Protecting employees: Workers’ compensation vs. health insurance

As a small business owner, you may already understand the basic differences between workers’ compensation insurance and health insurance. Workers’ comp covers workplace injuries and illnesses. Health insurance (including temporary and long-term disability coverage) is a benefit that many employers offer their workers for preventative care and medical expenses.

The difference between the two can sometimes be confusing, especially when a small business owner is trying to determine whether they should:

• Offer health insurance (and particularly disability benefits) to employees
• Purchase workers’ compensation insurance and health insurance as an independent contractor

Before purchasing insurance, there are a number of factors and legal obligations that each business owner should consider, such as the location of the company and their business type.

Although workers’ compensation insurance and disability insurance both provide financial help to sick and injured workers who are unable to work, there a few key differences that separate the two policies.

Workers’ comp is a type of business insurance that pays for the medical treatment of injured workers when they experience a job-related injury or illness. Most states require businesses that have employees to provide workers’ compensation benefits.

In general, health insurance benefits individuals by helping them pay for medical care that is unrelated to their work. Disability insurance is a type of health insurance that will help pay an individual’s lost income if they become disabled and are unable to work.

The federal government does not require Americans to carry health insurance, although Washington DC and the states of California, Massachusetts, New Jersey, Rhode Island, and Vermont do require individuals to have health insurance or pay a tax penalty.

While short- and long-term disability insurance policies are also voluntary, a few states, such as California, have state disability programs that offer mandatory coverage to all eligible employees.

It depends on the size of your business. Employers with 50 or more full-time employees, including full-time equivalent employees, are considered an applicable large employer (ALE) and must provide minimum essential coverage for employees. You need to meet these requirements whether you offer a group health insurance plan or use self-insurance.

If you employ 50 or fewer employees, your business might be eligible to buy coverage through the Small Business Health Options Program, or SHOP Marketplace. Some states allow employees with up to 100 employees to buy coverage through SHOP.

If you have less than 25 full-time employees, your business may be eligible for a Small Business Health Care Tax Credit that covers part of your costs of coverage.

Depending on the size of your company, one option would be to have your employees buy their own private insurance through the Healthcare.gov marketplace and offer some level of reimbursement to your employees to help with their premiums, co-pays, and other medical costs.

Every employer that provides health insurance to its employees must file an annual return with the IRS that includes the taxpayer identification number (TIN) and coverage information for each covered employee.

This is a gray area that requires a conversation with your health insurance provider. Most health insurance policies contain language that excludes coverage for occupational injuries and illnesses.

Some policies say that coverage is only excluded when the injury or illness can be covered by a workers’ comp policy – which is most of the time unless you are an independent contractor. In some states, you may be covered under a client’s policy because the laws consider contractors to be employees. In other states, you are on your own. Be sure to talk with your insurance agent in order to understand your exposures.

Perhaps you don’t technically have employees, but you do occasionally hire out your work to a subcontractor or seasonal part-time help. In some states, these workers would be considered “employees” and necessitate workers' comp coverage.

Independent contractors may be able to forego workers’ compensation insurance and health insurance, depending on the laws in their state.

While not every employer offers life insurance, workers’ comp claims can act as a type of life insurance. If an employee dies from a work-related injury or illness, their workers’ comp can provide a cash benefit to the employee’s dependents. The death benefit amount and who may receive it depends on the laws in your state.

If you need proof of workers’ comp insurance but don’t have any employees, a ghost policy may be a cost-effective option to consider. It can help you fulfill the terms of a contract or meet state requirements without paying a typical premium. However, ghost policies are also not available in every state.

If you think a workers’ comp ghost policy may be right for your small business, speak with an insurance agent to discuss your options.

Beyond worker’s comp, there are many types of insurance that small business owners should consider:

General liability insurance is typically the first insurance policy bought by small business owners, because it’s often required for leases and contracts. It insures against common business risks, such as customer injury, customer property damage, and advertising injury.

Commercial property insurance covers your business’s physical location and equipment in case it’s stolen, lost, or damaged. It may be required to sign a commercial property lease.

A business owner’s policy (BOP) combines your general liability and commercial property insurance into one policy and usually has lower premiums than buying these coverages separately.

Commercial auto insurance is required in most states for businesses that own vehicles. It covers legal bills, medical expenses, and property damage if a business-owned vehicle is in an accident.