Do Small Businesses Have To Provide Health Insurance
Business owners want to cut costs as much as possible while complying with all government regulations. Noncompliance can result in costly fines and affect employee productivity. That’s why employers want to know if small business health insurance is mandatory. Here is everything you need to know about the Affordable Care Act (ACA) and small businesses.
What are the basic requirements of the Affordable Care Act (ACA) for small businesses regarding health insurance?
The Affordable Care Act (ACA) comprises an employer mandate that applies only to companies with 50 or more full-time equivalent (FTE) employees. These are known as Applicable Large Employers (ALEs). If you’re an ALE, you must offer health insurance that meets small business ACA requirements or face penalties.
If your business has fewer than 50 FTEs, you’re not legally required to provide health insurance to your employees under the ACA. This means most small businesses are exempt from the mandate. The mandate requires ALEs to offer plans that are:
- Affordable: The employee’s share of the insurance premium for the lowest-cost, self-only coverage can’t exceed 9.02% of their household income (for 2025).
- Provide minimum value: The plan should cover at least 60% of the total allowed cost of benefits expected to be incurred under the plan.
What defines a “small business” under the ACA?
Under the ACA, a small business is defined as one with fewer than 50 full-time equivalent employees. This calculation includes both full-time and part-time employees. A full-time employee works an average of at least 30 hours per week, while part-time hours are aggregated to determine their full-time equivalent.
For example, under ACA guidelines, two part-time employees working 15 hours per week each would be considered one full-time equivalent employee. If you cross the 50 FTE line, you move from “small business” to “Applicable Large Employer,” and new health insurance responsibilities kick in.
What are the different types of health insurance options available to small businesses?
If you want affordable small business health insurance, consider the following group health insurance choices for small business owners. You can buy affordable health insurance for small businesses through an insurance company, broker or SHOP.
The Small Business Health Options Program (SHOP) Marketplace is a government-run platform that helps small businesses compare and buy group health insurance plans that meet ACA standards. Employers using SHOP may also qualify for the Small Business Health Care Tax Credit, which helps offset premium costs.
- Health Maintenance Organizations (HMOs): Employees choose a primary care physician who coordinates care and referrals.
- Preferred Provider Organizations (PPOs): Employees can see any provider, but costs are lower within the network.
- Exclusive Provider Organizations (EPOs): EPOs blend HMOs and PPOs. Employees receive care within the EPO network but don’t need a referral.
- Point of Service (POS) plans: A hybrid of HMO and PPO, offering flexibility while managing costs.
- High-Deductible Health Plans (HDHPs) with Health Savings Accounts (HSAs): This option offers flexibility and cost control, with employees using the HSA to pay for medical expenses.
Health reimbursement arrangements (HRAs)
HRAs are employer-funded health insurance plans that reimburse employees for qualified medical expenses, including individual health insurance premiums. They include:
- Qualified Small Employer HRAs (QSEHRAs): Employers reimburse employees for medical expenses up to a certain annual limit. QSEHRAs are available to small businesses with fewer than 50 employees that do not offer a group health plan.
- Individual Coverage HRAs (ICHRAs): Employers reimburse employees for individual health insurance premiums and other qualified medical expenses. Employees choose their own individual health plan.
Health savings accounts (HSAs)
Employees use pre-tax dollars to pay for qualified medical expenses. HSAs must be paired with an HDHP.
How can small businesses afford to offer health insurance?
- Tax credits: If your business has fewer than 25 FTEs, pays average annual wages below $50,000 (adjusted for inflation beginning in 2014) and contributes at least 50% of employee premiums, you may qualify for the Small Business Health Care Tax Credit. This credit can cover up to 50% of your premium costs if you buy insurance through the SHOP marketplace.
- Plan design flexibility: Choose plans with higher deductibles and pair them with HSAs or HRAs. This can reduce premiums while still offering meaningful coverage.
- Negotiating with insurers: Some insurers offer discounts for bundling health coverage with dental or vision insurance.
- Employee contribution: Small businesses can share premium costs with employees. Many businesses cover 50% to 75% of the premium, making the benefit more affordable.
- Defined contribution model: Instead of offering a specific insurance plan, give employees a set monthly allowance (e.g., through an HRA) to purchase their own coverage. This gives them flexibility while helping you control costs.
If you are unsure which health insurance is best for your business, contact the experienced insurance agents at Fringe Benefit Analysts for advice.
Final thoughts
So, are small business employee health benefits mandatory? Not unless you have 50 or more FTE employees. However, offering health insurance can boost employee morale and strengthen the business’s overall value proposition.
