Are employers required to provide healthcare?

As medical expenses increase and the healthcare landscape evolves, employees increasingly rely on their employers to offer health benefits. PeopleKeep's 2024 Employee Benefits Survey found that 92% of employees consider health benefits important.

Health coverage is one of the most important benefits employers can offer their workers. However, not all employers provide health insurance as part of their employee benefits packages. According to KFF¹, just more than 60% of people younger than 65 had employment-sponsored health insurance in 2023.

Whether you're a business owner or an HR professional, it's important to understand if you must offer health insurance to your employees.

In this article, we'll go over employer health insurance requirements, the cost of coverage, and your health plan options.

In this blog post, you'll learn the following:

• Employer responsibilities for health insurance coverage.
• The average cost of a traditional group health insurance plan.
• How you can reimburse monthly premiums for individual health insurance coverage using an HRA.

Mandated health insurance laws for employers

You may have heard of the Affordable Care Act's (ACA) employer mandate. This mandate is also known as the “play or pay” requirement or the employer shared responsibility provisions (ESRP). These terms refer to the same legal requirement that dictates whether an organization must offer affordable health benefits with minimum essential coverage (MEC) and minimum value to at least 95% of its full-time employees.

According to the ACA, only applicable large employers (ALEs)—or employers with at least 50 full-time equivalent employees (FTEs)—are subject to the employer mandate. ALEs must provide health coverage to eligible employees and their dependents. But if you have fewer than 50 FTEs, the ACA doesn’t legally require you to offer health insurance benefits to your employees.

However, offering health benefits is important for organizations of all sizes. Health benefits can boost employee satisfaction, contributing to a higher retention rate.

Health plans that satisfy the employer mandate

As an employer, you have several health insurance options for your employees. Let’s review the plans that meet the requirements of the employer mandate.

Group health insurance

There are a variety of health plan options that offer MEC, including group health insurance policies like low and high deductible health plans (HDHPs).

If you choose to offer a group plan, you may offer one of the following network types:

• Preferred provider organization (PPO) plans
• Health maintenance organization (HMO) plans
• Exclusive provider organization (EPO) plans
• Point of service (POS) plans

You also have the option of purchasing a fully-insured group policy from an insurance carrier, or implementing a self-funded or level-funded plan. If you choose to offer a fully-insured plan, you can work with an insurance agent or broker to find the right health insurance company for your organization. Small businesses with fewer than 50 employees (or up to 100 employees in some states) can also find a small group health plan through the Small Business Health Options Program (SHOP) marketplaces. SHOP plans aren’t available in all states.

While group health insurance is the traditional option for larger employers, it may be unaffordable or too time-consuming for small employers to manage. According to KFF², the average annual cost of employer-sponsored health insurance premiums per employee was $25,572 for family coverage and $8,951 for single coverage in 2024.

HRAs

If you're not interested in a costly and rigid group health insurance plan, a stand-alone health reimbursement arrangement (HRA) is another option. It’s a great way for small businesses to offer health benefits, often for the first time. As an ALE, an HRA can also help you avoid the penalties for not offering health insurance benefits.

An HRA is an affordable health coverage solution. With this employer-funded health benefit, you don't have to worry about striking a good deal with an insurance company or taking on the financial risk of covering employee claims with a self-funded plan. Instead, your employees buy their own policy through a health insurance marketplace. There’s no need to rely on employer-provided health insurance.

With an HRA, you choose a monthly allowance of tax-free money for your employees to spend on more than 200 types of qualifying out-of-pocket costs, including their individual health insurance premiums. Reimbursements are tax-free for your employees and tax-deductible for employers.

Here's how it works:

• You set an allowance amount for your employees to use on medical expenses.
• Your employees pay for their health plans and other medical services using their own money.
• Your employees submit proof of their eligible medical costs to you or your HRA administrator for reimbursement.
• Once you approve the expense, you reimburse them up to their available allowance amount.

Plus, any unused funds stay with you at the end of the year. This helps keep healthcare costs in check because you won’t have to stress about those yearly price jumps that usually come with group health plans.

For an ALE who needs to satisfy the employer mandate, the individual coverage HRA (ICHRA) is a great solution. Offering an affordable ICHRA allowance helps ALEs satisfy the mandate. Employees then enroll in individual health insurance plans with MEC and minimum value.

Learn more about calculating ICHRA affordability.

Here are some advantages of the ICHRA:

• The ICHRA works for employers of all sizes.
• You can offer this type of plan as a stand-alone benefit to all your employees. You can also offer it as a separate benefit for your employees who don't qualify for your group health insurance coverage. For example, you could offer the ICHRA to your remote employees in states beyond your main office or part-time employees.
• With the ICHRA, there are no minimum or maximum employer contribution limits, so you can offer your employees as little or as much as you choose.
• You can differ allowance amounts and benefit eligibility with 11 employee classes, such as full-time or seasonal employees.
• Your employees can choose the individual health plans that work best for their budgets and situations. Some workers may require very little care, while others with health issues may need a higher level of coverage.

Organizations with fewer than 50 FTEs can also use the tax-free qualified small employer HRA (QSEHRA). Like the ICHRA, you can use it to reimburse premium costs and other medical expenses.

Health stipends

While it's not an ACA-compliant health benefit, a taxable health stipend can cover your employees' healthcare costs. Small businesses that can't afford traditional group health insurance may find that a health stipend is a way to help employees pay for their own individual health plans and medical care.

A health stipend can cover out-of-pocket costs related to:

• Monthly premiums for health, vision, or dental coverage
• Doctor's appointments
• Prescription drugs
• Over-the-counter medication
• Emergency care

However, you can't require employees to submit receipts or invoices to prove they're spending this stipend as intended. You also can't ask them for proof of health insurance coverage. Stipend allowances are also taxable, and don’t satisfy the employer mandate.

The penalty for not offering health insurance to employees

While the ACA requires all ALEs to offer affordable coverage to 95% of full-time employees, only ALEs with at least 30 full-time employees (not full-time equivalent) will be subject to penalties for noncompliance.

There are two types of financial penalties an employer may have to pay—one for not offering MEC to 95% of full-time employees and one for offering MEC that doesn't meet minimum value (MV) or affordability standards:

Note: This figure represents the 2025 penalty³.

An organization only triggers a penalty if one or more of its full-time employees enroll in coverage through a health insurance exchange and also qualifies for a premium tax credit.

To determine the (a) penalty, employers only have to include their full-time employees in excess of 30. For instance, suppose an employer has 60 full-time employees and doesn’t offer MEC to at least 95% of those employees. In that case, they’d subtract 30 and calculate the Section 4980H(a) penalty based on the remaining 30 full-timers.

To get the monthly per-employee penalty, employers can divide the annual penalty by 12. To get the total monthly penalty, employers should multiply the number of full-time employees employed during a given month minus 30 by the monthly per-employee penalty.

Conclusion

Not every organization has to provide employer-sponsored health coverage. If you're an ALE, you must provide health insurance to employees. While offering health benefits may seem costly at first, the cost of not offering coverage for employees can come out to be even more, both in penalties and the high cost of employee turnover.

Even though small businesses don't have to satisfy the ACA's employer mandate, prioritizing employee health by offering healthcare coverage as part of a comprehensive benefits package can help boost retention and recruitment.

Luckily, offering health benefits that are affordable for both you and your employees is easier than it seems, especially if you have health benefits administration software and an award-winning customer support team like PeopleKeep on your side.

This blog article was originally published on November 10, 2021. It was last updated on December 10, 2024.

1. KFF Employer-Sponsored Health Insurance 101
2. KFF 2024 Employer Health Benefits Survey
3. IRS Rev. Proc. 2024-14