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Do small businesses have to offer health insurance?

Health Benefits • February 26, 2024 at 10:00 AM • Written by: Elizabeth Walker

As a small business owner, you may wonder, "Do I have to provide health insurance to my employees?" The Affordable Care Act (ACA), or "Obamacare," requires applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) 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 to provide coverage to employees.

This article will discuss employer health insurance requirements, such as determining if you're an ALE, calculating FTEs, and the ACA-compliant health benefits for small businesses with fewer than 50 employees.

Takeaways from this blog post:

  • The ACA only requires small businesses to offer health insurance to employees if they have 50 or more full-time equivalent employees (FTEs).
  • Health insurance benefits help small businesses attract top talent, stand out against competitors, promote a healthier workforce, and save money during tax season.
  • Small businesses have flexibility in the types of health insurance they can offer employees, including HRAs and health stipends. HRAs allow employees to choose their own individual health plans and medical services, while health stipends have fewer regulations and restrictions.

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

What is an applicable large employer (ALE)?

An ALE is any company or nonprofit 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.

You determine your organization’s ALE status 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 federal government considers the employer an ALE for the following 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 full-time employees and their dependents. If not, they'll face a no-coverage 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: These individuals work an average of at least 30 hours per week per 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 an ALE, and you'll need to follow the ACA mandate for offering health insurance benefits.

Small business health insurance requirements

The ACA stipulates that small businesses with fewer than 50 FTEs aren’t required to offer health insurance benefits to their current 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. In addition to competitive salaries, our Employee Benefits Survey Report found that 82% of employees believe an employer's benefits package is an important factor in whether or not they accept a job. It also has the potential to increase your employee retention rate.
  • Helping your business stand out against the competition. You can create a competitive benefits package that sets you apart from other companies in your industry by offering additional financial assistance through stipends or reimbursements.
  • Building a happier and healthier workforce. Having greater access to healthcare also boosts employee productivity and job satisfaction. If employees can avoid needing extended periods of sick leave, your organization can be more effective and profitable, and your staff will feel happier at work.
  • Saving more money during tax season. Depending on the type of plan you offer, you can benefit from tax savings for providing the health plan, and eligible employees can get tax benefits 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.

In addition to traditional employer-sponsored health insurance and small group insurance, you can consider health insurance alternatives such as a health reimbursement arrangement (HRA) or health stipend.

Health reimbursement arrangements (HRAs)

An HRA allows employers to reimburse employees tax-free for qualifying medical expenses. HRAs are a better fit for many small businesses than traditional group health insurance because they allow employees to choose the health plan, provider network, insurer, and medical care services that work best for them. They can also be more budget-friendly for employers than group coverage and have tax advantages. HRAs also have no minimum participation limits, making them an easier benefit for small businesses to offer.

Options such as the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA) give employees the ability to receive tax-free reimbursements for their individual health plan premium costs and other qualified medical expenses. An ICHRA can even help organizations with 50 or more FTEs offer a health benefit that satisfies the ACA.

Health stipends

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. But, unlike an HRA, employers can’t ask for proof of insurance or receipts for IRS Publication 502 expenses.

No employee eligibility requirements or minimum monthly allowances with a health stipend exist. This allows organizations of all sizes to create a fully customizable health benefit that best fits their needs. However, if you have 50 or more FTEs, you can’t offer a stipend instead of an ICHRA or a group plan.

How do HRAs and health stipends compare?

HRAs and health stipends allow your employees to purchase their own individual healthcare coverage from a state-based or federal Health Insurance Marketplace, directly from an insurance company, or a licensed agent. Employees can then request a reimbursement for their monthly premiums and other out-of-pocket costs. This allows your employees to choose the individual health plans that work best for them.

Taxability is the most significant difference between an HRA and a health stipend. While HRAs are tax-free for employers and employees—as long as the employee has MEC coverage—health stipends are 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. However, health stipends are an excellent option for organizations with employees who receive a premium tax credit, as a health stipend doesn't impact subsidy eligibility.

Affordable health insurance coverage options for employees of small businesses

There’s no penalty for individuals who don't work with an insurance carrier. But, if you're an employer that isn’t an ALE and isn't offering health insurance, your employees can get their own individual plan since they won't be eligible for employer-sponsored health coverage.

Employees can purchase their own 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 health insurance premiums and other medical costs they may have.

Individuals who want their own health insurance policy can apply for coverage with help from the federal government through the SHOP Marketplace. They can also go through a state exchange or a local insurance agent. Remember, open enrollment is the most convenient time for individuals to start any new health plan.

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 business 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 don’t have to.

However, offering health benefits is one of the best investments small business owners can make. Consider an HRA or health stipend if you want a quality small business health benefits solution.

Let us help you customize the right health benefits for your team. Schedule a call now with a PeopleKeep personalized benefits advisor to get started!

This blog article was originally published on November 10, 2020. It was last updated on February 26, 2024.

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Elizabeth Walker

Elizabeth Walker is a content marketing specialist at PeopleKeep. She has worked for the company since April 2021. Elizabeth has been a writer for more than 20 years and has written several poems and short stories, in addition to publishing two children’s books in 2019 and 2021. Her background as a musician and love of the arts continues to inspire her writing and strengthens her ability to be creative.