This is the first in a series of
articles, the purpose of which is to
simplify your post Obamacare health
After reading this
presentation you will have a
solid understanding of the
primary options for offering
health benefits to your
Most small business have absolutely no legal obligation to provide health
insurance, since only businesses with the equivalent of 50 full-time
employees need to offer health benefits. That being said, you may want
to offer health insurance in order to attract and retain great employees.
A Summary of Your
3 Broad Options
For Offering Health
There are three main options that
you should consider as you begin
exploring your health insurance options:
1. Increase employee compensation –
Give your employees a raise so they can
purchase their own health insurance.
2. Offer a “cafeteria” plan - A special
account your employees can use to pay their health insurance
premiums with pre tax income, and that you can make tax deductible
3. Offer small group health insurance – How health insurance has
typically been offered by employers.
The right recommendation is going to
depend on the size of your company, the
salary levels of your employees, and how
many of them are not already getting their
insurance through some other means (such
as a spouse).
What We Recommend
Because there is no one
size fits all solution, we
recommend taking the
following steps to decide
which option is best for
To gauge interest in health
insurance. Find out who is
being covered by a
spouse, who is purchasing
their own insurance, and
who is uninsured.
Talk to your
Ask them whether an employee raise, a cafeteria plan, or a small group
plan would be best for your unique situation. Get quotes for different
plans, as well as a firm understanding of the tax implications for each
option. Ask them how complicated each option will be to manage and
Talk to a health insurance professional.
We recommend speaking to Jonathan Pocius of Payroll Services LLC who
was a source on this article and we found highly knowledgeable. He can
be reached at 240-215-4438 or via his website at
Here is a more detailed overview the ins and outs of each option:
If you are looking for a good starting point
Offering health insurance can be extremely complicated, so one
option is to completely avoid getting involved, and just give everyone
a raise that they can use to buy their own plan.
1. Fixed costs: You are in complete control of compensation.
2. Tax deductible: Salaries are tax deductible as business expenses
3. Greater employee choice: Employees can shop around on the
individual exchanges for the plan that best suits their needs.
4. Customizable incentives: You can offer different amounts to
different employees, which helps you attract and retain valuable
5. Cheaper plans and subsidies: In most cases, plans purchased
through the individual marketplaces are cheaper than the equivalent
costs when paid as part of a small group plan.
6. Ease of use: Letting your employees select and manage their own
plans means one less thing for you to worry about.
1. No tax deductions for employees: Employee salaries are
taxable, so they will pay tax on any additional compensation that you
provide to help them purchase health insurance.
2. You Have To Pay Payroll taxes: Even though you can deduct
salaries as a business expense, you will still be on the hook for the
payroll taxes on the additional salary you are paying.
3. No control over employees’ use of funds: There is no way for
you to compel your employees to use their extra income to buy
health insurance. You can encourage them to buy insurance, but
there is no way to guarantee that they won’t use it for a vacation
So they can buy their own health insurance allows your employees to
shop around for the plan that works best for them, and saves you a
huge administrative hassle.
Increasing employee’s compensation
To help your employees pay for health insurance
is that you give more money to the government
this way. Because the extra money is being paid
out as salary the business must pay payroll
taxes on the money, and the employee pays their
normal income taxes on the additional income.
The downside of
Cafeteria plans can be a good way for small business owners to avoid paying
additional payroll taxes, while also giving their employees the ability to buy
insurance using pre-tax income.
A Cafeteria Plan
1. Fixed costs: You are in complete control of how much you
contribute to your employees cafeteria plan
2. Tax Advantaged: Contributions are tax deductible as business
expenses and exempt from payroll taxes.
3. Employees use pre-tax income: Employees are not taxed on
any contributions that they make to their cafeteria plan.
4. Greater employee choice: Employees can shop around for the
plan that best suits their needs.
5. Customizable incentives: You can offer different amounts to
6. Cheaper plans: In most cases, individual plans are cheaper than
small group plans.
1. Complexity: Setting up and administering
a cafeteria plan is complicated, and the rules
and regulations can be difficult to understand.
2. No subsidies: Employees are not eligible for government
subsidies when purchasing through a cafeteria plan.
That allows employees to set up
health spending accounts that
allow employees to contribute a
certain amount of their income to
a designated account before taxes
are calculated. Employees can then
use this account to pay for
insurance premiums and other
A cafeteria plan is a form
of “Section 125” plan
1. They are tricky to setup and administer.
2. Individuals cannot use cafeteria plans to purchase
health insurance that is part of the affordable care
exchanges, and are therefore not eligible for government subsidies.
There is also a lot of confusion, even among insurance professionals, as to
whether or not Obamacare allows cafeteria plans to be used when
purchasing off exchange health insurance plans.
There are two primary
downsides to using cafeteria
plans as part of your business:
When people think about
health insurance, they are
most likely thinking about an
employer-provided group plan.
Easy for employees to understand:
Most people are already familiar with the concept of employer-
based health insurance, and view it as the most important job
related benefit. Offering a group plan will almost certainly
increase your appeal as an employer.
The money you spend on providing health insurance counts as a
business expense, which means it is tax deductible. Employees are
also able to pay for their share of health insurance premiums out of
their pre-tax income, which decreases their overall tax obligation.
If you purchase your group plan through one of the Obamacare exchanges,
you may qualify for a tax credit worth up to 50% of your contribution
towards your employees’ premium costs. While this sounds enticing,
unfortunately the requirements to receive the tax credit generally make
providing group health insurance too expensive for the average small
business, even with the tax credit.
Share the premium payment:
Offering a group plan doesn’t necessarily mean that you need to pay the
whole cost of the premium. Employers typically pay 50-80% of the premium
cost, but small business can generally make smaller contributions and defer
the rest to the employee. Depending on your particular circumstances you
may end up paying anywhere from 0% to 100% of the premium cost.
Providing group health insurance
can be expensive. In 2012, the
average cost to all employers was
$4,226 per employee. In addition to
this, employees paid an additional
$1,118 on average (See this report
for state averages).
Health insurance premiums often change
from year to year depending on the costs
of medical procedures, physician pay,
prescription drugs, and administration.
The complex calculations underlying
health insurance premium makes it
difficult to fully anticipate changes and
In order to qualify for most group plans, you
have to give all your full-time employees the
option of enrolling, and at least 70% need
to actually opt in. The exact requirements
will vary depending on the insurance
company and plan, but group plans
generally give you less flexibility than simply
increasing compensation, which you can do
on a case-by-case basis.
In order to qualify for most group plans,
you have to give all your full-time
employees the option of enrolling, and at
least 70% need to actually opt in. The
exact requirements will vary depending
on the insurance company and plan, but
group plans generally give you less
flexibility than simply increasing
compensation, which you can do on a
That you only shop for a small group
plan with an experienced health
insurance professional. Using a broker
won’t cost you more than shopping on
your own, and they will be able to
explain to you the benefits and options
of various plans.
When you talk
to an advisor
Ask about traditional small group plans,
the Obamacare SHOP plans, and getting
group coverage through a Professional
Employer Organization (PEO). They will
be able to give you exact quotes, and
help you understand the costs and tax
implications of each option.
That you seek professional advice in
order to find the best solution for your
business. Trying to navigate the post
Obamacare health insurance
marketplace on your own is simply not
worth the time, hassle, or risk.
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