Understanding how health insurance costs are typically split between employers and employees is important to you, as an employer of 50–99 employees. With the January 1, 2016, ACA deadline approaching, you’re aware that you’ll soon be required to provide adequate health insurance coverage options for your employees or face certain penalties, so knowing what similar employers provide will help you make a more informed decision on what option is best for your company.
Who Pays for Health Insurance?
According to the Bureau of Labor Statistics (BLS) in an Economic News Release dated July 25, 2014, employers (excluding military, farm, private households, and the federal government) pay an average of 69 percent of insurance premiums. This data is based on the March 2014 National Compensation Study and is summarized in a BLS news release, which provides an in-depth look at employer-provided medical care and what is typical for companies and their workers in the United States.
You are, of course, free to set the percentages that you and your employees pay at your discretion. You may choose to pay a larger portion as an incentive to attract and retain talent, or you may increase your employees’ share of premiums to help manage costs. As you determine the cost split, it’s important to keep in mind that you must cover 60 percent of costs per the ACA minimum essential coverage requirements.
What Are the Typical Costs for Employers/Employees?
The amount actually paid is important to understand, in addition to knowing that the split between employers and employees is approximately 70 percent/30 percent. According to Medical Expenditure Panel Survey in a brief released in April 2014 by the Agency for Healthcare Research and Quality, the typical out-of-pocket expenditure for health insurance coverage by private-sector employers and employees for 2012 was as follows:
- Average private-sector total premiums were $5,384 for single or individual employee coverage; $10,621 for employee-plus-one coverage and $15,473 for family coverage.
- Average employee contributions were $1,118 for single or individual employee coverage; $2,824 for employee-plus-one coverage and $4,236 for family coverage. These figures represent 21 percent, 27 percent and 27 percent, respectively, of the total average premiums paid in 2012 for the respective types of plans.
Additionally, employees pay co-pays, deductibles, and co-insurance payments for services they receive. Employers typically do not pay any portion of these, although you may set up a special reimbursement plan as a way to increase your benefits plan and the attractiveness of your company.
What Coverage Options Are Available for Businesses?
Your business can choose between two types of coverage options for your health insurance plan. One type, known as contributory coverage, involves the employer and employee sharing in the cost of the plan. If your employees pay any portion under 100 percent of the premiums for the health insurance plan, no less than 75 percent of your employees must opt in the plan. For example, if you have 60 eligible employees, 45 would need to take the health insurance coverage.
If you, as the employer, contribute 100 percent of the premiums, such a plan is considered noncontributory coverage. This plan requires all of your employees to participate in the health insurance plan being offered, but employees with certain waivers, such as coverage from a spouse’s plan, are exempt. While it may not be feasible for some businesses to cover 100 percent of insurance premiums, businesses who can afford it are likely to see a surge in employee loyalty and job satisfaction.
Both types of plans permit you to deduct the percentage of the premium you provide on your employees’ behalf on your business’s taxes, according to the IRS. For contributory coverage, the amount that you contribute is excluded as employee income and reported on their Form W-2. Premiums that you pay in noncontributory coverage are excluded 100 percent from an employee’s income and reported as part of their gross income on the W-2; this means that employees may be taxed on the amount you pay for their coverage as part of their income tax.
Which Cost-Sharing Option Is Best for Your Company?
The way you, as an employer, choose to take on health insurance costs depends on your needs, notwithstanding the requirements set forth under the ACA to provide health insurance coverage options on or before 2016. The type of cost sharing you choose should be based not only on what constitutes the norm for your industry but also what provides you with the best level of benefits that is reasonable for your budget. You will need to factor in which cost-sharing method gives your business the best tax advantage and meets your requirements under the ACA.
Donald Parker has more than 20 years of experience in the insurance and financial services industry with several Fortune 500 companies. He holds a life, accident and health insurance license in Virginia. He has been FINRA Series 7, 24, 63 and 65 registered and specializes in the areas of long-term care, senior needs, retirement and employee benefit planning.