Healthy employees are more likely to be happy, productive employees. Yet providing health insurance—one of the main resources employees need to stay healthy—has long been an uphill battle for small businesses in California. With the advent of a new pre-tax, fixed benefit solution known as ICHRA (Individual Coverage Health Reimbursement Arrangement), small businesses have gained a better option for providing employees a health insurance benefit that’s more affordable and accessible.
This guide will talk you through what ICHRA is, how it works, and how it fits into the overall health insurance landscape for small businesses in California.
What is ICHRA? A brief intro
In 2019, the Internal Revenue Service (IRS) passed new legislation that introduced the Individual Coverage Health Reimbursement Arrangement (ICHRA). ICHRA gives small businesses a way to contribute to employees’ health insurance coverage without all the hassle involved in group insurance plans. It lets you give employees pre-tax money they can apply to the premiums for a health plan they choose themselves. You get to offer an attractive (and important) employee benefit; employees get to choose the health care plan that’s best for them.
Why is getting health insurance as a small business so darn hard?
ICHRA provides a solution to a problem that’s plagued small businesses for years. Group insurance plans work well for big corporations because they’re specifically designed to work best for companies with lots of employees. But for a 15-person business in Sacramento? Not so much.
For any business with fewer than 20 employees, a number of issues complicate this option:
- Time
Small business owners are pretty much always strapped for time. As if you’re not busy enough, small group plans tend to include a lengthy sales process that can take over 30 hours and six weeks just to get set up.
- Cost
The high cost of employee health insurance plans is one of the biggest hurdles for a small business to overcome. Premiums in California cost an annual average of $8,083 for single coverage and $22,818 for family coverage. And Covered California has announced a 9.6% increase in premiums for 2024.
- Participation criteria
Even if you make the time to haggle with insurance companies and find the budget to cover those prices, you can still be stymied by the minimum participation criteria. Many group plans require at least 70% of employees to opt in. If your employees have their own tight budgets, that may be an insurmountable barrier.
3 Main Health Insurance Options for Small Business: A Breakdown
Technically, both federal and state legislation lets small businesses (with fewer than 50 employees) off the hook for requiring health coverage, but you want to take care of your employees if you can. That leaves you with three main options to consider:
1. Traditional group health insurance plans
Traditional group plans typically involve working with a broker to identify the best health insurance offering for your business, then providing all employees with a standard plan. Some companies can offer employees a choice between similar plans with different premiums, deductibles, and copays. But that option is usually less available to small businesses than big corporations.
Group health insurance has both benefits and drawbacks for small businesses.
The good:
- It’s predictable (at least in the short term). You can trust your costs to stay consistent for the year.
- Plans must offer a reasonable standard of care. Group insurance plans must adhere to all state regulations, which outline the standards of coverage they must meet.
- It’s good for recruitment and retention. Offering health insurance as part of an employment package makes your job offers more attractive. And current employees will be harder to poach if their job includes decent health coverage.
The downsides:
- The costs are high. Group health insurance plans tend to be very expensive for small businesses.
- Budgeting is unpredictable long term. Insurance premiums often go up year after year, making costs hard to predict beyond a year. And if one employee has high medical costs this year, premiums for the whole company could go up next year.
- Employees lack choice. With this model, employees have little say in the details of their plan and the network it covers.
- High participation rates are required. If your employees don’t all want to enroll, you may not be able to qualify.
- It requires a lot of administrative work. Selecting a group health plan and getting it set up can take a lot of time and work. As a small business owner, dedicating many hours over several weeks to the process is a hard sell.
2. Giving employees cash
If group plans feel out of reach for your small business, you may figure that providing that same amount in cash should do the trick. Employees still get the benefit and can choose to spend it how they see fit. It seems like a basic enough idea on the surface, but there are some unintended downsides in practice.
The good:
- Cash is easy. You can skip dealing with salespeople, doing research, and managing paperwork. All you have to do is add some extra money to each employee’s paycheck.
- People like cash. No one’s ever upset to see a bigger number on their paycheck.
- You control the budget. You can’t control health insurance rates, but you can control how much cash you give employees. But if you don’t match the amount you give to current premium levels, it sort of defeats the purpose.
The downsides:
- They may not use it for insurance. You can tell employees that extra money is meant for health insurance, but they may just choose to pocket it instead. If an employee then experiences a medical emergency, they won’t have the coverage they need.
- They have to pay taxes on it. Employees won’t receive the amount you give them as a lump sum. A hefty chunk of it will be taken in taxes. Supplemental wages in California are taxed at 6.6%, then another 15.3% goes to FICA, and 22% for federal income taxes. That’s nearly half of the total amount gone before they can use it.
3. Go the pre-tax, fixed health benefit route (e.g. ICHRA)
A pre-tax fixed health benefit (also known as an ICHRA) takes the idea of giving employees cash to buy their own insurance, but improves upon it. By taking advantage of the type of group health benefit, employees can use the money to pay their premiums before any is taken out for taxes. That makes it a much better deal for both the business and employee.
The good:
- You control budgeting. Health insurance rates may fluctuate every year, but with a pre-tax fixed benefit you can keep your benefits budget under control by choosing what to offer based on what you can afford.
- It’s specific to health insurance. Employees who opt to use the benefit must put it toward a health plan, so there’s no confusion about the benefit they’re receiving.
- There’s no minimum participation rate. Employees who want to take advantage of it can, whether or not their colleagues feel the same way.
- It’s an option for both full-time and part-time employees. ICHRA lets you provide health coverage to all your employees, not just those working full-time. And it’s adaptable—you can offer different amounts to each type of employee.
- Employes gain choice. Each employee can select the health plan that best meets their needs.
- It allows employee privacy. You don’t need to be directly involved in your employees’ healthcare decisions. ICHRA lets you provide the benefit, while letting them handle all the details themselves.
- It’s easy. ICHRA requires far less time and work for small business owners than setting up a group health plan. Get that time back, while still taking care of your employees.
The downsides:
- It puts more work on employees. While the employer saves a lot of time with ICHRA, the work of researching and selecting the right health plan falls on the employee’s shoulders. Choosing the right plan may be overwhelming and time-consuming for them.
- Individual plans can have their limits. While plan options vary a lot based on location, the individual plans available on the marketplace aren’t always as robust or generous as the group healthcare plans big companies can offer. Some employees may find the difference disappointing.
How a pre-tax, fixed health benefit (ICHRA) works for employees
For employees to take advantage of ICHRA, they’ll need to select a qualified healthcare plan. In California, the best way to do that is via the Covered California marketplace. The marketplace makes it easy for employees to find all the available health insurance plans in their area that meet the Affordable Care Act (ACA) requirements.
Health insurance carriers in California
Luckily, most of the big-name health insurance companies likely to be on your employees’ radar will be represented on the marketplace. In California, this includes:
- Aetna CVS Health
- Anthem
- Blue California
- Kaiser Permanente
- LA Care
- Molina Healthcare
The specific health insurance carriers available to your employees will depend on the county they’re in.
Typical health insurance premium costs in California
California is a big state. The health insurance options and costs vary a lot between different counties and cities. That’s in addition to cost differences based on age and plan tiers. While we can’t tell you exactly what to expect a health plan for each employee to cost, we can provide a general idea.
To start, health insurance plans in California come in four tiers.
- Bronze
- Silver
- Gold
- Platinum
As you move up the tiers, the premiums increase along with the amount of coverage. Employees who anticipate minimal healthcare needs can opt to stick with Bronze, or maybe Silver. Those who expect to need a lot of healthcare throughout the year may want to pay more upfront for a Gold or Platinum plan.
Keep in mind that lower monthly premiums tend to mean higher out-of-pocket costs throughout the year. If you end up at the doctor much, you could end up spending more in copays and on your deductible than you save in premiums.
Snapshot of 2024 health insurance costs in San Francisco, California
While premiums can vary based on a wide range of factors, seeing actual numbers is always helpful to get an idea of what’s typical. Here’s a small sampling of what healthcare costs look like for people of different ages in different locations across California.
Some additional health plan guidance for San Francisco
Let’s talk about how to decide which options make sense for you. The prices below reflect a 35-year old female in San Francisco, California.
Gold health plans: Best for high expected medical costs: For example, the least expensive gold plan in San Francisco, California is Kaiser Permanente Gold 80 HMO (~$717/month).
Remember: Gold plans typically have the lowest deductibles and copays, but higher monthly rates. It’s an advantage for folks who know they’ll frequently require medical visits.
Silver insurance plans: Best for average medical costs: As an example, the cheapest silver plan in San Francisco County, California is Kaiser Permanente Silver 70 HMO (~$595/month).
Remember: Silver plans are the middle ground between the other two metal-named plans, combining lower monthly premiums and out-of-pocket costs.
Bronze health plans: Best for healthy folks with emergency savings: For example, the Bronze plan that costs the least in San Francisco County, California is Kaiser Permanente Bronze 60 HDHP (~$473/month).
Remember: Bronze plans have the lowest monthly premiums but significantly higher deductibles and co-pays, meaning if you need medical care during the year, you pay more out of pocket before coverage kicks in.
Snapshot of 2024 health insurance costs in Los Angeles, California
Some additional health plan guidance for Los Angeles
Let’s talk about how to decide which options make sense for you. The prices below reflect a 35-year old female in Los Angeles, California.
Gold health plans: Best for high expected medical costs: For example, the least expensive gold plan in Los Angeles, California is L.A Care Gold 80 HMO (~$367/month).
Remember: Gold plans typically have the lowest deductibles and copays, but higher monthly rates. It’s an advantage for folks who know they’ll frequently require medical visits.
Silver insurance plans: Best for average medical costs: As an example, the cheapest silver plan in Los Angeles County, California is L.A Care Silver 70 HMO (~$341/month).
Remember: Silver plans are the middle ground between the other two metal-named plans, combining lower monthly premiums and out-of-pocket costs.
Bronze health plans: Best for healthy folks with emergency savings: For example, the Bronze plan that costs the least in Los Angeles County, California is L.A Care -- Bronze 60 HMO (~$367/month).
Remember: Bronze plans have the lowest monthly premiums but significantly higher deductibles and co-pays, meaning if you need medical care during the year, you pay more out of pocket before coverage kicks in.
Snapshot of 2024 health insurance costs in San Diego, California
Some additional health plan guidance for San Diego
Let’s talk about how to decide which options make sense for you. The prices below reflect a 35-year old female in San Diego, California.
Gold health plans: Best for high expected medical costs: For example, the least expensive gold plan in San Diego, California is Molina Gold 80 HMO (~$411/month).
Remember: Gold plans typically have the lowest deductibles and copays, but higher monthly rates. It’s an advantage for folks who know they’ll frequently require medical visits.
Silver insurance plans: Best for average medical costs: As an example, the cheapest silver plan in San Diego, California is Molina Silver 70 HMO(~$374/month).
Remember: Silver plans are the middle ground between the other two metal-named plans, combining lower monthly premiums and out-of-pocket costs.
Bronze health plans: Best for healthy folks with emergency savings: For example, the Bronze plan that costs the least in San Diego, California is Anthem Bronze 60 HMO (~$346/month).
Remember: Bronze plans have the lowest monthly premiums but significantly higher deductibles and co-pays, meaning if you need medical care during the year, you pay more out of pocket before coverage kicks in.
Find the best health insurance options for your California small business
Navigating the world of health insurance for small businesses has long been confusing, complicated, and intimidatingly expensive. ICHRA simplifies the process, (finally) putting health insurance benefits within reach for more small business employees.
Need more guidance on how ICHRA pre-tax fixed health benefit works for your small business? Reach out to StretchDollar or get started here.
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