Why Health Benefits Matter for Small Businesses
Offering health insurance isn't just a legal question — it's a competitive one. Health benefits are consistently ranked among the most valued employee perks, and for small businesses trying to attract and retain talent, having a solid health plan can make a real difference. The good news: small employers have more options today than ever before.
Are You Required to Offer Coverage?
Under the Affordable Care Act (ACA), the employer mandate only applies to businesses with 50 or more full-time equivalent employees (FTEs). These are called Applicable Large Employers (ALEs). If you have fewer than 50 FTEs, you are not required to offer health insurance — but doing so can still provide significant tax advantages and workforce benefits.
Option 1: Group Health Insurance Plan
A traditional group health plan covers your employees (and often their dependents) under a single policy. You, as the employer, typically pay a portion of the premium and employees pay the rest through payroll deductions.
Pros:
- Employer premium contributions are tax-deductible
- Employee contributions are made pre-tax, reducing taxable income
- Familiar, trusted structure for employees
Cons:
- Can be expensive, especially for very small groups
- Less flexibility — one plan (or a small menu of plans) for everyone
Option 2: The SHOP Marketplace
The Small Business Health Options Program (SHOP) is the ACA's marketplace designed specifically for businesses with 1–50 employees. It allows you to offer qualified health plans and potentially qualify for the Small Business Health Care Tax Credit.
To qualify for the tax credit, you generally must:
- Have fewer than 25 full-time equivalent employees
- Pay average annual wages below a certain threshold (adjusted annually)
- Pay at least 50% of employee-only premium costs
- Purchase coverage through SHOP
The credit can be worth up to 50% of premiums paid (35% for tax-exempt employers). It's worth checking your eligibility each year.
Option 3: Health Reimbursement Arrangements (HRAs)
HRAs are employer-funded accounts that reimburse employees for qualified medical expenses and/or individual health insurance premiums — tax-free.
Two HRA types are especially relevant for small businesses:
- Qualified Small Employer HRA (QSEHRA): For businesses with fewer than 50 FTEs that don't offer a group plan. You set a monthly reimbursement cap; employees buy their own individual coverage and submit expenses for reimbursement.
- Individual Coverage HRA (ICHRA): Available to employers of any size. Employees purchase their own ACA-compliant plans and get reimbursed up to a set amount. Offers more flexibility than QSEHRA.
Option 4: Association Health Plans
If you're a member of a trade or professional association, you may have access to association health plans, which allow small businesses to band together to purchase coverage as a larger group — potentially accessing better rates and plan options.
Choosing the Right Approach
| Option | Best For | Key Advantage |
|---|---|---|
| Group Plan | Businesses with 10+ employees | Familiar, comprehensive coverage |
| SHOP Marketplace | Businesses with 1–25 employees seeking tax credits | Potential tax credit of up to 50% |
| QSEHRA | Very small businesses, no group plan | Flexible, low administrative burden |
| ICHRA | Any size, wants maximum flexibility | No contribution limits (unlike QSEHRA) |
Next Steps
Before selecting a health benefits strategy, review your workforce size, budget, and employee demographics. Consulting with a licensed insurance broker who specializes in small group coverage can help you navigate plan options in your state and ensure compliance with applicable regulations. Many brokers are compensated by insurers at no added cost to you.