Small Business Health Insurance Requirements

In the battle for high-quality employees, it helps to know the small business health insurance requirements.

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You have an idea for starting your small business and you are getting ready to launch it. You’ll need employees, and the competition for good workers is intense. One good way to stand out in the crowd is to offer health insurance. But first, you must add one more thing to your must-learn list: the small business health insurance requirements.

Providing health insurance to your eligible employees seems like a great idea. But do you have a choice? Is it required? If so, what regulations should you watch out for? If not, is it worth the trouble?

According to a 2022 Gallup poll, U.S. workers rank pay as the biggest factor in deciding whether to join employers. The second biggest factor was whether they provide health insurance. The poll also found that 64% said pay and benefits were very important.1 Here’s a look at the rules and regulations involved in satisfying that demand. 

Rules on providing health coverage

The Affordable Care Act 

The federal Affordable Care Act does not require small businesses to offer their employees insurance. The ACA defines a small business as one that has fewer than 50 full-time equivalent employees (FTEs).

 In addition to requiring individuals to buy coverage, the ACA requires employers with 50 or more full-time or full-time equivalent employees to provide minimum essential coverage that’s affordable to staff and their dependents.This employer mandate requires employers with 50 or more staffers to offer health insurance benefits to at least 95% of full-time staffers.

Failure to do so could result in penalties levied by the IRS

Full-time employees work 30 hours or more a week or 130 hours a calendar month, including vacation and paid leaves of absence.

An FTE is someone who works at least 30 hours a week or 130 hours a month. Small employers and big companies alike can follow this formula for determining FTEs.

  • Take the number of hours worked every month by part-time employees (less than 30 hours a week) and divide by 120.
  • For example:
    • 5 part-time employees work 20 hours a week = 100 hours
    • 100 hours x 4.33 (month) = 433
    • 433 ÷ 120 = 3.6 full-time equivalent employees

Applicable large employees (ALEs), those with 50 or more workers, must provide health coverage. In addition, the benefits must be affordable and meet the minimum essential coverage (MEC). To qualify as minimum essential coverage, it must be one these three types: 

  • Employer-sponsored. Examples include COBRA coverage and group health insurance plans that the employer provides. 
  • Individual healthcare coverage. Examples include student health plans, and health insurance the individual buys directly from a private insurance company or the Health Insurance Marketplace.  
  • Government-sponsored program. Examples include most TRICARE coverage, Medicaid coverage, Medicare Part A, and Medicare Advantage plans.  

Affordable/affordability threshold

Health insurance costs must be affordable enough for staff members to participate. Employer contributions may pay for all or part of healthcare coverage, and there’s a limit on the employee contribution.

For 2023, the IRS has set the health plan affordability threshold at 9.12% percent of an employee’s “household income.” That’s a drop from the 2022 limit of 9.61% percent. Employees’ monthly contributions to the lowest-cost plan will be capped at $103.28 in 2023. This is also called the affordability threshold.

Rate of pay safe harbor

To determine whether coverage is affordable under the law, employers may calculate a “rate of pay safe harbor.” Here is one of the simplest ways to determine this: 

Multiply the employee’s lowest hourly wage by 130, which is the ACA’s definition of the minimum number of hours that make the employee full-time or FTE.

Multiply that number by 9.12% for 2023. This number (capped at $103.28 for 2023) is the maximum monthly premium an employee can be required to pay. This number is the “rate of pay safe harbor.”

Note: the multiplier will change every year. 

FYI: You can calculate this 2 other ways: Federal Poverty Line (FPL) safe harbor and the W-2 Wages safe harbor.

Dependent coverage

Under the ACA, ALEs must offer coverage for full-time or FTE employees and their dependents up to age 26. However, the law does not mandate  coverage for spouses of employees. Employers may opt to cover dependents (and/or spouses) on their plans but may do so at the employees’ expense. The ACA doesn’t require businesses to pay for coverage for dependents, only employees.

Healthcare reporting

The ACA also requires employers to report to the IRS every year to show they’re complying with the employer mandate. These reports are Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

Form 1094-C reports summary information for each employer – a snapshot of what the employer has provided and paid for in the past year. The 1095-C report’s information about each employee. These must be filed by February 28, if by mail, or March 31, if filing electronically, and cover the previous years’ activities.

For SMBs filing fewer than 250 of 1095-C, they may be mailed. More than 250 forms must be filed electronically. Each employee must also receive a copy of 1095-C by January 31 for the previous calendar year

W-2 reporting

In addition, a business must report the cost of any provided health benefits on employee W-2 Forms with the Social Security Administration. Businesses must include the amount of healthcare coverage on the W-2 using Code DD. This includes the total value of any medical, dental, and vision coverage paid in the past year. Include the employer and employee cost, no matter who paid for the coverage.

IRS penalties

The IRS can punish businesses that don’t comply with the ACA mandate. ALEs that fail to offer coverage to 95% of their employees could be fined $2,570 per full-time employee beginning with the 31st employee (the first 30 are excluded) if one full-time employee receives subsidized healthcare coverage from the ACA Marketplace.

If the coverage offered fails to provide the minimum value and/or doesn’t meet the affordability threshold, there could be additional penalties. In 2022, employers paid  $4,120 for each full-time employee who received subsidized healthcare coverage from an ACA Marketplace because coverage didn’t meet minimum value or affordability.

In addition, the IRS fines businesses for failure to report on time or to accurately document compliance. The failure to file penalty for 2022 was $280per return. This means for a company with 10 employees, the fine would be $2,800. The IRS now has levy power to take property and holdings from businesses that don’t pay assessed penalties.

Health coverage shopping 

It is important to figure out what type of insurance you want to offer your employees. For instance, do you wish to stop at health insurance options or do you want to provide employees dental too? While a small business does not need to pay premium costs to offer coverage, it pays to shop around. You might find good group health plans with lower health insurance premiums for your employees.    

You can shop plans by speaking to a health care insurance provider and telling them what you are looking for. They can sift through the many different health insurance plans. Make sure you understand exactly what a health plan covers before you decide. You do not want any surprises.

If you are still not sure and are worried about costs, the federal government has set up The Small Business Health Options Program (SHOP), where you can shop several small business health options. Also, buying group health insurance coverage through a SHOP registered agent might enable a small business owner to qualify for a 2-year health care tax credit. Through the SHOP website you can:  

  • Learn the federal requirements for small business employers. 
  • Find out if you qualify for a Small Business Health Care Tax Credit.
  • Compare policies and prices.
  • Research group health plans and dental coverage.
  • Choose from several different plans.
  • Contact an agent who can enroll you. 

Meet the small business health insurance requirements

Navigating the law and requirements under the ACA for business can be complex. has many answers for small and medium-sized businesses. Many SMBs look for plans through the ACA or third-party HR services like Zenefits to get the coverage they need to meet all the legal requirements.

1 The Top 6 Things Employees Want in Their Next Job

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