How startups can set up health insurance benefits

Key Takeaways 

• Providing quality, affordable health insurance is crucial for attracting and retaining top talent in a startup.

• Startups can choose from various health insurance plans, such as group health insurance, self-funded plans, fully insured plans, and health reimbursement arrangements (HRAs). Each plan has its own advantages and disadvantages.

• When setting up health insurance, startups should consider their needs, budget, plan type, and eligibility and enrollment policies—while ensuring effective communication with employees.

When starting a new business, there are countless things to think about—developing your product or service, creating a financial plan, finding customers, hiring employees, and much more. However, one critical item that's easy to overlook is health insurance. 

Health insurance isn't just a nice-to-have perk. Providing quality, affordable health coverage is one of the most important things you can do to attract and retain top talent at your startup. This piece will walk you through everything you need to know about setting up health insurance benefits at your company.

Why should startups offer health insurance benefits?

For many job seekers, especially those with families, health insurance is a non-negotiable benefit. Not offering coverage will put you at a major disadvantage when competing for the best employees against other companies that do provide health plans. A recent survey found that health insurance is the most important benefit to 88% of workers when considering whether to accept a job.

Providing healthcare benefits also helps startups retain the great employees they already have. In another study, 56% of US adults with employer-sponsored health benefits said whether they like their health coverage is a key factor in deciding to stay at their current job. Losing good people is extremely costly, especially for resource-strapped startups. 

Healthy employees are also more productive—ill health costs US employers an estimated $575 billion per year in lost productivity and injuries.

Depending on the size of your startup, you may actually be legally required to offer health coverage. In the United States, under the Affordable Care Act (ACA), companies with 50 or more full-time equivalent employees must provide "affordable" health plans or face financial penalties. However, even if your startup is not legally obligated to offer health insurance, doing so is still a wise investment that can help you build a robust, healthy, and loyal team—potentially leading to significant long-term cost savings.

Understanding types of health insurance plans for startups

Now that we've established why health insurance is important, let's look at some common types of plans you might consider for your startup:

Group health insurance

This is what most people think of when they hear "employer-sponsored health insurance." With group health insurance, you as the employer select and provide coverage for your employees (and sometimes their dependents), and both you and your employees contribute to the premiums. A premium is the amount paid, often on a monthly basis, to keep an insurance policy active and maintain coverage.

The main advantage of group health insurance is that it often comes at a lower cost than individual health insurance plans due to the risk being spread across a larger pool of people. Additionally, group health insurance plans may offer more comprehensive coverage and benefits including dental, vision and prescription drug coverage compared to individual plans. 

However, employees usually have limited personal control over group health insurance options and are completely dependent on the employer's chosen health plan, which may not always meet their specific needs.

Self-funded health plans

In this model, instead of paying premiums to an insurance carrier, your company pays for employees' medical claims directly. This can be riskier for small startups, but it offers more flexibility and potential cost savings if your team is generally healthy.

In some cases, you could hire a third-party administrator (TPA) to process claims and provide access to a network of healthcare providers. Most self-funded employers also purchase stop-loss insurance to limit their financial risk in the event of unusually high claims. 

While self-funded plans can be particularly attractive for startups that have a young, healthy workforce, they also come with more administrative responsibilities and potential financial risk if there are unexpected major health issues among your employees.

Fully insured health insurance

This is the traditional model where the employer purchases health plans from insurance companies. The insurance company is then responsible for paying out the corresponding healthcare claims. Fully insured plans can be a good option for startups that want more predictable healthcare costs and less of an administrative burden. 

With these plans, the employer pays a fixed premium, and the insurance company takes on the risk of covering health care costs. However, fully insured plans often come with higher premiums and less flexibility compared to self-funded options. These plans can also be more expensive overall and may require additional tax considerations for your business.

Health reimbursement arrangements (HRAs)

An HRA is a way for employers to reimburse employees for their healthcare expenses tax-free. It's a great way to scale when you can't or don't want to do a full group health insurance program. It's also beneficial if you have some part-time people in addition to full-time employees.

With an HRA, you can set a budget for each employee's healthcare costs, and your employees can choose their preferred healthcare providers. However, your employees may find the reimbursement process cumbersome as they need to submit claims and wait for your approval, and they may have to deal with the fact that you determine which expenses are reimbursable and the amount allocated to the plan.

There are different types of HRAs, including Qualified Small Employer HRAs (QSEHRAs) and Individual Coverage HRAs (ICHRAs). Each has its own rules and limitations, so it's important that you research which type might be best for your startup.

How to set up health care insurance in your startup: Key considerations

Once you've decided to offer health benefits, what's next? Here are the key steps and considerations as you embark on setting up coverage:

Determine your budget and needs

Health insurance is a significant expense, so make sure to factor it into your financial projections. Consider not just the premiums but also any employer contributions to employee accounts like HSAs and HRAs. Think about cost-sharing—how much will employees chip in via payroll deductions vs. the company paying? Striking the right balance between containing costs and providing robust, market-competitive benefits is key. 

It's also important to assess your workforce's specific healthcare needs, such as coverage for families, prescription drugs, or particular medical conditions. Conducting an employee survey can help you understand your workforce’s priorities and tailor your plan selection accordingly.

Decide on plan type(s)

Do you want to offer a traditional group plan, self-insure, or go with a high deductible/savings account approach? If group insurance, do you want to provide one plan option or give employees a choice? Which insurance carriers have the best network in your area? Unless you have deep expertise in-house, you'll want to engage a professional employee benefits broker or consultant to help you navigate the health insurance market and evaluate the options based on your company's unique needs and priorities.

Determine eligibility and enrollment

Will healthcare benefits be offered to all employees or just full-time workers? What about part-timers or contractors? When is new hire coverage effective—on day one or after a waiting period? Will you offer coverage to dependents and if so, will the company contribute to their premiums? Documenting the answers to these questions in a formal benefits policy ensures consistency. If you have an employee handbook, include the policy there.

Communicate to employees

Once you've selected your health plans, you need to educate employees on their benefits and how to enroll. Hold an all-hands meeting or webinar to present the plan options, costs, and enrollment process. Provide self-service tools and resources so employees can evaluate their choices and get answers to questions. Make sure enrollment instructions and deadlines are crystal clear, and send reminders to stragglers as the enrollment window closes.

Update your systems

Ideally your HR, benefits, and payroll systems should all talk to each other automatically. Adding health insurance deductions to payroll or updating your HRIS with new enrollments shouldn't require manual effort. Look for software platforms that handle these core functions in one integrated database. The initial set up takes time, but pays off in the long run with reduced admin work.

Simplify benefits management with Rippling

Health insurance is notoriously complex, with requirements varying significantly from country to country and even state to state. Offering health benefits as a key part of a competitive employee benefits package involves not just choosing and implementing plans, but ongoing administrative overhead to keep everything running smoothly.

Rippling's benefits administration solution brings all your employee benefits—including health, dental, vision, disability, FSA, HSA, and commuter benefits—into one centralized system. Employees can access everything through a self-service portal.

Rippling automates much of the benefits administration process, including new hire enrollment, open enrollment, payroll deductions, and compliance with regulations like ACA and COBRA. This allows startups and other businesses to spend less time on benefits paperwork and focus more on core business priorities.

With Rippling and your broker, you can choose from over 4,000 pre-built plans from leading insurance carriers like Aetna, Humana, and Blue Cross Blue Shield. You can also set up custom plans or seamlessly integrate your existing health care coverage. Employee and benefits data syncs across Rippling's platform, eliminating the need for duplicate data entry and manual updates. For health insurance programs, our benefits administration solution allows you to rely on your own insurance broker or Rippling can help you easily find a broker for you to work with, depending on the size of your business. For more information on Rippling Insurance Services, please click here.

Frequently asked questions

How much does small business health insurance cost?

The cost of health insurance for small businesses per employee varies based on factors like location, plan type, coverage level, and employee age and health. The 2023 KFF Employer Health Benefits Survey provides benchmarks on premiums and deductibles:

• For small firms, the average annual premium is $23,621 for family coverage. Workers at small firms contribute $8,334 on average towards family premiums, which is considerably higher than the $5,889 average contribution for workers at large firms.
• For single coverage, the average premium is $8,722 at small firms, higher than the $8,321 average at large firms. 

• The average deductible amount for single coverage is much higher at small firms ($2,434) compared to large firms ($1,478).

• At small firms, 47% of covered workers have a single deductible of $2,000 or more, compared to 25% of workers at large firms.

In summary, small businesses face higher premium costs on average, especially for family coverage. Covered workers at small firms pay more in premium contributions and have higher deductibles compared to those at larger companies. The overall cost burden of providing health benefits is greater for small employers. However, small businesses can potentially lower these benefit costs by working with a professional employer organization (PEO). PEOs can help small businesses access better quality plans at lower prices by leveraging their economies of scale.

What is the difference between a PPO and a HMO?

A PPO (preferred provider organization) and an HMO (health maintenance organization) are two types of health insurance plans. With a PPO, you have more flexibility to choose your healthcare providers, but you typically pay higher out-of-pocket costs and may need to file your own claims. In contrast, an HMO generally has lower out-of-pocket costs and handles claims for you, but you are limited to using healthcare providers within the HMO's network and may need referrals from your primary care physician to see specialists.

Is employee health insurance tax-deductible? 

Yes, health insurance premiums paid by employees can be tax-deductible. Employees who itemize deductions on their tax returns can write off out-of-pocket health insurance costs, including premiums, that exceed 7.5% of their adjusted gross income. However, any premiums reimbursed by their employer through a stipend or health reimbursement arrangement (HRA) are not deductible.

This blog is based on information available to Rippling as of July 24, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.