Health insurance has long been considered a desirable employee benefit, but in today’s competitive market, the right offerings can be a strategic business advantage. The majority of today’s workers value benefits as much as (or more than) their salary, so small businesses that offer insurance plans like health, dental, and vision coverage can be better positioned to attract and keep talent.
If you’re considering offering employee health insurance as a small business owner, our guide can help you explore your options, choose an insurance plan, and understand how it fits into your broader benefits and retention strategy.
Whom should you cover?
Under the Affordable Care Act (ACA), businesses with 50 or more full-time or full-time equivalent (FTE) employees are considered applicable large employers (ALEs). ALEs must offer health coverage to full-time employees and their dependents (typically an employee’s spouse/domestic partner and children under the age of 26) or face potential penalties.
Legally, employees who work an average of at least 30 hours per week are considered full time. Part-time employees can also count toward your total based on FTE calculations. For instance, three part-time employees, each working 10 hours per week, would collectively count as one FTE.
Even if you’re not legally required to offer health insurance, many smaller employers choose to provide coverage anyway to compete with larger businesses. If you do, there are some important steps to take to ensure compliance with federal and state requirements.
“You’ll need to make sure your plan meets certain minimum essential coverage standards, properly document eligibility and enrollment, and communicate key plan details to employees,” said Brian Mauck, Director of Revenue and Product Development at Woligo Health.
Shop for a plan
The best health insurance plan for your small business should fit your company's size, budget, and workforce. Before comparing specific options, Mauck advised determining how much you can contribute toward premiums, what type of coverage your employees value most, and how flexible you need the plan to be as your business grows.
Here are a few additional considerations to keep in mind as you shop for plans.
- Should I offer one plan or multiple plan options? Workforces often span different ages, family situations, and health conditions. Providing at least two options — a higher-premium plan with more comprehensive coverage and a lower-cost plan with more basic benefits — can help accommodate a broader range of preferences and needs.
- Is this plan compliant with federal and state laws? Any plan you offer must meet federal and state requirements, including minimum essential coverage standards. This means the plan covers core health services, including hospitalization, preventive care, and prescription drugs. Employers also need to ensure that eligibility, enrollment timelines, and plan documentation align with federal and applicable state regulations.
- Is this plan affordable for employees? Under the ACA, a health plan is considered “affordable” if the employee’s share of the premium for self-only coverage doesn’t exceed 9.96% of their household income for plans starting in 2026. Small employers’ plans don’t necessarily need to meet this requirement, but ALEs face steep penalties for noncompliance ($5,010 per employee who doesn’t meet the threshold).
- Will this plan meet the needs of employees in different regions? Some traditional group health plans are designed for businesses with employees concentrated in a single region. If most of your workforce is spread across multiple states, you may need a plan with a national provider network — or an alternative explicitly designed for multistate employers — to ensure consistent access to care.
Many small businesses explore coverage through the Small Business Health Options Program (SHOP), a marketplace that offers health and dental plans for employers with one to 50 employees. SHOP plans are offered by private insurers, allow employers to choose how much of the premiums to cover, and generally meet minimum essential coverage requirements.
Eligible businesses can typically enroll in a SHOP plan at any time of year (not just during open enrollment at the end of the calendar year). You can work with a SHOP-registered agent or broker to compare options and choose the one that's right for you.
[Read more: Health & Wellness Perks Employees Love]
Employers can look for solutions that combine cost transparency, data-driven decision-making, and customizable plan designs.Brian Mauck, Director of Revenue and Product Development at Woligo Health
Health insurance options
Here’s a quick breakdown of the various health insurance options your small business can offer.
Group health insurance
Small businesses can provide group health insurance through a traditional private insurer or through SHOP. Enrolling in a SHOP plan is often required if you intend to claim the Small Business Health Care Tax Credit. Employers can choose to offer one plan option or many. They must also contribute a fixed portion of each premium, typically a larger share than employees.
Self-funded health insurance
Self-funded health insurance options allow employers to pay out of pocket for employees’ health claims. Rather than paying monthly premiums to an insurer, businesses set aside pooled funds in a protected account to cover claims as they arise.
These plans are sometimes considered a risky option for businesses without strong cash flow, but they offer the freedom to use funds as needed without adhering to an insurer’s coverage rules. Employees can make claims directly with the company or through an employer's third-party administrator.
Level-funded health insurance
Level-funded health insurance plans offer a middle ground between traditional fully insured plans and self-funded coverage.
“Level-funded plans and captives have become increasingly popular because they give employers more control over costs and transparency in how dollars are spent,” said Mauck.
With a level-funded plan, employers pay a fixed monthly amount that covers estimated claims, administrative costs, and stop-loss insurance. If stop-loss insurance claims exceed the plan’s maximum, the insurer covers the difference, limiting the employer’s risk. If claims come in lower than projected, the employer may receive a surplus refund at the end of the plan year.
Health reimbursement arrangements (HRAs)
Health reimbursement arrangements (HRAs) allow employers to contribute to employees’ healthcare costs without offering a traditional group health insurance plan. Instead of paying premiums to an insurer, businesses reimburse employees for eligible medical expenses and, in some cases, individual health insurance premiums on a tax-free basis.
Two common HRA options for small businesses are individual coverage HRAs (ICHRAs) and qualified small employer HRAs (QSEHRAs). ICHRAs are available to businesses of any size and do not have employer contribution limits, giving employers flexibility to set allowances based on employee classes. QSEHRAs, on the other hand, are limited to businesses with fewer than 50 employees and include annual contribution caps.
Both options can be appealing for employers with remote or geographically dispersed teams, since employees can choose coverage that fits their location and needs.
Health insurance costs
When choosing a health insurance plan, you’ll need to consider both your business’s and your employees’ financial responsibilities. Below are the most common costs on both sides, along with factors that influence the final numbers.
Premium costs
According to the KFF 2025 Employer Health Benefits Survey, the average annual premium cost is $9,325 for single coverage and $26,993 for family coverage. Exact rates vary depending on various factors, including:
- The number of employees to be insured.
- The business’s location.
- Employee ages, habits, and locations (if different than the business’s).
- Your chosen insurance carrier, plan type, and coverage level.
Premium costs are shared between employers and employees, though employers often pay the majority. Employees pay an average of 16% of premiums for single coverage and 26% for family coverage, with employers covering the remainder.
Out-of-pocket employee costs
Employees on an employer-sponsored health plan are responsible for various out-of-pocket costs for inpatient, outpatient, and prescription drug services. In 2023, employees paid an average of $869 in annual out-of-pocket spending, with most of that going toward outpatient services.
Depending on your chosen plan and coverage, the structure of these out-of-pocket costs will fall into at least one of these three categories:
- Co-pays: a predetermined flat rate that employees pay at the time of care.
- Deductibles: the total amount an employee must pay out of pocket each year before health insurance covers the cost.
- Coinsurance: a predetermined percentage of a medical charge that the employee must pay, with the rest paid for by insurance. Coinsurance typically “kicks in” once an employee’s deductible has been met.
Where your employees receive care matters, too: Care from an out-of-network provider often requires employees to pay a higher out-of-pocket rate.
Additional considerations
Beyond annual premiums, you’ll need to budget for the administrative and compliance costs of offering health insurance. These may include but are not limited to plan enrollment and management, regulatory requirements, and associated legal and vendor fees.
To help manage these responsibilities, some businesses may invest in benefits administration software that integrates with existing HR and payroll systems. Most platforms use per-employee pricing, typically ranging from $5 to $30 per employee per month in addition to a base fee.
Small businesses can also partner with a professional employer organization (PEO). A PEO health plan “pools” employees from multiple companies into a singular group, allowing small businesses to access more affordable plans and reduce administrative costs. PEOs usually charge a per-employee fee or a percentage of payroll – the exact rates vary based on the services and support provided.
[Read more: Choosing a PEO: A Guide to Finding a Professional Employer Organization]
Compliance basics for small employers
Understanding the compliance regulations associated with employer-sponsored health insurance can significantly reduce the risk of reporting issues, audits, and financial and legal penalties. Here’s how to stay compliant:
- Get educated. Identify which federal regulations apply to your business — including ACA requirements, employee eligibility rules, and any necessary reporting — to ensure you meet your obligations.
- Stay up to date with state laws. In addition to federal requirements, many states have their own rules around continuation coverage, mandated benefits, and employee notices. Review these regularly to stay abreast of any changes, especially if your employees are based in different states.
- Take advantage of HR software. HR and benefits administration platforms can help automate enrollment, track eligibility, and manage required documentation in a centralized location. These tools not only reduce manual work but also help minimize compliance gaps caused by administrative errors or missed deadlines.
- Audit your health insurance offerings. Periodically review your plan documents, employee classifications, and employer contribution structures — especially if you’ve had changes in your business’s headcount, structure, or plan design.
How to save on employee health insurance costs
As a small business, it’s important to save money where you can, but Mauck explained that affordability and coverage don’t have to be mutually exclusive.
“Employers can look for solutions that combine cost transparency, data-driven decision-making, and customizable plan designs,” he said. “For example, pharmacy carveouts, tiered networks, and level-funded options can all help control healthcare costs while maintaining access to quality coverage.”
Here are additional ways to save on your healthcare costs.
Select a plan with higher deductibles
A common healthcare savings strategy for businesses is to choose higher deductibles, requiring employees to contribute a larger share of the premium. High-deductible health plans (HDHPs) paired with health savings accounts (HSAs) can be a prudent way to manage rising healthcare costs while providing employees with valuable financial support. Although HDHPs require employees to pay more upfront costs, an HSA helps balance that out by letting them pay for medical expenses with pretax dollars.
Implement wellness initiatives
Offering an employee benefit such as wellness programs doubles as an effective insurance savings strategy. In theory, healthier individuals use their health insurance less. Offering programs focused on preventive healthcare measures that promote physical and mental wellness can help reduce insurance claims.
Consult with an insurance broker
If you’re really struggling to cut health insurance costs for your small business, consider getting outside help to assist you. An insurance broker compares specialized plans to find the best and most cost-effective deal for your business. Plus, brokers can be helpful when it’s time to renew plans because they can help negotiate terms with your insurers.
“Working with a trusted adviser or partner who understands both traditional and alternative funding options can help ensure you choose a plan that provides strong coverage without overextending your resources,” Mauck told CO—.
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