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