MN Small Businesses – Individual vs Group Health Insurance

Many MN small businesses are wondering if they should offer an employer sponsored group plan or simply pay for employees’ individual plans.

In light of recent IRS guidance, employers must be very careful when pay for employees’ individual health insurance plans. Not only do they have to treat any payment toward individual premiums as wage (and thus subject to FICA and taxed), but they also cannot associate those payments with any individual plan. That means any “reimbursement” or payment has to be a salary increase that is the same for every employee in the job class, even if the employee is on their spouse’s plan. If the payments are in any way tied to an individual health plan, the possible penalty is $100 per day per employee.

The benefit of the employer sponsored group plan is that it is in compliance with the Affordable Care Act and IRS guidance. Also, by offering a group plan, you can take advantage of the pre-tax nature of employee and employer contributions toward the group premiums. That means those payments can avoid the 7.65% payroll tax levied against the employer and the employee. In addition, the employees don’t get taxed on the contributions, so it does not count toward taxable income for state and federal income tax purposes. When accounting for the tax savings, the group plans are often less expensive than the corresponding individual plans.

In the end every employer is different and no one strategy can be applied to every small business, and there are real benefits to considering each strategy. Speak with an MNHI broker to determine which strategy would be best for your situation.