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 such as determining if you’re an ALE, calculating FTEs, and what the ACA requirements 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 Affordable Care Act, 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:
- You employed fewer than 50 full-time employees on average 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 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 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.
Small business health insurance requirements
The Affordable Care Act 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
Small group health insurance is available to organizations with fewer than 50 employees in most states. 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 some small businesses over group health insurance because they give employees the option to choose the health plans and services that work best for them. They can also be more budget-friendly 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 reimbursements for their insurance premiums and other qualified medical expenses.
Your small business can also provide employee reimbursements for medical expenses through a health stipend. These employee stipends work similarly to an HRA but with fewer regulations and restrictions.
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 health insurance coverage from a health insurance marketplace. Employees can then request a reimbursement for their insurance premiums. This allows your employees to get the coverage that works 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, a health stipend is taxable. If you decide to offer a health stipend, your small business will pay payroll taxes on the reimbursement amount, while employees will have to pay income taxes on the amount received.
This makes health stipends an excellent option for organizations with employees who receive premium tax credits, as a health stipend doesn’t impact APTC eligibility.
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 or a health stipend as an added benefit bonus.
Individuals that want their own health insurance policy can apply for coverage on the federal marketplace, a state exchange, or through a local broker. The most convenient time for individuals to start a new policy is during 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 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, smaller companies aren’t compelled 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 April 7, 2022.