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Do small businesses have to provide health insurance?

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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.

Back to the main question at hand: Do these small businesses have to provide health insurance to their employees?

The answer is it depends. Whereas 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.

  • Although a business with 60 full-time employees is a small business under the SBA definition, 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.1

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COBRA Requirements for Companies Providing Health Insurance

Employers also have to comply with COBRA health insurance 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.

Staying Competitive by Offering Health Insurance Coverage

Small businesses are not always legally required to offer health insurance, but they may still find that group health insurance is a necessary part of their employment strategy.

Health insurance can attract talent. According to the U.S. Chamber of Commerce, 96 percent of Americans think it’s important for a job to offer health insurance. Small businesses have to compete against big corporations for top workers. If they don’t offer health insurance, many in-demand workers may decide to stick with large employers. Offering a strong employee benefits package that includes health insurance can help you compete.

Health insurance can support a productive workforce. If you don’t offer health insurance, some of your employees may obtain coverage on their own, but others may risk going without coverage. This decision could be detrimental to their health, as they may lack preventative and routine care or neglect to take important prescription medications. This could hurt their overall health, eventually resulting in more sick days and lost productivity. According to the Integrated Benefits Institute, employers lost $575 billion in lost productivity costs in 2019 due to illness.

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 group life, dental, vision and disability insurance. Learn more.

  1. 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.

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