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Are you ready to offer small-group health insurance?

small-group health insurance

Key takeaways

Owners of America’s small businesses have plenty on their plates to worry about – marketing costs, tax compliance, and their competition, just to name a few – and yet millions of these entrepreneurs also the devote time, energy, and money necessary to provide health benefits for their employees.

If you’re thinking it’s because small-business owners have no choice, you’d be wrong: they actually aren’t required by federal law to do so. The nation’s smallest businesses – with fewer than 50 full-time equivalent (FTE) employees – are exempt from the law’s employer mandate. That means they’re not required to offer health insurance coverage, and are not subject to a penalty if their employees buy subsidized coverage in the exchange.

So why do these small-business owners go to the trouble of setting up small-group coverage?

4 reasons to look at small-group coverage

1. Attracting a talented workforce

Offering health benefits has been one of the ways historically that businesses of all sizes have attracted and retained talented workforces.

Employees are drawn to businesses that offer health benefits. Being able to simply enroll in an employer’s health plan is easier for most people than having to shop for coverage on their own. Employer contributions to the premiums are an added benefit that employees wouldn’t have if they worked for an employer that didn’t offer health benefits. And the fact that employer-sponsored health insurance premiums can be paid pre-tax (and the employer’s share is not considered taxable compensation) helps to reduce employees’ tax burden.

Surveys have consistently revealed that employees overwhelmingly consider health benefits to be the most important part of an employer’s benefits package.1 The inclusion of health insurance will make a benefits package much more robust and more useful as a recruitment and retention tool. If you can afford to offer coverage, it will help your small business stand out from other businesses that are competing for your employees.

2. Tax incentives

At the same time, dedicating funds to employee coverage will likely be less expensive than simply using the same money to provide higher wages.

Health insurance is a form of compensation, but payroll and income taxes are not assessed – on you or your employees – on money that employers use to purchase health insurance (and in most cases, taxes are also not assessed on the portion of premiums that employees pay).

In contrast, if you were to not offer coverage and instead give your employees a raise equal to the amount you were paying in health insurance, payroll taxes and income tax withholdings would apply. This makes group health insurance an attractive way to optimize compensation while minimizing the tax hit for both employers and employees.

3. Costs that are split with your employees

Employers certainly don’t have to bear the whole burden of paying for the coverage. Most health plans require employers to pay at least 50 percent of each enrolled employee’s premiums, although employees can be asked to pay up to the full cost of adding family members to the plan.

For perspective, a 2023 Kaiser Family Foundation survey found that across firms of all sizes, employers pay nearly 73% of total family premiums for their employees, leaving the employees to pay just 27% of the cost.2 But small businesses (which the Kaiser survey defines as having up to 199 employees) generally contribute a smaller percentage of the total premium for family coverage, with workers picking up a larger share of the premium.

4. Healthier, happier employees

Subsidizing health coverage is a logical step toward improving the health of employees, who may be more likely to embrace preventive screenings and care. It also stands to reason that healthier – and insured – employees are less likely to be burdened by financial stress.

Those positive effects, in turn, are likely to boost attendance, productivity, and profits for your small business.

How to decide whether to provide benefits

Deciding whether or not to provide small-group coverage for your employees is not a “no-brainer.” Here are some factors to look at as you make your decision:

1. Look at the costs now.

The first step is getting a realistic picture of how much it would cost, by obtaining a variety of premium quotes for your group. A local broker will be able to show you a variety of options and help you work out how much you’d have to pay and how much your employees would pay under various contribution splits. From there, ask yourself whether you can afford the coverage.

2. But also consider future coverage costs.

You’ll also want to consider whether continuing to offer coverage is likely to be a viable option for your business in the long run. Will you still be able to afford to offer coverage as premiums rise with time? (Keep in mind that there are cost-saving measures available, including switching plans, increasing out-of-pocket costs, or requiring employees to pay a larger share of their premiums).

3. Check up on your competition.

Do other similarly sized employers in your industry tend to offer coverage? If they do, you may need to offer coverage to remain competitive.

4. Get feedback from your employees.

HR leaders at large organizations routinely survey their employees to determine their level of satisfaction with their overall benefits package. Seeking feedback from your employees is a good place to start, and can give you an idea of their willingness to join an employer-sponsored plan, the type of coverage they’d like to see, and the amount they’d be willing to pay for it.

5. Consider the ‘family glitch’ fix

Some employers pay the entire premium for their employees’ coverage, but that’s the exception rather than the rule. Employer-sponsored health insurance premiums are typically funded via a combination of employer contributions and employee contributions, with the latter being deducted from each employee’s paycheck.

If you’re a small business owner and you’re setting up a group plan for your employees, you’ll want to understand the ramifications of who pays what. This includes an understanding of how the “family glitch” fix works. Here’s the basic info you need to know:

  • As a small business owner, you’re not required to offer coverage to anyone.
  • No employers – large or small – are required to pay for coverage for employees’ spouses and/or kids.
  • However, if you offer coverage to your employees and their families, and pay for all or most of your employees’ premium – but require them to payroll deduct the full premium to add their families to the plan – your employees should be aware that they might be able to get a better deal by enrolling in the group coverage for themselves but having their family shop for coverage in the health insurance Marketplace. This will vary depending on the cost of the coverage and each employee’s household income, but the “family glitch” fix that took effect in 2023 has made some employees’ family members newly eligible for Marketplace subsidies. Both employers and employees need to understand how this works.

A few more small-group pluses

1. Buying options.

You can buy a small-group plan directly from an insurance company, via a broker or private exchange, or from the SHOP exchange in your state (if your state has one). You may qualify for the Small Business Health Care Tax Credit for up to two years if you buy a SHOP plan. In states that use Healthcare.gov, as well as several of the states with their own health insurance exchanges, SHOP plans are now purchased directly through the insurance companies, or with the help of a SHOP-certified broker.

Use our tool to get a small-group coverage quote.

2. Plans are ACA-compliant.

Regardless of where you get the plan, all new small-group plans effective since January 2014 are compliant with the ACA. (In most states, small-group rules apply to groups with up to 50 employees, but in four states – California, Colorado, New York, and Vermont – they apply to groups with up to 100 employees).

3. Medical history isn’t a factor.

Insurers cannot use the group’s medical history to set premiums for ACA-compliant small-group plans, and premiums for older employees cannot be more than three times those for younger employees.

4. Clearly defined benefits.

ACA-compliant small-group plans have to fit into one of the four metal levels and cover the ACA’s essential health benefits.

What if you decide to not offer benefits?

ACA introduced viable alternatives

Before 2014, individual health insurance (the kind people buy on their own) was medically underwritten in most states, so pre-existing conditions were an obstacle when people had to obtain coverage on their own. And the tax code didn’t give people a way to deduct individual insurance premiums unless they were self-employed or spent more than 7.5% of their income on health insurance and medical care (this threshold reset to 10 percent in 2019, but has since been set back to 7.5%3).

In those days, there were some clear advantages to a small-group health insurance plan: the premiums were paid pre-tax, and coverage was guaranteed-issue, regardless of the group’s medical history (states could allow premiums to be based on a group’s medical history, but under HIPAA, small groups could not be declined altogether as long as the group met minimum participation and contribution requirements, and individual employees could not be singled out for higher premiums due to pre-existing conditions).

But under the ACA, the playing field has been leveled to some degree. Coverage in the individual market is now guaranteed-issue and premiums no longer depend on applicants’ medical history. (Note that coverage in the individual market is only available during open enrollment or a special enrollment period triggered by a qualifying event – as is the case for employees seeking coverage under an employer-sponsored plan. But employers can purchase a plan to cover their business at any time during the year).

In addition, premium tax credits (subsidies) in the exchange provide a tax advantage for low-income and middle-income people who purchase their own coverage; this makes the tax system a little more equitable in terms of how individual and group health insurance premiums are treated.

Reimbursing employees for coverage is an option: QSEHRAs and ICHRAs

Under 2013 ACA implementation guidelines established by HHS, the IRS, and the DOL, employers of any size were banned from reimbursing employees for the cost of individual market coverage. The penalty for non-compliance, which was delayed until July 2015, was $100 per day, per employee – a significant deterrent, for sure.

But in late 2016, Congress passed the 21st Century Cures Act with strong bipartisan support. Among many other things, the legislation allows businesses with fewer than 50 full-time equivalent employees to establish Qualified Small Employer Health Reimbursement Arrangements (QSEHRA). And starting in 2020, employers of any size can use Individual Coverage Health Reimbursements (ICHRA) to reimburse employees for individual market coverage.

For a small employer that doesn’t offer group health insurance benefits, QSEHRAs and ICHRAs allow the employer to reimburse employees, tax-free, for some or all of the premiums they pay for coverage purchased in the individual market, on or off-exchange. There are limits on how much an employer can reimburse with a QSEHRA, but not with an ICHRA.

If a QSEHRA is offered and the coverage is purchased on-exchange, a premium subsidy is available as long as the QSEHRA doesn’t constitute affordable coverage (explained here, in Question 65). Although a QSEHRA doesn’t necessarily make the employee ineligible for an exchange premium subsidy, the QSEHRA is taken into consideration for determining affordability, and the amount of the exchange subsidy is reduced by the amount that the employee receives via the QSEHRA.

Read IRS FAQs about QSEHRAs.

If an ICHRA is offered by the employer and is sufficient to result in coverage being considered affordable, the employee is not eligible for premium subsidies in the exchange. (Note that the family glitch fix did not affect anything about ICHRA affordability, which continues to be based on the cost of employee-only coverage, regardless of the cost of family coverage.4)

Read IRS FAQs about ICHRAs.

If you start offering an ICHRA or QSEHRA benefit to your employees mid-year, that will trigger a special enrollment period for them to enroll in individual/family coverage. This will allow them to begin receiving the health reimbursement benefits right away, instead of having to wait for the annual open enrollment period.

Funding an HSA

Some small employers choose to make contributions to their employees’ health savings accounts (HSAs), if the employees enroll in HSA-qualified high deductible health plans (HDHPs). The HDHP can be offered as a small-group health plan, or the employees can purchase HDHPs in the individual market and the employer can provide some or all of the HSA contributions.

It’s possible to fund your employees’ HSAs and also offer a QSEHRA or ICHRA benefit that reimburses some or all of the HDHP premiums. But to do this, the ICHRA or QSEHRA must be specifically set up to only reimburse employees for health insurance premiums and/or for “disregarded coverage” such as accident insurance or dental/vision coverage, but not for other medical expenses (see questions 74-78 of the IRS series of FAQs related to QSEHRAs). This is because reimbursing employees for other medical expenses would make them ineligible for HSA contributions.5

What if you have a very small business?

In most states, the term “small group” applies to groups of 2 to 50 employees. In California, Colorado, New York, and Vermont, it includes groups with up to 100 employees. Businesses that fall into the small group category all have the same coverage options available in the small group market, and the rules in terms of pricing and coverage availability are the same regardless of whether you have two employees or 42.

But a very small group might have different needs and goals in terms of health coverage. If you’ve only got two or three employees, you may have closer personal relationships with them than you would if you have dozens of employees, and your employees may have expressed their health coverage needs with you as well. That may help you to better tailor your coverage offerings to exactly what your employees need, but you may also find the cost of health coverage to be more prohibitive than a larger small business would, given the tight margins that many very small businesses face.

If you want to offer group health insurance, you can select from among the same small group coverage options as any other small employers in your area. But you may find that it’s not possible to offer multiple coverage options, as the private exchanges that offer that sort of choice generally require employers to have several employees to be eligible to offer multiple plan options to employees.

(This was the primary value of the small business exchange, but in most states, including all the states that use HealthCare.gov, small groups now enroll directly with an insurer, rather than using the exchange site and having employees select from among the available plans.)

If your employees have varying healthcare needs and are confident that the plans available in the individual market will meet their needs, a QSEHRA or an ICHRA (described above) might be a great option for your business.


Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.

Footnotes

  1. Best Employee Benefits in 2024. Forbes Advisor. February 2023. 
  2. Employer Health Benefits, 2023 Annual Survey. KFF. October 2023. 
  3. Consolidated Appropriations Act, 2021. Congress.gov. Accessed January 2024. 
  4. Affordability of Employer Coverage for Family Members of Employees. Internal Revenue Service. October 2022. 
  5. A Comparison of Tax-Advantaged Accounts for Health Care Expenses. Congressional Research Service. May 3, 2021. 
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