Small Business Health Insurance Options

As a small or mid-sized business owner, you may find the rising cost of health insurance challenging. The cost of group health insurance and its strict participation requirements have made many small employers unsure if they can offer a health benefit.

However, not offering a comprehensive health benefit may cost more in the long run. A recent survey found that 78% of workers would leave their current company if they felt their employee benefits package was lacking¹. High turnover drives up your hiring and new employee training budget.

Fortunately, you don’t have to rely on group health insurance. There are many affordable small business health benefits options. We’ll take a look at some of them below.

In this blog post, you’ll learn:

• The different health benefit options for small businesses that can support a healthy workforce.
• How health reimbursement arrangements (HRAs) can help offset healthcare costs for eligible employees.
• The pros and cons of various healthcare benefits.

Do small businesses need to offer health insurance?

With so many businesses offering their employees traditional group health insurance, it might seem that all employers must provide health benefits. But this isn’t the case. Before we dive into your coverage options, let’s review which employers must offer health insurance benefits.

Under the Affordable Care Act (ACA), organizations with 50 or more full-time equivalent employees (FTEs) must provide an affordable health benefit that meets minimum essential coverage (MEC) to at least 95% of their full-time workers and their dependents. The benefit must also provide minimum value.

Applicable large employers (ALEs) who don’t comply with these rules are subject to a tax penalty if at least one employee buys subsidized health coverage through a public exchange.

Even if the federal government doesn’t require you to offer a health benefit, doing so can help you attract and retain talented workers and improve employee loyalty. However, there are more flexible alternatives to group coverage. In the sections below, we’ll dive into other affordable plan options that can work for your business.

Option 1: Small group health insurance

As the commonly known traditional option, employers can offer group health insurance benefits to their employees, spouses, and dependents. To make the coverage more affordable, the employer often shares the cost of the monthly premiums with employees enrolled in the plan.

Larger businesses most commonly seek group health insurance. But companies with two to 50 full-time employees (or as many as 100 in some states) can buy a small group health plan if they qualify.

Here’s how it works:

• Small business employers must meet the eligibility and participation requirements before enrolling in coverage.
• If they qualify, employers buy small group health coverage through an insurance carrier, agent, broker, or the Small Business Health Options (SHOP) marketplace. Unlike individual health insurance, employers can buy group health insurance coverage at any time during the year.
• Companies with fewer than 25 FTEs may also qualify for the small business health care tax credit. To be eligible for the health care tax credit, you must offer SHOP coverage, pay an average annual salary of $56,000 or less per employee, and pay at least 50% of your staff’s premium costs.
• The employer and employees pay their portion of a fixed premium rate to the insurance company to keep their coverage active. When they receive care, employees are responsible for the plan’s cost-sharing amounts, like copays and deductibles.
• You can renew your existing group policy or shop for new coverage at the benefit plan's end.

Traditional group health insurance can be a good choice for small businesses in this competitive job market. That’s because most employees are already familiar with this plan type. But, employee premium prices with group medical plans can be costly.

In 2024, employers contributed an average of $7,584 annually toward each employee’s self-only plan premiums and about $19,276 per employee with family coverage². This can make group plans too expensive for many small employers with limited budgets.

Pairing an integrated HRA with small group health insurance

Offering high deductible health plans (HDHPs) is one way to make group plans more affordable. They have lower monthly premiums than low deductible group plans. But there’s a reason they’re less expensive: they have higher out-of-pocket costs for employees. If you want to offer group health insurance but seek to make it more attractive to your employees, you can supplement it with a group coverage HRA (GCHRA).

Also known as an integrated HRA, you offer your employees a monthly allowance to spend on qualified medical expenses. GCHRAs have no contribution limits, so you can offer as much allowance as your budget allows. After an employee submits proof of purchase for an eligible item, you reimburse them tax-free up to their allowance amount.

While you can offer a GCHRA alongside any group coverage, employers will see the most health insurance cost savings with an HDHP. Either way, only employees enrolled in your group plan can participate in the benefit.

Here are some other key features of the GCHRA:

• All medical services and items listed in IRS Publication 502³ and the CARES Act⁴ are available for reimbursement. You can limit this list or require your employees to submit an explanation of benefits (EOB) with their reimbursement request.
  • By law, group plan premiums aren’t eligible for reimbursement.
• Unused HRA funds stay with you at the plan year's end or if the employee leaves your company.
• GCHRA reimbursements are payroll-tax-free for employers and free of annual income tax for employees.
• Employers can vary eligibility requirements and allowances by job-based employee classes.

Option 2: Self-funded health insurance

If you’re looking to offer a group plan but want more flexibility than working with an insurance carrier, consider offering a self-funded plan. Some small businesses choose self-insured plans to avoid expensive monthly premiums and other restrictions that come with fully-insured group plans.

But self-insurance is risky. Larger-than-expected claims could leave a small business financially strapped. For this reason, self-funded health insurance is more common among larger firms. According to KFF, 79% of employees covered by a self-funded plan work at a company with 200 or more workers⁵.

Here are some key features of self-funded medical insurance:

• With a self-insurance arrangement, you run your own business health plan and assume the financial risk of providing healthcare benefits to your employees. This means that rather than paying a fixed premium to an insurance company, you pay each employee's medical claims as they arise.
• You’re responsible for drafting plan documents and determining eligibility requirements and what costs the plan will cover.
  • A third-party administrator (TPA) or software solution can help you manage claims and other tasks for a separate fee.
• Businesses may pair the fund with a stop-loss insurance policy to limit their risk level.
• You must consider the administrative burden of managing this type of plan and estimating your fixed and potential benefit costs.

Option 3: Individual coverage HRA (ICHRA)

Another health benefit plan option for small employers is the individual coverage HRA (ICHRA). An ICHRA is an alternative to traditional group health insurance for employers of all sizes. Like the GCHRA, you set a monthly allowance and reimburse your employees tax-free when they incur an eligible medical expense.

However, ICHRAs don’t work with group health insurance. Instead, employees choose their own individual health plan, and you reimburse them for their plan premiums and other out-of-pocket costs.

Here are some other key features of the ICHRA:

• You can offer the ICHRA if you have at least one full-time W-2 worker. Like the GCHRA, the ICHRA has no minimum or maximum contribution limits.
• Only employees with a qualifying form of individual health coverage can use the benefit. Employees enrolled in a spouse's group health insurance policy or a healthcare sharing ministry can't participate.
• Businesses can offer different allowance amounts and vary eligibility based on unique employee classes.
• You can offer a group health plan and the ICHRA at the same time, just not to the same employees. You can’t offer the same employee class the choice between the ICHRA and the group plan. You can only offer one or the other to each class.
• Suppose your business grows to the size of an ALE. In that case, you can design your ICHRA benefit to satisfy the ACA’s employer mandate instead of opting for a group health plan.

Are you an ALE looking for a comprehensive ICHRA benefit with white-glove customer service? Remodel Health’s ICHRA+ solution can help!

Option 4: Qualified small employer HRA (QSEHRA)

If you expect your business to stay small for a while, a QSEHRA is an excellent option. This type of HRA is specifically for employers with fewer than 50 FTEs. A QSEHRA works much like an ICHRA, allowing employees to choose their own health plan and permitting reimbursements for premiums and other medical costs. But there are some differences between the two employee benefits.

Here are some key features of the QSEHRA:

• As long as you have at least one W-2 employee, you can provide a QSEHRA. Eligible employers can’t offer a group health plan and a QSEHRA simultaneously.
• All full-time W-2 employees are eligible for the benefit if they have a health plan providing MEC. You can also choose to offer the QSEHRA to part-time employees.
• The QSEHRA offers value to small businesses in unique situations, such as those with employees included on a spouse’s or parent’s group policy.
• Unlike the ICHRA, the IRS sets annual contribution limits for the QSEHRA. But there are no minimum contribution caps.
• Employers can design the benefit to reimburse employees only for insurance premiums or premiums plus other out-of-pocket costs.

Check out PeopleKeep’s QSEHRA product demo to learn how we can support small to midsized businesses!

Option 5: Health stipends

Finally, your last option is a health stipend. With a stipend, you can offer your employees a set amount of money to buy medical insurance and other out-of-pocket expenses. Stipends are flexible, so they’re often more manageable for small employers to administer. They can also work alongside other health benefits, including HRAs and group health insurance.

Here are some other key features of health stipends:

• Employers can offer stipends as a one-time payment, regularly, or as reimbursements. With a reimbursement system, employers only pay the employee once they approve the purchase of an eligible expense.
• Stipends aren’t subject to as many regulations as HRAs or traditional group health insurance benefits. Employers can set their own employee classes, allowance amounts, and eligible expenses.
• To improve employee engagement, you can offer them to any type of staff member, such as a part-time worker or 1099 contractor.
• By law, you can’t require your employees to use their stipend to buy a health insurance plan or ask them to show proof that they purchased a medical service or item.
• A health stipend isn’t a formal benefit, so it doesn't meet the ACA’s employer mandate for organizations with 50 or more full-time equivalent employees.
• The IRS considers stipends taxable income for the employee. While you won’t have to withhold any taxes for your employees, you’ll have to pay payroll taxes. Your employees will then pay income taxes when they file their tax returns.

Conclusion

It may seem tricky for small businesses to find affordable benefit plans. But luckily, several small business health insurance options can provide comprehensive coverage. Whether you offer traditional group coverage or a more flexible, alternative health benefit, understanding your affordable options is the first step to finding the right policy for you and your employees.

Are you ready to offer an HRA or health stipend to your team? Schedule a call with an HRA specialist now!

This blog article was originally published on January 6, 2020. It was last updated on February 28, 2025.

1. 2024 Intuit QuickBooks Allstate Health Solutions Benefits Survey

2. KFF 2024 Employer Health Benefits Survey

3. IRS Publication 502

4. CARES Act

5. KFF Section 10: Plan Funding