How small business owners can provide health care for employees without breaking the bank


If you’re running a small business, you know that the price of everything has gone up this year. So it’s no surprise that providing health care benefits is also more expensive. Yes, thanks to supply chain shortfalls, tight labor markets and other inflationary pressures, health care costs are also rising — and perhaps more so than in previous years. That’s according to two recent studies from HR giants Willis Towers, Watson and Mercer.

A Willis Towers Watson survey of employers found that most expect a big increase in the next three years, with more than seven in 10 expecting a 6% pay rise. A similar study from Mercer predicts an average increase of 5.6% by 2023. So what can a small business owner do to control these costs?

Of course, you always have the option to lower your costs by having your employees pay more for health care premiums or changing your plan to something with a higher deductible and fewer benefits. However, with the popularity of health care coverage and today’s competitive job market, taking these steps may lose good people. The good news is that there are other possible options for you.

One option is to self-insure or self-manage your health plan. Instead of purchasing a health plan from an insurer, companies that self-fund their health plans pay directly for employees’ health care costs. Most will hire a third-party administrator to administer the plan and process claims. In the past, self-insurance was more common among companies large enough to handle risk, but the approach is more attractive to small businesses that want to offer health benefits while saving money.

Tiered financing plans are a type of self-financing that is particularly attractive to small businesses. Under these plans, employers pay up to a certain amount for employee health costs—perhaps a few thousand dollars per person per year. After that the group insurance plan starts.

“A tiered plan is like individual financial aid,” says Noah Glassman, president of Philadelphia Life & Health, a benefits consulting firm. “If you have a young healthy group or a large group with a good health history, this can be a good option.”

Glassman said that more administrative work may be required from the employer, but the employee does not see the difference, and these types of plans have grown in popularity at startups, which often benefit young people. “In the last two years, I’ve moved more small groups to tiered plans than ever before,” he said.

Exude, Inc., an employee benefits firm based in Center City. Vice President Gregory Grimm has seen a significant increase in self-insurance options from his small company clients over the past few years.

“We have self-funded teams of 40 or 50 employees in a secure environment. [without fear of incurring catastrophic liabilities] By now there were typically hundreds of workers;

Another strategy I recommend to my clients is to consider paying a larger share of employees’ health insurance rather than just giving them a raise – increasing their family coverage. As an accountant, I like the fact that health care premiums are usually non-taxable for employees (and deductible for the company) so there are significant tax savings to be realized. Employers do not have to pay federal and state payroll taxes on health care contributions, as they would if they gave a raise. In the end, the employee is still seeing a higher net pay and the business owner is saving money.

Health reimbursement arrangements – or HRAs – have also grown in popularity over the past few years. An HRA is a health benefit account where the employer contributes money and the employees use it to cover eligible health expenses such as doctor visits, prescription drugs, and in some cases, an individual health insurance plan. Most of the clients I have who offer HRAs contribute the same amount they would pay under a group plan. But for them, it’s a relief not to have to negotiate new health care bills every year or participate in their employees’ health histories.

“It’s a great strategy for very small businesses,” said Robert DeNino, principal at Precision Advantage Group in Philadelphia. “Especially if your employees can use federal subsidies on the health care exchanges.”

If you opt for an insurance plan with a high deductible, health savings accounts (HSAs) are a great way to help employees control their share of the costs. These plans are like a 401(k) for your health care expenses. Employees can save up to $3,850 ($7,750 for families) pretax in 2023 for out-of-pocket expenses, such as co-pays for office visits, prescription drugs and other qualified health expenses such as reading glasses, acupuncture. and certain prescription medications. (See the full list of eligible HSA expenses here.) The best thing about these plans — besides being cheap to set up — is that employees don’t lose any unused amounts at the end of the year. Also, if they decide to leave their current employer, the remaining balance stays with them.

“We tell our clients to max out their HSAs even before contributing to a 401(k),” DeNino says. “It gives many workers who can’t control their health care costs a chance to better control their out-of-pocket costs and overall costs.”

Finally, there may be some savings by comparing premiums with major carriers like Blue Cross and Athena and then negotiating. Unfortunately, most of the benefits carriers I know often offer the same price so they admit that any savings are negligible. But given the company’s demographics and the carrier’s needs, there may be some advantages to doing so as long as the discussions begin earlier than the plan renewal date. Grimm recommends asking employees early to see what benefits are available and what can be excluded. Glassman encourages his customers to wait.

“The most important thing is to go early and understand what the next 12 months will look like from a hiring perspective,” says Glassman. “Unfortunately, for most of my small business clients, the health care decision is pushed to the last minute and it is now. They said you know what, I really don’t like dealing with this, but it’s done and let’s just move on. Meanwhile, they are being hit with that increase.”



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