Why Fewer Small Businesses Are Offering Group Health Insurance

Even though most small businesses don’t have to offer health benefits under the Affordable Care Act (ACA), many employers know that providing health insurance is a necessary part of taking care of their employees. However, premium rate spikes, renewal difficulties, and limited plan options are pushing small employers away from traditional group coverage. But that doesn’t mean you don’t have other options.

This article explores why fewer small businesses are offering group health insurance and the alternative coverage options that can help you keep costs down while supporting employee satisfaction and retention.

In this blog post, you’ll learn:

• How small business health insurance works, including eligibility requirements, participation thresholds, and tax credit qualifications.
• The various factors that are driving fewer small businesses to offer traditional group health insurance.
• How alternative options, like health reimbursement arrangements (HRAs), give small businesses more flexibility and cost control compared to group health plans.

Do small businesses have to offer health coverage?

The ACA requires all organizations with 50 or more full-time equivalent employees (FTEs) to offer affordable health coverage to at least 95% of their employees and dependents. This coverage must meet minimum essential coverage (MEC) and minimum value standards.

So, any organization with fewer than 50 FTEs on average for the previous year doesn’t need to offer health coverage. However, doing so can boost employee satisfaction and retention.

What is group health insurance for small businesses?

Small group health insurance is a traditional health benefit that employers offer to their employees. If the plan allows, your employees’ spouses and eligible dependents can also participate. In most states, a small business must have between two and 50 employees to qualify for small group health insurance. However, California, Colorado, New York, and Vermont include organizations with up to 100 workers.

Here’s how small group insurance policies work:

• To qualify for small group health insurance, employers typically must enroll a minimum number of full-time employees in the plan and contribute a certain amount toward employees’ monthly premium costs. They must also meet state- and insurer-specific participation requirements.
  • Most carriers require 50% to 75% of eligible employees to enroll. Employers who buy a plan on the Small Business Health Options (SHOP) marketplace between November 15 and December 15 are exempt from participation requirements.
• Once eligible, employers can buy a small group plan through an insurance carrier, broker, agent, or the SHOP marketplace at any time during the year. You can renew your existing plan or choose a new policy that better fits their budget and workforce needs.
• Suppose you have fewer than 25 full-time equivalent employees (FTEs), pay at least 50% of employee premiums, and maintain an average annual salary of $56,000 or less per employee. In that case, if you offer SHOP coverage, you may qualify for the small business health care tax credit.

All SHOP small group health insurance policies must comply with ACA requirements and use the metallic tiers system (i.e., bronze, silver, gold, or platinum) to categorize coverage. These plans must also cover essential healthcare benefits, including hospitalization, prescription drugs, and preventive care.

While employers and employees split the cost of a fixed monthly premium, employees are responsible for cost-sharing requirements, like copays and deductibles, when they receive medical care.

Small businesses can also offer other types of group health insurance, such as a self-funded group plan. With this type of plan, employers directly pay for employees’ medical claims. While this can lower insurance costs by eliminating the need to pay premiums to an insurer, it can be financially risky for small businesses. If medical claims exceed what the small business can cover, it can expose the business to financial burdens.

Five reasons why fewer small businesses are offering group health insurance

Traditional group coverage can be a good choice for larger companies with bigger business sizes, budgets, and resources. However, many small employers are reevaluating whether group health plans are right for them. With each passing year, smaller companies are finding it challenging to obtain group coverage due to financial, administrative, and flexibility concerns.

According to KFF¹, the number of organizations with 10 to 199 employees offering health insurance coverage has decreased from 81% in 1999 to 59% in 2025. For those with 10 to 49 employees, the share of employers offering coverage dropped from 78% in 1999 to 54% in 2025.

Additionally, the federal Medical Expenditure Panel Survey shows a similar trend², with the number of small firms with fewer than 50 employees offering health insurance dropping from 61.6% in 2008 to 50.5% in 2024.

Table source: PeopleKeep by Remodel Health using MEPS data, 2008-2024.

But what are some other reasons for this decline? Let’s dive into more details in the section below.

1. Group health insurance policies can be expensive

One of the main reasons small businesses are shifting away from group health coverage is cost. According to KFF, in 2025, the average annual premium was $9,325 (or $777/month) for self-only coverage and $26,993 (or $2,249/month) for family policies. Of these amounts, employers contributed $7,884 toward their employees’ self-only premiums and $20,143 toward family plan premiums on average¹.

These insurance costs can be way beyond the projected revenues for smaller employers. Even small increases in premium rates can strain budgets and force employers to choose between offering comprehensive benefits and other business operations.

In KFF’s 2025 survey, 41% of small businesses cited the cost of health insurance as a reason for not offering coverage.

Beyond premiums, group plans also come with potential additional costs, such as rate hikes and changes to plan offerings. The unpredictable nature of group coverage can make long-term financial planning difficult, especially for small businesses with little wiggle room in their budgets.

2. There are minimum employee participation requirements

Most group health plans require at least 70% of eligible employees to enroll in the policy for you to offer coverage. This percentage can vary by state. But for small teams, it can be a significant hurdle. If you only have a handful of employees, one or two individuals opting out of the policy may mean you can’t meet the plan’s participation requirements.

In many cases, insurance companies also require you to contribute a certain amount of money toward your employees’ premiums. For example, if you get a SHOP on the federal Marketplace and want to qualify for the tax credit, you must pay at least 50% of your full-time employees' premiums. These rules from the federal government and private insurance companies can limit flexibility, making group coverage unattainable for businesses with smaller teams and budgets.

KFF’s survey found that 15% of small businesses cited their organization being too small as a reason for not offering health coverage.

3. Group insurance companies may offer limited coverage types

Traditional group plans often offer limited plan options, which may not meet the diverse needs of your workforce. Younger employees, families, and individuals with specific health needs or medical conditions may require different types of coverage. However, group plans typically offer a one-size-fits-most solution.

Employees these days expect personalized benefits, and this is especially important for small businesses looking to stay competitive and attract and retain good workers. If your employees feel restricted by plan options, you may find that group coverage no longer delivers enough value.

4. There can be complex administrative and compliance challenges

Managing a group health plan requires ongoing administrative effort. For small business owners and HR teams who are already overwhelmed, this extra administrative workload may not be feasible.

Employers with group health plans must handle:

• Open enrollment for employees
• Plan eligibility tracking
• Renewal negotiations with insurance brokers and carriers
• Federal and state regulations compliance requirements
• Answering employees’ questions and concerns

Without someone handling these tasks full-time, some necessary items may slip through the cracks, which could make your plan noncompliant. The risk of mistakes and the potential for thousands of dollars in penalties can discourage small employers from offering group coverage.

5. Employees can get cheaper coverage through the ACA Marketplace

In many states and counties across the country, individual health insurance premiums are generally more affordable than small group coverage.

For example, Ideon found that individual gold plans are cheaper than small group coverage in the following counties for 2026:

All table data from Ideon’s ICHRA Insights³.

With individual plans being cheaper than group plans in many places, some small businesses encourage their employees to purchase an individual health plan instead of offering a group plan. KFF’s survey found that 7% of small employers said that their employees would get a better deal on the health insurance exchanges.

While this may be the case, these employees are buying health insurance without the assistance that comes with the employer’s share of premiums in a group plan. However, there’s a way to take advantage of the lower cost of individual health insurance while still offering an employer-sponsored benefit.

What are the alternatives to group health insurance for small employers?

Group health insurance is typically the first thing that comes to mind when employers consider a health benefit. However, many organizations have switched to more personalized and flexible alternatives to escape the annual rate hikes and unpredictability. In the sections below, we’ll review some other benefit options that may better suit small employers on a budget.

Qualified small employer HRA (QSEHRA)

A qualified small employer HRA (QSEHRA) is a health benefit option designed specifically for employers with fewer than 50 full-time equivalent employees (FTEs). Instead of signing up for a group health plan, employees choose their own coverage, and employers reimburse them, tax-free, for qualified out-of-pocket medical costs, including health insurance premiums.

Like other HRAs, employers provide each employee with a fixed monthly allowance. Employees then pay for monthly premiums and eligible healthcare costs upfront, and receive reimbursements up to their allowance amount once the employer approves their claim documentation. Even better, QSEHRA reimbursements are payroll tax-free for the employer and income-tax-free for employees.

Here’s how the QSEHRA can work for small businesses:

• Employers who don’t offer a traditional or ancillary group health plan with at least one W-2 employee can offer a QSEHRA.
• All full-time W-2 employees are eligible to participate as long as they have health plans that provide minimum essential coverage (MEC). Employers may also include part-time employees if they receive the same allowance as full-time workers.
• The IRS determines annual maximum allowance limits. But outside of those limitations, there’s no minimum amount employers must contribute.
• Small employers can tailor the benefit to reimburse only health insurance premiums or include other qualified out-of-pocket medical expenses, depending on their budget and goals.

Individual coverage HRA (ICHRA)

Another alternative is the individual coverage HRA (ICHRA). Like the QSEHRA, an ICHRA allows employers to reimburse employees for individual health insurance premiums and other eligible medical costs using a defined monthly allowance. This way, employees can shop for their own individual health plan and have greater control over their insurance provider options.

Here’s how the ICHRA can work for small businesses:

• Organizations of all sizes can offer the ICHRA benefit as long as they have at least one W-2 employee.
• The ICHRA has no contribution limits, so you can set whatever allowances that work best for your budget and adjust as your company grows — especially if you have remote workers or multi-state business locations.
• Employees enroll in qualifying individual health coverage to participate in the benefit.
  • Employees with coverage from a spouse’s group plan or a healthcare sharing ministry aren’t eligible for the ICHRA unless they enroll in qualifying coverage. However, those with ACA-compliant individual or student plans, Medicare Part C, or Medicare Parts A and B together, or catastrophic coverage can participate.
• You can customize allowances and eligibility using employee classes, age, and family status. This gives small employers more flexibility in their plan design and budgeting.
• If one of your future company goals is growth, the ICHRA can still meet your needs. Applicable large employers (ALEs) can use an ICHRA to satisfy the ACA employer mandate, provided the allowance meets affordability requirements.

Conclusion

Traditional group health insurance is still a popular employee benefit. However, for many small businesses, it’s no longer the best way to offer health coverage. As premium rates rise and other benefit options become more prevalent, small employers may opt for more modern and flexible solutions, such as the HRA, over traditional coverage.

Whether you choose a QSEHRA or an ICHRA, small businesses can gain more flexibility and predictability while empowering employees to select the individual coverage that works best for them. If you’re ready to make the switch to a personalized HRA, PeopleKeep by Remodel Health can help. Book a call with our HRA specialists, and we’ll get you started.

References

1. KFF - 2025 Employer Health Benefits Survey
2. MEPS - Health Insurance Benefits at Private Employers, Estimates from MEPS-Insurance Component: 2008-2024
3. Ideon ICHRA Insights