Health Insurance for Small Businesses

Find affordable and flexible employee health benefit options for small employers.

Need help designing a benefit that works for your organization? Book a call with a personalized benefits advisor. 

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Unsure how to provide affordable health insurance for your employees?

Many small employers on a limited budget find they can’t justify spending a lot of money on a health benefit. And those who can afford it are often wary of group health insurance because of its minimum participation requirements and rising premium rates.

Although health benefits are a top consideration for job seekers after compensation, many small employers don’t offer them due to budget issues or accessibility. Fortunately, small employers have more options now than in previous years. 

As traditional health insurance options have become unsustainable for many small organizations, alternative health benefit options that allow employers to control costs have grown in popularity.

Innovative advancements in the individual market have produced several viable health benefit options that small employers can use to provide cost-effective and flexible health benefits to their employees.

This page will guide small employers through everything they need to know about offering health insurance and which health benefit options are available to them.

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Are small businesses required to provide health insurance?

As a small employer wearing many hats, it can be challenging to keep up with health insurance regulations for your small business. Many employers are confused about whether or not they’re required to provide health insurance to their employees. 

According to the Affordable Care Act (ACA), an employer with 50 or more full-time employees is considered an applicable large employer (ALE) and is required to offer affordable health insurance coverage that meets minimum essential coverage (MEC). If they fail to do so, they’ll be subject to a penalty. 

The first step in determining if you need to provide health insurance to your employees is by calculating the number of full-time equivalent employees (FTEs) you have at your organization. If you’re under 50 FTEs, you’re not considered an ALE and therefore aren’t required to offer health insurance, nor will you be subject to a penalty under the ACA.

Why should small businesses offer health insurance?

Even though small businesses that aren’t considered ALEs aren't legally required to provide health benefits, it doesn’t mean they shouldn’t do it. Offering a health benefit to your employees can add immense value to your company.

How offering health coverage benefits employers:

  • Attracts and retains employees: In a competitive job market, offering health insurance can boost your employee compensation package, help you entice job seekers, and keep valuable employees loyal to your company.
  • Helps your company stand out: Providing a health benefit makes your organization stand out as a responsible employer that cares about their employees’ wellbeing. 
  • Builds a healthy and productive workforce: Having access to affordable healthcare can keep your employees healthy, resulting in fewer sick days and increased productivity.
  • Saves your employees’ money: A pre-tax health benefit can reduce your employees’ tax burden, saving them money and ensuring they get the full value of the benefit.

Which health benefits options do small employers have?

If you choose to offer health benefits to employees, you have the option of offering traditional group health insurance plan or more flexible and accessible options. We’ll discuss each option in the sections below.

Traditional group health insurance

While traditional group health insurance is undoubtedly the most understood health benefit for employees, it’s not the only one—and it’s not always the best choice for small employers.

According to recent data, group health insurance premiums average around $7,739 for individual plan coverage and $22,221 for family plans per year. Nearly a third (29%) of small organizations pay between $463 to $926 per month for family coverage premiums.

Depending on the type of plan you have, like preferred provider organization plans (PPO) and health maintenance organization (HMO) plans, or where you live, your premiums and other plan costs may be higher or lower. 

Small employers can reduce their budget with greater cost-sharing provisions for employees, but increasing these may discourage your employees from participating in the plan, and health insurance companies typically require at least a 70% participation rate.

In addition to cost, time-intensive administration requirements can come with group health insurance plans. For many small businesses that don’t have a dedicated HR department, tackling the ongoing administrative services and tasks that come with group health insurance isn’t practical. 

Group health insurance plans also require constant communication between the employer, health insurance company, and employees. If you don’t have a dedicated employee benefits specialist that manages communication every time an employee has a health insurance question, that can take time away from running your business.

Finally, annual benefit renewals for group health insurance plans are complex and take time. Understanding plan changes, cost negotiations, and researching new policies and programs is a big undertaking if you’re inexperienced. To be successful, you may need to work with a broker, which takes time and money.

Small business group health insurance

Small businesses with up to 50 employees (or as many as 100 in some states) can purchase small group health insurance.

Businesses offering small business group health insurance pay a fixed premium rate. In most cases, employees are responsible for the annual deductible and copays associated with the services they seek and a portion of the premium.

Businesses typically search for coverage options through an insurance broker or the Small Business Health Options Program, also known as SHOP.

Small business group health insurance is relatively easy to obtain—particularly if it’s a SHOP plan—and most employees are already familiar with how it works. However, monthly premium amounts can be out of reach for small employers with limited budgets. 

Additionally, minimum participation requirements leave most small organizations with only one or two policies to choose from, meaning many employees may not get the policy they want, or their individual healthcare needs may not be a covered service.

Self-funded insurance plans

Some small employers opt for a self-funded insurance plan to avoid the costly employee premiums and restrictions of group health insurance. With a self-funded health plan, employers assume the financial risk of providing healthcare to their employees. This means that the organization pays for each employee's individual claim rather than paying a fixed premium cost to an insurer. 

Typically, the employer sets up a trust fund, which the employer and the employees both contribute towards, to pay the claims. Small employers estimate the maximum annual liability they’ll take on, often ranging from $100,000 to $2 million. Employers may also pair the trust fund with a stop-loss policy that limits the organization’s potential risk. 

Employers may be attracted to a self-funded health plan because their health insurance coverage can be less expensive, they’re not subject to federal or state premium taxes, and they allow for personalization. However, they do have their downsides. 

A self-funded plan can be complex in its administration due to ERISA requirements, and TPA costs, stop-loss insurance premiums, and potentially large claims can make it very costly in the long run.

Health reimbursement arrangements (HRAs)

A health reimbursement arrangement (HRA) is an IRS-approved, employer-funded, formal health benefit used to reimburse employees for qualified out-of-pocket medical expenses, and sometimes, health insurance premiums.

Despite common belief, an HRA isn’t health insurance. Employers offer employees a pre-determined monthly allowance of tax-free money to spend on healthcare. Employees purchase medical services and items, and sometimes health insurance, and their employer schedules HRA reimbursement up to their allowance amount.

HRAs are an excellent way for small businesses to provide a personalized and flexible health benefit to employees to pay for specific healthcare services that meet their individual needs. They’re an especially cost-effective option for employers that can't afford a small business group health insurance plan.

Two popular HRAs for small employers are:

  • Qualified small employer HRA (QSEHRA): The QSEHRA is a popular stand-alone health benefit for small businesses with less than 50 FTEs that don’t offer group health insurance. QSEHRAs work specifically with an individual health insurance policy. With the QSEHRA, companies can offer different allowance amounts to employees based on their individual or family status. QSEHRAs also have annual contribution limits that typically rollover from month to month. 
  • Individual coverage HRA (ICHRA): The ICHRA is similar to the QSEHRA, but with fewer restrictions. It’s for employers of any size, has no contribution limits, and lets businesses offer different allowance amounts based on 11 employee classes. The ICHRA is only available to employees with an individual health insurance policy, so employees on a family member's group policy or health sharing ministry can’t participate.

Health stipends

Another way small businesses help their employees with their healthcare costs is with a health insurance stipend. While a less formal option than an HRA, employee stipends are a good option for employers who don’t want the administrative duties that come with group health insurance. 

A stipend works by simply grossing up an employee’s annual wage. It’s a fixed amount given to all employees, which they can then spend on whatever they choose. This means that even if an employer asks employees to spend their stipend on healthcare items, they can’t make them or ask for proof that they purchased a medical plan from an insurance carrier. 

Additionally, stipends are subject to income taxes for employees and payroll taxes on reimbursements for employers. 

While health insurance stipends come with some extra taxes, they can be a good option for organizations with many employees who qualify for premium tax credits or health insurance premium subsidies.

With premium tax credits, employees can receive a discount on their individual health insurance premiums. Unlike HRAs, which require careful integration with subsidies, employees offered a stipend can receive their stipend money and collect their full premium tax credit. 

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Compare HRAs and health stipends with our comparison chart

How can small businesses choose the best health benefit for their organization?

Choosing between the four small business health benefit options we listed above can be tricky for employers, especially if it’s their first time offering a health benefit. Let’s walk you through the most important questions you should ask yourself when weighing each option.

Step 1: Consider eligibility and cost

The first step is to use eligibility criteria to eliminate all business health insurance options your organization simply can’t offer. For example, if you have just one full-time employee, you likely can’t offer traditional group health insurance in most states. Similarly, if you’re determined to keep your current business group health insurance policy, you can’t offer a QSEHRA. 

Cost is the biggest determining factor for most small employers when choosing a health benefit. If this is true for your organization, use your budget to help narrow your options down further. 

Determine how much you are willing and able to spend on your health benefit. In general, you should aim to spend as much as you can afford on health benefits because, next to wages, they’re the top consideration on where people work. 

Once you’ve calculated this figure, compare it to the estimated cost of each health benefit option your organization is eligible to implement. You should research estimates for your geographic area and industry to get a more accurate estimation. 

After comparing these projections to your budget, you may be able to eliminate some options. For example, if a small employer can’t afford traditional group or self-funded health insurance, a QSEHRA or health stipend may be better.

Step 2: Determine benefit administration time

Another consideration is how much time you have to administer your health benefit. Small employers wear many hats, so their time is limited and valuable. Some health benefit options require more administration time than others. 

Self-funded health insurance typically requires the most time, followed by traditional group health insurance. HRAs—when administered by a personalized benefits provider like PeopleKeep—are much less time-intensive.

Step 3: Think about your employees’ situations

Beyond business considerations, you should evaluate each benefit option from your employees’ perspective. Firstly, you should consider their current health insurance status and determine how you can provide them with even more value with the addition of your health benefit. If you have employees that are located out-of-state, you should consider how you can provide a health benefit that is as acceptable as the benefit you’re providing to your in-state employees. 

An ICHRA, QSEHRA, health stipend, or a self-funded health insurance benefit would provide value to employees no matter where they live. If employees who fall into these categories are valuable to your organization, you should narrow your list of options to those that will best serve them.

Step 4: Consider what your employees would want the most

Lastly, you should consider your employees’ preferences on health benefits. Your employees are more likely to use benefits that meet their needs, which ultimately helps you accomplish your goal of attracting and retaining your workforce. 

The employee cost of a benefit is a consideration for most benefits options, but it’s an especially critial factor for group and self-funded health insurance. HRAs don’t use employee contributions, so your workers could save more over other traditional plan options. However, if you provide a smaller monthly allowance, your employees will pay for more out-of-pocket costs. 

Employees also want to know how your benefit will work with their individual healthcare preferences and needs. For example, they may want to know if your group health insurance policy covers their particular doctor or provides coverage to employees for mental health services. 

With this in mind, an HRA is typically the most personalized way your employees can use their benefit to cover the healthcare services and items they value the most.

Need help finding the right benefit? 

Schedule a free consultation with a PeopleKeep personalized benefits advisor. 

FAQ

Frequently asked questions

Is health insurance tax-deductible for small businesses?

Employers that provide a small business health insurance plan for their employees can get tax relief for their contributions. Health insurance costs are typically tax-deductible from their federal business taxes. Expenses that could qualify for deduction include monthly premiums, HSA contributions, and tax-advantaged dollars.

Can I make changes to the type of plan I offer midyear?

The annual open enrollment period for health insurance isn’t the only time employers can make changes to their benefits plan or offer additional health benefits. If you sign up for an HRA midyear, your employees will qualify for a special enrollment period, giving them a 60-day window to enroll in a plan through a private insurance company or on the American health insurance market to make the health plan choices they need.

Which expenses are eligible with an HRA?

HRAs can reimburse many health insurance products and healthcare services, including individual health insurance premiums, provided they are not already paid with pre-tax dollars. Use our IRS expense tool to see which expenses can be eligible for reimbursement.

What is the difference between an HRA and an HSA?

An HRA is an arrangement between an employer and an employee, allowing them to get reimbursed for their medical expenses. An HSA is a portable account that the employee owns and keeps with them even after they leave the organization. With an HRA, the employee only gets paid when they incur an eligible expense, while an HSA is pre-funded each month regardless of whether or not they spend the money.

To learn more, see our article on HRAs vs. HSAs

How do stipends differ from business expenses?

While stipends can include work-related expenses such as office equipment and internet access, they can also include expenses that are for your employees’ personal use outside of work, such as gym memberships, wellness apps, and mental health counseling.

Can business owners participate in an HRA?

Some business owners can participate in an HRA depending on how they file.

C-corporation owners: C-corporations are legal entities separate from the owner. This means owners are considered common-law employees of the corporation and are eligible to participate in this benefit. As with all employees, this eligibility extends to the C-corp owner’s family as well. All reimbursements paid to the C-corp owner and the owner’s family are tax-free to the company and the owner.

Sole proprietors: A sole proprietorship is an unincorporated business owned and run by one person. There’s no distinction between the business and the owner, so the owner isn't an employee. This means sole proprietors can’t participate.

But, if the owner is married to a W-2 employee of the business, the owner could gain access through their spouse’s allowance as a dependent. All reimbursements would be tax-free to the sole proprietorship and the owner’s spouse.

Partners: A partnership is a pass-through entity, so the company isn't subject to income tax. Instead, the partners are directly taxed individually. Partners in a partnership are considered self-employed, rather than employees of the company, so they’re not eligible to participate in a reimbursement benefit.

Like sole proprietors, partners can access the benefit if they are married to a W-2 employee of the business, as long as the partner’s spouse isn’t also a business partner.

S-corporation owners: An S-corporation is a pass-through entity, meaning the company isn’t subject to income tax. Instead, shareholders (i.e., owners who own 2 percent or more of the company’s shares) are directly taxed individually. This means shareholders aren’t considered employees and aren’t eligible to participate in a reimbursement benefit.

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