Do small businesses have to offer health insurance?

Most non-elderly people in the U.S. get health coverage through their employer. According to KFF, about 164.7 million people younger than 65 had employer-provided health insurance in 2023. But are their employers providing it out of choice or necessity?

Some employers do provide health insurance because they have to, but not all. The Affordable Care Act (ACA) requires applicable large employers (ALEs) to:

• Offer health benefits that meet minimum essential coverage (MEC) and minimum value to at least 95% of full-time employees or face a penalty
• Offer affordable health benefits or face a penalty

But smaller businesses aren't under such obligations to provide coverage to employees.

In this article, we'll go over employer health insurance requirements and your options for health coverage.

In this blog post, you'll learn the following:

• Why small businesses with fewer than 50 FTEs don’t have to offer health insurance.
• The benefits of offering your employees health insurance coverage.
• The different health insurance options available to small employers.

What is an applicable large employer (ALE)?

An ALE is any company or nonprofit with at least 50 full-time equivalent employees (FTEs). According to the ACA, an FTE is someone who works at least 30 hours per week or 130 hours per month.

You determine your organization’s ALE status based on the previous calendar year. For example, you could be an ALE in one year but not the following year if you lost some employees in the previous year. Typically, if an employer has a monthly average of at least 50 FTEs during a calendar year, the federal government considers the employer an ALE for the following calendar year.

Your organization doesn't qualify as an ALE if:

• On average, you employed fewer than 50 full-time employees during the previous calendar year.
• Due to a seasonal workforce, you employed more than 50 full-time employees no more than 120 days during the previous calendar year.

Due to the employer mandate, ALEs must provide health coverage to at least 95% of full-time employees and their dependents. If not, they'll face a no-coverage penalty. The 4980H(a) employer shared responsibility penalty is $2,900 per year per full-time employee for 2025. The penalty applies after you subtract your first 30 employees.

Calculating full-time and part-time employees

To see if your organization is an ALE, count all full-time employees and the full-time equivalent of part-time ones.

For the majority of organizations, the calculations are simple:

• Full-time employees: These individuals work an average of at least 30 hours per week per month. You'll need to count up all your full-time employees.
• Full-time equivalents: To calculate the full-time equivalent of all your part-time workers, add the total number of hours worked by part-time employees in a given month. Then divide the total by 120.

If you reach 50 or more in your calculations, your organization is an ALE. You must offer health insurance benefits under the ACA.

Small business health insurance requirements

The ACA states that small businesses with fewer than 50 FTEs don't have to provide health insurance benefits to their employees. However, that doesn't mean they shouldn't provide health insurance benefits.

Here are some advantages:

• Attracting employees and retaining top talent. In addition to competitive salaries, our 2024 Employee Benefits Survey found that 81% of employees believe an employer's benefits package is an important factor in whether they accept a job. It also has the potential to increase your employee retention rate.
• Helping your business stand out against the competition. You can create a competitive benefits package that sets you apart from other companies in your industry by offering additional financial assistance through reimbursements.
• Building a happier and healthier workforce. Having greater access to healthcare also boosts employee productivity and job satisfaction. If employees are healthy and don’t need extended periods of sick leave, your organization can be more effective and profitable. Health benefits will also help your staff feel happier at work.
• Saving more money during tax season. Depending on the type of plan you offer, you can benefit from tax savings for providing the health plan. Eligible employees can get tax benefits by participating.

In most states, small group health insurance is available to organizations with fewer than 50 employees. You can purchase a small group health insurance plan directly from an insurance company or through a Small Business Health Options Program (SHOP) exchange. Getting a SHOP plan can qualify your organization for the small business health care tax credit.

In addition to traditional employer-sponsored health insurance, you can consider health insurance alternatives. Affordable alternatives include a health reimbursement arrangement (HRA) or health stipend.

Health reimbursement arrangements (HRAs)

An HRA is an excellent choice for affordable health coverage. It allows employers to reimburse employees tax-free for qualifying medical expenses. HRAs are often a better choice for small businesses than traditional group health insurance because they let employees pick the plan and services that suit them best. They can also save employers money compared to group coverage and offer tax benefits. Plus, HRAs have no minimum participation requirements, so they’re easier for small businesses to offer.

With the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA), employees get tax-free reimbursements for their health insurance premiums and other qualified medical expenses. An ICHRA can also help organizations with 50 or more FTEs offer a health benefit that satisfies the ACA.

Here are some examples of HRA-eligible expenses:

• Monthly premiums for health, vision, and dental coverage
• Doctor's visits
• Prescription drugs
• Over-the-counter medication
• Chiropractic care
• Mental health counseling

Health stipends

Your small business can also provide employees money for out-of-pocket expenses through a health stipend. These employee stipends work similarly to an HRA but with fewer regulations and restrictions. But, unlike an HRA, employers can’t ask for proof of insurance or receipts for their expenses.

No employee eligibility requirements or minimum monthly allowances with a health stipend exist. This allows organizations of all sizes to create a fully customizable health benefit that best fits their needs. However, if you have 50 or more FTEs, you can’t offer a stipend instead of an ICHRA or a group plan.

How do HRAs and health stipends compare?

HRAs and health stipends allow your employees to buy their own individual healthcare coverage. Employees can get coverage from a state-based or federal Health Insurance Marketplace, directly from an insurance company, or a licensed agent. Employees can then request a reimbursement for their monthly premiums. This allows your employees to choose the individual health plans that work best for them.

Taxability is the most significant difference between an HRA and a health stipend. While HRAs are tax-free for employers and employees—as long as the employee meets the participation requirements, like having MEC coverage—health stipends are taxable. If you decide to offer a health stipend, your small business will pay payroll taxes on the reimbursement amount. Employees will have to pay income taxes on the amount received.

This makes HRAs a better option for most organizations. However, health stipends are an excellent option for organizations with employees who receive a premium tax credit, as a health stipend doesn't impact subsidy eligibility.

Affordable health insurance coverage options for employees of small businesses

If you're not an ALE and aren't offering health insurance, your employees can get their own individual plan since they won't be eligible for employer-sponsored health coverage.

Employees can purchase their own plan, and you can set them up with an HRA. Then, they can use that money toward their health insurance premiums and other medical costs they may have.

Individuals who want their own health insurance policy can apply for coverage with help from the federal government through the Marketplace. They can also go through a state exchange or a local insurance agent. Remember, open enrollment is the most convenient time for individuals to start any new health plan.

However, there is some wiggle room when it comes to open enrollment. Suppose an employee experiences a qualifying life event, such as:

• Losing their current health coverage
• Being offered a QSEHRA or ICHRA
• Getting married or divorced
• Having a baby
• Changing their residence

In that case, they can qualify for a special enrollment period.

If you use PeopleKeep to administer your QSEHRA or ICHRA, your employees can shop for health insurance right from their account.

Conclusion

For many small businesses, it can be challenging to keep up with the rules and regulations surrounding employee health benefits. While larger employers with 50 or more FTEs need to offer health insurance to employees or potentially face a penalty, smaller employers don’t have to. However, offering health benefits is one of the best investments small business leaders can make. If you're worried about the cost of health coverage, consider a budget-friendly solution like an HRA.

This blog article was originally published on November 10, 2020. It was last updated on October 4, 2024.