Why do employers offer health insurance?

Health insurance is one of the most sought-after employee benefits. But you may not know why employers started providing it. Employer-sponsored insurance became prevalent during World War II. It enabled employers to compete for talent amid wage freezes and provided tax benefits.

The U.S. healthcare system is an intricate web that requires employers, insurance carriers, healthcare providers, and the federal and local governments to work together. It can be difficult to navigate and expensive to offer, especially for smaller employers. So, why do employers continue to offer health benefits today?

In this blog post, you’ll learn:

• The historical reasons employers began offering health insurance and how it became tax-advantaged.
• Five key reasons businesses provide health insurance, including employee retention strategies.
• How offering employer-sponsored insurance promotes employee well-being, productivity, and job satisfaction.

Five reasons why employers offer health insurance

The reason an employer offers health insurance will vary depending on the organization. But there are five main reasons why most businesses provide some kind of health benefit.

1. Employer-sponsored health benefits have tax advantages

To understand this first reason, we need to go back to the 1940s. In 1942, the high demand for military service members created a labor shortage and a competitive job market. Businesses and the government prohibited raising salaries because it would spike inflation. So, companies had to find other ways to attract new workers.

In 1943, the Internal Revenue Service allowed employers to provide tax-free health insurance to their employees. This was a tax break for employers and allowed them to increase employee compensation packages by making income-tax-free contributions to their health insurance premiums. At the time, it was the cheapest and most accessible way to get health coverage.

The new tax advantages prompted more employers to offer the benefit. As a result, more U.S. workers began getting health coverage.

See the complete history of employer-provided health insurance to learn more.

A few tax advantages that come with providing health insurance include:

1. Often, 100% of employer payments toward employee health plans are tax deductible for businesses.
   1. If they meet specific criteria, self-employed individuals can deduct 100% of their premium costs as a business expense.
2. Employers have reduced federal payroll taxes.
3. Employers can deduct health savings account (HSA) contributions from their business taxes.

Additionally, covered workers may also have a lower tax liability because job-based insurance is a pre-tax benefit.

Lastly, if you’re a small business owner, you may be eligible to receive a tax credit for enrolling in small business health insurance¹. The government created this tax credit to encourage small employers to provide employer-sponsored insurance to their staff.

To qualify for the credit, you must meet all the following requirements:

• Your business must have fewer than 25 full-time or full-time equivalent employees (FTEs)
• Your business must pay an average salary of less than $56,000 each year per employee
• You must pay at least 50% of your qualified employees’ health insurance premiums.
• You must buy your small group health plan through the Small Business Health Options Program (SHOP) Marketplace and offer it to all your full-time employees.
  • You can also buy a Marketplace plan from a licensed SHOP insurance agent or broker.

The small business health care tax credit is available for two consecutive years if you qualify.

2. The company is an applicable large employer (ALE)

Another reason an employer provides health insurance is federal requirements based on business size. Under the Affordable Care Act (ACA), employers with 50 or more FTEs must offer affordable health insurance that meets minimum essential coverage (MEC) to at least 95% of their full-time employees and their dependents. The health plan must also cover at least 60% of the average medical costs for a standard population, which is the minimum value. These rules are called the employer mandate.

Employers that meet the 50 FTE threshold are called applicable large employers (ALEs). ALEs who fail to meet either rule may face a tax penalty if at least one employee buys subsidized health coverage through a public exchange.

Other important details that ALEs need to know are:

• When calculating FTEs, the ACA considers an employee full-time if they average at least 30 hours per week (or 130 hours per month).
  • You must also count the hours of part-time employees who work fewer than 30 weekly hours to determine full-time equivalents.
• Suppose an employer had an average of 50 FTEs during the previous calendar year. In this case, they will qualify as an ALE for the current calendar year.
• In 2025, the IRS considers an employer-sponsored health plan affordable as long as the employee is contributing no more than 9.02% of their household income toward the lowest-cost self-only plan that meets minimum value standards².
• Under the employer mandate, an ALE may face two potential penalties. The IRS will impose the greater of the two penalties. Employers won’t pay both fines.

The ACA doesn’t consider an employer with fewer than 50 FTEs an ALE. These companies don’t have to provide health insurance to their employees or pay a penalty. But, employers with fewer than 50 FTEs can offer health insurance for other reasons.

3. An employment contract requires health insurance coverage

While it may not apply to most workers, some enter an employment contract when they start a new job. The contract may guarantee certain aspects of employment, including health benefit plans. A great example of this is union employees.

Union employees have collective bargaining agreements which often outline the following provisions:

• Annual wages, including regular pay, bonuses, and stipends
• Benefits for workers, such as health insurance, retirement, and paid time off (PTO)
• Work hours and working conditions
• Union's rights and responsibilities
• Management's rights

Due to collective bargaining agreements, union workers tend to receive health benefit plans more often than non-union employees.

4. They want to attract and retain top talent

A business looking to be more competitive may prioritize offering health insurance benefits. Employer-sponsored health benefits go a long way toward boosting morale, creating a strong company culture, and showing your workers you care.

Talented job seekers know they’re in high demand. And they’re more likely to value companies that provide excellent health benefits. If you’re growing your business or competing with others in your industry, health insurance can help you win great candidates.

Additionally, health insurance benefits aid in retention and reduce costly turnover. Our 2024 Employee Benefits Survey found that 81% of employees said an employer’s benefits package is important when determining whether to accept a job. Furthermore, 92% of employees voted health benefits as somewhat or very important.

Luckily, you have options when determining what health benefits to offer at your company. Alternative coverage options like health reimbursement arrangements (HRAs) and health stipends are flexible enough for job seekers and current employees.

5. The company cares about their employees’ health and wellbeing

Healthier workers tend to be more productive than unhealthy workers. They may take fewer sick days and experience less stress than others. Having an employer-provided health benefit is necessary to keep your workforce running smoothly.

Here are a couple of ways offering health insurance keeps your staff healthy:

• Qualified health plans must offer preventative medical care as an essential health benefit. Employees with access to preventive medical care can ensure they stay healthy by preventing more serious illnesses.
  • Having affordable insurance allows employees to access health services at a more reasonable price than if they didn’t have coverage.
• If employees experience a health problem, having coverage allows them access to critical care at a more reasonable price than they would experience if they didn't have coverage.
  • This saves them from financial distress that could affect their physical and mental health.

These factors contribute to your business's productivity. But there’s also a larger benefit. Caring about your employees’ well-being by providing health insurance also increases job satisfaction and employer loyalty.

What’s next for employer-sponsored health benefits?

While group health insurance has been the norm for decades, HRAs are becoming more popular. Stand-alone HRAs like the individual coverage HRA (ICHRA) and qualified small employer HRA (QSEHRA) allow employers to reimburse employees tax-free for qualifying medical expenses. This includes individual health insurance premiums.

HRAs allow employers to better control their costs by setting allowances that fit their budgets. They also give employees the freedom to choose plans that fit their unique needs.

Discover how HRAs can save your organization money while offering personalized health benefits to your team.

Conclusion

Job-based insurance covers almost 154 million Americans³. From its tax benefits for employers to the peace of mind it offers employees, health insurance offers employers a smart way to invest in and care for their team.

There are more alternatives to traditional group health insurance than ever before. No matter your organization’s size or budget, a personalized HRA is an innovative solution that can meet your needs. Contact us if you’re ready to add an HRA to your benefits package!

This article was originally published on April 27, 2012. It was last updated on January 31, 2025.

1. Small business health care tax credit

2. Affordable health coverage

3. KFF 2024 Employer Benefits Survey