Running a small business isn’t easy. In addition to delivering a product or service that people want and marketing it successfully, you have to comply with business licensing requirements. If you have employees, there are even more hoops to jump through. One question in particular comes up a lot: Do small businesses have to provide health insurance?
For very small businesses, health insurance is often optional. However, the definition of what constitutes a small business can vary because state and federal laws have different thresholds. Additionally, there are considerations beyond the legal requirements.
What counts as a small business?
According to the U.S. Small Business Administration (SBA), a small business is an independent business with fewer than 500 employees. Based on this definition, there are 33.2 million small businesses in the U.S.
Although not all of these small businesses have employees, the ones that do are a major source of jobs. The SBA says small businesses accounted for 62.7 percent of net new jobs between 1995 and 2021.
Do these small businesses have to provide health insurance to their employees? The answer is it depends. While many employers do have some health insurance requirements, the smallest businesses may be exempt.
ACA Requirements for Health Insurance Benefits
Under the Affordable Care Act (ACA), applicable large employers are subject to certain requirements regarding health care. Specifically, these employers have to comply with employer shared responsibility provisions, which state they must offer affordable health insurance that provides minimum value and minimum essential coverage or face IRS fines. These employers also need to meet employer information reporting requirements involving certain IRS forms they must file annually.
The ACA defines an applicable large employer (ALE) as any employer that had an average of at least 50 full-time employees (including full-time equivalent employees) during the prior year.
Whether a small business needs to offer health insurance therefore depends on the exact number of employees.
- A business with 60 full-time employees is a small business under the SBA definition, but it is an applicable large employer under the IRS definition and is therefore subject to the ACA requirements. Therefore, this business needs to file ACA forms with the IRS and offer employee health insurance or face fines.
- A business with 30 full-time employees is also a small business under the SBA definition. However, as this business does not count as an applicable large employer, it is exempt from the ACA coverage and reporting requirements. (Note: Companies under common ownership are counted together for ACA size applicability, so it is possible for a company of 30 employees to still be subject to ACA rules if the total combined count is over 50 full-time employees.)
However, many small employers decide to offer health insurance even when they are not required to do so.
Why Small Businesses Should Offer Health Benefits
In the United States, many people expect to access health insurance through work, and most companies offer health benefits. The U.S. Census Bureau says that 54.3 percent of Americans had employer-based health insurance in 2021, making this the most common type of health insurance.
According to the KFF 2022 Employer Health Benefits Survey, 51 percent of all firms offer health benefits. Larger companies are more likely to offer health insurance than smaller companies, with 91 percent of firms with 50 to 199 workers offering coverage, compared to only 39 percent of firms with three to nine workers. However, even among small companies, the figures show that health insurance is a common offering.
Health insurance matters to employees. It might even matter more than salary. Glassdoor surveyed workers and found that when choosing between a high-paying job and a low-paying job with better benefits, health insurance and flexible hours could spur them to pick the lower-paying job with better benefits. In fact, 88 percent of job seekers would give better health, dental and vision insurance either some or heavy consideration.
When it comes to talent recruitment and retention, small companies are up against larger companies. Larger companies are offering health insurance, so if small companies want to compete, they need to offer health insurance, too.
Health insurance may also help support a healthy and productive workforce. If you don’t offer health insurance, some workers may secure coverage on their own, but others will simply go without insurance. Bankrate found that 32 percent of U.S. families say they’ve avoided health care, including vaccinations, annual exams and medications, due to the cost. If your workers don’t have insurance, they might not get the medical care they need, and this can have a negative impact on health and result in more sick days and lost productivity.
For small businesses that decide offering health insurance makes sense, the next step is determining how to provide coverage.
Health Insurance Company Options for Small Businesses
Small businesses that decide to offer health insurance have several options. They can buy a plan through the Small Business Health Options Program (SHOP), or they can buy a group health plan directly from an insurance company outside of the SHOP marketplace. Alternatively, they can offer an Individual Coverage Health Reimbursement Arrangement (ICHRA).
SHOP Plans and the Small Business Health Care Tax Credit
Small businesses that purchase a group health plan through SHOP may qualify for the Small Business Health Care Tax Credit. According to HealthCare.gov, this tax credit can be worth up to 50 percent of the costs that you pay for your employees’ premiums.
However, to qualify for the tax credit, you must meet the following criteria:
- You have fewer than 25 full-time equivalent employees.
- Your average annual employee salary is around $56,000 or less.
- You pay at least 50 percent of your full-time employees’ premium costs.
- You offer SHOP coverage to all of your full-time employees.
The IRS says the tax credit can be carried back or forward to other tax years if you don’t owe tax for the year in question, and the credit is refundable. These tax breaks make SHOP an attractive option for small business owners that want to offer benefits for their employees while reducing their tax burden. A SHOP-registered insurance agent can help you enroll.
Group Employee Benefit Plans
If you don’t want to use the SHOP marketplace, or if you don’t qualify for the tax credits, you can buy group health insurance from an independent insurance agency. An independent insurance agent has access to several health insurance plans and can shop the market on your behalf and help you find the option that best suits your needs.
A benefits broker can also help you create an employee benefits package that includes other options your employees may value like dental, vision, life and disability insurance. You can choose to pay all or part of the premium, and you can even offer some benefits, like pet insurance, on a voluntary basis so it’s available at an affordable group rate for employees to purchase if they are interested. Voluntary benefits can be offered with little to no out-of-pocket expense to the employer.
Individual Coverage Health Reimbursement Arrangements (ICHRA)
Instead of offering a traditional group health plan, small businesses can offer an ICHRA. According to HealthCare.gov, this is an account-based health plan that lets employers provide a defined non-taxed reimbursement to employees.
Employees can then use this account to pay for qualified health insurance costs and medical expenses, including monthly premiums and out-of-pocket costs. However, to qualify for ICHRA reimbursement, employees must be enrolled in an individual health plan. Many employees with ICHRAs use the ACA Marketplace to buy a health plan.
Rounding Out Your Employee Benefits
Although health insurance may be the most important employee benefit, a strong employee benefits package typically includes other options as well.
- Dental and vision insurance. If you’re using the SHOP marketplace to buy health insurance for your employees, you can also use it to buy dental insurance. Alternatively, you can buy the products through your benefits partner or by shopping directly with a carrier.
- Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSA). Both of these accounts are designed to help people cover out-of-pocket medical costs. HSAs are used in conjunction with high-deductible health plans. These accounts are owned by the employee, and the funds never expire. FSAs can be used with other types of health insurance plans. FSAs are owned by the employer, and the funds may expire if they’re not used by the deadline.
- Life, disability and critical illness insurance. Other insurance types can help employees manage their finances and relieve financial stress. This may improve employee loyalty and retention. As mentioned earlier, your insurance partner can assist you with these options.
Other Requirements for Small Business Health Insurance
Once a small business decides to provide health insurance, there may be additional compliance requirements to consider.
COBRA Requirements
First, employers providing health insurance have to comply with COBRA continuation requirements.
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act. Under this federal law, workers and their dependents must have the option to continue group health insurance benefits for a certain period of time after losing coverage. However, the employer does not have to pay the insurance premiums. The insured pays up to 102 percent of the premium (this includes a two percent administration fee). This law applies to employers that had 20 or more total employees on more than 50 percent of its typical business days in the prior calendar year.
What does COBRA mean for small business owners? Let’s say you have 30 employees, meaning you are exempt from ACA employer shared responsibility provisions, but you decide to provide health insurance coverage anyway. This will mean you are not exempt from the COBRA requirements. If an employee or an employee’s dependent loses health insurance – for example, because the employee quits or is laid off – you need to offer COBRA continuation coverage.
Nondiscrimination and HIPAA Rules
Small business owners also need to consider the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and nondiscrimination rules that impact health insurance benefits.
Nondiscrimination rules prohibit group health plans from charging more or denying coverage based on health issues. Under HIPAA, a group health plan cannot deny coverage and individuals cannot be charged more than other similarly situated individuals based on health factors.
HIPAA also establishes rules for special enrollment periods. If employees decline coverage for themselves or their dependents, they may be eligible for a special enrollment period to elect coverage outside the regular open enrollment period. This is based on certain life events, such as losing coverage under another plan or gaining a dependent through marriage, birth or adoption.
State Business Health Insurance Requirements
In addition to federal requirements, employers need to comply with relevant state laws.
For example, many states have their own mini-COBRA laws. Like the federal COBRA requirements, these require employers to offer continuation coverage after an employee or dependent loses coverage. Since many of these state laws apply to employers that are exempt from the federal laws because they have fewer than 20 employees, small business owners need to pay close attention to the mini-COBRA rules.
States may also have laws that establish additional coverage requirements. Since these laws vary between states and can change frequently, it is critical that small businesses stay up to date with the laws in the states where they operate.
Does your small business need help offering health insurance?
Navigating health insurance can seem complicated, but it doesn’t have to be. Higginbotham offers customized solutions and personalized services to help you offer health insurance to your employees while controlling health insurance costs. We can also help you with other employee benefits, including life, dental, vision and disability insurance.
Connect with one of Higginbotham’s employee benefits consultants today and discover how we can help your small business explore its options.
