The majority of today’s workers value benefits as much as (or more than) their salary. 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, this guide can help you explore your options, choose an insurance plan, and understand how it fits into your broader benefits and retention strategy.
Are you legally required to offer health insurance to employees?
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.
Most U.S. small businesses are not subject to the ACA mandate. According to 2026 Small Business Administration data, just 17.7% of American small businesses have paid employees, and on average, those firms employ 11 (non-family-owned businesses) to 15 (family-owned businesses) individuals. However, even if you’re not legally required to offer health insurance, many smaller employers choose to provide coverage anyway to compete with larger businesses.
[Read more: How to Offer Competitive Benefits for Your Employees]
Health insurance options
Depending on your company's size, budget, workforce, and goals, you might consider traditional group insurance, a health reimbursement arrangement (HRA), a level- or self-funded plan, or accessing benefits through a professional employer organization (PEO).
Here’s a breakdown of the primary options to consider, particularly if you have fewer than 50 employees.
Group health insurance
Small businesses can provide group health insurance directly through a traditional insurer or through Small Business Health Options Program (SHOP), a marketplace that offers private health and dental plans for employers with one to 50 employees. Enrolling in a SHOP plan is often required if you intend to claim the Small Business Health Care Tax Credit (more on this below).
With traditional group insurance, you can select one or more plans and determine how much you’ll contribute toward employees' premiums. Employees then choose among the options the employer makes available and pay their share of the premium.
This structure can be particularly valuable when employees prefer a straightforward, company-selected benefits package. Jennifer Schaefer, Founder and CEO of JS Benefits Group, noted that employees should know “what the company is offering, what it costs and what they are getting in return.”
Consider this option if: You want to provide employees with a consistent benefits package and narrow down their health insurance choices for them.
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 (ICHRA) and qualified small employer HRAs (QSEHRA):
- ICHRA. ICHRA plans are available to businesses of any size and have no employer contribution limits, giving employers flexibility to set allowances by employee class. Employees use this benefit to purchase qualifying individual health coverage.
- QSEHRA. A QSEHRA is limited to businesses with fewer than 50 employees that do not offer a group health plan. This arrangement is subject to annual federal 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. However, that flexibility also puts more responsibility on employees to compare premiums, deductibles, provider networks, and other plan features. Before choosing an HRA, consider whether your workforce will value having more choices or would prefer the simplicity of an employer-selected group plan.
Consider this option if: You want greater control over your employer contribution while giving employees flexibility to choose their own qualifying individual coverage.
[Read more: ICHRA vs. QSEHRA: What Is the Difference?]
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.
Consider this option if: Your business has the financial resources and risk tolerance to assume greater responsibility for healthcare claims in exchange for more control over the plan.
Level-funded health insurance
Level-funded health insurance plans offer a middle ground between traditional fully insured plans and self-funded coverage. 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.
Consider this option if: You want to explore some of the potential cost advantages of self-funding while using stop-loss coverage to limit claims risk.
Professional employer organization (PEO) health plans
Instead of offering their own employer-sponsored health plan, small businesses can partner with a professional employer organization (PEO). Through a co-employment arrangement, a PEO can provide access to health insurance and other employee benefits while also taking on certain HR, payroll, benefits administration, and compliance responsibilities.
Keep in mind that PEOs charge for their services, so businesses should evaluate total cost, available plans, the level of administrative support, and the terms of the co-employment relationship.
Consider this option if: You want to outsource some benefits and HR administration rather than managing your health plan entirely in-house.
[Read more: How PEO Health Plans Help Small Businesses Save on Costs and More]
"The best [health insurance option] balances employer sustainability with whether employees can find affordable coverage, appropriate provider networks, and prescription coverage where they live."Dean Clune, Small Business Solutions Practice Leader at Gallagher
Do you qualify for the Small Business Health Care Tax Credit?
If you have a particularly small workforce, the Small Business Health Care Tax Credit can potentially offset some of the cost of providing employee health insurance.
According to the IRS, the credit generally applies to employers with fewer than 25 full-time equivalent (FTE) employees that pay at least 50% of the cost of employee-only coverage and meet an inflation-adjusted average-wage requirement. Employers must also offer a qualified health plan through the SHOP Marketplace, although limited exceptions apply.
Eligible small-business employers can receive a credit of up to 50% of qualifying premiums paid, while eligible tax-exempt employers can receive up to 35%. The actual credit operates on a sliding scale based on workforce size and average wages and is generally available for no more than two consecutive taxable years. Employers use IRS Form 8941 to calculate the credit.
“The tax credit can be meaningful, but employers should validate eligibility before building a benefits strategy around it,” said Dean Clune, Small Business Solutions Practice Leader at Gallagher, an insurance, risk management, and consulting firm.
Clune recommended working with qualified local tax and benefits advisors to determine whether the business and its coverage qualify.
Schaefer similarly cautioned against allowing the potential tax savings to dictate your health insurance decision.
“If the plan isn't right for the employees or isn't sustainable for the company, the tax credit doesn't necessarily make it the right plan,” she said.
Because factors like ownership, family relationships, and related businesses can affect the calculation, Schaefer also recommended having a tax professional confirm your credit amount before relying on it.
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, and ACA Marketplace rates are expected to increase by a median of 15% in 2027. 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 2024, the average family of four on an employer-sponsored plan spent $3,564 on out-of-pocket medical expenses, including co-pays, deductibles, and coinsurance.
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.
How to shop for a health insurance plan
The best health insurance plan for your small business should fit your company's size, budget, and workforce. Before comparing carriers and premiums, start by defining what you want your benefits package to accomplish, said Schaefer. For example, a business focused heavily on recruiting and retention may prioritize a consistent, employer-selected benefits package, while another may value the budget control and employee choice offered by an ICHRA.
“The best decision balances employer sustainability with whether employees can find affordable coverage, appropriate provider networks, and prescription coverage where they live,” added Clune.
Ask yourself the following questions as you shop for plans.
What can your business comfortably afford?
Determine what your business can reasonably spend on benefits right now, at renewal, and as your workforce grows. Compare employer contributions, administrative expenses, and other potential costs across your options rather than automatically selecting the plan with the lowest premium.
Which providers, prescriptions, and networks are covered?
Review each plan's provider network to determine whether it provides meaningful access to care where your employees live. This is especially important for businesses with geographically dispersed employees. A group plan that works well around your headquarters may offer limited access elsewhere, while employees purchasing individual coverage through an ICHRA may encounter very different premiums, provider networks, and plan choices depending on their location.
How much choice do you want to give employees?
Consider whether employees would rather select among a few employer-chosen plans or shop for individual coverage themselves. Although greater choice can sound appealing, it also creates more responsibility. Employees purchasing their own insurance may need to compare premiums, deductibles, provider networks, prescription coverage, and family options themselves, so if you go this route, you may need to provide additional guidance to assist their decision-making process.
How much administration can your business handle?
Factor in the work required to enroll employees, manage eligibility changes, distribute required documents and notices, administer contributions or reimbursements, and maintain compliance. Consider whether those responsibilities will be handled internally, through a broker or benefits administrator, or as part of a PEO relationship.
Will the plan still work as your business grows?
Finally, consider how your benefits strategy may need to change as you hire employees, expand into new states, or approach the ACA's applicable-large-employer threshold. Rather than choosing solely based on what is cheapest today, look for a benefits strategy you can reasonably sustain as your workforce and budget evolve.
Compliance basics for small employers
If you offer employer-sponsored health insurance as a small business, you’ll need to ensure compliance with applicable federal and state requirements. However, the specific rules depend on factors such as your business's size, location, and type of health plan.
If your business is subject to the ACA as an ALE, the coverage you offer must meet the following standards to avoid an employer shared responsibility payment:
- Minimum essential coverage. You must offer minimum essential coverage to at least 95% of your full-time employees and their dependents.
- Minimum value. The coverage you offer must provide “minimum value.” This means it covers at least 60% of the total allowed cost of benefits and provides substantial coverage of inpatient hospitalization and physician services.
- Affordability. Your plan must meet the ACA’s definition of “affordable.” For plans starting in 2027, this means the employee’s share of the premium for the lowest-cost self-only coverage that provides minimum value doesn’t exceed 10.22% of their household income.
Businesses with under 50 full-time or full-time equivalent employees generally aren't subject to these employer shared responsibility requirements. However, other federal and state requirements can still apply to the coverage they offer, such as rules about eligibility, enrollment timelines, and plan documentation.
If you’re unsure about which laws apply to you or whether you can keep up with them as your business grows, consider an HR and benefits administration platform. These providers 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.
You might also consider working with an insurance broker to help you choose the right plans and coverage. Brokers can compare specialized plans to find the best and most cost-effective deal for your business. Plus, they can help negotiate terms with your insurers at renewal time.
“Working with a trusted advisor 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,” said Brian Mauck, Director of Revenue and Product Development at Woligo Health.
Some source interviews were conducted for a previous version of this article.
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