Small businesses with fewer than 50 employees aren’t legally required to offer health insurance or retirement plans, but doing so can help you attract better candidates and keep the people you already have. The good news: you don’t need a Fortune 500 budget to put together a meaningful benefits package. Several plan types, tax credits, and outsourcing options exist specifically to make benefits accessible at smaller scales.
When Benefits Are Required vs. Optional
Under the Affordable Care Act, only “applicable large employers,” those with 50 or more full-time employees (including full-time equivalents), are required to offer health coverage. If you fall below that threshold, offering benefits is entirely voluntary. That said, voluntary doesn’t mean unimportant. In competitive labor markets, even a modest benefits package can be the difference between landing a strong hire and losing them to a larger company.
The 50-employee count includes full-time equivalents, not just people on your payroll at 40 hours a week. If you have a mix of part-time workers, add up their combined weekly hours and divide by 30 to see how many full-time equivalents they represent. A business with 35 full-time employees and enough part-timers to equal 15 more would cross the threshold.
Health Insurance Options for Small Employers
Traditional Group Health Plans
A group health plan is the classic approach: you choose a plan from an insurer, pay a portion of the premium, and employees pay the rest through payroll deductions. Small businesses can purchase group coverage through the SHOP (Small Business Health Options Program) marketplace or directly from an insurance carrier. Enrolling through SHOP is generally the only way to qualify for the Small Business Health Care Tax Credit, which can cover up to 50% of your premium contributions for two consecutive years. To be eligible for that credit, you need fewer than 25 full-time equivalent employees with average salaries of about $65,000 or less per year. The credit is highest for companies with fewer than 10 employees earning an average of $27,000 or less.
Group plans give you more control over what coverage employees get, but they also come with more administrative responsibility. You’ll handle enrollment, manage renewals, and deal with carrier requirements each year.
QSEHRA: A Reimbursement Approach
If managing a group plan sounds like too much, a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) lets you reimburse employees for their own individual health insurance premiums and medical expenses instead. Your employees buy their own coverage, pay their providers, and submit proof of payment to get reimbursed by you up to a set monthly amount.
To offer a QSEHRA, you must have fewer than 50 full-time employees and cannot simultaneously offer a group health plan or a flexible spending account. You must provide the arrangement on the same terms to all full-time employees, though reimbursement amounts can vary based on age and whether someone covers just themselves or a family. For 2026, the maximum annual reimbursement is $6,450 for employee-only coverage ($537.50 per month) and $13,100 for employees with families ($1,091.66 per month). Employees must carry qualifying health coverage to use their QSEHRA funds.
You’re required to give written notice to new employees as soon as they become eligible and to current employees at least 90 days before each plan year begins. The upside is simplicity: you set a budget, employees choose their own plans, and you’re not locked into a single carrier.
ICHRA: More Flexibility, No Size Cap
An Individual Coverage Health Reimbursement Arrangement (ICHRA) works similarly to a QSEHRA but has no employer size limit and no annual reimbursement cap. You can offer different reimbursement amounts to different classes of employees (full-time vs. part-time, salaried vs. hourly) as long as everyone within a class gets the same terms. This makes ICHRAs appealing if your workforce is diverse or if you want to offer more generous reimbursements than QSEHRA limits allow.
Retirement Plans That Fit a Small Budget
SIMPLE IRA
A Savings Incentive Match Plan for Employees (SIMPLE IRA) is designed for businesses with 100 or fewer employees. It’s one of the easiest retirement plans to set up because there’s minimal paperwork and no annual filing requirement with the IRS. Employees can contribute up to $17,000 in 2026, with a $4,000 catch-up contribution for those 50 and older. Workers between ages 60 and 63 can make an enhanced catch-up contribution of $5,250.
As the employer, you’re required to make contributions each year in one of two ways: match employee contributions dollar-for-dollar up to 3% of their compensation, or make a flat 2% contribution for every eligible employee regardless of whether they contribute themselves. That mandatory employer contribution is the trade-off for the plan’s simplicity.
401(k) Plans
A 401(k) gives employees the highest contribution room: $24,500 in 2026, with an $8,000 catch-up for those 50 and older and an $11,250 catch-up for employees ages 60 through 63. You can choose whether to match employee contributions and at what level. There’s no legal requirement to match, though offering even a small match significantly boosts participation.
Traditional 401(k) plans involve more administration than a SIMPLE IRA, including annual nondiscrimination testing and IRS filings. Many small businesses use a “safe harbor” 401(k), which eliminates the testing requirements in exchange for a mandatory employer contribution (typically a 3% match or a 3% nonelective contribution to all eligible employees). Several payroll providers now bundle 401(k) administration into their platforms, which has driven costs down considerably for businesses with just a handful of employees.
SEP IRA
A Simplified Employee Pension (SEP) IRA is the most straightforward option if you’re a solo operator or have very few employees. Only the employer contributes, not employees. You can contribute up to 25% of each employee’s compensation. The catch is that whatever percentage you contribute for yourself, you must contribute the same percentage for every eligible employee. That makes SEP IRAs best suited for self-employed individuals or very small teams where the owner wants to save aggressively.
Benefits Beyond Health and Retirement
A competitive package doesn’t have to start with the most expensive items. Several lower-cost benefits carry outsized value for employees and can be added incrementally as your budget grows.
- Paid time off: Even a straightforward PTO policy covering vacation, sick days, and holidays costs you only the wages for days not worked. Having a written policy signals professionalism and helps with retention.
- Dental and vision insurance: Group dental and vision plans are significantly cheaper than medical coverage, often running $20 to $60 per employee per month. Some employers cover these fully; others offer them as voluntary benefits where employees pay the full premium but get the group rate.
- Life and disability insurance: Basic group life insurance can cost as little as a few dollars per employee per month. Short-term and long-term disability coverage protects employees’ income if they can’t work due to illness or injury.
- Flexible work arrangements: Remote work options, flexible hours, or compressed workweeks cost nothing to implement and consistently rank among the most valued perks in employee surveys.
- Professional development: Tuition reimbursement, conference stipends, or a small annual learning budget shows employees you’re investing in their growth.
You don’t need to launch everything at once. Many small businesses start with a retirement plan and PTO, add health coverage once revenue stabilizes, and layer in dental, vision, and other benefits over time.
Getting Help: Brokers and PEOs
Two common ways to outsource the complexity of benefits administration are insurance brokers and Professional Employer Organizations (PEOs).
An insurance broker is a licensed professional who shops the market on your behalf, compares plans, and recommends options based on your budget and coverage needs. Carriers pay brokers a commission, so standard broker services typically have no upfront cost to you. However, brokers are advisors only. You’re still responsible for enrolling employees, handling paperwork, and administering the plan day to day. Brokers are a good fit if you want expert guidance on plan selection but are comfortable managing the ongoing administration yourself or through your HR staff.
A PEO takes on a much larger role. It becomes a co-employer of your workforce, which means it sponsors and administers the benefits plan, handles enrollment, manages open enrollment periods, processes claims, and takes care of related tax filings. Because PEOs pool employees from many small businesses together, they can often negotiate group rates that a five- or ten-person company couldn’t access alone. The trade-off is cost: PEOs charge a monthly fee, typically estimated at 2% to 12% of your total payroll or $50 to $250 per employee. That fee usually covers not just benefits administration but also payroll processing, HR compliance support, and risk management tools.
If your company has fewer than about 15 employees and limited HR capacity, a PEO can effectively become your outsourced HR department. If you mainly need help choosing the right insurance plan and are comfortable running things internally, a broker is the lighter-touch option.
Tax Advantages of Offering Benefits
Most benefit costs are tax-deductible as business expenses. Employer contributions to health insurance premiums, retirement plans, and other qualified benefits reduce your taxable income. Employee contributions to 401(k) and SIMPLE IRA plans are made pre-tax, which also reduces payroll taxes for both you and your employees.
Beyond the standard deduction, smaller employers may qualify for the Small Business Health Care Tax Credit described earlier if they purchase coverage through SHOP. There’s also a tax credit available for the first three years of starting a new retirement plan, which can offset up to $5,000 per year in plan startup costs. If you add an auto-enrollment feature, an additional credit of $500 per year may apply. These credits are specifically aimed at making it cheaper for small businesses to get started with benefits for the first time.
Employer contributions to retirement accounts, whether SEP, SIMPLE, or 401(k), are deductible up to the applicable limits, and they don’t count as taxable income for employees until withdrawn in retirement. That dual benefit makes retirement plans one of the most tax-efficient forms of compensation you can offer.