As businesses compete to attract and retain top talent, offering comprehensive employee benefits has become essential. Among these, group health insurance stands out—not only for its impact on employee well-being but also for its role in recruitment and retention.
However, before committing to a plan, small business owners need to understand the real cost of providing health benefits. What factors influence pricing? How can you balance affordability with attractive coverage? In this article, we’ll break down the key components that determine the cost of group health insurance for small businesses.
What Goes Into the Cost of Employee Benefits?
Premiums and Employer Contributions
The biggest expense in group health insurance is the premium, the amount paid to the insurance company for coverage. Typically, employers share this cost with employees, though the employer’s contribution depends on factors like budget, industry standards, and the range of benefits offered.
Small businesses not classified as Applicable Large Employers (ALEs) under the ACA have no legal requirement to contribute a specific amount toward premiums. This means that small business owners have full control over their contribution level, though many choose to offer competitive benefits to attract and retain talent.
Group health insurance costs vary based on workforce size, employee demographics, and plan type. Most small group plans use age-banded pricing, meaning rates increase with age. It’s common for premiums for older employees (65+) to be as much as 300% higher than those for younger employees.
Despite this, group health plans are often more affordable than individual marketplace plans. According to eHealth research from 2018, the average monthly premium per individual in a group health plan was $409, compared to $440 for an individual plan. Similarly, small group plans had an average deductible of $3,140, compared to $4,578 for individual plans.
Plan Design and Coverage Options
The specific plan design and coverage options selected by the employer also influence the cost of group health insurance. More comprehensive coverage, including benefits like prescription drugs, mental health services, and preventive care, generally comes with a higher price tag.
Employers need to find the right balance between affordability and the level of coverage employees expect.
How Benefits Affect Your Costs
Typically, if you have a plan that has very low deductibles and low maximum out-of-pocket costs, the monthly premiums tend to be significantly higher than those plans that have higher deductibles and higher maximum out-of-pocket costs (sometimes called high deductible health plans, or HDHPs).
Also, the more benefit-rich a plan is, the more one will pay for the coverage. Most small group health plans are relatively the same based on the type of plan meaning that these plans do not have much variation in terms of coverage. The larger group health insurance plans can have a variety based on the group’s ability to negotiate with carriers and tailor plans more specific to their workforce. Unfortunately, many small-group carriers do not provide this option.
The Impact of Employee Utilization and Preventive Care on Future Premiums
One often overlooked factor in health insurance costs is how employees use their benefits. The more healthcare services employees utilize, the higher renewal premiums will be. Employers can help manage costs by educating employees on healthcare utilization, encouraging preventive care, and promoting wellness programs.
For example, educating employees about urgent care vs. emergency room visits can significantly reduce unnecessary ER claims, which tend to be far more expensive. Additionally, workplace programs that address stress management, ergonomics, and overall well-being can reduce healthcare claims related to repetitive stress injuries, anxiety, and chronic conditions—all of which contribute to rising costs.
Employers who invest in employee education and preventive care often see lower renewal rates and better long-term cost stability.
Administrative Costs of Employee Benefits
Beyond the cost of premiums and employee claims, small businesses must also account for administrative expenses associated with managing benefits. These include:
- Enrollment and eligibility management
- Claims processing
- Regulatory compliance
- Broker or third-party administration fees
For businesses looking to streamline administration, Whirks offers brokerage and benefits administration services through our Whirks package under a per-employee-per-month (PEPM) pricing model. This allows businesses to eliminate middlemen and get direct support for both the employer and employees.
Regulatory Compliance and Legal Considerations for Offering Health Benefits
Offering group health insurance means staying compliant with federal, state, and local regulations. For small businesses with 20 or more employees, COBRA compliance is required, including reporting, notices for terminated employees, and documentation for newly enrolled employees.
Another key regulation is Section 125 of the IRS tax code, which governs Premium Only Plans (POPs). Employers who offer pre-tax benefits must have a written Section 125 plan document that outlines employees’ rights to pre-tax or post-tax payroll deductions. Without it, employers cannot legally offer pre-tax deductions for health insurance premiums.
Staying compliant with these regulations is critical, as failure to do so can result in fines and legal issues.
Group Health Insurance Is a Strategic Investment
Offering group health insurance to employees is a significant investment for any organization. Providing group health insurance is a strategic investment in your employees and your business. While health benefits require careful budgeting, they also improve employee well-being, retention, and productivity.
By evaluating factors like premiums, plan design, utilization, administrative costs, and compliance, small businesses can create a sustainable benefits package that balances cost and value.
Remember, the cost of providing group health insurance is not merely a financial one but also a strategic investment in the health, productivity, and overall satisfaction of employees.
Need Help Managing Benefits? We’ve Got You Covered.
Whirks cuts out the “middleman” and is both the broker of record for your insurance as well as the group administrator that handles 100% of the benefits administration for both you AND your employees!
Want to simplify benefits and take the stress out of administration?
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as a small business?
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