How to Meet Small Business Health Insurance Requirements Effectively

By Mariah Collins, SHRM-CP on May 20, 2024
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Keeping up with federal and state laws regarding small business health insurance requirements can be challenging for many companies. Whether your business is brand new or you’re an established company re-examining your benefits offerings, one of the first questions entrepreneurs face is “Do small businesses have to offer health insurance?” and if not, should they offer it anyway?

Does a Small Business Have to Offer Health Insurance?

The Affordable Care Act (“ACA”) is the most important regulation to cover in the discussion of small business health insurance requirements. Under the guidelines of the ACA, businesses with at least 50 full-time employees or a part-time equivalent must offer health insurance. 

Small businesses with fewer than 50 full-time employees are exempt from this requirement. However, it is common for companies not legally mandated to provide health insurance to offer it voluntarily.

Benefits of Offering Health Insurance to Employees

Employers listed the following reasons for making this choice in a MotleyFool survey:

  • Incentive to attract and hire the best talent: 66%
  • Felt a moral obligation: 43%
  • Felt that offering this benefit encourages employee productivity: 27%
  • Understanding that employees could not afford to purchase health insurance on their own: 26%
  • Tax benefits for the employer: 11%

The data above shows that salary alone is not the deciding factor for most people when it comes to deciding whether they should accept a new job. Employees tend to put more stock in the overall benefits package, which can include things like paid time off, company-matched retirement savings and health insurance where the employer pays part of the premium.

With larger companies having more resources to offer the most attractive employee benefits, it makes sense for smaller businesses to attempt to provide a similar level of benefits when competing for employees.

The benefits of offering health insurance to employees are clear. So, the question may not be “Do small businesses have to offer health insurance?”; rather "Should small businesses offer health insurance?" 

However, health insurance can be costly for small businesses. With the help of a professional employer organization (PEO), small businesses can gain access to Fortune 500-level benefits at a rate they can afford all thans to the PEO's buying and bargaining power.

RELATED: A Three-Step Guide to Shopping for Small Business Health Insurance >>

Partnering with a PEO to Meet Small Business Health Insurance Requirements

Axcet HR Solutions, a Kansas City PEO, assists clients with obtaining the best coverage at the most affordable rates. We act as a co-employer to our clients and can handle all aspects of employee benefits. This includes negotiating for competitive health insurance rates that enable our clients to attract highly skilled applicants who may not have considered working for a smaller employer.

Here is how it works: As a certified PEO and co-employer, we negotiate for health care benefits on behalf of all our clients at the same time.

For example, assume we had 100 clients with 50 employees each. That means we would bring the large-group bargaining power of 5,000 employees to our negotiations with health insurance carriers.

Higher numbers of employees covered mean lower rates for employees and employers alike. It also means that, as a small business, you get to reap the benefits of offering health insurance to employees–all at a price that works for you.

Small Businesses Health Insurance and the PEO Option

Benefits of Offering Health Insurance to Employees 

The benefits of offering health insurance to employees go beyond competing with larger businesses for talent. Here are several other factors to consider:

  • Tax Deductions

    Companies can deduct contributions toward employee health insurance from their federal income tax return. Some small businesses also qualify for a tax credit if they meet certain Internal Revenue Service (IRS) requirements.
  • Employee Retention

    Health insurance is a major expense and consideration for most employees. The more attractive the benefit, the more likely they are to stay with the company long-term.
  • Employee Health & Productivity

    Employees with access to health insurance can remain proactive with chronic conditions like asthma or diabetes and receive prompt attention for sudden illnesses and injuries. 

    Healthier employees are more productive and take fewer sick days, leading to an improved bottom line for the employer.
  • Pre-Tax Benefits

    The IRS allows businesses to include company-sponsored health insurance as a pre-tax benefit, effectively lowering employee tax obligations.
  • Future-Proofing Your Business

    As your business grows, you’ll have already set the foundation for meeting small business health insurance requirements.

Once small business owners decide to offer employee health insurance, they may not know where to turn to find it. A key advantage of working with a certified PEO like Axcet is that our experienced benefits professionals understand the health insurance marketplace and can work with you to source the best benefits offerings for your company and its employees.

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Alternatives to Health Insurance for Small Businesses

Now that you’re familiar with basic small business health insurance requirements and the benefits of offering health insurance to employees, you may be wondering what the alternatives may be to traditional health insurance plans. 

First, employers are always free to purchase health insurance themselves through a broker or their state marketplace. Most insurance providers require an employee participation rate of at least 50% before they will agree to sell a group plan.

Benefits of this option include employer tax incentives and guaranteed coverage regardless of employees’ health status. The biggest drawback is that the cost is unaffordable for most small companies. They are also subject to unpredictable premium increases and generally do not have flexibility with plan offerings.

Self-funded plan: Establishing a self-funded plan is another option. Employers establish a separate fund and pay employee healthcare claims themselves rather than going through an insurance carrier.

Businesses that opt for a self-funded plan benefit from not paying state-mandated health insurance premium taxes of up to three percent. They maintain control over the plan and can offer greater flexibility to employees due to the government imposing fewer regulations.

On the downside, few small businesses can afford to take the chance of financing healthcare costs that can run into the hundreds of thousands of dollars for a major illness. A single catastrophic claim could force the company to file for bankruptcy.

Businesses typically take out stop-loss insurance to cover catastrophic claims and may outsource claims processing to a third-party administrator. Companies need to carefully consider whether they can afford these added expenses.

RELATED: Small Business Health Insurance: How to Manage Costs >>

Why Partnering with a PEO for Employee Health Benefits Makes Sense

Each of the above health insurance options has in common that employers must do all the work of obtaining and managing the plan. At Axcet, we’re proud to manage everything from benefits negotiation to administration. This is only a small portion of the human resources services we provide.

For more information about small business health insurance requirements or to find out how Axcet can help your company source affordable benefit offerings, visit our employee benefits details page.

Our company invites small business owners in Kansas City and the surrounding communities to schedule a consultation to learn more about the advantages of a co-employment relationship.

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