Offering health insurance as a small business isn’t just a nice perk—it can be the difference between attracting top talent and losing it to bigger competitors. But the process can feel like navigating a maze: high costs, confusing regulations, and countless options. Are you looking for the right health insurance for small business? This guide breaks it down into clear steps, so you can make smart, informed decisions about health coverage for your business and your team.
Table of Contents
- Why Health Insurance for Small Businesses Matters
- Are You Legally Required to Provide Health Insurance?
- Understanding Group Health Insurance
- The Small Business Health Options Program (SHOP)
- Alternatives to Traditional Insurance
- What Is QSEHRA?
- How to Choose the Right Health Insurance Plan
- Managing Costs Without Sacrificing Value
- Compliance and Reporting
- Final Thoughts
Why Health Insurance for Small Businesses Matters
Health benefits are one of the top factors employees consider when accepting or staying in a job. Offering a plan shows you care—and it pays off:
- Recruitment & Retention: Competitive benefits help you stand out.
- Tax Incentives: You can often deduct premiums and qualify for credits.
- Productivity: Healthy employees miss fewer days and perform better.
- Workplace Morale: Employees feel valued, which boosts engagement.
But many small businesses hesitate, mostly due to cost or complexity. Let’s tackle both head-on.
Are You Legally Required to Provide Health Insurance?
If you have fewer than 50 full-time equivalent employees (FTEs), you’re not required to offer health insurance under the Affordable Care Act (ACA). Once you cross the 50-FTE threshold, you’re considered an Applicable Large Employer (ALE), and different rules apply—specifically the Employer Mandate, which requires offering affordable coverage or facing penalties.
But even if you’re under 50, offering insurance can give you an edge—and it comes with financial help.
Understanding Group Health Insurance
Group health insurance is a single policy issued to a business that covers all eligible employees (and often their families). It tends to be more affordable than individual plans because risk is spread across the group.
Here are your main options:
- Fully Insured Plans
- Traditional option
- Fixed monthly premiums
- Insurance company takes on all risk
- Simple to manage, but less flexible
- Self-Funded Plans
- You pay for employees’ claims out-of-pocket as they arise
- More risk, but potentially cheaper long-term
- Works best if you have good cash flow and a healthy workforce
- Level-Funded Plans
- Hybrid model: fixed monthly payments with potential refunds at year-end
- Less volatile than fully self-funded plans
- Health Maintenance Organizations (HMOs) & Preferred Provider Organizations (PPOs)
- HMOs: lower cost, but less provider flexibility
- PPOs: higher cost, but more provider options
The Small Business Health Options Program (SHOP)
The ACA created the SHOP Marketplace for small businesses with fewer than 50 employees. It allows you to:
- Compare plans side-by-side
- Offer multiple plan options
- Qualify for the Small Business Health Care Tax Credit (worth up to 50% of premiums for eligible employers)
To qualify for the credit:
- You must have fewer than 25 full-time equivalent employees
- You must pay at least 50% of their premium
- Average employee salary must be below $63,000 (as of 2025, adjusted yearly)
Alternatives to Traditional Insurance
If traditional group plans feel out of reach, consider these:
1. QSEHRA (Qualified Small Employer Health Reimbursement Arrangement)
- You reimburse employees for their individual health insurance premiums (tax-free)
- Flexible and budget-friendly
- Ideal for businesses with fewer than 50 employees
2. ICHRA (Individual Coverage HRA)
- More flexible than QSEHRA
- Available to businesses of any size
- Lets you segment employees into different classes for varied benefits
3. Association Health Plans (AHPs)
- Join with other businesses to form a larger risk pool
- More negotiating power and potentially lower premiums
- Must be part of a legitimate trade association or group
What Is QSEHRA?
QSEHRA allows small businesses to reimburse employees tax-free for certain medical expenses, including:
- Monthly premiums for individual health insurance
- Out-of-pocket costs like copays, deductibles, and prescriptions
Instead of offering a group insurance policy, you give your employees a monthly allowance, and they use it to pay for their own health coverage.
Who Can Use QSEHRA?
To qualify:
- Your business must have fewer than 50 full-time equivalent (FTE) employees
- You can’t offer a group health insurance plan
- All eligible employees must be offered the same QSEHRA terms (though reimbursement amounts can vary based on family status or age)
How Much Can You Reimburse?
The IRS sets annual limits on how much you can reimburse tax-free. For 2025 (adjusted annually):
- Individual coverage: Up to $6,150
- Family coverage: Up to $12,450
Employers can choose to offer less than the max.
How It Works
- You set a budget (e.g., $300/month per employee)
- Employees buy their own health insurance (on the Marketplace or elsewhere)
- They submit receipts or proof of expenses
- You reimburse them, tax-free
The business gets a tax deduction, and employees don’t pay income or payroll tax on the reimbursements.
Key Benefits
- Cost control: You set the budget; no surprise rate hikes
- Simplicity: No need to manage a group plan
- Flexibility: Employees choose plans that work for them
- Tax efficiency: Reimbursements are generally tax-free
A Few Rules to Know
- Employees must have minimum essential coverage (MEC) to get tax-free reimbursements
- You must provide formal written notice about the QSEHRA
- You’ll need to handle some reporting, like adding QSEHRA info to W-2s
Is QSEHRA Right for Your Business?
QSEHRA is ideal if:
- You want to offer health benefits without the cost or hassle of a group plan
- You have a small team (under 50 people)
- You want to give employees freedom to choose their own insurance
It’s not a fit if you already offer group health insurance or need to provide more robust, company-managed benefits.
How to Choose the Right Health Insurance Plan
There’s no one-size-fits-all answer, but here’s a practical approach:
- Assess Your Budget
- How much can you afford per employee per month?
- Consider shared-cost models where employees contribute
- Survey Your Employees
- What matters more—low premiums, provider access, or prescription coverage?
- Understanding your team’s needs helps you offer the right fit
- Compare Plans
- Don’t just look at premiums. Weigh deductibles, copays, out-of-pocket limits, and network sizes
- Work With a Broker or Advisor
- They can simplify the process, especially when dealing with compliance or unfamiliar terms
- Think Long-Term
- Consider not just what works this year, but how the plan will scale as you grow
| Type of Insurance | Cost to Employer (Monthly/Employee) | Risk Level | Tax Benefits | Flexibility |
|---|---|---|---|---|
| Group Health Insurance | $500–$800 | Low (insurer handles claims) | Premiums are tax-deductible | Limited (fixed plan options) |
| Self-Funded Plan | $300–$700* | High (employer pays claims directly) | Tax-deductible claims and admin fees | High (customizable but complex) |
| QSEHRA | You set the budget (e.g., $100–$500) | Low (reimbursement only) | Tax-free for employer and employee | High (employer sets allowance) |
| ICHRA | You set the budget (flexible by employee class) | Low (reimbursement only) | Tax-free for employer and employee | Very High (segment by employee classes) |
*Self-funded plans carry more financial risk but can save money if claims are low.
Managing Costs Without Sacrificing Value
Health insurance is expensive, no question. But there are ways to manage costs smartly:
- Offer High-Deductible Plans with HSAs: Lower premiums and tax advantages
- Promote Preventive Care: Many plans cover screenings and checkups 100%
- Wellness Programs: Healthy habits can reduce claims and premiums
- Reevaluate Annually: Don’t let auto-renewals cost you—shop around each year
Compliance and Reporting
Even if you’re exempt from the ACA’s Employer Mandate, compliance still matters:
- Provide Summary of Benefits and Coverage (SBC) to employees
- File IRS Forms if you offer HRAs (e.g., Form 1095-B)
- Keep HIPAA in mind when handling employee health info
If you cross the 50-employee mark, you’ll have additional filing obligations, including Forms 1094-C and 1095-C.
Final Thoughts
Health insurance might seem like a big leap for a small business, but it’s one of the smartest investments you can make. It strengthens your workforce, helps you compete, and can even save you money through tax benefits and reduced turnover.
Here’s a quick recap:
- You’re not legally required to offer insurance under 50 employees—but there are incentives to do it
- Group plans, HRAs, and the SHOP marketplace offer paths for every budget
- Planning, employee input, and a solid broker can make all the difference
Don’t let confusion or cost keep you from doing what’s right for your team. The tools and options are there—you just need the right strategy for your health insurance for small business.
Andrej Fedek is the creator and the one-person owner of two blogs: InterCool Studio and CareersMomentum. As an experienced marketer, he is driven by turning leads into customers with White Hat SEO techniques. Besides being a boss, he is a real team player with a great sense of equality.