Deciding on Health Insurance Options for your Small Business

Choosing the most cost-effective and appropriate health insurance plan for your small business has the potential to be onerous and confusing. With such a range of types of product on the market, each with wildly different premiums, excesses, coverage plans and mark-ups, small business owners often face a real dilemma with regards to which route to choose. In this article, we have summarized the three traditional options that are available to you:

Group Health Insurance

These plans are probably the most well-known and well-utilised way of paying for your healthcare costs. Essentially, the health insurer charges you an annual or monthly premium for which you get access to health and dental care when you need it.

Of course, one of the main advantages to health insurance schemes, and probably one of the key reasons why so many people choose to rely on them, is the security of having a safety net for an unforeseen and potentially very costly situation.  But one must weigh up the benefits that such a scheme can bring you and your company in the longer terms, particularly from a financial perspective.

Paying Out of Pocket for Medical Expenses

An alternative to group health insurance can be the option of paying for medical treatment out of pocket, as and when it is required. Although this method provides less of a perceived sense of certainty than a traditional insurance plan, it is likely to prove to be more cost effective over the longer term as you aren’t paying for unnecessary administration and planned events.

However, you should carefully consider the tax implications of such a route.  The main reason for this is that you will need to pay medical bills after tax – potentially adding big dollars on top without you being fully aware of it. Without getting into complicated examples, if you imagine that your marginal tax rate is 43% and you have to pay a bill for medical care of $1000, the true cost to you would be $1,750! Clever budgeting and structured cash flow arrangements are therefore crucial if you decide to pay out of pocket for your company’s medical expenses.

Using a Health Spending Account

Now we come to a really viable alternative to the two mainstream approaches described above, and a product that is gaining popularity in Canada. A health spending account aims to correct the two flaws of insurance and out of pocket methods, being expense and tax inefficiency, by providing a mechanism to convert out of pocket after-tax medical bills into a before-tax business expense.  It is a potentially flexible and easy to use option, whereby you usually just pay a small annual fee or a small administration fee on the amount of your claims and gain reimbursements for a range of health-related expenses. It’s certainly worth exploring as a potential way to get around the pitfalls of the traditional routes for paying for health costs for your small business.