Stop overpaying for employee health insurance

Offering health insurance to your employees feels great – that is, until you get the renewal notice. Who knew keeping everyone happy and healthy could make you feel so sick? For small business owners, rising premiums can take a serious chunk out of your budget. And while passing those increases along to employees might seem like the easiest solution, this isn’t exactly going to win you the Employer of the Year award. 

Fortunately, keeping costs under control doesn’t mean gutting your benefits package. Here’s where to start.

Make your payroll work smarter

What if you could save on health insurance-related payroll costs without changing coverage or making employees cough up another dime? That’s where a Section 125 cafeteria plan comes in. 

These plans allow employees to pay their share of eligible health insurance premiums with pretax dollars. That means the money comes out before federal income taxes, and usually before Social Security and Medicare taxes are calculated, too. 

Employees get to keep more of their pay, while you save on payroll taxes. Everybody wins, which isn’t something you hear very often when talking about health insurance. 

Here’s what it looks like. Let’s say an employee contributes $200 a month toward health insurance through a qualifying cafeteria plan. At the standard 7.65% employer FICA tax rate, that’s about $15.30 in monthly payroll tax savings – or $183.60 a year. With 15 participating employees, that’s potentially $2,754 in annual savings (assuming the full amount would be subject to both taxes). It won’t fund your retirement, but it’s nice to see a payroll tax calculation end in your favor for once. 

Of course, you can’t just declare everything pretax and hope the IRS agrees. Section 125 plans require written documentation and compliance with eligibility and nondiscrimination rules. Certain business owners, including sole proprietors and partners, also can’t participate as employees. 

If you’re already offering pretax premiums, you won’t unlock additional savings. But if you’re not, it’s worth discussing with your benefits provider or accountant. 

And don’t forget about tax breaks! As we covered last week, eligible businesses may qualify for credits and deductions that help offset insurance expenses. 

Payroll tax savings are a good start. But the way you’re splitting premiums could be costing you more than you realize. 

Rethink how you split the bill

Covering a percentage of employee premiums seems simple enough. Unfortunately, every time premiums get a raise, your contribution does, too. 

If you have an employee whose monthly premium is $500 and you pay 70%, you’re contributing $350. Now, suppose that premium jumps to $550. Suddenly, you’re paying $385 for the same coverage. That’s $35 more every month per employee for the exact same coverage. Multiply that across your staff, and that modest increase quickly turns into a big expense. 

Depending on your insurer and plan rules, switching to a fixed-dollar contribution could make your expenses more predictable. Instead of covering 70%, you might contribute a set $350 monthly. When premiums increase, your contribution stays the same. 

There’s just one catch: the extra money doesn’t just disappear. It falls on your employees, so make sure they can reasonably afford the difference. Also, some insurers require employers to pay a minimum share of premiums, so confirm a flat contribution is allowed before making the switch.

You might also be able to contribute different amounts toward employee-only versus dependent coverage, which gives you another way to manage costs. Just make sure any changes meet applicable state, insurer, and federal requirements.

The idea isn’t to make your employees foot the bill so you can save a buck. It’s to find a contribution strategy that works for everyone. 

Take your renewals off autopilot

Auto-renewing your health insurance might save you some paperwork. Unfortunately, it doesn’t guarantee you’ll be saving any money. Before signing on for another year, request updated quotes and compare available insurers, premiums, and coverage options. An insurance broker can help you find alternatives and evaluate provider networks if you don’t want to make comparison shopping your second job. 

When you’re comparing options, look beyond the monthly premiums. For example, an HSA-eligible high-deductible health plan might offer lower premiums, but employees could have higher out-of-pocket costs when they need care. If you go this route, consider pairing that coverage with employer HSA contributions to help soften the blow. 

And before making any big changes, ask your employees what they think. Can they see their preferred doctors? Are prescriptions affordable? Is there a deductible that seems impossible to meet? A plan that looks good on paper might not be so great when someone actually goes to use it. 

Start shopping well before renewal so you have time to compare costs and coverage. Saving a few bucks isn’t much of a victory if your employees suddenly can’t see their doctors.  

Health insurance is expensive enough without paying extra out of habit. A little homework now could uncover savings without leaving employees wondering what happened to their benefits. 

Before you sign off on another year of premiums, take a closer look at what you’re paying for and whether there’s a smarter way to spend that money. Your employees need good coverage. But your business shouldn’t have to go on life support to pay for it.