How to Budget for Your Group Benefits Plan

As the labor market remains tight and businesses struggle to find staff, more small firms are starting to offer employee benefits, particularly health coverage.

But the costs of coverage can be daunting and many employers worry about whether they can afford benefits programs and struggle to set a budget that won't deplete or severely dent their profits.

Typically, the most expensive and most important benefit is health insurance. For most people, purchasing health coverage on their own is prohibitively expensive. They will gravitate toward employers that offer affordable health plans with networks that include their doctors and provide reasonable coverage.

If you have more than 50 full-time employees, the Affordable Care Act requires you to provide your employees with coverage that is affordable and covers a set of essential benefits without cost-sharing. Not offering this coverage can result in penalties.

On the other hand, companies with fewer than 50 full-timers are not required to offer coverage. That said, 53% offered health benefits in 2020, including 48% of businesses with three to nine employees.

However, there are options for those who want to offer it. For example, employers with fewer than 25 employees may qualify for federal tax credits if they offer health insurance.

Don't game the system

Firms that should be covering their employees under the ACA sometimes try limiting the amount of shifts they give employees to avoid hitting the hours-worked threshold that requires them to offer coverage.

But that's not a good strategy if you want to keep your employees happy and avoid high turnover. Think of an employee benefits plan as a need-to-have, not a nice-to-have. Also think of it as an investment in the future of your business, your staff's lives and your community.

Getting it right

Finding room in your budget for group health insurance can be especially difficult when you're just starting out or your profit margins are thin. According to a 2021 Kaiser Family Foundation (KFF) report, the average annual health insurance premium for small businesses (those with up to 199 employees) was:

• $7,813 for single coverage (the average employer contributed $6,485, or 83% of the premium, while workers covered the rest).
• $21,804 for family coverage, of which employers contributed an average of $13,737, or 63%.

The considerations

The factors employers need to consider when determining the budget include:
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Employer premium contributions. You should expect to pay 50% or more of the premium, for two reasons:

• Most insurers require it.
• Federal tax credits are available only to small employers who pay at least that much.

To get an idea of what your baseline cost will be, multiply the numbers from the KFF report by the 50% requirement. Keep in mind that premiums tend to rise each year, so your actual cost will be higher even if you limit your contribution to 50%.
Caution is called for when deciding how much to require employees to contribute. Setting their contribution too high may discourage workers from participating. If employee participation falls below 70%, you may not be able to purchase the plan you want.

Your employee profile. The ACA prohibits insurers from raising premiums based on most employee characteristics. However, it does permit them to raise premiums based on employees':

• Age
• Tobacco usage
• Residence location

A business made up of older employees, most of whom smoke, will pay more than one whose workforce is younger and doesn't smoke.

The type of plan you pick. The ACA requires state health insurance marketplaces to offer four tiers of coverage. These tiers differ based on the premium cost and the percentage of health care costs the plan pays for:

• Bronze (least expensive; insurer pays 60% of health care cost, employee pays 40%)
• Silver (insurer pays 70%, employee pays 30%)
• Gold (insurer pays 80%, employee pays 20%)
• Platinum (most expensive; insurer pays 90%, employee pays 10%)

You aren't limited to offering just one tier. You can give your employees a choice of plans in different tiers and still hold your per-employee cost constant.
There are also four types of plans:

• Exclusive provider organization (EPO) — A plan where coverage applies only if employees use health care providers within a specified network, unless there is an emergency.
• Point of service (POS) — A plan where the employee out-of-pocket cost is reduced if they use health care providers within a specific network, but referrals to specialists are required.
• Preferred provider organization (PPO) — Similar to a POS plan, but employees can see specialists without a referral and see out-of-network providers for an additional cost.
• Health maintenance organization (HMO) — Coverage applies only if employees see health care providers who work for or are under contract with the HMO, unless there is an emergency.

EPO, POS and PPO plans tend to cost more than HMO plans, but they offer employees wider choices of health care providers.

The takeaway

Some businesses simply cannot afford to provide their employees with health insurance and paid leave. Those that can, however, should view these benefits as investments in the business. They make employees' lives more comfortable, and good employees who are comfortable tend to stay.

Finding the budget space isn't easy. It takes careful strategic planning, and it may require either cost-cutting in other areas, raising prices or accepting lower profits.

However, many successful companies have found offering benefits to be worth the effort and cost. For them, it has paid off because it has enabled them to attract and keep the talented employees who make their businesses successful.