Are Small Businesses Required To Provide Health Insurance

For small business proprietors, a common query may arise: “Must I furnish health insurance for my staff?” The Affordable Care Act (ACA), colloquially known as “Obamacare,” mandates that applicable large employers (ALEs) boasting 50 or more full-time equivalent employees (FTEs) must provide affordable health benefits meeting minimum essential coverage (MEC) standards, or else face penalties for lack of coverage.

However, businesses on a smaller scale do not bear the same obligation to extend insurance offerings to their employees.

This article delves into the requisites for employer-provided health insurance, exploring aspects like determining ALE status, calculating FTEs, and outlining ACA-compliant health benefits tailored for businesses with fewer than 50 employees.

Are Small Businesses Required To Provide Health Insurance

What is an applicable large employer (ALE)?

An Applicable Large Employer (ALE) is defined as a company with a minimum of 50 Full-Time Equivalents (FTEs).

As per the Affordable Care Act (ACA), an FTE is an individual who works at least 30 hours per week or 130 hours per month.

Your organization’s ALE status is determined on a yearly basis, following the calendar year.

For instance, you may qualify as an ALE in one year but not in the subsequent year if there is a reduction in your workforce.

Generally, if an employer maintains a monthly average of at least 50 full-time equivalent employees throughout a calendar year, it is classified as an ALE for the subsequent calendar year.

Your organization isn’t considered an ALE if:

  1. Had less than 50 full-time employees on average in the previous year.
  2. Employed more than 50 full-time employees for no more than 120 days due to seasonal work in the previous year.

ALEs must offer health coverage to full-time employees and their dependents or face a tax penalty.

Calculating full-time and part-time employees

Determining if your organization is an ALE involves tallying all full-time employees and part-time employees’ equivalent hours.

For clarity:

Full-time employees: Those working at least 30 hours per week.

Full-time equivalents: Calculated by totaling part-time hours in a month, then dividing by 120.

If the total reaches 50 or more, your organization is an ALE, subject to ACA’s health insurance mandate.

Small business health insurance requirements

The Affordable Care Act stipulates that small businesses with fewer than 50 FTEs are not required to offer health insurance benefits to their employees or pay a tax penalty.

However, that doesn’t mean they shouldn’t provide health insurance benefits.

Advantages include:

  1. Attracting and retaining top talent: 82% of employees consider the benefits package crucial in job acceptance, according to our 2022 Employee Benefits Survey Report.
  2. Competitive edge: Financial assistance like stipends or reimbursements enhances your benefits package, setting you apart from competitors.
  3. Healthier workforce: Improved healthcare access boosts productivity, reducing sick leave and increasing organizational effectiveness and profitability.
  4. Tax savings: Offering certain health plans can lead to tax savings for your business, while employees may also benefit from tax savings by participating.

Small group health insurance, available in most states for organizations with under 50 employees, can be obtained directly from insurers or through a SHOP exchange.

Opting for a SHOP plan may make your organization eligible for the small business health care tax credit.

The Affordable Care Act allows flexibility in the types of insurance offered, as long as it’s affordable and meets Minimum Essential Coverage (MEC).

Alongside traditional group health insurance, employers can explore non-traditional options like health reimbursement arrangements (HRAs) or health stipends.

Health reimbursement arrangements (HRAs)

Many small businesses find that HRAs offer a more suitable solution compared to conventional group health insurance.

This is because HRAs provide employees with the flexibility to select health plans and services that align with their individual needs.

Additionally, HRAs can present a more cost-effective option for employers and come with tax benefits.

Examples include the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA), both designed to enable employees to receive tax-free reimbursements for health insurance premiums and other qualified medical expenses.

Health stipends

Your small enterprise has the option to offer health stipends for covering medical care expenses incurred by employees.

These stipends function much like HRAs, but they come with fewer regulations and restrictions.

In contrast to HRAs, employers are not required to request proof of insurance or receipts for IRS Publication 502 expenses.

With a health stipend, there are no prerequisites for employee eligibility or mandatory minimum monthly allowances.

This flexibility empowers organizations of various sizes to establish a highly customizable health benefit tailored to their specific requirements.

Also read: How to get business insurance? A complete guide

How do HRAs and health stipends compare?

Both HRAs and health stipends let your employees buy their own health coverage from an insurance marketplace.

HRAs offer tax-free benefits if employees maintain Minimum Essential Coverage (MEC), while health stipends are taxable, leading to payroll taxes for employers and income taxes for employees.

HRAs are generally preferred, but health stipends can be beneficial for employees eligible for the Advance Premium Tax Credit (APTC).

Affordable health insurance options for employees of small businesses

Individuals not working with an insurance carrier face no penalties.

Non-ALE employers not offering health insurance allow employees to opt for individual policies.

Employees can receive an HRA or health stipend for their own plans.

They can utilize these funds for premiums or healthcare expenses.

Individuals can seek coverage through the SHOP Marketplace, state exchanges, or local agents.

Open enrollment is the ideal time, but special enrollment is available for qualifying life events.


For small employers, it can be challenging to keep up with the rules and regulations of employee health insurance. While companies with 50+ employees need to offer qualified health coverage or potentially face a penalty, smaller companies aren’t forced to do so.

However, offering health benefits is one of the best investments small business owners can make. Consider an HRA or¬†health stipend¬†if you’re looking for a quality small business health benefits solution.

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