Navigating Healthcare Options for your Startup
Understanding your payroll + healthcare options for your startups can be daunting and complex.
This blog post aims to shed light on three popular healthcare options for startups: PEOs (Professional Employer Organization), Small Group plans, and ICHRAs (Individual Coverage Health Reimbursement Arrangement).
1. PEOs (Professional Employer Organization) Plans:
Examples: Justworks, Rippling, Insperity
PEO plans involve a partnership with a third-party organization that acts as the employer of record for payroll and benefits purposes. Some notable examples of current PEO providers for startups include companies such as Justworks, Rippling, and Insperity.
- Simplicity: PEOs are straightforward to use and very easy to integrate into your business. In fact, PEOs handle payroll, benefits administration, and compliance-related tasks that can often burden startups, making it easier for founders to focus on growing their business while also providing needed benefits for their employees.
- Ample Offerings: Since your plan is managed by your PEO and not you, your startup has the ability to qualify for various health plans that you may not have been previously eligible for. Due to their ability to pool employees from firms across the globe into a singular organization, PEOs are legally considered “large-employers,” meaning they have access to different health plans (some with more benefits) than those available to small businesses. Thus, PEOs can serve as a valuable plan for startups looking for accessible and expansive benefit offerings.
- High Costs: PEOs operate at a variable cost – meaning that the price you pay is dependent on the number of employees at your startup and the type of plan that you are seeking. Especially if your business has scaled and your employee count has increased, this may be inefficient for your business and can cost you more than a fixed price plan (ICHRA)
- Size Restrictions: Some PEO providers have restrictions that are not suitable for small teams. Many PEOs only serve companies with 5 or more employees meaning that startups with a lower employee size are unable to utilize their services.
- Hard to Migrate: Since PEOs offer bundled services, it can be logistically challenging and financially inefficient to transition to another plan provider once you have already implemented a PEO. This is especially important for high-growth startups looking to scale their operations to that of a large-employer, as transitioning off of a PEO comes with a multitude of additional administrative costs.
PEOs can serve as an effective plan for startups looking to provide health benefits for their employees due to their simple, almost hands-off design. However, once your business grows and you start to employ more people it may be costly to maintain a PEO compared to other options.
2. Small Group Plans:
Small Group plans are designed for businesses with a limited number of employees. Typically, businesses eligible for Small Group plans have less than fifty employees.
Small group plans function as an effective way for startups to provide health benefits to their employees, especially for businesses with teams in one locality.
- Premium Calculation: Small Group plans are crafted by insurance companies that factor qualities like location, age, and tobacco usage when calculating the price of premiums. A universal location for all employees creates a standard rate that can save startups money through lower premiums and administrative costs. Also, startups with younger employees may be at an advantage due to the lower risk that they pose for insurance companies.
However, while there are tangible benefits of utilizing a small group plan, there are also some important disadvantages.
- Variable Cost:. Since the price of small group plans are calculated per-employee, they can grow burdensome for startups looking to scale.
- Premium Calculation: While a variable premium cost can function as a benefit for some startups, it can inhibit those with teams across multiple states and those with employees of differing ages.
- Plan Access: Plans are restricted for certain businesses on levels of employer-contribution and employee-participation, which can inhibit the type of plan that startups can offer their employees.
In summary, Small Group plans should be utilized by smaller startups with teams centralized in one location. Businesses looking to scale or with teams spread across the country could potentially face higher insurance costs compared to other options if they utilize a Small Group plan.
3. ICHRA (Individual Coverage Health Reimbursement Arrangement):
ICHRA is a healthcare benefit option that allows employers to reimburse employees for individual health insurance premiums and other medical expenses. ICHRAs are the newest healthcare option out of those covered in this blog, becoming available for usage in 2020 and have quickly grown in popularity since then.
- Employee Freedom: ICHRA empowers employees to choose the health insurance plan that best suits their individual needs, fostering employee satisfaction.
- Scalability: ICHRA’s are highly scalable. As the company grows, it can adjust its contributions without having to change insurance carriers or plans.
- Fixed Cost: Employers establish a set budget that they are willing to spend on prior to their employees purchasing their own plans. The amount of money a startup spends on health benefits is internally dictated and not dependent on their number of employees. Employers can always change their budget contributions over time at their discretion.
- Location-Fluid: Since employees choose their own independent plans that align with their own needs, there are no restrictions that limit benefits to certain states. This is helpful for remote-based startups or companies with geographically diverse teams who are looking to still provide their employees with important benefits.
- Unfamiliarity. The relative newness of ICHRAs as a market offering for startups has resulted in a general limited understanding of their coverage. While ICHRAs are relatively flexible and easy to manage, startups must take many steps to handle set-up, implementation, administration, and budgeting, all which could potentially be overwhelming for a startup with a lot on their plate. Since ICHRAs were established in 2020, the lack of familiarity with the intricacies of the plan could potentially inhibit the quality of care that employees receive.
- Administrative Complexity: Similarly, ICHRA plans require startups to handle administrative tasks such as verifying employee expenses, reviewing documentation, and reimbursing employees accordingly. This administrative burden can be time-consuming and may require dedicated resources or external assistance to manage effectively.
The bottom line is that firms looking to take advantage of the flexibility and cost-effective nature of ICHRAs should heavily consider adopting them as their main method of providing benefits. However, if a startup is wary of the relatively new and growing space or is unable to manage the administrative tasks associated with ICHRAs, then they should consider providing benefits through the other aforementioned options.
As startups navigate the healthcare landscape, it's essential to explore and compare different options to find the best fit. ICHRA, Small Group plans, and PEO plans all offer distinct advantages and considerations. All three options are tax-deductible, providing clear financial reasons for startup founders to adopt healthcare options as a meaningful way of attracting and retaining talent. By carefully assessing cost, customization, compliance, administrative requirements, and employee preferences, startups can make informed decisions that promote the health and well-being of their team members while aligning with their budgetary constraints. Ultimately, selecting the right healthcare option is crucial for building a strong foundation that supports both the business and its employees in the long run.