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Understanding small business health insurance is something most small business owners perceive as complex and an expense over which they have little control.

Small business health insurance is something most small business owners perceive as complex and as an expense that they have little control over. A new report by the Urban Institute tackles the subject and provides several points that warrant consideration by businesses of any size.

The new report identified the trend of rising costs of individual premiums within the government-run Healthcare Marketplace and the uncertainty of the future of the Affordable Care Act (ACA). Together these elements are forcing small business managers to reevaluate their health care coverage and carefully consider their policy cost, risk, coverage levels and even the possibility of fines.

Self-funded health insurance plans (also known as self-insured plans) are heavily utilized by enterprise companies but remain relatively rare in the small to midsize business sector (SMB). These plans are generally administered by insurance carriers or Third Party Administrators (TPAs) and have medical claims paid by the businesses as they're incurred.

Financial Risk

Traditional small business health insurance plans provide coverage when premiums are paid to brokers or insurance carriers. The financial risk of providing benefits to employees, in this case, is incurred by the insurance company. With self-insured plans, the financial risk is taken on by the businesses covering their employees.

Stop-loss insurance policies are often available to aid businesses in alleviating the potential risk of incurring excessively high claims that could otherwise be severely detrimental to businesses that self-fund their health cost coverage. Unfortunately, many business owners are unaware that stop-loss coverage exists and don't consider self-funding as an option due to the potential risk to their cash flow and business viability.

Administering Self-Funded Plans

When evaluating whether to administer their own self-funded plans, consider the regulatory compliance needs of governing bodies and laws such as the Employee Retirement Income Security Act (ERISA) and the Health Insurance Portability and Accountability Act (HIPAA). Plan managers must be well-versed in all applicable state and federal regulations and properly secure employee health care data whether it's in paper, electronic or verbal form.

While these administrative tasks may seem burdensome, companies will benefit in the long run. By following these regulations, businesses will have greater control over the health care costs they cover, secure better access to providers and directly benefit from a healthy workforce when claims costs are lower than the premiums they once paid.

Financial benefits to the companies continue with improved cash flow, being able to invest the income that would have otherwise been paid in premiums and by having access to health care data to help guide and support employees in making healthier choices.

Tax Considerations

A primary benefit of self-funded health care is eliminating state health insurance premium taxes that often range from 2 to 3 percent of premium dollars. In late 2016, Congress reversed the IRS definition of Health Reimbursement Accounts (HRA) which can affect small businesses that average less than 50 full-time employees. While ultimately beneficial for many, it does require heavy documentation. With these HRA plans, employers pay 100 percent of the health care benefit (up to specific caps) rather than cost-sharing premium amounts with employees. Not only is this valuable to the employee, but employers are able to reduce their taxable income as well.


Every employer will not qualify or be suitable to implement self-funded insurance programs. Companies with workers that are at a higher risk of incurring claims due to disease, lifestyle or demographics, may not be ideal for this type of program. A decade ago most insurance carriers only offered self-insurance plans to companies with over 100 employees in their workforce. Today, plans are routinely available for as few as 25 employees and some reported to have had only five employees.

Businesses will want to take into consideration their employees' current plan usage (loss ratios) among coverage areas if the information is available to them. Potential coverage gaps with medical, dental, vision, disability or mental health could result in retention concerns. A similar problem exists if companies choose to continue with traditional health insurance plans. Often narrow networks that severely limit provider choice and the employee's portion of the premium itself, could compel employees to seek work elsewhere when specific coverage is desired.


Health care coverage for small businesses remains a complex topic with many aspects to consider. That's why it's important to consult with a trusted advisor to make sure you're providing the best plan for your needs. Cash flow, taxes, potential fines and employee retention are all contributing factors that must be weighed. Adequate time will need to be invested by business leaders and advisers to choose coverage levels and program structures that are right for each company. Self-funded insurance plans and risk mitigation policies should be considered as potential alternatives when health care coverage options are evaluated.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.

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