Each month, more than half a million aspiring entrepreneurs in the United States take the bold step of starting their own businesses. For these determined individuals, the right insurance choices can make all the difference between celebrating their business's first anniversary or experiencing a disappointing inaugural year. Whether they have a small team or a few hundred employees, whether they sell products or offer services, and whether they run their operations from a home office or a separate location, small business owners must consider insurance in a distinct manner compared to individual consumers.
What are the types of health insurance coverage?
There are several types of health insurance available for purchase within a group plan. Plans typically cover a comprehensive array of healthcare needs including doctor visits, prescription drugs, and hospital care. Benefits are delivered in a variety of ways including:
- Indemnity plan – This major medical plan typically carries a deductible – an amount the insured must pay before the insurance company begins paying benefits. After covered expenses exceed the deductible amount, benefits usually are paid as a percent of actual expenses. These plans usually provide the most flexibility in choosing where and from whom the insured can receive care.
- Health Maintenance Organization (HMO) – This plan typically requires the insured to choose a primary care physician (PCP) from an approved list of network providers. The PCP is responsible for all healthcare decisions. If a patient needs care from a different healthcare provider, he or she must get a referral from the PCP. Medical treatment by out-of-network providers may not be covered by the HMO at all or may be covered at a reduced level.
- Preferred Provider Organization (PPO) – In this plan, the insurance company enters into contracts with selected hospitals and doctors to furnish services at a discounted rate. As a member of a PPO, if you choose to receive care from a doctor or hospital not listed as a preferred provider, you will likely pay a higher deductible or co-payment.
- Exclusive Provider Organization (EPO) – This plan is similar to a PPO, but more restrictive. The insured must only use providers from the specified network of physicians and hospitals to receive coverage. Typically, except for emergency situations, there is no coverage for care received from a non-network provider.
- Point of Service (POS) – The POS plan is a hybrid of the PPO and HMO models. The plan is more flexible than HMOs but does require the insured to select a PCP. Like a PPO, employees may choose to receive care from an out-of-network provider and pay additional costs out of pocket. However, if a PCP refers the employee to an out-of-network doctor, the POS provider will likely cover the care.
What are health savings and spending accounts?
Small businesses also may offer special health savings and spending accounts to help employees offset out-of-pocket medical costs.
- Health Flexible Spending Accounts (FSA). A Health FSA allows an employee to set aside a portion of earnings for qualified medical expenses. Money is deducted from an employee's pay before payroll taxes. Under new terms of the Patient Protection and Affordable Care Act (ACA), employees can carry over up to $500 in the account into the following year – you no longer forfeit funds not spent by year-end.
- Health Savings Accounts (HSA) with High-Deductible Health Plans (HDHP). An H allows employees to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis. To open an HSA, the employee must be covered by a High Deductible Health Plan (HDHP). Sometimes referred to as a “catastrophic” health insurance plan, an HDHP is a less expensive health insurance plan that does not pay for the first several thousand dollars or more of healthcare expenses, i.e., the deductible, but covers health expenses after that.
What is disability insurance?
When your livelihood depends on a few key people, making sure you have the resources to keep the business running in the event of a personal mishap is a must. Disability insurance is designed to replace income or other expenses if you or your employees are unable to work for an extended period of time due to a physical or mental illness or injury. Like other insurance, small businesses typically can save money by purchasing disability coverage within a group policy.
What are the types of disability insurance?
- Short-term disability insurance covers a portion of the policyholder’s salary for a short period, typically three to six months following a disability. The specific time period and percent of income replaced vary. According to the Small Business Administration (SBA), employers may specify a number of days of sick leave to be paid at 100 percent of salary. Employees can use specified sick days before short-term disability begins.
- Long-term disability insurance coverage typically begins after the policyholder is unable to work for at least six months. Coverage can extend for a specified number of years or until the insured retires or reaches age 65 depending on the policy.
Note that most states require employers to purchase workers’ compensation insurance, not disability insurance to protect employees injured on the job.
What is workers' compensation?
Workers' compensation insurance protects a business owner from the employer's statutory obligation to provide coverage for its employees who experience a work-related injury or illness on business premises or due to business operations. Nearly all U.S. states require employers to purchase a workers' compensation insurance policy to cover employees. The law provides workers' compensation as the sole remedy for an injured employee. Check with your state insurance department to understand what is required for your specific business type.
What does workers' compensation cover?
Typically, workers' compensation covers an injured employee’s medical expenses, rehabilitation costs, and lost wages. Workers' compensation insurance premiums are set by insurers. For a new business, premiums may be based on broad factors such as total company payroll, number of employees, earnings per employee, and type of work performed. For an established business, workplace safety history also is a contributing factor to costs.