The Affordable Care Act (ACA)’s employer mandate requires applicable large employers (ALEs) to provide health insurance coverage for all full-time employees or face steep penalties from the IRS. However, the law excludes small employers with fewer than 50 full-time equivalent employees (FTEs).
Even though there’s no legal requirement, small employers should still provide a health benefit to recruit and retain top talent. Many small organizations try to make their compensation packages more attractive by adding a group health plan.
However, group health insurance requirements are often challenging, especially for small employers. In this blog, we’ll discuss the nuances of group health insurance, how many employees you need to qualify for group health insurance, and the alternatives available to you.
How many employees do you need to qualify for group health insurance?
Group health insurance is a single policy issued to a group of people and their dependents. Because group health coverage is typically associated with large organizations, many small organizations wonder whether they are eligible for group coverage.
Luckily, there’s group coverage specifically designed for small employers, known as small group health insurance. To be eligible for small group health insurance, a company must have between two and 50 FTEs.
If you’re the sole proprietor, you’re eligible to enroll in the group plan. However, at least one other FTE who isn’t an owner must enroll in the group health plan to qualify.
The other employee must be someone who is:
- Not an owner or employer
- Not the spouse of an owner or employer
- Not a family member of the owner or employer
- Not a partner of the owner or employer
- Not a seasonal worker, even if the person works full-time during that period
- Usually not a contractor of the owner or employer
If you’re an employer with 50 or more FTEs, you’re considered an ALE and don’t qualify for small group health insurance. You will need to apply for large group coverage, meet group health coverage reporting requirements, and meet group plan standards, like offering insurance that meets minimum essential coverage (MEC).
Do small businesses have to provide health insurance to employees?
While employers with fewer than 50 full-time employees aren’t legally required to offer health insurance, many still choose to do so. Offering health benefits is a great way to improve recruitment and retention, which is vital for an employer of any size.
According to a recent PeopleKeep survey, 82% of employees say that an employer’s benefits package is an essential factor in whether they accept a job. Additionally, 87% say that having health insurance is “extremely important” to them.
The data shows that health benefits contribute positively to talent acquisition and retention. Happy and healthy employees tend to be more loyal, productive, and satisfied with your business. While health insurance plans can be costly, it’s in your best interest as a small business to offer a health benefit to stay competitive.
What are the participation requirements for a group health insurance plan?
To ensure they don’t lose money, an insurance company may require organizations to meet minimum participation requirements to purchase a group health insurance policy. For insurers, participation is the percentage of full-time employees who enroll in the group plan. The state and insurance companies set their own rates, but it’s often about 70%.
This requirement aims to prevent “adverse selection,” meaning only those who are frequently ill sign up for medical coverage, creating a group of high-risk individuals. By requiring a specific percentage of eligible employees to enroll, the health insurance company broadens the coverage pool and avoids groups comprised of mainly high-risk individuals.
You must enroll at least 70% of your uninsured, full-time employees to meet this requirement. If some of your employees have single coverage, they won’t count toward the participation requirement. The same is true if you have employees covered by their spouse’s insurance plan.
There is an exception if you’re looking for a way around the 70% rule. The participation rule isn’t applicable if you enroll in a group plan through the Small Business Health Options Program (SHOP) program during the annual open enrollment period.
This makes open enrollment period the best time to enroll if you know you have employees that won’t be participating in your group health plan and you don’t want to disqualify your company from getting group health insurance.
How can employers supplement their group health insurance plan?
The rising cost of health insurance can leave small employers feeling like they have to settle for a reasonably priced but less comprehensive policy. However, the good news is that employers can supplement that coverage with an integrated HRA or a health stipend.
An integrated HRA, or a group coverage HRA (GCHRA), is an arrangement between an employer and employee designed to reimburse employees for medical costs that their group health insurance plan doesn’t fully cover.
An integrated HRA supplements the group health plan by helping to pay for out-of-pocket medical care expenses only. This means employees can’t request reimbursement for group insurance premium costs. Instead, employees can use the HRA’s allowance toward their deductibles, coinsurance, copayments, and other qualified out-of-pocket medical expenses.
Employers can set their own cost-saving rules regarding minimum deductibles, cost-sharing, explanation of benefits, and allowable expenses the GCHRA can reimburse to make the health benefit even more budget-friendly. And like with the excepted benefit HRAs (EBHRAs), employers can set different eligible employee classes.
Employee classes separate employees into groups by job-based criteria, such as full- and part-time status. Employees in different classes can be offered a benefit with different allowance amounts to save the employer money further.
With a health stipend, a small business can offer a fixed amount of money to its employees to help them pay for deductibles and out-of-pocket medical expenses outside their traditional group health plan. The amounts can be administered weekly, monthly, or annually and are typically included in your employees’ paychecks as added income.
However, it’s up to your employees how they want to spend the money. Even if this additional benefit is for medical bills, you can’t dictate its use.
It’s also important to note that stipend money is taxable income for the employee, and employers must pay payroll taxes on the amount. But because stipends are taxable non-wage income, they can be offered to employees who qualify for a premium tax credit.
What are small business alternatives to group health insurance?
We know employer-sponsored health plans play a significant role in recruiting and retaining employees. Still, not every small business can offer group health insurance. Thankfully, there are other coverage options. Instead of offering traditional group benefits, more employers are choosing a stand-alone HRA.
An HRA is a flexible alternative to traditional group health plans that can help businesses of all sizes control healthcare costs. With an HRA, you reimburse employees tax-free for out-of-pocket medical expenses and, sometimes, individual health insurance premium payments.
Qualified small employer HRA (QSEHRA)
A QSEHRA lets a small business reimburse their employees, tax-free, for qualified medical expenses, including monthly premiums, copayments, and coinsurance.
To offer a QSEHRA, you must:
- Have fewer than 50 full-time employees
- Not offer a group plan, including health coverage through the Small Business Health Options Program (SHOP), or a flexible spending account (FSA)
- Provide the HRA on the same terms to all full-time employees. You can also choose to offer the benefit to part-time employees.
You can decide how much QSEHRA allowance to set up to the annual dollar limit. To qualify for tax-free reimbursements, employees must have an individual plan that meets MEC. If employees don’t have MEC, any reimbursements they receive will be taxable.
Individual coverage HRA (ICHRA)
If a QSEHRA isn’t suitable for your small business, you can offer an ICHRA. Employers of any group size can offer an ICHRA and make contributions of any size, too—no minimum or maximum allowance amount applies.
Employees must be enrolled in individual health insurance coverage or Medicare to use the allowance funds. Similar to the QSEHRA, reimbursements are tax-free if their policy meets MEC requirements.
Like the GCHRA, employers can design their ICHRA benefits based on 11 employee classes, making it more flexible and customizable than the QSEHRA. You can vary the allowance for each class you set. However, you must provide the same terms to all employees within the same class.
Additionally, if your employees are eligible for premium tax credits, they will have to waive their credits if their ICHRA is considered affordable. They can opt out of the ICHRA benefit and collect their subsidy if it's not affordable.
Regardless of your choice, QSEHRAs and ICHRAs allow employers to set their own budget for a health benefit that provides value to all employees with no minimum contributions or participation requirements attached.
Many employers want group health insurance for their organization. However, not everyone qualifies for group coverage plans. If you have a small business, determining eligibility and additional requirements is crucial before applying for health insurance.
Luckily, you still have other solutions if you’re ineligible for a group plan. If you’re looking to supplement your existing group health plan with a GCHRA or want a group health alternative like a QSEHRA, ICHRA, or health stipend, PeopleKeep can help.
This post was originally published on November 12, 2020. It was last updated on February 21, 2023.