5 Key Questions: What Business Owners MUST KNOW About Offering Employee Benefits.
For a long time, applicants with multiple job offers had one main criteria for basing their decision, which was annual salary. Bread winners would pack up and move their families to less desirable communities, even if it meant taking home slightly more income.
The working landscape has experienced significant changes over the last few years. Effects of the pandemic have shifted the way that we approach facets in our lives. Even the youngest group of employees, Generation Z, are outpacing the millennials and baby boomers in expected medical usage rate. When it comes to attracting and retaining top talent, offering a competitive benefits package is the new standard.
“According to the Glassdoor survey, 80% of employees prefer additional benefits over a pay increase. Employees are starting to prioritize the benefits they would receive from a company over salary because employee benefits provide better experience and helps increase their job satisfaction.” As detailed by Human Resources Director magazine. (1)
That being said, what do business owners need to know about offering their employees benefits? Here are five key questions.
1. What size business must offer Health Insurance?
The Affordable Care Act (ACA) requires that businesses with 50 or more full-time employees (large employers) offer health insurance, or else a penalty will be assessed.
“A penalty of $2,750 (for 2022) per full-time employee minus the first 30 will be incurred if the employer fails to offer minimum essential coverage to 95 percent of its full-time employees and their dependents, and any full-time employee obtains coverage on the exchange. For example, if an employer with 150 employees does not offer health insurance to its full-time employees and their dependents, and if at least one full-time employee buys tax-subsidized health insurance through the marketplace exchange, the employer's penalty in 2022 will be $330,000 (150 - 30 × $2,750).” – (2)
There are no requirements for companies with less than 50 employees (small employers) to offer benefits. However, it is highly suggested that smaller businesses offer a benefits package or provide their employees with a stipend to cover outside costs.
2. What options do I have for funding my company’s Health Insurance?
The two main options for employers are Self-Funded and Fully-Insured. The risks associated with both options are substantially different.
Self-Funded- The employer assumes financial risks here, as they are responsible for covering health claims as they occur. In self-funded plans, employers will hire a TPA (Third Party Administrator) to administer the plan. TPA’s will manage claims, bill payments, and other functions on behalf of the employer.
Pro: If the employees stay healthy, the lower the plan costs will be.
Con: If employees aren’t healthy, the plan costs will increase as the claims can add up.
To protect from large claims, like cancer treatments which can cost greater than $150,000, it is recommended that employers purchase stop-loss coverage. This coverage limits the amount that the employer needs to pay per individual. For example, if the stop-loss amount is set at $25,000, the employer is responsible for paying the first $25,000 in claims by the employee. Any additional amount is covered by the insurance company.
Level-Funded- Level funded plans are an attractive self-funding option for small employers. This type of funding bundles administration fees, stop-loss, and claims into a monthly premium paid by the employer. Although this is similar to a fully-insured plan, there are differences. The employer pays claims, which are tracked by the insurance carrier. At the end of the year, if there is a claims surplus, the employer may receive a portion of the surplus back. This is a great option because in years with healthy employees, the surplus claims will come back to the plan. In unhealthy years, the plan sponsors will know their maximum liability and won’t be responsible for paying additional claims deficit.
Fully Insured- The employer contracts with an outside organization to assume financial responsibility to cover employee’s medical claims and administrative costs. The employer pays monthly premiums to the insurance company, based on the number of participants and dependents enrolled. Medical claims are determined by the plan’s benefit outline, will employees being responsible for the deductible and co-pay.
Pro: Financial predictability for businesses and more attractive benefit options for employees.
Con: If employees stay healthy, the monthly plan costs still remain the same. Insurance carriers keep the money collected from premiums and won’t refund employers for money that isn’t spent on claims.
3. How can businesses obtain Health Insurance?
Insurance Broker & Agent- Agents and Brokers can help find a competitive policy because of their experience in evaluating benefit plans. They are paid directly from the health insurance companies when they sell a policy, so clients should never pay a fee directly to the broker.
Directly from the Carrier- Employers can go directly to the insurer to purchase health coverage. They will only see policies available from that single insurer. It is suggested that businesses shop around to several insurers to understand all of their options when buying direct.
Professional Employer Organizations (PEO)- PEO’s operate under a co-employment model, in which the PEO is the employer of record for tax purposes. They are responsible for processing and remitting payroll taxes for all employees on their platform. For this reason, PEOs have a large pool of employees to spread risk between, and may offer more competitive rates than the open market. Keep in mind, PEOs require employers to take on their bundle of services, which will have additional administrative costs.
Typically, the workforce responds very favorably when their employer offers multiple plan options. Having a variety of PPOs (Preferred Provider Organization), HMOs (Health Maintenance Organization), and HDHP (High Deductible Health Plans) will satisfy the needs for all types of employees. A well thought out funding strategy, will also help the employer and employees project costs in coverage.
4. When are companies required to offer COBRA?
COBRA (Consolidated Omnibus Budget Reconciliation Act) is a federal law allowing employees to continue their health coverage for a certain period of time after they leave their job. Companies must offer COBRA coverage when they have 20 employees or more full-time employees.
Employees qualify for COBRA when:
-Losing coverage at work due to switching from full-time to part-time employment.
-Leave your job for any reason other than gross misconduct. Gross misconduct means doing something illegal, reckless, or harmful to others.
Employees can remain on the plan for up to 18 months. Spouses, Dependents, and ex-spouses may be able to continue coverage for 36 months. There are other exemptions for time periods that can last up to 6 months. Be sure to check with your state for continuation laws and additional information about these exemptions.
5. What percentage of an employee’s salary is paid toward benefits?
According to the bureau of labor statistics (September 2022), benefits account for nearly 30% of employer’s costs for individuals working in the private sector. (3) This figure is the national average, and it may actually be much higher in the states where your business operates. The cost of benefits will vary depending on the size of your business, industry, and location. When businesses map out their plans to scale and expand the workforce, the benefit structure needs to be in heavy consideration. In this current hyper-inflationary environment with the annual increases in health coverage, experts believe that benefits will account for 40% of employer’s costs by the year 2030.
If you’d like to know more important questions, please reach out to us at Luminescent. Learn how our free high-touch business consulting service will tailor the perfect fit! www.goluminescent.com
