Considerations Before Cancelling Your Small Business’s Health Insurance Plan

Since the announcement of the Affordable Care Act (ACA), small business owners have been concerned about increased costs that could occur with employer-provided insurance plans. Currently, employer-based insurance plans end up costing an average of around $9,300 a year per employee. Employers typically cover around $6,700 per employee of this expense.

Some small business owners are considering cancelling their employee health insurance plan as a means to cut costs. However, there are a variety of legal, societal, and tax implications that should be considered before making this decision.

The Legal Requirements for Providing Health Insurance

Employers are only required to provide a health insurance plan if they have 50 or more full-time employees. However, your employees are legally required to have health insurance coverage, or they will be required to pay a penalty equal to one percent of their total annual income. Luckily, employees are assisted with receiving health insurance coverage, even if their employer does not provide this for them. Purchasing insurance coverage through the ACA online exchanges will allow employees to see if they qualify for government-based subsidies that could greatly decrease their health insurance premiums. There is a good chance that your employees would be eligible to receive some form of subsidy through the exchange, as over 80 percent of people enrolled in 2014 were eligible for subsidies.

Considerations to Make Before Cancelling 

Though your small business may not be legally required to provide insurance because you have fewer than 50 employees, there are still a variety of considerations to think about before making the decision. First, you should consider what effects your decision to cancel the employer health insurance plan will have on your overall staff. Significant damage to employee retention and morale could occur. Many employees cite health insurance as the main reason why they continue to stay in positions with which they are not happy. Even if you cut your insurance plan and offer a stipend that can be personally used by your employees you may still face an angered staff, while also getting rid of a bargaining chip that you have over your employees. This could especially be the case if you have older employees, who typically have higher health insurance expenses than younger their younger counterparts.

Second, you must consider the tax consequences that come with cancelling your employment-based insurance plan. Group health insurance plans are tax-deductible and thus lower the complete cost of employee compensation that you pay. This in turn lowers the amount of payroll taxes that you pay each year. Both of these tax advantages will be lost by cancelling your employer based health insurance plan, causing both state and federal taxes to be deducted from the amount that you pay to employees to purchase their own coverage.

You should consider whether a private exchange contribution would be a reasonable alternative to your current health insurance plan. These exchanges provide great rates, and allow an employer to make a fixed financial contribution that an employee in turn can use towards purchasing their own health plan that is not employment based. Contact the small business attorneys here at the Gierach Law Firm in Naperville, Illinois for any small business questions that you may have as an employer.