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 an HRA specialist.
How can you provide affordable health insurance for your employees?
Health benefits are the top consideration for job seekers after compensation. However, , according to KFF, nearly half of employers don’t offer them.
Small employers with limited budgets are even less likely to offer a health benefit because they can’t justify the cost. Traditional options like group health insurance often come with hefty price tags, strict participation requirements, limited covered services for employees, and annual premium rate hikes.
As traditional health insurance options have become less attainable for many small organizations, more employers have turned to alternative health benefits that provide more cost control and personalization. Thanks to innovative advancements in the individual market, small business owners can access affordable and flexible health benefits.
This guide will explain everything you need to know about offering health insurance coverage at your small business and your available health benefit options.
Get our small business guide to offering health benefits
Are small businesses required to provide health insurance?
For many small employers, offering a health benefit is completely voluntary. However, depending on the size of your organization, you may be legally obligated to provide health coverage to your employees.
The Affordable Care Act (ACA) considers an employer with 50 or more full-time equivalent employees (FTEs) an applicable large employer (ALE). This means they must offer at least 95% of full-time employees and their dependents affordable health insurance that meets minimum essential coverage (MEC) and minimum value. If they fail to do so, they’ll be subject to tax penalties.
The first step in determining if you need to provide a health insurance benefit to your employees is by calculating the number of FTEs you have at your organization. If you employ fewer than 50 FTEs, the federal government doesn’t consider you an ALE and doesn’t require you to offer your staff health insurance. You also won’t be subject to a penalty under the ACA.
Why should small businesses offer health insurance?
Even if you aren't legally required to provide health benefits, that doesn’t mean you shouldn’t. Offering a health benefit to your employees can add immense value to your company.
How offering health coverage benefits employers:
- It 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.
- It helps your company stand out: Providing a health benefit makes your organization an employer of choice that cares about its employees' well-being.
- It builds a healthy and productive workforce: A comprehensive health benefit can result in healthier employees, leading to fewer sick days and increased productivity.
- It 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 want to offer your employees a health benefit, you have a variety of plan options. We’ll discuss each possibility in the sections below.
Health reimbursement arrangements (HRAs)
One of the best options for small employers is a health reimbursement arrangement (HRA). An HRA is an IRS-approved, employer-funded health benefit used to reimburse employees for health insurance premiums and qualified out-of-pocket medical expenses.
HRAs are a great solution for employers of all sizes, locations, and budgets. With an HRA, you set a monthly allowance that your employees can spend on insurance premiums and medical care. Once employees make an approved purchase, you reimburse them tax-free up to their set allowance amount.
HRAs are employer-owned. This means that any unused funds stay with you if an employee leaves your company. Due to their flexibility, offering an HRA is a surefire way to attract and retain top talent.
Here are some other reasons why HRAs work well as a health benefit for small businesses:
- They don’t require employers to pre-fund an account
- They don’t have minimum contribution requirements
- They don’t have participation requirements
- There are no annual rate increases
- They enable employees to choose the insurance policies that work best for them
In the sections below, we’ll take a closer look into two types of HRAs that small employers can leverage as a health benefit.
1. Qualified small employer HRA (QSEHRA)
The qualified small employer HRA (QSEHRA) is for employers with fewer than 50 FTEs who don't offer a group health or ancillary plan. While it has no minimum contribution requirements, the QSEHRA does have annual maximum contribution limits that are set by the IRSThe simplicity and flexibility a QSEHRA offers make it an excellent solution for small businesses seeking a quality but affordable health benefit.
If you choose to offer a QSEHRA, you must offer it on equal terms to all your W-2 full-time employees. You can also add your part-time employees to the benefit as long as they receive the same allowance as full-time employees.
Employees who are offered the benefit and want to participate must be covered by a health plan that provides MEC. Employees who aren’t covered by MEC before the offer of a QSEHRA can enroll in a qualifying plan during a special enrollment period.
Employers have the option of customizing your QSEHRA’s eligible expenses. For example, you can design your benefit to reimburse your employees for health insurance premiums only or their premiums plus qualified out-of-pocket costs.
According to our 2024 QSHERA Report, 42% of all QSEHRA reimbursements were for insurance premiums. However, 58% were for non-premium expenses, like prescription drug coverage and mental health services. So, if you have the budget, a premium plus QSEHRA can help your employees get the most out of their allowance.
2. Individual coverage HRA (ICHRA)
An individual coverage HRA (ICHRA) works similarly to the QSHERA. However, it has a few differences. For example, it’s available for organizations of all sizes and has no maximum contribution limits. If your business grows to the size of an ALE, you can design an ICHRA to satisfy the employer mandate without enrolling in costly group health insurance.
With an ICHRA, you can also set different allowance amounts based on 11 job-based employee classes, making it easier to customize the benefit to meet your and your staff’s needs. The benefit can also coordinate with premium tax credits, allowing your employees who qualify for subsidies to opt in or out of the ICHRA based on affordability.
The ICHRA can only cover employees with a qualified individual health insurance plan that meets MEC. Employees with coverage from a family member's group policy or an alternative plan, like a healthcare sharing ministry, can't participate.
However, your staff who can participate can select the individual health plan—whether through a public or private exchange—that works best for them and their families and use their ICHRA benefit to cover their monthly premiums and other expenses.
Traditional group health insurance
While traditional group health insurance is undoubtedly the most understood health benefit for employees, it’s not always the best choice for small employers. With a group health benefit, you choose the group health plans and policies for your company that your employees can enroll in at a reduced rate. A health insurance company, licensed agent, or broker can help you buy a group plan.
There are many types of health insurance plans, including:
- Health maintenance organizations (HMOs)
- Preferred provider organizations (PPOs)
- Exclusive provider organizations (EPOs)
- Point of service (POS) plans
ALEs often choose group health insurance because they have a large enough risk pool to qualify for lower rates and meet the participation requirements. In some states, smaller businesses can also buy a small business health insurance plan on the Small Business Health Options (SHOP) marketplace. They can save on premium costs for a SHOP plan if they qualify for the Small Business Health Care Tax Credit. But even so, premium rates can still be expensive for small business owners.
According to KFF, the average annual group health insurance premium in 2023 was $8,435 for self-only coverage and $23,968 for family plans. Employers typically split these costs with their employees, and in 2023 contributed an average of $7,034 toward their employees’ self-only coverage and $17,393 toward family coverage3. Depending on the plan type and other factors, your premiums will vary.
In addition to plan cost, time-intensive administration requirements can come with group health insurance plans. They also require constant communication between the employer, health insurance company, and employees. If you don’t have a benefits specialist who manages employees’ health insurance questions, that can take time away from running your business.
Finally, annual benefit renewals for group health insurance plans are complex. If you're inexperienced, understanding plan changes, cost negotiations, and researching new policies is a big undertaking. To be successful, you may need to work with an agent or broker, which takes time and money.
Self-funded insurance plans
Some small employers opt for a self-funded insurance plan to avoid the costly employee premiums and restrictions of a fully-insured group health insurance policy. With a self-funded plan, employers assume the financial risk of providing healthcare to their employees. This means you’ll pay for each employee's claims instead of paying a monthly premium to a health insurance company.
Typically, the employer sets up a trust fund, which the employer and the employees both contribute toward, 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.
Even though they’re not subject to federal or state premium taxes and allow for personalization, self-funded plans have downsides. For instance, administrative services for these plans can be complex under ERISA, require the help of a third-party administrator, and have potentially large claims, making them costly in the long run.
Health stipends
Another way small businesses help their employees with their medical costs is with a health insurance stipend. While they aren’t considered formal health benefits, employee stipends are a great option for employers who don’t want the administrative duties that come with group plans.
A stipend is 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 use their stipend on healthcare items, they can’t make them or ask for proof that they purchased a medical plan from an insurance carrier.
Stipends are subject to income taxes for employees and payroll taxes on contributions for employers. However, they can be a good option for organizations with many employees who qualify for premium tax credits or other subsidies. Employees with a stipend can receive their stipend and collect their full premium tax credit.
Lastly, you can compliantly offer a health stipend alongside other health benefits, like an HRA or group health insurance. This can make stipends a flexible and easy addition to your benefits package, further attracting and retaining your workers.
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 critical 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 can’t offer. For example, suppose you have just one full-time employee. In that case, you likely can’t offer traditional group health insurance in most states. Similarly, if you’re determined to keep your current group health insurance policy, you can’t offer a QSEHRA.
Monthly costs are 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’re willing and able to spend on health benefits. Generally, you should aim to spend as much as you can afford on health benefits because they’re the top consideration for job seekers.
Once you’ve calculated this figure, compare it to the estimated cost of each health benefit option your organization can 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 can 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 have busy lives, 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 software solution 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 support their needs. If you have employees 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 self-funded health plan can help employees regardless of where they live. If employees who fall into these categories are valuable to your organization, narrow your coverage 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. 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. If you’re unsure what your staff is looking for, you can survey them to get a better idea.
Benefit cost is a consideration for most employee benefits options, but it’s an especially critical 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 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 counseling 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 want.
Need help finding the right benefit?
Schedule a free consultation with a PeopleKeep personalized benefits advisor.
Frequently asked questions
How can small employers afford health insurance?
The cost of health insurance can be too expensive for small businesses. Thankfully, you can save money by offering a health reimbursement arrangement (HRA). Instead of paying for premiums, you give your employees a tax-free allowance for their qualifying medical expenses. An HRA is the best way to give employees a health benefit without the high cost of health insurance.
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 update their policy terms or offer additional health benefits. Suppose you sign up for an HRA mid-year. In that case, your employees will qualify for a special enrollment period, giving them a 60-day window to enroll in a plan through a private exchange or on the federal health insurance marketplace.
Which expenses are eligible with an HRA?
An HRA is an arrangement between an employer and an employee that allows them to get reimbursed for their medical costs. A health savings account (HSA) is a portable account the employee owns and keeps with them even after leaving 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 the employee spends the money.
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 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?
Depending on how they file, some business owners can participate in an HRA.
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 also extends to the C-corp owner’s family. 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. The IRS considers partners in a partnership to be self-employed rather than company employees. Therefore, they’re not eligible to participate in a reimbursement benefit.
Like sole proprietors, partners can take advantage of 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 employees and can’t participate in a reimbursement benefit.
Wondering how PeopleKeep can help you offer benefits?
Speak with a PeopleKeep HRA specialist who can answer your questions and guide you toward the best benefits options for your organization.