Why Raises for Health Insurance Don't Work (and What to Offer Instead)

Many small businesses want to support their employees by offering health coverage as part of their benefits package, but feel priced out of traditional group health insurance plans. As a result, some businesses choose to provide salary raises instead of health benefits, hoping that extra cash will help employees cover their own healthcare costs.

While raises can feel simpler and more flexible, replacing health insurance benefits with higher wages often doesn't deliver the value employers expect.

In this article, we'll explain the importance of offering health coverage as a small business and how health reimbursement arrangements (HRAs) provide an affordable alternative to coverage or wage increases.

In this blog post, you'll learn:

• Which businesses must adhere to the Affordable Care Act's (ACA) employer mandate.
• How health insurance coverage can improve employee morale, retention, and productivity.
• How health reimbursement arrangements (HRAs) relieve the health insurance burden for small businesses.

Many small businesses don't have to offer health insurance, but they should

Before getting into the details, it’s important to clarify one thing: federal legislation doesn't require small businesses to offer health insurance coverage to their employees. The Affordable Care Act's (ACA) employer mandate applies only to applicable large employers with 50 or more full-time equivalent employees (FTEs).

Small businesses with fewer than 50 FTEs don't have to follow these ACA regulations. Even so, many small employers choose to offer a health benefit anyway. They do so to stay competitive in the labor market and support employee well-being. Not offering health benefits can lead to higher employee turnover and dissatisfaction.

The challenge is finding a way to offer a health benefit that fits a small business budget.

Why small businesses turn to raises instead of health benefits

Between the participation requirements and annual rate hikes, group health insurance feels risky for small businesses.

According to KFF’s 2025 Employer Health Benefits Survey¹, the average annual premium for employer-sponsored family health insurance reached $26,993. That’s an increase of 6%, or $1,408, from last year. This rise is in line with the increases seen over the past two years and continues to outpace both inflation at 2.7% and wage growth at 4%.

Raises, on the other hand, are simple. Employers can increase pay without setting up a formal benefit or navigating healthcare compliance rules. For some small businesses, this can feel like the safest option.

However, higher wages are not a substitute for health insurance coverage.

Why raises fall short as a replacement for health benefits

A salary increase puts more money in your employee’s paycheck, but taxes reduce most of it before they ever see it. You and your employee pay taxes on the raise. Plus, there's no guarantee the extra money will go toward health coverage. Your employee can choose to spend it however they want.

Raises also don't improve employees’ access to healthcare. It relies on employees getting their own coverage without any way of ensuring that they do so. Without coverage, employees may delay preventive services because of the cost, and their health issues can worsen over time, often leading to more sick days and reduced productivity.

Even with a higher salary, employees with their own coverage are still responsible for rising premiums, deductibles, and unexpected medical bills. When healthcare costs spike, a modest raise may not come close to covering the gap.

Enhanced premium tax credits ended on January 1, 2026

Without employer-provided health insurance, employees either forgo coverage entirely or get their own through the individual market. Since 2021, enhanced premium tax credits have made coverage more affordable by lowering health insurance premiums for millions of individuals and families. However, these temporary enhanced tax credits expired at the end of 2025², making access to employer-sponsored health benefits increasingly important in 2026.

Without these enhanced tax credits, fewer Americans will qualify for federal premium subsidies. This means employees earning more than 400% of the Federal Poverty Level won’t qualify for federal help and must take on the full cost of their coverage themselves.

The retention risk of skipping health benefits

According to Peoplekeep by Remodel Health's 2024 Employee Benefits Survey, 81% of employees said an employer's benefits package is an important factor in whether they accept a job. Healthcare coverage tops the list in order of importance, with 92% of employees valuing it.

When small businesses offer raises instead of health insurance, employees may still leave for roles that provide health benefits, even if the base pay is similar. An Economist Impact study³ found that 70% of U.S. workers would be willing to switch jobs for better employee benefits.

This is especially true for employees with families, chronic health conditions, or upcoming medical needs. Over time, the lack of a health benefit can limit a small employer’s ability to attract and retain top talent.

A cost-effective way to offer coverage

Small businesses don't have to choose between offering expensive group health insurance or relying solely on raises. Health reimbursement arrangements (HRAs) provide a more balanced option.

With a stand-alone HRA, employers offer a tax-free monthly allowance that employees can use for eligible medical care expenses, including their individual health insurance premiums. Employers control their budget, while employees choose the health coverage that fits their needs.

Other eligible medical care expenses include:

• Prescription drugs
• Over-the-counter medication
• Preventive care
• Emergency care
• Mental health counseling

By helping employees afford coverage and medical care, HRAs support better health outcomes, which can lead to more reliable attendance without increasing payroll costs.

The most popular stand-alone HRAs are:

• The individual coverage HRA (ICHRA): An ICHRA is the most flexible HRA an employer can offer. With no IRS limits on contributions, employers can offer as much as they want in allowances. They can vary eligibility and allowances using 11 employee classes, such as full-time and part-time. They can also differ allowances based on employee age and family size. For employees to participate in this benefit, they need to enroll in qualifying individual health insurance plans.
• The qualified small employer HRA (QSEHRA): The ICHRA works for employers of any size, but the QSEHRA is only for small employers with fewer than 50 FTEs. The IRS sets annual limits on employer contributions. But you can still vary allowances based on employee age and family size. In practice, more of your employees may be able to participate in this benefit rather than an ICHRA because the QSEHRA only requires plans that provide minimum essential coverage (MEC) to participate. This means coverage through a parent's or spouse's group health plan qualifies, and employees with these plans and QSEHRAs that reimburse out-of-pocket expenses other than premiums can participate. An ICHRA, on the other hand, requires enrollment in individual health plans.

The bottom line: Stand-alone HRAs are a better, more compliant way to provide health benefits as a small business:

• All HRA contributions are generally FICA/FUTA payroll tax-free for employers and completely tax-free for employees with eligible coverage.
• An HRA can only reimburse employees for eligible medical expenses and individual health insurance premiums, so employees must use their funds on healthcare.
• Employees must enroll in qualifying coverage to participate in the HRA, so you can guarantee they’ll get health coverage, unlike with a stipend or wage increase.
• The HRA benefit has plan documents and clear parameters, making it a clear health benefit instead of a simple wage increase.

Comparing wage increases to ICHRA

The table below shows how traditional group health insurance compares to an ICHRA and a QSEHRA.

How PeopleKeep by Remodel Health supports small businesses

Offering a health benefit doesn't have to mean taking on the cost and complexity of a traditional group health insurance plan. PeopleKeep by Remodel Health specializes in helping small employers offer flexible, compliant health coverage through HRAs.

As an HRA administrator, PeopleKeep supports employers by:

• Setting up and administering ICHRAs and QSEHRAs in a compliant way
• Helping employers define predictable monthly allowances
• Reviewing and substantiating reimbursements for eligible medical expenses
• Providing guidance and support so employers and employees understand how the benefit works

We also offer a simpler way to shop for coverage. Employees can compare and purchase individual health insurance plans that fit their needs straight from their PeopleKeep accounts.

Conclusion

Offering salary increases instead of health benefits may seem like an easier path for small employers, but it often leaves employees under-supported and businesses less competitive in today's labor market. Adding health benefits to your overall employee benefits package can deliver tax advantages, stronger retention, and protection against rising healthcare costs that raises alone can't match. With flexible options like health reimbursement arrangements (HRAs), small businesses can offer quality health coverage without overextending their budgets.

References

1. KFF
2. Congress.gov
3. The Economist Group