Small Business Health Insurance Plans don't alwasy provide a financial benefit

While it sounds counter intuitive for a small business to forgo their “Group” health insurance plan and replace it with individually owned employee policies, in many cases it makes sense both financially for the company, as well as for most of their employees. Here’s why this may be true:

“Group” Status: A widely misunderstood belief is that only traditional “Group” plans can be expensed as a company cost. That is no longer true in Washington State. Now, with the proper tax plan documents (a specific HRA plan document under section 125 of the IRS tax code) a small business can reimburse, and thus deduct as an employee benefit expense, premiums their individual employees pay towards their own individually owned health insurance plans.

Cost: There used to be a substantial price break for small business when they formed a group insurance plan. Not anymore. Here in Washington State, rates for both small group community pool plans as well as individual health insurance plans are based on the age of the person(s) joining the plan. Over the last several years, the price of the Small Group plans has gone up faster than the rates for the individually owned insurance plans, leaving the individual health insurance plans priced less than the fairly comparable Group Plan options. In addition, the small changes in the way individually owned insurance plans operate have also given them a considerable cost advantage.

Employees can “own” their plan: With individually owned health insurance, unlike “Group” plans, employees are able to choose and own their plans. When they leave the company, change jobs, or become unemployed they don’t lose their coverage like they do with a “Group” plan, but simply take their insurance with them. In the current economic climate one can certainly see how beneficial this can be!

Less Administration: With no “Group” Plan, the small business has no renewals each year to go through, no participation requirements for employees on the plan, no minimum financial percentage required from the business, etc, the list goes on and on! Plus, the business can still decide who is eligible for the new plan and when they are eligible with the same criteria they used before.

Here is an example of how it can work. ACME Company drops their Group Plan which costs $400 per month per employee and now pays a set $300 per month towards an employee’s similar individually owned health insurance plan. Right away they save $1,200 per employee per year. In addition, the company can “give” part of their premium savings back to employees to cover the first dollar costs (such as copays, part of a deductible, etc.) and still save money! The employee now has greater choice to choose which plan they want (they are no longer tied to just one company plan), and now can receive first dollar coverage towards their health expenses! The company benefits from having a specific dollar amount they will provide to each employee, thus their cost is fixed and doesn’t go up each year unless they decide to increase it! It’s a win-win for the business and the employees.

This is a basic description of how not having a Small Business Group Health Insurance Plan can be beneficial, but there are many pitfalls and caveats to be aware of. Small business owners should always consult My Health Insurance of Washington when putting any type of “Group” or non-Group plan together.