Pennsylvania small businesses grapple with the difficulties in finding affordable health insurance options for their teams. More than ever before, traditional group health plans are cumbersome and expensive. There is, however, an option newly on the market that many don’t yet know about. It’s not another group plan and it’s also not giving team members cash instead of benefits. Called an ICHRA (Individual Coverage Health Reimbursement Arrangement), the pre-tax health benefit is making health benefits more reasonable for small businesses.
In today’s guide for folks in PA, we decipher the overtly complicated world of acronyms in insurance, and shed light on a new arrival that could change how your company supports employees.
Grasping ICHRA in less than 30 seconds
Individual Coverage Health Reimbursement Arrangement (ICHRA) came out of federal regulation passed in 2019, and was created to simplify how employers contribute to their team members’ health insurance coverage. It busts open options and flexibility for companies that never existed before. In a nutshell, it lets businesses use pre-tax money to give to employees for health insurance they buy and own.
Why is health insurance such a dreaded struggle for all small businesses?
Corporations have a disproportionate advantage in the marketplace by having so many employees that they can keep their costs low. But a 12-person team in Kensington? Fuhgettaboutit.
For businesses with fewer than 20 employees, the costs and challenges are numerous. For example:
- When setting up small group plans, the tedious sales process is painfully time consuming. Did you know it can take a company over 30 hours spanning six weeks just to get set up? That’s before anyone even has any benefits!
- Then, you’re up against unrealistic minimum participation criteria, often requiring that at least 70% of employees opt in to even qualify for coverage. Smaller businesses that aren’t paying big salaries often find themselves with too few people willing to enroll. Another unfair disadvantage.
- Finally, pricing for employee health insurance continues to skyrocket. In just the past decade, average premium costs have spiked a shocking 25%. Individual health coverage currently averages $8,000 annually per person, and $23,000 for families. Ouch.
Many SMBs (Small-to-Medium Businesses) find this combination of rapidly rising expenses and increasing market complexities to be overwhelming, and it may feel like health insurance is even unobtainable. Perhaps that is why in the last dozen years, only 39% of companies with less than 10 employees offer healthcare benefits, hitting a record low.
This disparity has led to smaller companies worrying about retaining existing talent while attracting new candidates, especially when large companies can pay less to offer more. It feels unfair and impossible.
That said, there remain three options most SMBs use today - traditional group health insurance plans, offering employees cash in lieu of insurance, or ICHRA (the pre-taxed benefit program).
Let’s objectively look at the advantages and disadvantages of those three choices.
Pros/cons traditional group health insurance plans
The classic option of traditional group health insurance is what most of us are accustomed to. In this scenario, a company of any size finds a broker to research current options based on basic employee info like age and location. In this option, there is a uniform rate for all employees.
A small business owner will choose one plan that is the same for all team members, but corporations can typically offer multiple plans with different deductibles, copays, and premiums.
Advantages of group health insurance:
- Better short term budgeting predictability: If an employee becomes ill and requires extensive care, smaller businesses can be hit harder than big companies, but with group plans, the insurance company carries the risk if total claims exceed the premiums.
- Standards: State regulators oversee group insurance plans, so there are standards the insurers must meet to guarantee employees have ongoing access to a predictable standard of health insurance.
- Recruiting and retaining employees: Because insurance is considered part of a salary package, a candidate or employee might seek employment elsewhere if better insurance options can be offered. In a competitive hiring landscape, offering comprehensive benefits wields significant strength.
Disadvantages of traditional group plans:
- So expensive: Group health insurance plans can get expensive, and usually come with the highest premiums.
- Worse long term predictability: If even just one employee has high medical costs in a year, premiums for the entire company could spike the next year, making long term budgeting nearly impossible.
- Less options: SMBs will typically have a few plans to choose from, and can only offer one of those plans to all employees.
- Participation rates: If a small business wants to offer a group plan, most insurers will require that at least 70% of all employees must enroll. This can feel impossible at some companies.
- Time suck: Generally, business owners oversee the insurance process themselves, spending over 30 hours across numerous weeks. And it starts all over again the next year.
Pros/cons of giving cash in lieu of benefits
Group plans can become overwhelming, prompting many small businesses to choose an alternative approach, opting to allocate the amount they would have spent on insurance directly into their employees' paychecks. It’s a benevolent gesture, but doesn’t always translate into the intended value.
Advantages of just doling out cash:
- It’s easy: With this option, all an employer has to do is add money to a paycheck. No research, no extra paperwork, no calls to brokers, just a little pay bump.
- Certainty: Doling out cash gives employers full control and predictability for their budgeting, because they only give the exact amount that the company can afford. The amount doesn’t rise or fall based on external factors.
Disadvantages of giving out cash instead:
- Perceived value: Employees can be told at onboarding, but don’t always remember or understand that they’re receiving cash instead of benefits. The amount can become almost invisible, fusing into their wages, and is not often seen as the generous move it is intended to be.
- Taxes: Employees in Pennsylvania will be taxed the flat 3.07% on that extra cash, and then will still have 15.3% taken out for FICA, and another 22.0% for federal income taxes. They won’t even be able to use nearly half of that cash you’ve given them for insurance (or anything else). Ouch.
- Employees don’t benefit: Because so few employees remember or understand this scenario, do they even end up using the money for its intended purpose of insurance? Because of this, many will end up without any health insurance.
Pros/cons of ICHRA, the pre-tax, fixed health benefit
ICHRA (the pre-tax, fixed health benefit) is the newest health insurance option for small businesses. With ICHRA, small businesses can give money to employees to cover their health premiums BEFORE a single penny of taxes are taken out.
It sounds so simple, and it is - so why isn’t this what every small business is doing? It is because ICHRA is still pretty new, only becoming a possible option in 2020 due to IRS legislation. Understandably, the passage of the legislation didn’t grab headlines as we were going through a global pandemic at the time. Adoption rates have been moderate, but there are significant changes underway.
Advantages of ICHRA for small businesses in Pennsylvania:
- Predictability: Group insurance plan rates are unpredictable from year to year, but ICHRA allows businesses to decide the exact amount they will contribute, and it only changes when they make changes.
- Perception is inherent: Employees understand that this money can only be used for health insurance, so it’s not extra cash that gets taxed and blends in with the rest of their paycheck. Unlike group insurance, employees see exactly how much an employer contributes, so perception is inherent.
- Participation rates: Because ICHRA has no minimum participation, it remains an option if 12 employees waive coverage and only two enroll.
- FT vs. PT: ICHRA is the only option that allows employers to offer different amounts to full-time versus part-time employees, making it a truly adaptable option.
- Employee choice: ICHRA allows team members to choose their own option that syncs with their personal requirements, rather than the single plan all employees must opt in or out of under group health insurance.
- Privacy: Speaking of personal requirements, unlike group health, ICHRA takes employers out of the awkward (and some would say inappropriate) position of being involved in employees’ doctor-patient relationships.
- Simplicity: Lastly, employers enjoy a simplified process without seeking out brokers, researching, and spending dozens of hours setting plans up. ICHRA streamlines everything by simply existing as a pre-tax benefit.
Disadvantages of ICHRA:
- More chaos: The primary disadvantage of ICHRA is that employees must do the research themselves, and may become overwhelmed by the options. Insurance can feel like a foreign language, and making an informed choice can be difficult for individuals.
- Expectations gap: When candidates or employees are used to generous large group health plans at major corporations, the individual marketplace options currently available may appear to be lacking.
In summary:
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Where employees shop for a health plan: The individual marketplace in Pennsylvania
When employees are offered the pre-tax fixed health benefit under ICHRA, their next step is to select a “qualified health insurance plan.” What exactly is that? It’s simply a plan that complies with the Affordable Care Act (ACA) requirements.
Passed in 2010, this law established a national health insurance exchange. It also put into place consumer protections like maternity care, pre-existing conditions being covered, prescription drug coverage, and more.
Within the first five years, over 8 million people purchased their health insurance through the exchange, and by 2022, fully 14 million people were using the marketplace. In those years, they added more options, but do you know what options are available to your employees in Pennsylvania? Let’s look into that:
Health insurance carriers in Pennsylvania
Pennsylvania has a state-based ACA health insurance exchange called the Pennie. Several health insurance companies offer coverage in PA on the Pennie, both national carriers as well as regional brands. For example:
- Ambetter from Pennsylvania Health and Wellness
- Capital Blue Cross
- Geisinger Health Plan
- Highmark
- Independence Blue Cross
- Oscar Health
- UPMC Health Plan
Note: The set of insurers changes by county - see all plans and prices in your county here. Going forward, we’ll use Philadelphia County as an example.
Average costs of health insurance coverage in Philadelphia
When you or an employee shops on an exchange (in Pennsylvania or elsewhere), there will be plans named after metals - gold, silver, and bronze. Higher-tiered plans have higher monthly premiums and lower out-of-pocket costs like deductibles and copays.
The lower-tiered plans typically come with more affordable premiums, but will have higher out-of-pocket expenses.
Next up, let’s discuss how to decide which options make the most sense.
- Gold plans: Best when expecting high medical costs
For example, the least expensive gold plan in Philadelphia County, Pennsylvania is Ambetter Clear Gold - HMO plan (~$331/month).
Remember: Gold plans usually have lower deductibles and copays, but monthly rates that are higher. This plan is popular for people who will have frequent medical visits in any given period.
- Silver health plans: Best for average medical costs
One example is the cheapest silver plan in Philadelphia County, Pennsylvania is the Ambetter Clear Silver - HMO plan (~$349/month).
Remember: Silver plans tend to be a compromise between Gold and Bronze, 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 Philadelphia County, Pennsylvania is the Ambetter Choice Bronze + HSA - HMO plan (~$258/month).
Remember: Monthly premiums tend to be lowest for Bronze plans, but deductibles and copays can be much higher. If you need medical care during the year, you’ll pay more out of pocket before coverage kicks in, but if you don’t end up needing care, you’ve saved cash.
Snapshot of health insurance costs in Philadelphia, Pennsylvania
Your age and location can dramatically change the cost to carry health insurance. Here is an overview of the most affordable plans in Philadelphia County by plan tier and individual's age:
Find the best health insurance option for your Pennsylvania small business
Health insurance has always been complex, but most especially for smaller businesses. If you're struggling with your current health benefits offering or hoping to add benefits for the first time, consider the pre-tax fixed health benefit, ICHRA. It simplifies benefits and empowers your employees.
Looking for guidance on ICHRA pre-tax fixed health benefits? Reach out to StretchDollar or get started here.
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