When you’re running a business, every dollar matters. If you’re not legally required to offer medical coverage, choosing not to provide health benefits may seem like an easy way to pinch your pennies. However, the real cost of not offering health coverage can appear in less obvious places, such as higher turnover, lost productivity, and Internal Revenue Service (IRS) penalties for larger employers.
In this article, we’ll break down what not offering health benefits costs businesses of all sizes and explain how health reimbursement arrangements (HRAs) can help you provide competitive benefits without overspending.
In this blog post, you’ll learn:
- How not offering health benefits can cost small businesses money.
- What IRS penalties applicable large employers (ALEs) are at risk for under the Affordable Care Act’s employer mandate if they fail to offer proper health coverage.
- The costs of traditional group plans and taxable health stipends, and how stand-alone HRAs can provide a more budget-friendly alternative.
If your organization has fewer than 50 full-time equivalent employees (FTEs), there’s no federal requirement to offer your employees health insurance coverage. You may think not offering benefits will save your small business money, but it’s actually quite the opposite.
Here are a few ways that choosing not to offer health benefits can cost you:
Larger organizations are still subject to the turnover, productivity, retention, and hiring costs that smaller companies face, as outlined in the section above. Even large organizations don’t want to spend extra money just to avoid offering health benefits. However, there is a bigger concern you should have if you’re a larger business.
All applicable large employers (ALEs), or organizations with 50 or more full-time equivalent employees (FTEs), must offer health insurance to at least 95% of their full-time workers that includes minimum essential coverage (MEC). The coverage must also be affordable and provide minimum value to full-time employees and their eligible dependents.
This requirement, also known as the employer mandate (or the employer shared responsibility provision) under the Affordable Care Act (ACA), helps ensure health coverage for millions of employees nationwide.
If you’re an ALE and you don’t comply with the employer mandate, you may be subject to a tax penalty if at least one of your full-time employees qualifies for premium tax credits and buys a subsidized individual health plan on an ACA exchange.
The employer mandate penalties are as follows in 2026:
|
Who does it penalize? |
How much is the penalty? |
Further details |
|
|
Section 4980H(a) penalty |
ALEs who fail to offer MEC to 95% of their full-time workers. |
$3,340 per full-time employee, minus the first 30 employees. |
The IRS determines this penalty based on how many months your employees went without coverage during the previous calendar year. |
|
Section 4980H(b) penalty |
ALEs who fail to offer affordable health coverage that provides minimum value. |
$5,010 per full-time employee |
The IRS determines the Section 4980H(b) penalty based on the number of employees enrolled in a health plan that received premium tax credits. |
According to federal government rules, if you violate Section 4980H(a) and Section 4980H(b), the IRS will fine you the greater of the two penalties, not both.
Now that you know the high cost of failing to offer health benefits, you may consider offering a traditional group health plan. Roughly 154 million Americans have employer-sponsored group health coverage. Since so many people are familiar with group health plans, offering one is a good way to attract and retain employees and improve overall workplace satisfaction. But if you think group plans are a cost-effective option just because they’re popular, think again.
According to KFF’s Employer Benefits Survey, the average premium for self-only coverage was $9,325 annually ($777 per month) in 2025, while the average family coverage premium was $26,993 annually ($2,249 per month)5. Of these amounts, employers contributed $7,884 annually toward their employees’ single coverage premiums and $20,143 annually toward family plan premiums6.
These high costs can be too much for employers’ budgets, regardless of company size. Small businesses may also have difficulty meeting their insurer’s minimum participation requirements. Insurance carriers typically require employers to enroll 50% to 70% of their employees in the group health plan to offer coverage. If they don’t meet the set participation rate, the employer can’t offer it.
Many small businesses compensate for not offering group health insurance by cobbling together an informal solution, such as a taxable health stipend. With a stipend, employers give each employee a flat salary raise and encourage them to spend it on individual health insurance and other medical expenses. This solution allows employers to control their costs and frees them from the administrative time they may have spent on managing a group health plan.
However, grossing up your employees’ wages may not solve your problem. Most employees don’t consider extra cash a “benefit,” and they can choose to spend it on other items rather than health insurance. Stipends also cost your organization more in payroll taxes.
Suppose you give each of your 40 employees an extra $3,000 per year to buy health insurance. In addition to the base salary increases, you must also pay 6.2% of every dollar to Social Security and 1.45% to Medicare7. In total, that’s an additional $9,180 in payroll taxes alone for your organization, and your staff will have to pay income taxes on the extra money.
If you want to avoid group coverage and stipends because of the high costs but still want to provide your employees with a health benefit, you’re in luck. A stand-alone HRA is an affordable, flexible employee benefit that can work for small businesses, midsized organizations, and ALEs — without the need to buy a group health plan.
With a stand-alone HRA, you choose a defined monthly allowance. Your employees then use that allowance to pay for out-of-pocket medical costs, including individual health plan premiums. After employees incur an eligible expense, you review their claim documentation and, if approved, reimburse them tax-free up to their set allowance amount.
The sections below will go over two stand-alone HRAs that can work for you, depending on your company’s size.
The qualified small employer HRA (QSEHRA) is only for small businesses with fewer than 50 FTEs that don’t offer a traditional group health plan. Employers set a budget-friendly monthly allowance up to the IRS’s annual maximum limit. Then, employees enroll in their preferred individual health coverage, whether that’s a single plan or a family policy.
Through a QSEHRA, employees can receive tax-free reimbursements for individual health insurance premiums and eligible out-of-pocket medical expenses, including preventive care, doctor visits, and prescription drugs listed in IRS Publication 502. As with other HRAs, reimbursements made through a QSEHRA are tax-deductible for the employer, exempt from payroll taxes, and income-tax-free for employees.
You must offer the QSEHRA to all your W-2 full-time employees. You may also extend eligibility to your part-time staff, but federal rules require that you provide the same allowance amount to all eligible employees. To participate in the benefit, employees must have a health plan that provides MEC.
An individual coverage HRA (ICHRA) allows employers of all sizes to reimburse employees tax-free for individual health plan premium payments and other qualified medical expenses. While it’s similar to the QSEHRA, the ICHRA offers greater flexibility.
This stand-alone HRA has no annual limits, and employers can customize the benefit by selecting different allowances and setting specific eligibility rules based on employee classes, such as full-time, part-time, seasonal, or salaried workers. You can also vary allowances by age or family status.
An ICHRA can also help satisfy the ACA’s employer mandate for ALEs, provided their ICHRA allowance meets affordability requirements. However, whether you’re a small business or an ALE, your employees must enroll in a qualifying individual health plan to receive reimbursements.
Not offering health benefits can seem appealing if you’re trying to avoid the cost of group coverage. However, this choice comes with hidden costs. From high turnover, decreased productivity, and spikes in payroll taxes, going without a formal health benefit just isn’t worth it, regardless of your company’s size. Instead, a stand-alone HRA is a smarter way to avoid these problems and give your employees access to an affordable, comprehensive health benefit.
This article was originally published on May 30, 2017. It was last updated February 23, 2026.