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Do Small Businesses Need to Offer Health Insurance?

By Jeannine Mancini

Published on 3 Jul 2023 6 min read

If you’re a small business owner, you may be wondering “Do small businesses need to offer health insurance to employees?” The Affordable Care Act, also known as Obamacare, says that big businesses with 50 or more full-time equivalent employees have to offer affordable health benefits that meet specific requirements. If they don’t, they can face penalties. But if you have a smaller business, you don’t have the same obligation to provide insurance.

Read on to learn the rules for offering health insurance as an employer. 

Are Small Businesses Required to Offer Health Insurance?

Small businesses are not required by law to offer health insurance to their employees. However, there are several reasons why offering health insurance can be beneficial for both the business and its employees. One important law to consider in relation to health insurance is the Affordable Care Act (ACA).

Why Should You Offer Health Insurance Even if You’re a Small Business?

The ACA requires applicable large employers (ALEs) with 50 or more full-time equivalent employees (FTEs) to offer affordable health benefits that meet minimum essential coverage (MEC). ALEs that fail to provide such coverage may face penalties. However, smaller businesses with fewer than 50 employees are not subject to this requirement.

Despite not being mandatory, providing health insurance as a small business can have significant advantages. Here are some reasons why offering health insurance is beneficial:

Attract and Retain Employees

Health insurance is a highly valued employee benefit. By offering health coverage, small businesses can attract and retain talented individuals. Access to health insurance is often a deciding factor for job seekers, especially in competitive labor markets.

Improve Employee Health and Productivity

When employees have access to health insurance, they can seek necessary medical care and preventive services. Regular check-ups and timely treatment contribute to better overall health and well-being. Healthy employees are more likely to be productive and have fewer absences due to illness.

Reduce Absenteeism

By providing health insurance, employees are more likely to address health issues promptly, reducing the number of sick days taken. Early detection and treatment of health conditions can prevent them from worsening and leading to extended absences from work.

Increase Morale and Job Satisfaction

Offering health insurance demonstrates that a small business values its employees’ welfare. It can create a positive work environment and contribute to higher job satisfaction and morale among the workforce.

Take Advantage of Tax Credits

Small businesses that offer health insurance may qualify for tax credits under the ACA. The Small Business Health Care Tax Credit helps offset the cost of providing health coverage. To be eligible, the business must have fewer than 25 full-time equivalent employees, pay average annual wages below a certain threshold, and contribute a specific percentage towards employees’ premiums.

To take advantage of the tax credits, small businesses need to provide health insurance through the Small Business Health Options Program (SHOP) Marketplace or meet specific requirements set by the Internal Revenue Service (IRS).

Best Health Insurance for Small Businesses

When choosing health insurance for a small business, there are important things to think about. Consider what the employees need, how much money the business has, and what level of coverage is necessary. Listed below are some of the best health insurance plans for small businesses:

Group Health Insurance Plans 

Group health insurance plans provide coverage to a group of employees and often offer a range of options. These plans can include Preferred Provider Organization (PPO) or Health Maintenance Organization (HMO) style plans, which have a network of healthcare providers. They may also offer self-funded options like Health Reimbursement Arrangements (HRA) or Flexible Spending Accounts (FSA).

High Deductible Health Plans (HDHP)

HDHPs typically come with lower premiums but require employees to pay more out of pocket in the event of medical expenses before the insurance coverage kicks in. These plans often qualify for associated tax savings options like Health Savings Accounts (HSAs), where employees can contribute pre-tax funds to cover eligible medical expenses.

Government-Sponsored Coverage

Small businesses with fewer than 25 full-time equivalent employees may be eligible for the Small Business Health Options Program (SHOP). SHOP offers access to affordable health insurance plans and provides the opportunity to compare different options and choose the best fit for the business and its employees. The availability of SHOP may vary depending on the state.

How to Buy Health Insurance for Your Small Business?

When it comes to buying health insurance for your small business, here are the steps you can follow:

1. Determine Your Budget 

Assess your financial situation and set a budget for health insurance. Consider how much you can afford to contribute towards premiums and other associated costs. This will help narrow down your options and find plans that fit within your budget.

2. Determine Your Employees’ Needs 

Understand the healthcare needs of your employees. Consider factors such as age, family size, and any specific medical conditions or requirements. This will help you choose a plan that meets their needs and provides the necessary coverage.

3. Shop Around and Compare Plans

Research different insurance providers and their plans. Obtain quotes and compare the coverage, costs, networks, and additional benefits offered by each plan. Look for plans that align with your budget and meet your employees’ needs. It can be helpful to consult with insurance brokers or use online marketplaces to simplify the comparison process.

4. Enroll 

Once you have identified the best health insurance plan for your small business, complete the enrollment process. This typically involves submitting the necessary paperwork and providing employee information to the insurance provider. Pay attention to enrollment deadlines and ensure a smooth transition from the previous coverage, if applicable.

5. Communicate with Your Employees

Inform your employees about the health insurance plan you have selected. Clearly explain the coverage details, any changes in costs or benefits, and how they can access healthcare services. Make sure to address any questions or concerns they may have and provide ongoing support related to their health insurance coverage.

Things to Consider for Small Businesses Before Offering Health Insurance

Before deciding to offer health insurance, there are several factors that a small business needs to consider:

High Costs 

Providing health insurance can be expensive for small businesses. Premiums, deductibles, and other associated costs can significantly impact your budget. It’s important to carefully assess the financial implications and determine if offering health insurance is financially feasible for your business.

The Complexity of Choosing the Right Health Insurance Plan

The process of selecting the right health insurance plan can be complex and time-consuming. There are various factors to consider, such as coverage options, networks, premiums, and employee needs. Navigating through these options and understanding the intricacies of each plan can be challenging for small business owners who may lack expertise in the insurance industry.

Possible Negative Impact on Profitability

Offering health insurance may affect your business’s profitability. The costs associated with providing coverage can eat into your bottom line, especially for businesses operating on tight profit margins. It’s crucial to carefully assess the potential impact on your financial stability and determine if the benefits outweigh the costs.

Navigating Health Insurance and Financial Considerations for Your Small Business

Deciding whether to offer health insurance for your small business involves weighing the costs, complexities, and potential impact on profitability. While there are challenges, providing health insurance can attract and retain employees, improve productivity, and boost morale. To navigate the financial aspects effectively, consider Doola’s bookkeeping services. They offer professional assistance tailored to small businesses, including budgeting, expense tracking, payroll management, and tax preparation.

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