As a small business owner, you may wonder, "Do I have to provide health insurance to my employees?" Under the Affordable Care Act (ACA), or "Obamacare," 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 no-coverage penalty. But smaller businesses aren't under such obligations to offer insurance to employees.
In this article, we'll discuss employer health insurance requirements, such as determining if you're an ALE, calculating FTEs, and what the ACA-compliant health benefits are for employers with fewer than 50 employees.
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 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 following 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:
- On average, you employed fewer than 50 full-time employees during the previous calendar year.
- Due to a seasonal workforce, you employed more than 50 full-time employees no more than 120 days during the previous calendar year.
Due to the employer mandate, ALEs must provide health coverage to employees who work full-time and their dependents. If not, they'll face a tax penalty.
Calculating full-time and part-time employees
To determine whether your organization is an ALE, you must include all full-time employees, 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 the total number of hours worked by part-time employees in a given month, then divide the total by 120.
If the total is 50 or more after your calculations, your organization is classified as an ALE, and you'll need to follow the ACA mandate for offering health insurance benefits.
Small business health insurance requirements
The Affordable Care Act stipulates that small businesses with fewer than 50 FTEs 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:
- Attracting employees and retaining top talent. Our 2022 Employee Benefits Survey Report found that 82% of employees believe the benefits package an employer offers is an important factor in whether or not they accept a job.
- Helping your business stand out against the competition. Offering additional financial assistance through stipends or reimbursements can make for a competitive benefits package that sets you apart from competitors.
- Building a healthier workforce. Having greater access to healthcare also boosts employee productivity. If employees can avoid needing extended periods of sick leave, your organization can be more effective and profitable.
- Saving more money during tax season. Depending on the type of plan you offer, you can benefit from tax savings for offering the health plan, and employees can get tax savings by participating.
In most states, Small group health insurance is available to organizations with fewer than 50 employees. You can purchase a small group health plan directly from an insurance company or through a Small Business Health Options Program (SHOP) exchange. Getting a SHOP plan can qualify your organization for the small business health care tax credit.
The ACA doesn't specify which types of health insurance small businesses can offer their employees as long as it's affordable and meets MEC. Therefore, in addition to group health insurance coverage and small group insurance, employers can consider non-traditional health insurance options such as a health reimbursement arrangement (HRA) or health stipend.
Health reimbursement arrangements (HRAs)
HRAs are a better fit for many small businesses than traditional group health insurance because they give employees the option to choose the health plan options and services that work best for them. They can also be more budget-friendly for employers and have tax advantages.
Options such as the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA) are designed to allow employees to receive tax-free reimbursements for their health insurance premiums and other qualified medical expenses.
Your small business can also provide employee reimbursements for medical care expenses through a health stipend. These employee stipends work similarly to an HRA but with fewer regulations and restrictions. But, unlike an HRA, employers can’t ask for proof of insurance or receipts for IRS Publication 502 expenses.
There are no employee eligibility requirements or minimum monthly allowances with a health stipend. This allows organizations of all sizes to create a fully customizable health benefit that best fits their needs.
How do HRAs and health stipends compare?
Both HRAs and health stipends allow your employees to purchase their own individual healthcare coverage from a health insurance marketplace. Employees can then request a reimbursement for their monthly premium costs. This allows your employees to choose the individual health plans that work best for them.
The most significant difference between an HRA and a health stipend is its taxability. While HRAs are tax-free for both employers and employees, as long as the employee has MEC coverage, a health stipend is taxable. If you decide to offer a health stipend, your small business will pay payroll taxes on the reimbursement amount. Employees will have to pay income taxes on the amount received.
This makes HRAs a better option for most organizations. But, health stipends are an excellent option for organizations with employees who receive a premium tax credit, as a health stipend doesn't impact APTC eligibility
Affordable health insurance options for employees of small businesses
Currently, there is no penalty for individuals who don't work with an insurance carrier. 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 since they won't be eligible for employer-sponsored health coverage.
Employees can purchase their own type of plan, and you can set them up with an HRA or a health stipend as an added benefit bonus. Then, they can use that money toward their own health insurance plan, employee premiums, or other healthcare-related costs they may have.
Individuals who want their own health insurance policy can apply for coverage with help from the federal government through SHOP Marketplace. They can also go through a state exchange or a local insurance agent. Keep in mind the most convenient time for individuals to start any new type of health plan is during open enrollment.
However, there is some wiggle room when it comes to open enrollment. Suppose 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. In that case, they can qualify for a special enrollment period.
For small employers, it can be challenging to keep up with the rules and regulations of employee health insurance. While companies with 50+ employees need to offer qualified health coverage or potentially face a penalty, smaller companies aren't forced to do so.
However, offering health benefits is one of the best investments small business owners can make. Consider an HRA or health stipend if you're looking for a quality small business health benefits solution.
This blog article was originally published on November 10, 2020. It was last updated on March 9, 2023.