Do small businesses have to offer health insurance?

Written by: Elizabeth Walker
December 17, 2021 at 8:53 AM

As a small business owner, you may be wondering, "Do I have to provide health insurance to my employees?" Under the Affordable Care Act (ACA), applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) are required to offer affordable health benefits that meet minimum essential coverage (MEC) or be subject to a penalty. But smaller businesses aren’t under such obligations.

In this article, we’ll discuss employer health insurance requirements like how to determine if you’re an ALE, calculating FTEs, and what the ACA requirements are for employers with less than 50 employees.

Aren't sure if your business is required to offer health insurance? Find out in our reference chart!

Looking for a specific section? Skip ahead below!

What is an applicable large employer (ALE)?

An ALE is any company that has at least 50 FTEs. According to the ACA, an FTE is someone who works at least 30 hours a week, or 130 hours of service per month.

Your organization is defined as an ALE on a calendar year basis. For example, you could be an ALE in one year but not the next year if you lost some employees. Typically, if an employer has a monthly average of at least 50 full-time equivalent employees during a calendar year, the employer is considered an ALE for the next calendar year.

Your organization doesn’t qualify as an ALE if:

  • You employed fewer than 50 full-time employees on average during the previous calendar year.
  • You employed more than 50 full-time employees no more than 120 days during the previous calendar year due to a seasonal workforce.

Due to the employer mandate, ALEs are required to provide health coverage to their FTEs and their dependents or else pay a tax penalty.

Calculating full-time and part-time employees

To determine whether your organization is an ALE, you must include all FTEs, plus the full-time equivalent of your part-time employees.

For the majority of organizations, the calculations are simple:

  • Full-time employees: Are defined as working an average of at least 30 hours per week in a given month. You’ll need to count up all your full-time employees.
  • Full-time equivalents: To calculate the full-time equivalent of all your part-time workers, add up the total number of hours worked by part-time employees in a given month, then divide the total by 120.

If after your calculations, the total is 50 or over, your organization is classified as an ALE and you’ll need to follow the ACA mandate for offering health insurance.

Small business health insurance requirements

The ACA stipulates that small businesses with fewer than 50 employees are not required to offer health insurance benefits to their employees or pay a tax penalty. However, that doesn’t mean they shouldn’t provide health insurance benefits.

Here are some advantages of offering health insurance:

  • Attracting employees and retaining top talent
  • Helping your business stand out against the competition
  • Building a healthier workforce
  • Saving more money during tax season

The ACA doesn’t specify what kind of health insurance small businesses can offer your employees, as long as it’s affordable and meets MEC. Therefore, in addition to group health insurance, employers can consider a variety of non-traditional health insurance options, such as a health reimbursement arrangement (HRA).

Many organizations prefer HRAs over group health insurance because they are more budget-friendly and come with tax advantages. Options such as the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA) are designed to allow employees reimbursements for their insurance premiums and other qualified medical expenses.

Overall, offering health insurance may be a worthwhile investment for your small business, even if you aren’t legally bound to offer it.

Want to know which HRA is best for your organization? Check out our comparison chart!

Insurance options for employees of small businesses

Currently, there is no penalty for individuals who don’t have insurance. However, if you’re an employer that is not an ALE and isn’t offering health insurance, your employees have the option of getting their own individual health insurance policy. Employees can purchase their own health policy and you can set them up with an HRA as an added benefit bonus.

Individuals that want their own health insurance policy can apply for coverage on the federal marketplace, a local broker, or a state exchange. The most convenient time for individuals to start a new policy is during open enrollment.

If an employee experiences a qualifying life event, such as losing their current health coverage, getting married or divorced, having a baby, or changing their residence, they can qualify for a special enrollment period.

Check out our blog on how to apply for individual health insurance!


For small business employers, it can be challenging to keep up with the rules and regulations of health insurance. While companies with 50+ employees need to offer qualified health coverage or potentially face a penalty, other smaller companies aren’t compelled to do so.

However, offering health benefits is one of the best investments small business owners can make. If you’re an ALE looking for a quality customizable health benefit solution, consider an HRA. Schedule a call with a PeopleKeep personalized benefits advisor to see how we can help get you on your way to a customized health benefit.

This article was originally published on November 10, 2020. It was last updated December 17, 2021.

Topics: Employer Mandate, Affordable Care Act, Health Reimbursement Arrangement, Healthcare Reform, Applicable Large Employers

Additional Resources

See what you can expect to pay for health insurance in your state.
Get our guide on how to offer health benefits with a small budget.