Small business health insurance options

If you’re a small business owner or employer shopping for employee health benefits, you may be finding it hard to grapple with the rising cost of health insurance. According to recent data, 98% of employers feel the cost of providing healthcare to their employees is excessive—and small business owners are especially vulnerable to these costs.

These increased costs, along with group health insurance’s rigid participation requirements, have given employers pause when considering offering a health benefit. But, not offering health benefits costs more in the long run because employees will look elsewhere for jobs with better benefits packages.

Fortunately, there are many affordable small business health benefits options, including alternatives to group health insurance. Below, we’ll review a wide range of coverage options and how they work, including what pros and cons employers must consider before making a decision.

Takeaways from this blog post:

• Many small businesses may have trouble offering traditional health benefits due to increased annual costs and rigid participation requirements.
• There are affordable alternatives to group health insurance, such as health reimbursement arrangements (HRAs), that small businesses can use to provide employees with tax-free reimbursements for healthcare expenses. Taxable health stipends can also help employees with their medical costs.
• Small employers can also consider offering self-funded health insurance, which allows businesses to assume the financial risk of providing healthcare benefits to their employees and save on monthly payments for premium costs. However, it also carries the risk of larger-than-expected claims.

Do small businesses need to offer health insurance?

Before we dive into your options, let’s review why some small businesses need to offer affordable healthcare in the first place.

With so many businesses offering a traditional health insurance coverage option, it might seem that all employers must provide a group health plan. However, that isn’t the case.

Under the Affordable Care Act (ACA), employers with 50 or more full-time equivalent employees (FTEs) must provide an affordable benefit with minimum essential coverage (MEC) and minimum value to their employees. If they don’t, they’ll be subject to a tax penalty.

Even if the federal government doesn’t require you to offer health benefits to your employees, it can help you attract and retain top talent by improving employee satisfaction and morale.

If you must offer health coverage, it doesn’t have to be one of the traditional types of health insurance, like group plans. Offering a health reimbursement arrangement (HRA) is another way to give your employees access to healthcare. We’ll review common types of HRAs and other affordable options in the sections below.

Option 1: Small group health insurance

The traditional choice for most businesses is a group health insurance policy. Employers choose the group health plan for their organization and provide the coverage to employees and, potentially, employees’ spouses and dependents. Companies with between two and 50 full-time employees (or as many as 100 in some states) can purchase a small group health insurance for employees to increase satisfaction and retention.

Small employers offering small business health insurance pay a fixed premium for the policy. Sometimes, they pass on a portion of the premium cost to employees. Employees are responsible for copays and deductibles associated with the range of services they receive.

Businesses typically purchase health coverage through an insurance company, licensed agent, broker, or the public Small Business Health Options (SHOP) marketplace¹. SHOP provides affordable health insurance and dental coverage, but you’ll need to ensure you qualify for a small business health insurance plan before you enroll.

Traditional group health insurance can be a good choice for small businesses because it's relatively easy to obtain, and most employees are already familiar with this type of plan.

However, employee premium prices with group medical plans can be costly. In 2023, employers contributed about $6,575 each year toward each employee’s single coverage premiums and about $17,393 per employee with family coverage premiums². This is more expensive than many alternatives.

If your organization has fewer than 25 employees and you purchase a SHOP plan, you may qualify for the Small Business Health Care Tax Credit, which can provide some relief for rising premium costs. But there are other ways to offset the costs of group health insurance.

Pairing an integrated HRA with small group health insurance

If you want a group health insurance plan but also want to offset your employees' out-of-pocket healthcare costs, a group coverage HRA (GCHRA), also known as an integrated HRA, is a great supplement.

Because of their lower cost, many organizations offer high-deductible health plans (HDHPs). However, there’s a reason they’re less expensive: they cover less than other policies.

Small businesses can offer a GCHRA to mitigate some of that loss. With a GCHRA, you offer your employees a monthly allowance of tax-free money in addition to the group policy. Employees then pay for their out-of-pocket healthcare expenses, and the business reimburses them up to their allowance amount. While you can offer a GCHRA alongside any group health plan, employers will see the most cost savings with an HDHP.

Unlike health savings accounts (HSAs), unused HRA funds stay with you if the employee leaves your company.

Generally, employees use the HRA to cover expenses like copays, deductibles, routine care, doctor visits, and prescription drugs. All items listed in IRS Publication 502 and the CARES Act, other than insurance premiums, are available for reimbursement. Still, you can choose to limit this list or require an explanation of benefits (EOB) for out-of-pocket expenses.

Reimbursements made through a GCHRA are free of payroll tax for the business and its employees. They’re also free of annual income tax for employees.

In addition, businesses can structure their employee eligibility requirements as long as employees participate in the group policy.

Option 2: 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 you can leverage as your only health benefit or an option for employees who don’t qualify for your group health plan.

With an ICHRA, you can reimburse the cost of individual health insurance premiums and—if you choose to—any eligible out-of-pocket health costs. The ICHRA works well for employers of all sizes because it has no minimum or maximum participation requirements.

With an ICHRA, employers offer employees a monthly allowance of tax-free money. Employees then enroll in an individual health insurance policy, and the business reimburses them up to their allowance amount.

The ICHRA has no contribution limits, and depending on your benefit’s design, businesses can offer different allowance amounts based on unique employee classes. It’s only available to employees enrolled in individual coverage; employees enrolled in a spouse's group health insurance policy can't participate.

As long as the ICHRA is affordable, it can help organizations with 50 or more FTEs satisfy the ACA’s employer mandate.

Option 3: Qualified small employer HRA (QSEHRA)

A QSEHRA is a formal, IRS-approved benefit for employers with fewer than 50 FTEs. A QSEHRA works much like an ICHRA, with a few exceptions.

Unlike an ICHRA, employees don’t need qualifying individual health insurance to participate. Reimbursements will be free of income tax for employees if the employee has a policy that meets MEC, including a spouse’s or parent’s group plan.

Also, unlike the ICHRA, QSEHRAs come with annual allowance caps that employers can’t exceed. A QSEHRA does not have a minimum allowance requirement, so employers can set their own budget and define a monthly allowance for their employees as long as it doesn’t exceed the cap.

Employees can use the allowance to purchase a health policy from a public exchange, health insurance company, or broker and out-of-pocket medical expenses that best fit their needs.

QSEHRAs also offer value to small businesses in unique situations, such as those with employees included on a spouse’s or parent’s group policy or who have employees without insurance.

Option 4: Self-funded health insurance

If you’re looking to offer a group plan but find that working with an insurance carrier won’t give you the control and flexibility you want, you can consider offering a self-funded plan. Some small businesses choose self-insured plans to avoid expensive monthly premiums and other restrictions.

With a self-insurance arrangement, the business assumes the financial risk of providing healthcare benefits to employees. This means that rather than paying a fixed premium to an insurance company, the business pays for each employee's out-of-pocket claim as it arises.

Under this arrangement, you’ll draft plan documents that will outline eligibility requirements and covered benefits. Typically, an employer sets up a trust fund to earmark money the company and its employees contributed to pay these claims. Businesses may also pair the fund with a stop-loss insurance policy that limits the businesses’ potential risk.

Third-party administrators (TPAs) manage claims and other filings. Small businesses can save money with a self-funded health insurance plan, especially administrative costs. According to the Self-Insurance Educational Foundation³, cost savings in non-claims expenses compared to group health insurance can range from 10% to 25%.

However, self-insurance is risky, and larger-than-expected claims could put a small business out of business. For this reason, self-funded health insurance is more common among larger firms. The average size of larger companies with self-funded medical care is 300 to 400 employees.

Option 5: Health stipends

Finally, health stipends are another option for small businesses to help their employees with medical expenses.

Businesses can offer stipends upfront or through a reimbursement model similar to an HRA. With a reimbursement system, employers grant employees an allowance that they can use to cover their medical expenses, and employees receive that allowance after they incur an eligible expense.

Employers are in control of employee classes and allowance amounts. When an employee submits a request for reimbursement, employers simply approve the amount for qualifying expenses.

Health stipends can reimburse employees for health insurance premiums plus out-of-pocket costs relating to medical care. This can also include expenses incurred by your employees’ supplemental plans, like monthly premium amounts for vision coverage and dental insurance, or other healthcare costs major medical insurance doesn’t fully cover, like mental health services.

Stipends aren’t subject to as many regulations as an HRA or traditional group health insurance. It’s important to note that with a stipend, you can’t require proof of health insurance or receipts for medical expenses listed in IRS Publication 502 from employees. A stipend also doesn't satisfy the ACA’s employer mandate for organizations with 50 or more FTEs.

It’s also helpful to know that if you have employees who receive premium tax credits, their stipend allowance won’t interfere with their premium tax credit eligibility like a formal health benefit.

Stipends are also flexible in that they can even work alongside group health insurance or an HRA. However, the IRS considers stipends taxable income. 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 benefits, but luckily, several small employer health insurance options can provide comprehensive coverage. Whether you offer SHOP coverage, an HRA, a health stipend, or a self-funded plan, understanding your options is the first step to finding the right policy for you and your employees.

This blog article was originally published on January 6, 2020. It was last updated on January 8, 2024.

1. https://www.healthcare.gov/small-businesses/choose-and-enroll/shop-marketplace-overview/

2. https://www.kff.org/report-section/ehbs-2023-summary-of-findings/

3. http://www.siefonline.org/docs/self.pdf