While employees at large corporations may expect health care coverage to be a given, this isn’t always the case with smaller businesses — that’s because small businesses with fewer than 50 employees aren’t required to provide health care benefits to their employees.
Offering this coverage anyway, however, can be beneficial to both the employees and the business as a whole — though researching, establishing, and paying for that coverage can feel quite overwhelming.
Here’s everything you need to know about offering health insurance to your small business employees, and what to watch out for along the way.
How small business health insurance works
When a small business first decides to offer health insurance to its employees, the process can feel a bit daunting. The business will need to initially determine its federal requirements and the coverage options available to them according to the company’s size. It’ll also need to calculate how many employees will be covered and decide how much to contribute toward that coverage (in accordance with any federal requirements).
Employers also need to shop around for coverage. This means examining different carriers and plan options, comparing pricing, and ensuring availability. Once a plan is established and offered, though, things move pretty smoothly.
Typically, a small business will offer a set health care plan or a number of plans from which employees can choose. The business can also choose to offer coverage to employees’ families, including their spouses, children, and other dependents, and coverage cannot be denied to any of them based on factors like age or preexisting conditions. The small business will then contribute its share of the premiums (unless offering an HRA, which we’ll discuss later), and the employee will enjoy access to the coverage that they need.
In order to qualify for certain tax credits, this contribution will need to be at least 50% of the employee’s care costs, though many employers choose to contribute more — in fact, a recent study found that employers cover an average of 83% of single coverage premiums. The employee is responsible for covering the rest, which is typically paid through automatic paycheck deductions.
Requirements for small business health insurance plans
There are three primary requirements that small business owners need to keep in mind if they’re looking to offer health insurance plans to their employees.
Healthcare must be universally offered
If choosing to offer health insurance to any employees, small businesses are required to offer that coverage to all eligible employees, as soon as they become eligible. There is a maximum waiting period of 90 days allowed, but employers cannot make any eligible employees wait longer than that to receive active coverage.
Healthcare must be affordable
While “affordable” generally has different meanings to different people, there is a specific threshold that these health insurance premiums must meet in order to be considered affordable for employees.
For 2022, an employees’ out-of-pocket annual cost for self-only coverage (not including any dependents) cannot exceed 9.61% of their annual household income. This requirement, down from 9.83% in 2021, only applies to the lowest-priced plan offered.
Because it’s impossible to know each employee’s overall household income, there are a few ways that employers can ensure they meet the requirement. They can determine affordability using three different safe harbors:
- The employee’s W-2 wages
- The employee’s pay rate (their hourly rate time 130 hours each month or their monthly salary multiplied by 0.0961)
- The federal poverty level (currently $12,880 for individuals in the 48 contiguous states and D.C., for 2021, according to the Department of Health and Human Services)
Using the federal poverty level to calculate the affordability of coverage is preferred (and typically, the safest) — that’s because coverage is automatically deemed “affordable” if it meets this threshold.
Healthcare might not be optional
If your small business has 50 or more employees, it is required to offer health care coverage to all full-time employees, according to the Affordable Care Act.
Reasons to offer coverage
If you’re an employer with more than 50 employees, you don’t have a choice but to offer health insurance coverage. But what if you have fewer than 50 employees? Why would you want to offer coverage if you don’t have to?
Well, there are quite a few reasons to consider adding health care benefits to your workplace.
It’s beneficial for employees
Better employee benefits usually equate to happier employees. Offering competitive benefits can be important, whether a business is looking to recruit new talent, retain existing talent or just ensure that employees are satisfied and feel like they’re being taken care of. Plus, the healthier your employees stay, the better it is for your small business and workplace efficiency.
Group coverage can be more affordable
The average cost of individual health insurance coverage is $541 per month, for a 40-year-old male on a silver-level plan. And when you consider that the median income for a 40-year-old man is also around $5,382, this means that typical health care costs account for more than 10% of the average person’s income.
Establishing and offering group health care coverage to a workplace can put affordable coverage options in front of employees. This pooled coverage can provide for employees and their spouses, children, and other dependents, often at a premium that’s lower than they would find on the individual marketplace.
You could receive a tax credit
The health care tax credit is available to many employers who offer health insurance coverage to their employees. The smaller the business is and the lower the average wages paid, the bigger this tax credit may be.
The maximum tax credit is 50% of the premiums paid toward employees’ health care coverage, as long as it’s offered through the Small Business Health Options Program (SHOP). It’s available to employers with fewer than 25 employees who pay less than $50,000 annually per full-time (or equivalent) employee. However, the tax credit is on a sliding scale, with greater credits being offered to smaller businesses or those with smaller wages.
Factors to consider when choosing healthcare
Thinking about offering health care coverage to your small business employees? Here are some things to consider while deciding.
How many employees you have
The fewer employees you have, the lower your out-of-pocket costs will be for offering that coverage. With that said, group insurance plans tend to have lower rates when the employee participation pool is larger. In addition, the number of employees matters when it comes to taking advantage of the health care plan tax credit, as fewer employees may qualify your business for a larger credit.
Whether you’re required to provide coverage
Employers with 50 or more full-time employees are required to provide health insurance coverage to all employees. However, if you have fewer than 50 full-time employees, it can still be an option for your business.
How much you’re willing to contribute
While there are affordability thresholds that employers need to meet, these are just minimums. Employers can pay even more toward their employees’ health care costs if they so choose. Consider what you’re willing (and able) to contribute.
Whether you want (or need) to receive a tax credit
The Small Business Health Care Tax Credit is available to employers with fewer than 25 employees, with an average salary of below $50,000. The fewer employees and lower wages you have, the higher this credit can be, as long as your business meets the 50% contribution requirement.
How much does health insurance cost small businesses?
The cost of providing health care coverage to your small business employees depends on so many unique factors. These costs can be impacted by your:
- Total number of employees
- Number of employees who participate in the plan
- Level of coverage offered
- Average age of employees
- Chosen contribution or reimbursement amount
With that said, the most recent Kaiser Family Foundation Employer Health Benefits Survey found that the average premium for employer-sponsored health care plans was $22,221 per family. Of that, employees paid an average of $5,969, leaving employers to cover the remaining $16,252. For single employee coverage (not including dependents), the average premium was $7,739, of which employees paid $1,299 and small businesses covered the remaining $6,440.
Finding affordable coverage options may involve the SHOP marketplace if your small business is eligible. There, employers can search for qualifying plans that meet their federal requirements and also ensure that they remain eligible for any tax credits.
For employers, the cost of providing health insurance to employees comes down to both monetary costs and time expenses.
The monetary costs include the actual reimbursement (or contribution) offered to employees. To take advantage of the IRS tax credit, this will need to be at least 50% of eligible employees’ expenses.
There are also costs involved with researching, building, and establishing the plan to be offered. Third-party companies and brokers charge fees for these services, so employers should be sure to factor those in.
Time costs are both upfront and revolving. Initially, they center around researching and choosing plans, educating employees, allowing them to select their options and enrollment. Each year, time will also need to be devoted to managing plan changes, enrolling new employees, and ensuring that the plan always meets changing federal requirements.
Types of insurance you could offer
There are three group coverage options to consider when establishing health care coverage as a small employer.
Small group coverage
Qualified small group coverage includes group health care plans offered by insurance companies to eligible small employers, with between one and 50 employees (aside from certain owners or their spouses). This coverage typically includes a defined benefit for employees and may include SHOP coverage options.
Employers can offer a single plan (which provides minimum essential coverage) or multiple plans from which the employee can choose. If desired, the employer can also allow employees to buy coverage for their dependents. Enrollment may occur on a rolling basis.
If offering SHOP coverage to employees — and contributing at least 50% of those full-time employees’ premium costs — employers may be eligible for the Small Business Health Care Tax Credit.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
A Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA, is a health care plan that allows employers to make non-taxed contributions to their employees’ health-related costs. This is different from a group insurance plan and involves reimbursing employees for items like health insurance premiums or coinsurance costs.
QSEHRAs are only available to small businesses with fewer than 50 full-time employees. With this option, the same arrangement must be offered to all employees, though the actual reimbursed amounts can vary according to the employee’s age and the number of individuals covered by the arrangement.
Employees are required to pay their health care providers directly, then submit a claim to their employer for reimbursement. The employer will then reimburse the employee up to the IRS allowed maximum.
For 2021, these maximums are:
- $5,300 annually ($441.67 monthly) for employee-only coverage
- $10,700 annually ($891.67 monthly) for employees and households
Individual coverage HRA
The last option is the individual coverage HRA: This is offered to employers of any size, as long as they have one employee (not including certain owners and spouses). It too can be used to reimburse employees for a range of qualifying health care and medical expenses, such as individual health care premiums or even Medicare.