Small businesses can offer health insurance through three main approaches: buying a group health plan, using the federal SHOP Marketplace, or reimbursing employees for individual coverage through a health reimbursement arrangement (HRA). The right choice depends on your budget, your number of employees, and how much control you want over plan selection. Here’s how each option works and what it takes to get started.
Know Whether You’re Required to Offer Coverage
Under the Affordable Care Act, businesses with 50 or more full-time equivalent employees are classified as Applicable Large Employers (ALEs) and are legally required to offer health coverage that meets minimum standards. If you fall below that threshold, offering insurance is voluntary. Most businesses searching for guidance on this topic have fewer than 50 employees and are choosing to offer coverage as a recruiting and retention tool, not because the law demands it.
Even without a legal mandate, offering health benefits gives you a real edge. For many job seekers, health insurance is the single most valued benefit after salary. And depending on your size and wage structure, you may qualify for a federal tax credit that covers a significant portion of your premium costs.
Option 1: Buy a Group Health Plan
A traditional group health plan is what most people picture when they think of employer-sponsored insurance. You work with an insurance carrier (or a broker who represents multiple carriers) to select a plan, and you pay a share of the monthly premium for each enrolled employee. Employees typically pay the remainder through payroll deductions.
To get started, you’ll generally need at least one W-2 employee other than yourself. Most insurers also require a minimum participation rate, meaning a certain percentage of eligible employees must enroll for the plan to take effect. This threshold varies by carrier but often falls in the 50% to 75% range.
When shopping for group plans, you’ll choose among familiar plan types like HMOs, PPOs, and high-deductible health plans. Premiums depend on your location, the age mix of your workforce, the plan’s benefit level, and how many people enroll. As the employer, you decide how much of the premium to cover. Many small businesses pay between 50% and 100% of the employee-only premium and let employees pay for dependent coverage.
Working with a licensed insurance broker can simplify this process considerably. Brokers are typically paid by the insurance carrier, not by you, and they can present quotes from multiple companies so you can compare costs and networks side by side.
Option 2: Use the SHOP Marketplace
The Small Business Health Options Program (SHOP) is a federally run marketplace specifically for small employers. It’s available to businesses with 1 to 50 employees and lets you compare and purchase qualified health plans in one place. You can enroll through SHOP directly at HealthCare.gov or work with a SHOP-registered agent or broker.
The main reason to consider SHOP is the Small Business Health Care Tax Credit. This credit is available only to employers who purchase coverage through SHOP, and it can be worth up to 50% of the premiums you pay (35% for tax-exempt organizations). To qualify, your business must meet all three of these criteria:
- Fewer than 25 full-time equivalent employees. You calculate this by adding up total hours worked by all employees and dividing by full-time hours, so part-time workers count as fractions.
- Average annual wages below an inflation-adjusted cap. For 2023, that cap was $62,000. The IRS adjusts this figure each year.
- You pay at least 50% of employee-only premium costs.
The credit is largest for businesses with fewer than 10 full-time equivalent employees earning average wages under $25,000 (also adjusted for inflation). As your headcount or average wages rise above those levels, the credit phases out on a sliding scale. You can claim it for two consecutive tax years.
Option 3: Set Up a Health Reimbursement Arrangement
Instead of choosing a plan for your employees, you can give them a monthly allowance to buy their own individual health insurance and then reimburse them tax-free. This is done through a health reimbursement arrangement, or HRA. Two types are designed specifically for small employers.
QSEHRA
A Qualified Small Employer HRA is available to businesses with 50 or fewer full-time employees that do not already offer a group health plan. You set a fixed monthly reimbursement amount, and employees use it toward premiums and qualifying medical expenses for individual coverage they purchase on their own. The federal government sets annual contribution caps, which are adjusted for inflation each year. For reference, in 2022 the limits were $5,450 per year for self-only coverage and $11,050 for family coverage. Current limits are higher due to annual adjustments.
With a QSEHRA, you can vary reimbursement amounts based on family status (single vs. family), but you cannot differentiate by age or job role. Employees must be enrolled in minimum essential coverage to receive reimbursements. One thing to know: QSEHRA reimbursements reduce an employee’s eligibility for premium tax credits on the ACA marketplace, though they don’t eliminate them entirely.
ICHRA
An Individual Coverage HRA works similarly but with more flexibility. Businesses of any size can offer an ICHRA, and there is no annual cap on how much you can contribute. You can also set different allowance amounts for different classes of employees, defined by factors like job type, geographic location, age, or full-time versus part-time status.
The trade-off is that employees who accept an ICHRA must waive their premium tax credits entirely. They can opt out of the ICHRA to keep their tax credits instead, which gives them a choice based on which benefit is more valuable to them.
Both types of HRA shift plan selection to the employee, which means less administrative work for you and more choice for your team. You also get predictable costs since you set the reimbursement budget up front.
Costs to Expect
For group plans, the biggest cost is your share of monthly premiums. The average annual premium for employer-sponsored coverage in the U.S. runs over $8,000 for single coverage and over $23,000 for family coverage, though small business rates vary widely based on location and plan design. Your actual cost depends on the plan you choose and what percentage you decide to cover.
HRAs cost less to administer than group plans, especially if you use a third-party HRA administrator. Monthly administration fees from these platforms typically range from $15 to $25 per employee. Your reimbursement spending is entirely within your control since you set the budget.
Regardless of which route you choose, the premiums you pay or the reimbursements you make are generally tax-deductible as a business expense. Employee contributions to premiums through payroll deduction are typically made pre-tax as well, saving both you and your employees on payroll taxes.
Steps to Get Started
First, determine your budget. Decide how much per employee per month you can realistically spend. Even a modest contribution makes a meaningful difference to employees and can make your job offers more competitive.
Next, count your full-time equivalent employees. This number determines whether you qualify for SHOP, the tax credit, or a QSEHRA. Add up all hours worked by every employee in a week, divide by 30 (the ACA’s full-time threshold), and you have your FTE count.
Then choose your model. If you want to pick the plan and manage enrollment centrally, go with a group plan (through SHOP if you want the tax credit, or directly through a carrier or broker). If you’d rather give employees flexibility and keep administration light, set up an ICHRA or QSEHRA.
For group plans, contact a licensed broker or visit HealthCare.gov/small-businesses to explore SHOP options. For HRAs, choose a third-party administrator that handles compliance, reimbursement processing, and employee communications. Most HRA platforms can have you set up within a few weeks.
Finally, communicate the benefit clearly to your team. Employees need to understand what’s covered, what their share of the cost will be, and when coverage begins. For HRAs, they’ll also need guidance on purchasing individual plans through the ACA marketplace or directly from an insurer.