The Ultimate Guide To Small Business Health Insurance

Providing health insurance for you and the employees of your small business doesn't have to be a daunting task. Start here to learn everything you need to know about small business health insurance.

WRITTEN & RESEARCHED BY
Kymberlin Bush
Staff Writer

Jan 24, 2023

UPDATED

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If you are a small business, are you required to provide health insurance for your employees? If you aren’t, should you offer it anyways? How much will it cost you?

In this guide to small business health insurance, we’ll discuss what health insurance is, when it is a legal requirement, why it benefits your business, how much it will cost, where to find the best plan, and much more.

Read on to learn more about the world of small business health insurance!

Table of Contents

What Is Small Business Health Insurance?
Why Should I Offer Health Insurance As A Small Business?
Main Types of Health Insurance Plans
Choosing The Right Health Insurance Providers For Small Businesses
Getting Started: Where To Find Small Business Health Insurance
How To Purchase Health Insurance In 5 Steps
Health Insurance For Small Business FAQs

What Is Small Business Health Insurance?

At the most basic level, health insurance refers to insurance policies that cover medical expenses. Small business health insurance is group insurance designed to meet the needs of a smaller organization that may not have a full HR department to organize health benefits.

Some employers are legally required to provide health insurance to their employees depending on the size of their business. But even if it’s not legally required, health insurance is a competitive benefit that can help set your small business apart and increase employee loyalty and, you guessed it, health.

Am I Legally Required To Provide Health Insurance

The answer to this question is going to come down to the size of your business. Here’s a breakdown of recent health insurance rulings and what they mean for your small business.

In 2010, the Federal Government passed the Affordable Care Act (ACA), and through that healthcare mandate, over twenty million more Americans have had access to healthcare. The health mandate included employers and required businesses of a certain size to provide health insurance.

So, what exactly does the Affordable Care Act mandate? If your business is considered an Applicable Large Employer (ALE) with 50 or more full-time employees for more than six months out of the year, then you will need to provide your employees with health insurance as a legal requirement of the ACA.

If your business is not an ALE, then supplying health care for your employees is a choice, and a good one at that.

The ACA also provided resources to make it easier for small businesses that want to provide health coverage to their employees.

How Does Health Insurance Work?

Health insurance is just like any other insurance: it protects people if they need medical care due to an illness or an injury and it provides preventative care: routine check-ups, and annual tests. The amount of money a person might pay for these services will vary depending on the health plan, however, and so understanding how health insurance works is an important first step in deciding how best to cover your employees.

There are many ways that healthcare providers share the cost with the consumer and these choices can have a drastic effect on the out-of-pocket costs you and your employees pay. Here are some of the most common health insurance terms and what they mean for you:

Deductibles: This is the amount of money you will pay before your health insurance takes over and pays for you. (Lower premiums per month might result in a higher deductible.)
Copayment (Copay): This is the fixed amount you pay for services. (For example, every office visit is $20 or every prescription is $10.)
Coinsurance: This is the percentage of the cost you will pay for services after you’ve reached your deductible. (For example, with a 30/70 coinsurance, you will pay 30% of the cost for services and your insurance will cover 70%.)
Out-Of-Pocket Limit: The maximum amount of money you are expected to pay for services in a calendar year. After you reach this limit, your insurance covers 100% of services.
Health Care Provider Network: This is a list of doctors and other providers that will accept your insurance.
In-Network: Providers/specialists your insurance will cover.
Out-Of-Network: Providers and specialists that your insurance may not pay for or will only cover a smaller portion of the expenses.

In order to highlight how all of these terms work, here are two fictional examples:

Employee A, aka Jenny:

Jenny is 25-years-old and doesn’t have any major health complications. Her employer has offered insurance through a Health Care Provider Network. She pays no out-of-pocket fees per month for her health insurance, but she has a $500 deductible (which she hasn’t hit yet) and a co-insurance policy of 20/80 for services.

One day, Jenny gets a massive headache and temporary blindness. She calls her doctor and her doctor says to go to the Emergency Room to rule out any major medical issues. At the ER, she pays a $100 copay to be seen, but then the tests they run are billed to her on the 20/80 scale. The ER visit ends up costing $6,000, of which she is responsible for $1,200. That visit = $1,800 ($100 copay, $500 for the deductible, plus the remaining $1,200).

Employee B, aka John:

John is 25-years-old and doesn’t have any major health complications. His employee health insurance is through a Health Maintenance Organization and he pays a pre-tax out-of-pocket amount of $100 a month to cover his own insurance needs. (So, over the course of the year, he will pay $1,200 toward his own insurance costs.) He is having a major blinding headache, so he goes to the ER. He pays only a $100 ER copay and nothing else. That visit = $100.

These are only two scenarios, but they highlight how each type of health insurance can dramatically change how you and your employees are billed for medical expenses. It’s crucial for you to understand as an employer how nuanced the health care choice can be for your employees.

Health insurance is a specialized type of insurance and your dedication to getting it right will go a long way in establishing a positive relationship with those you employ. You want to save on cost and navigate the marketplace. Your employees want to know they are covered if they become sick or injured.

When insurance is employer-provided, employers have the final choice about the structure of benefits, and while bigger costs upfront might lead to lowered costs down the road and vice versa, it’s an employer’s responsibility to become knowledgeable about these terms and insurance options and how each one might affect future health care choices for employees. The growth of your business may depend on it.

Not only will understanding the basics of health insurance help you choose the right insurance plans, but the burden to explain the options may fall to you, so knowing the basic principles of how health insurance works are key.

Why Should I Offer Health Insurance As A Small Business?

You may be legally required to provide this option to your employees, but if you aren’t you may be asking yourself, “Why is health insurance worth the cost and the hassle?”

Even though you may not be legally obligated to offer health insurance, there are several key benefits that may make it more than worth it for your business. Plus, with this guide, setting up your small business health insurance isn’t a hassle as you might think. In this case, the pros outweigh the cons.

Here are just some of the benefits of offering health insurance as a small business owner:

Happy Employees, Happy Life: First and foremost, humans need to be happy and healthy, and happy and healthy employees work harder, faster, and contribute more. Worries about money and health are high on the list of what creates stress in an employee’s life, but health insurance can relieve that stress and make an employee feel valued.
Keep Your Businesses Competitive: The reality is that employees want health insurance and are looking for businesses that offer it. You need to remain competitive in the job market to recruit and maintain talented employees. These target employees may not consider job offers that come without the benefit of health insurance.
Save On Taxes: If you have fewer than 25 employees and your average yearly income is less than $50,000, then you may be eligible for tax credits. Even if you aren’t, the money you spend on employee health is tax deductible. Employee-paid premiums are tax-exempt. Talk to your accountant or tax professional to see if you qualify.
Your Peers Are Doing It: More and more small businesses are offering health insurance to their employees, which means that soon it could be industry standard.

Main Types of Health Insurance Plans

As you start to shop for health insurance, you will find that there are several specific health insurance plans for you to choose from. The main differences between these plans come down to:

Size of the network
The cost for you and for your employees
The ability to see specialists without referrals
The number of in-network providers
Cost coverage for out-of-network services

Benefits for each choice vary, so it’s important to figure out which health insurance option is the best for your business type and size. Here is an overview of major health insurance plans and what they mean for your small business.

Health Maintenance Organization (HMO)

An HMO is a type of health insurance plan where there is a network of doctors that accept your insurance. Your employees only have access to providers employed through the HMO and out-of-network care is often not covered (except in an emergency). The HMO provides a lower cost option to employees but decreases the choices of providers/hospitals where they can be treated.

The HMO plan is ideal for:

People who want to know exactly what each visit will cost
Young and healthy people
People with known health conditions and a significant number of expected appointments (for example, pregnancy)
People who don’t need many specialists
Those focused on prevention and wellness

With an HMO, the insured must retain a Primary Care Physician and go through that doctor for referrals to specialists. That means this plan is not ideal for people who need care across a wider geographical area (people who travel). However, out-of-pocket expenses tend to be lower and more predictable.

Preferred Provider Organization (PPO)

A PPO is a type of health insurance plan where a network of doctors agrees to accept a set payment. Unlike the HMO, you aren’t limited to in-network provers, so you have access to any health provider you choose (out-of-network providers just cost more). You also do not need a referral for specialists. While you are not limited to in-network providers, using in-network providers is cheaper. Since there are more choices, the premium costs of a PPO are generally higher.

The PPO plan is ideal for:

People who might spend more for more specialist care
People who want to choose which medical professionals to visit
People who visit specialists and want the option to choose their own

The PPO plan offers more choices for more money and gives greater flexibility on which care providers you can see.

Exclusive Provider Organization (EPO)

An EPO is a type of health insurance plan where you can only go to the doctors and hospitals offered in-network (except in the case of an emergency). It is similar but less expensive than an HMO plan, and there is a larger selection of in-network providers than with the HMO.

The EPO plan is ideal for:

People who don’t mind what doctor they visit
People who will benefit from lower deductibles and out-of-pocket expenses
People who might need to see specialists
People who might need care across a wider geographical area (people who travel)

EPO plans are similar to HMOs with the biggest difference being that you may not need a referral to see a specialist within the provider’s organization.

Point Of Service Plan (POS)

The POS plan is an insurance plan that falls somewhere between an HMO and a PPO. With A POS, you have to select a Primary Care Physician and go through that doctor for referrals to specialists. You can still go to out-of-network providers; you’ll pay more. You will pay less if you go to an in-network provider.

The POS plan is ideal for:

People who don’t mind choosing a doctor within a provider list
People who are young and healthy
People who have no plans for any long-term health needs
People who have out-of-network specialists they want to see (counselor, therapist, dermatologist)

Even though a POS plan is not as common as an HMO or PPO, it provides a hybrid of coverage that may be the best fit for your employees.

Health Reimbursement Arrangement (HRA), & Health Savings Accounts (HSA)

These plans are designed for someone who anticipates no looming need for health care. Every month, employees can pull out money pre-tax and shelter it in a Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA). In a High Deductible Health Plan (HDHP), preventative care is often covered at 100% but any additional health costs would be paid by the employee from their HRA or HSA.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

This is not technically an insurance plan but an arrangement between an employer and an employee to cover medical expenses. An employer will agree upon a certain amount of money they will reimburse the employee over the course of a year to go toward medical care. Employees may enroll in the Individual Health Marketplace and then use their QSEHRA to pay for the coverage.

Choosing The Right Health Insurance Providers For Small Businesses

In order to determine which health insurance is right for your business, you’ll have to decide how much of the upfront costs you are willing to contribute to your employee premiums and what kind of insurance options would be the best fit. Here are the biggest factors in health insurance costs:

Medical history
Prescription drug coverage
Number of doctor visits a year
Available specialists
Specific employee medical needs
Any plans for pregnancies, etc.

As a business owner, it is illegal for you to ask your employees for health information. (For example, you have a female-identifying employee that you want to provide good health insurance, but you cannot ask them if they plan on becoming pregnant!) Knowing your employees and their needs should direct your choices.

So, ask yourself the following questions: What benefits do my employees need? How much choice am I giving my employees? What will their out-of-pocket costs be?

The answers to these questions should guide you to the right health insurance benefits.

We’ve stressed the importance of health care and the ways plans can differ. The most important part of this entire process is what plan you choose for your employees. Start with understanding the basic terms (co-pay, deductibles, co-insurance, out-of-pocket expenses), decide how much you can afford, and then move on to comparing which networks will work best for your employees.

If you want to get down to the nitty-gritty of choosing providers, there are several ways you can compare and contrast providers and plans. Healthcare.gov offers ratings of health plans, and under an in-network plan, you can plug their name into the system and see availability and ranking. You can then sit down with the list of providers in your area and look at their rankings.

Here are some things to think about:

Medical Care: Ratings of providers will tell you how well the plan does with managing their member’s health. Individual ratings for providers will let you know how well they manage the medical care of the people enrolled in their coverage and what percentage of people are happy with their coverage.
Member Experience: Ratings about member experience also look at what percentage of members get preventative care, regular check-ups, and vaccines. Does the provider show a willingness to pursue healthier options?
Wellness Programs: Does the provider give enrolled users access to wellness programs, including stress management, smoking cessation, or weight loss programs?
Administrative Rating: An administrative ranking will look at the customer service rankings, overall health scores, and how well a member can access their health records online.

Once you understand the rankings and have researched the providers in your area, you are ready to purchase health insurance! Decide if you want to use a broker or go directly to talk to an insurance agent, sit down, and gather your quotes.

Getting Started: Where To Find Small Business Health Insurance

Once you have decided what kind of insurance you need, the next phase is to shop for it.

There are several places to look, depending on your needs.

Here are the main places to find health insurance for small businesses:

Small Business Health Options Program (SHOP)

If you run a small business with fewer than 50 employees, you may be eligible to enroll in the Small Business Health Options Program (SHOP). You’ll need to visit the SHOP website to determine whether or not you are eligible to enroll. Then you can choose to sign-up directly through the insurance platforms offered in your state or work with a SHOP broker who can walk you through the process.

You will need to have the following information available:

Your business address
How many employees you are insuring
Employee ages, zip codes, number of dependents (sometimes tobacco use)
Business Name
Tax ID

Sole proprietors and the self-employed may register through the Individual Marketplace during open enrollment. Businesses with 50+ workers can explore health insurance costs through a variety of insurance companies that offer larger programs and plans (but are specifically ineligible to apply for the SHOP) year-round.

Online Insurance Carriers

Contact online insurers directly to get a quote and see what plan could work best for you. A simple Google search can lead you to many providers selling directly to you and your business. Those businesses include but are not limited to Kaiser Permanente, UnitedHealthCare, JustWorks (the platform for Aetna and Metlife), Humana, etc.

Join A Purchase Alliance

A purchase alliance is a private version of the government’s SHOP options. With a purchase alliance, you pick a private health exchange. Then you agree to pay a specific amount for coverage per employee. Your employees will choose a plan offered by the purchasing alliance.
With a private health exchange, you are not eligible to receive a tax credit. However, it can be more competitively priced, and if your employees are paying for their medical care from pre-tax money, it can be a cost-effective program for you both.

Use A Professional Employer Organization (PEO)

A PEO is a business that outsources its human resources department. Since the hours required to do human resources are considered non-revenue generating, sometimes there is a question about whether or not it is worthwhile for an owner to spend their time working on payroll, insurance, claims, etc. Often, it seems more cost-effective to pay a flat rate for a different organization to take that off your plate.

If the administrative aspect of the job is taking over too many of your revenue-building hours and you have more than ten employees, it could be cost-effective to invest in a PEO. (The cost varies per business but can run anywhere between $150-$1,500 an employee.)

Hire An Insurance Broker

Sometimes you need an expert. An insurance broker’s job is to be the go-between an insurance company and your business. They will negotiate the sale of the insurance, and they have a legal responsibility to get you the best price. An insurance agent at a firm is there to represent their firm, but an insurance broker is hired specifically to work for you.

How To Purchase Health Insurance In 5 Steps

You have decided that purchasing health insurance for your small business is a great idea and now you are looking for the right way to start. The process of purchasing health insurance doesn’t need to be too overwhelming: the research beforehand is the most daunting part (which you’ve already got a leg up on simply by reading this post).

Now that you know the basics of health insurance, here are five easy steps to purchasing health insurance.

Step One: Set A Budget

Take a look at your business’s budget and ask yourself the following questions: How much money should I allot to health care? How much will I contribute per employee?

You want to choose a plan that offers good coverage to your employees while still remaining within your business’s budget. This will play a large role in which business insurance plan and the provider you choose. It’s vital to know exactly what you are paying for and what you might be asking your employees to pay for.

Step Two: Know What Plan & Benefits You Need

Now that you know how much you can spend on health insurance, it’s time to think about which plan fits within your price range and provides the benefits you’re looking for.

Here are some things to ask yourself to help pinpoint the right health insurance plan and level of coverage for your small business:

How many employees do I need coverage for?
How old are all my employees? How many of them are smokers?
Am I going to add ancillary options to the insurance plan? (Vision or dental? What are you willing to pay for prescription drugs? Do you want to offer a wellness program?)
How much of my employee’s premiums am I going to pay? (For tax credits, you will need to cover at least 50% of the premium coverage.)
Will I also offer insurance to dependents and part-time employees?
Am I going to have a waiting period before employees are eligible to collect insurance?

Your answers to these questions will help you know exactly what you need and where to look for the right health insurance providers. If you are prepared for your first meeting with an insurance agent or broker, you’ll be one step ahead of the game and off to the right start on your health insurance-buying journey.

Step Three: Gather The Proper Documents

You’ll need to provide some numbers and documentation to receive an accurate health insurance quote from an insurance broker. Before you call an agent or a broker, make sure you have gathered and prepared the proper documents. Most often, you’ll need to provide:

Your business address
How many employees you are insuring
Employee ages, zip codes, number of dependents
Sometimes the employee’s tobacco use
Business Name
Tax ID

Step Four: Start Shopping

Whether you pass along your information to a broker or head to the SHOP site or online sites, now you’re ready to actually start making purchasing decisions. Decide if you want to contact a broker or venture out on your own. (If you decide to outsource to a Professional Employer Organization, they will take it from here!)

There are a few things to consider when evaluating providers:

The financial strength of the provider
Customer service ratings for the provider
Claims service ratings
Plan pricing
Policy offerings and coverage benefits
Provider choices.

Step Five: Compare Quotes

Study the numbers and look at the plans. It’s safe to say that sometimes the cheapest plan may not be in your best interest as a small business owner. Examine how much you can buy and how the plans work for your employees. Don’t be afraid to ask questions, push for numbers, and run scenarios with the experts. When comparing quotes and choosing the right health provider, research and make an educated decision that is best for your business AND your employees!

Health Insurance For Small Business FAQs

What is small business health insurance?

Small business health insurance is group insurance designed to meet the needs of a smaller organization that may not have a full HR department to organize health benefits.

How do I get health insurance for my small business?

To get health insurance for your small business, you can enroll in the Small Business Health Options Program (SHOP), go through an online insurance carrier, join a purchase alliance, contract out the work with a Professional Employer Organization (PEO), or hire an insurance broker.

When does a small business have to provide health insurance?

A small business has to provide health insurance when it employs 50 or more people, according to the Affordable Care Act.

Is there a penalty for not providing health insurance to my employees?

The 2023 penalty for not providing health insurance to your employees (if you are legally required to) is $2,800 or $4,320 per full-time employee minus the first 30 employees.

How much does it cost to provide health insurance?

The cost of providing health insurance for the employees at your small business varies greatly depending on what plan you choose, how many employees you have, and how you find a plan to purchase.

Are there ways to save on health insurance?

The best way to save on health insurance is to get quotes and shop around for the best deal for your business.

Where do I find health insurance for my small business?

You can find health insurance for your small business through the Small Business Health Options Program (SHOP), an online insurance carrier, a purchase alliance, a Professional Employer Organization (PEO), or an insurance broker.

When can I enroll in health insurance for my small business?

The next open enrollment period for health insurance starts November 1, 2023. If your business must comply with the Affordable Care Act (ACA), there are private insurance companies that will assist you at any point in the year.

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Kymberlin Bush

Staff Writer

Kymberlin started contributing to Merchant Maverick as a freelancer in 2022 and joined the team as the full-time small business health insurance expert in 2023. She earned her Bachelor of Arts in Creative Writing from Pacific University in 2020 and continues to reside in Portland, Oregon.

View Kymberlin Bush's professional experience on LinkedIn.

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