Offering group health insurance is getting more expensive, causing some employers to wonder if offering health benefits will become unsustainable within the next few years. This is especially true for small businesses with tight budgets, fewer resources at their disposal, and fewer employees to help meet the participation requirements for group health plans.
So what’s a small employer to do when offering health insurance seems unrealistic given budget constraints? Below we’ll discuss the healthcare costs small organizations can expect when offering employer-sponsored health insurance and how organizations can control costs with a health reimbursement arrangement (HRA).
How much do group health insurance premiums cost?
According to the Kaiser Family Foundation (KFF)1, annual group health insurance premiums average around $7,911 a year for single coverage—roughly $659 monthly—and $22,463 a year for family coverage, which is about $1,872 a month.
In 2022, 17% of small organizations with fewer than 200 workers paid between 25%-50% of their employees’ single coverage premiums, whereas 28% of small businesses paid the same amount for family coverage. This amounts to an employer contribution equaling $1,978–$3,956 for single coverage and $5,616–$11,232 for family coverage.
Monthly premiums run higher for certain types of health insurance, like preferred provider organization (PPO) plans and health maintenance organization (HMO) plans. Premiums are also more expensive in the Northeast and Midwest regions of the United States and in specific industries like transportation, communications, and utilities.
Of course, organizations can reduce their budget by implementing higher cost-sharing requirements for employees. However, adding these requirements increase the risk that eligible employees will decline participation in the plan.
If too many employees choose not to participate, the organization may not be able to offer the policy at all. An insurance company typically requires at least 70% of employees to participate in a group health plan.
How much time does it take to administer a group health insurance plan?
While many organizations are aware of the cost of offering a group health plan, they are less prepared for another factor—the cost of the plan’s administration time. For most small organizations trying to get as much done with as little staff as possible, the impact of this administration cost might even exceed premium costs.
Let’s go over the three most significant factors that make managing a group health plan time and labor-intensive:
- Ongoing regulatory changes the organization must track
- Complicated communication processes
- Painful yearly renewal processes
1. Ongoing regulatory changes the organization must track
For many small businesses, having an entire human resources team to tackle the administrative tasks of offering group health insurance coverage isn’t an option. That means an already busy employee must become the go-to person to educate staff on health insurance options, who is eligible for coverage, what local facilities are in- or out-of-network, and the covered services under the plan. They also must stay on top of rule changes.
Without someone watching these regulations full-time, it’s easy for some rules to slip through the cracks, making your plan out of compliance—which comes with hefty penalties of up to thousands of dollars.
2. Complicated communication processes
Group health insurance plans also require businesses to undergo a complicated communication process between employers, the health carrier, and their employees.
Employers are often forced to become an intermediary between the health insurer and employees, managing tedious and unorganized back-and-forth communication via phone and email updates every time an insurance issue surfaces.
Larger companies may be able to undertake these tasks. But for many small employers, this is time better spent on running their business.
3. Painful yearly renewal processes
Annual benefit renewals that come with group health insurance plans are complex and require a lot of time to complete. If claims employees made to the insurance carrier were expensive the previous year—if they’ve filed a higher than usual number of health insurance claims, for example—they’ll likely face cost increases or changes in plan terms.
You must then consider whether you will accept the changes, negotiate with the carrier, or work to identify new health insurance options that better match your budget and benefits goals. To do this, you may need to meet with new benefits brokers, which takes time.
If small organizations spend just four hours each month of one employee’s time managing benefits day-to-day and five days during benefits renewal, that’s an additional 88 hours of the employee’s time that could have been used differently and perhaps more productively.
Group health insurance options are limited for small organizations
The annual costs and minimum participation requirements for a traditional group plan leave many small organizations with just one or two policies to choose from for all of their employees. Invariably, this means many don’t get the policy they want. Available insurance options may not cover their employees’ healthcare needs, or they may be unable to afford a policy that covers them.
Employees in this situation may choose not to participate in the policy, which means your organization may not meet the policy’s minimum participation requirements, forcing you not to offer a benefit at all.
However, a PeopleKeep Survey found that 87% of employees say having a health insurance benefit is “extremely important” to them, so you’ll want to offer some kind of health benefit to keep turnover low at your organization.
Turnover can be a significant cost, especially for small businesses. Some studies2 found that every time an organization replaces a salaried employee, it costs an average of six to nine months’ salary to train a new hire.
Therefore, making your compensation package more attractive by including a comprehensive health benefit worth your time and money. Otherwise, you may have to invest those resources into replacing employees who leave your organization in search of ones that offer health coverage.
How small organizations can control their health benefits costs with a QSEHRA
Unsurprisingly, many small organizations decide they can’t afford traditional group health insurance’s financial and administrative costs. But simply going without health benefits isn’t the answer, as the increase in employee turnover and associated costs are even higher.
Many small organizations find that HRAs are one of the most effective ways to offer a quality health benefit that fits a tight budget. With a tax-advantaged HRA, instead of paying employee premiums, the organization provides employees a set monthly allowance the organization can afford.
Employees get reimbursed, tax-free, for individual insurance premiums and qualifying out-of-pocket costs up to a maximum allowance that their employer determines, enabling employers to control their health benefits costs. Employees also have the ability to choose an individual medical plan that works best for them, which can increase their overall satisfaction.
A qualified small employer HRA (QSEHRA) is often the best HRA for small businesses. QSEHRAs are for employers with fewer than 50 full-time equivalent employees (FTEs). Once employees purchase individual coverage, they can get reimbursed for their monthly premiums, medical expenses, and out-of-pocket costs tax-free.
Unlike other HRAs, QSEHRAs have annual maximum contribution limits set by the IRS. But since there are no minimum employer contribution limits, small businesses assume much less financial risk. But the flexibility doesn’t end there.
QSEHRAs don’t have participation requirements. So even if you only have one or two employees, you can still have a QSEHRA. Also, if you have part-time employees, they’re eligible to use the QSEHRA benefit. However, if you decide to do so, part-time employees must receive the same allowance as your full-time employees.
Best of all, unlike group health insurance plans that require hours of administration, HRA administration software like PeopleKeep enables you to manage a QSEHRA in minutes per month.
Whether it’s customizing plan documents, reviewing reimbursement documentation, or navigating tax regulations and compliance, PeopleKeep will guide small employers through every step of managing their QSEHRA benefit.
Conclusion
The cost of health insurance can be incredibly steep for small organizations, not to mention the amount of time that goes into administering the benefit. Given this, it’s easy to see why HRAs are becoming a popular alternative, as they empower employers to offer a much more flexible health benefit while keeping costs in check.
With a QSEHRA, employers can avoid group health insurance and win big with a tax-advantaged and personalized benefit for their employees’ compensation packages. If you think a QSEHRA is right for your organization, PeopleKeep can help. Schedule a call with one of our benefits advisors to see how an HRA can work for you.
This post was originally published on November 3, 2020. It was last updated on February 13, 2023.
1. https://www.kff.org/report-section/ehbs-2022-summary-of-findings/
2. https://lrshrm.shrm.org/blog/2017/10/essential-elements-employee-retention