required to offer health coverage to at least 95% of full-time employees and dependents, or face penalties. This coverage must include employer sponsored plans as well as plans provided through exchange marketplaces; additionally, plans that comply with minimum value standards (MVC), which ensure they cover 60% of a typical population’s health expenses, must also be provided.
Workers contribute to their premium costs by paying either all or part of their monthly premium through payroll deduction, in addition to potentially incurring out-of-pocket costs such as copays and deductibles. On average, covered workers in 2023 contributed 17% of their income towards single coverage premium costs and 29% towards family coverage premium costs.
Premiums are typically calculated based on an estimate of health spending by a covered population, plus administrative fees and charges. As a result, premiums tend to rise when more healthcare services are consumed or prices for them increase.
Employers often employ the “reference plan” or “standard contribution” approach when calculating employee contributions to premiums. This method establishes a minimum contribution requirement by designating one plan as the benchmark plan, then comparing their actual employer contribution against HHS’ standard contribution table in their rating area.
According to the standard contribution method, an employer calculates each eligible employee’s contribution to a benchmark plan by multiplying the employer share of premium by the percentage required under ACA for employee-only benchmark plans. An employer may also make contributions directly into flexible spending accounts and health savings accounts without counting against worker’s uniform contribution requirements.
Small businesses are permitted to utilize different methods than larger employers for calculating their uniform percentage share, and tax credits can help offset some of the costs of providing health insurance to small firms. However, generally speaking the ACA’s requirements for small firms coverage tend to be more stringent.
Taxes
Health insurance can be an invaluable employee benefit, but it comes at a price. Employers must pay both payroll and income taxes on employee premium contributions; the tax burden for small businesses can be especially heavy. Furthermore, annual family coverage premium costs have grown at an astounding rate over time – more quickly than either wages or inflation rates have.
As a result, many small employers are struggling to provide health coverage to their employees. Current law dictates that companies with 50 or more full-time and equivalent employees must offer affordable/minimum value healthcare for them or face penalties; this is often too expensive a proposition for small businesses with only enough resources available to cover approximately half their workforce.
Small firms who do not want or cannot afford group health insurance coverage have access to federal tax breaks. Employers typically must contribute at least 50 percent of employee premium costs as minimum contributions; state laws may dictate otherwise and some require employers pay all or even 100%.
Experts propose that to minimize the financial impact on taxpayers, some experts suggest capping the exemption of health-related premium payments from income and payroll taxes at 75% of market values, indexed for inflation over time. According to estimates by the Congressional Budget Office and Joint Committee on Taxation this would result in cumulative deficit reduction by $500 billion through 2032.
Additionally, they suggest eliminating employer tax exemption for health-related payments and instead imposing a marginal tax rate on such income, in order to encourage more competition and lower overall costs. Doing this would reduce “job lock”, where employees fear losing insurance when switching jobs; eliminating this obstacle allows people to shop around for plans with the lowest costs rather than accepting jobs with poor benefits or no health coverage at all.
Deductibles
Employers’ health insurance plan offerings play a large part in how much their employees pay in premiums each month. Some employers choose plans with differing premium levels and deductibles to give employees freedom of choice for what best meets their needs and budget; other companies may provide cost-cutting strategies like flexible spending accounts (FSAs) or health savings accounts (HSAs) to assist employees manage deductibles and out-of-pocket costs, like flexible spending accounts (FSAs).
Size of company also influences how much an employee will owe for their share of premium payments. Larger firms may have greater bargaining power with insurers, which could mean lower premiums for their employees. Smaller businesses, however, may face higher rates since there may be limited options when selecting health care provider(s).
Who an employee covers depends heavily on their monthly health insurance costs; family plans tend to cost more than individual ones and require employees to contribute a larger share of premium payments; additionally, younger employees tend to pay less due to decreasing premiums as they grow older.
Employers are mandated to provide employees with a Summary of Benefits and Coverage form which details what coverage plans offer and their respective costs, so that employees may easily compare options and select one best suited to them. This form serves as an essential way for employees to compare available plans and select one suitable to their individual needs.
KFF found that, on average, employers covered 83% of employee self-only health insurance premiums and 73% of family coverage premiums in 2023. Over five years and 10 years, the annual family coverage premium had increased 22%; significantly outpacing wages or inflation.
Companies can go beyond providing health insurance to provide employees with additional savings through Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) and Individual Health Reimbursement Arrangement (ICHRA). Both plans allow employees to set aside money before taxes are applied and save money on healthcare costs. Both forms of HRAs must be offered alongside traditional group health plans or they will incur an Affordable Care Act penalty.
Flexible Spending Accounts
FSAs allow employees to set aside pre-tax funds on an FSA for out-of-pocket medical expenses that occur out of pocket, such as prescription medication costs or over-the-counter remedies, dental or vision procedures and insurance deductibles and copayments. Contribution limits have been set forth by the IRS; an FSA differs from a Health Savings Account in that an FSA doesn’t intend on saving for future costs.
Employees enrolled in healthcare FSAs can make purchases using an IRS-approved debit card that’s designed for easy use; typically featuring touchscreen capabilities for quickly scanning barcodes and receipt storage capabilities, these cards also store receipts as history of purchases; for reimbursement expenses employees must submit receipts substantiating them – often using third-party administrators for this process.
FSAs can offer many advantages to employees, yet they come with some drawbacks as well. Unused funds must be forfeited at the end of each year – commonly known as “use-it-or-lose-it” rule.
To counter this potential drawback, some employers have begun allowing any unused FSA funds from one year to roll over into the following one; these must then be spent within two and a half months after their expiration. Furthermore, under CARES Act of 2020 expenses such as menstrual products can now be reimbursed using FSAs.
FSAs remain an attractive benefit among workers despite their drawbacks, helping companies save money by providing an alternative payment mechanism for out-of-pocket healthcare costs such as cash or credit cards.
FSAs can be an invaluable way for employees to cover significant out-of-pocket costs like Lasik eye surgery or purchasing a CPAP machine, which aren’t covered by traditional forms of insurance. Furthermore, some employers contribute funds directly into employees’ FSA accounts, potentially making purchases less sensitive to costs as “free money.” To prevent wasteful spending in this manner and set reasonable contributions levels and expense guidelines in advance.