This article is general information, not insurance, legal, tax or financial advice. Rules for employers differ by country, state and company size, and some obligations may apply to your business. Confirm requirements with a licensed broker, advisor or the relevant authority.
An employer choosing a health plan is deciding on behalf of many people at once. The right answer depends on what the business can afford, what employees need and what the law in your area requires or encourages. There is no universal best choice, but there is a sensible order for thinking it through.
Begin with the basics: are you required or choosing to offer coverage?
Some places require employers above a certain size to offer coverage or face penalties, while others do not. Small businesses may have different rules or access to special programs. Because these requirements depend on your location and size, find out where you stand first. It shapes whether you are weighing a legal duty, a recruiting tool or both.
Know your people before you look at plans
A plan that suits the owner may not suit the staff. Useful questions include:
- How many employees would be eligible, and how many are likely to enroll?
- What is the general age and household mix? A workforce with many families has different needs from one made of single, younger workers.
- Where do employees live? A plan with a regional network may work poorly for remote staff.
- Do employees have other coverage options, such as a spouse’s plan?
- How much can employees afford to pay from their paychecks?
An anonymous staff survey can help, as long as it respects privacy. Avoid trying to learn individual employees’ health conditions, since that can raise legal concerns.
Contribution levels: how much will the business pay?
Contribution is usually the biggest budget decision. Employers often pay a portion of the employee’s premium, and may pay a different share for dependents. Our article on employer contribution explains how this works.
Considerations include:
- Employee-only versus family tiers. Some employers pay most of the employee’s cost but less for family members. Others contribute a fixed dollar amount.
- Affordability and take-up. If employees’ share is too high, fewer will join, which can undermine the plan. Some rules also define a level of affordability for the employee.
- Predictability for the business. A fixed dollar contribution gives you a stable cost even if premiums rise. A percentage contribution rises with the premium.
- Competitiveness. Many employers see coverage as part of their pay package, and what others in the same field offer can matter for hiring.
A hypothetical illustration: if a plan’s monthly premium for one employee is 500, an employer paying 70 percent contributes 350 and the employee pays 150. If the premium rises to 550, the same percentage costs the employer 385, an increase of 35, and the employee pays 165. A fixed 350 contribution would instead leave the employer at 350 and push the employee’s share to 200. These numbers are made up, but the pattern shows who absorbs increases.
Plan tiers and design
Many group offerings come in tiers, often with a higher-premium, lower-deductible option and a lower-premium, higher-deductible option. Offering a choice can serve different needs, though it adds complexity.
Points to weigh:
- Plan type. Options include HMO, PPO and others. Our articles on health maintenance organizations and preferred provider plans describe the tradeoffs: tighter networks and lower cost versus broader choice and higher cost.
- High-deductible plans with accounts. A high-deductible plan can lower premiums, and may pair with an employer-funded health savings account. Employees with limited savings may find the deductible hard, so consider whether your staff could manage it.
- Reimbursement arrangements. Some employers fund an arrangement that reimburses employees for medical costs. The rules vary, so read about reimbursement arrangements and talk to an advisor.
- Network fit. Check whether the doctors and hospitals your employees use are included.
- Extras. Dental, vision, disability and wellness programs might be offered alongside medical coverage. The employee benefits package article describes what is typically included.
How the plan is funded
Most small employers buy a fully insured plan, where an insurer takes on the claims risk for a set premium. Larger employers sometimes use self-funded plans, where the employer pays claims directly and often buys protection against very large claims. Self-funding can add risk and administrative work and is generally not a simple choice for a small business. The article on self-funded plans covers the difference.
Process and timing
- Decide a budget range for what the business will contribute.
- Gather quotes through an insurer, a licensed broker or an official small business program, if one exists where you live. Quotes depend on the information you provide, so provide accurate details.
- Compare total cost, including employer and employee shares, deductibles and out-of-pocket maximums, and network.
- Check administration. Who handles enrollment, billing and employee questions, and what does it cost in time?
- Plan the enrollment period. Group plans have a yearly open enrollment and a window for new hires. A clear calendar and good communication reduce errors.
- Explain it simply. Employees often struggle to compare plans. A short guide helps, along with a benefits summary they can refer to.
Common pitfalls
- Choosing the lowest premium without checking whether employees can afford the deductible.
- Ignoring dependents, spouses and part-time staff, whose eligibility rules should be clear.
- Forgetting that premiums change from year to year, and building room for that into the budget.
- Not reviewing the choice annually.
A broker or advisor can help, but ask how they are paid, since compensation arrangements vary. Check the plan documents rather than relying on summaries, and consult a qualified professional about legal and tax matters for your business.