Business Tips

How to Navigate Employee Healthcare: A Guide for Small Businesses

January 31, 2025

As a small business owner, keeping your employees happy and healthy is essential to maintaining and growing your business. One of the best ways to support your team is by offering healthcare benefits. This may seem like a big ask, especially as a small business owner, but there are still ways to offer affordable employee healthcare within legal requirements.

In this overview of employee healthcare options, you’ll learn the most common options available and the steps to choosing the right one for your business.

Why does employee healthcare matter?

Employer-sponsored health insurance is one of the most sought-after benefits, as well as other health-related benefits, such as dental and vision care, support for mental health, gym memberships, and wellness services. In fact, statistics show:

78 percent of employees say they would stay with their current employment solely because they like their benefits.
49 percent of employees are likely to look for new job opportunities because they are unhappy with their current employee benefits plan.

Offering healthcare benefits can give you a competitive edge, especially when the labor market is tight. However, it can also be one of the largest ongoing expenses for many small businesses.

The good news is that today, there are more options than ever to make employee healthcare benefits a part of your compensation package. There are also different strategies to manage the expense, from covering it entirely as an employer to offering partial coverage or reimbursement.

As an incentive to support small businesses, employer-paid health insurance is generally deductible as a business expense on your business tax return. If you share the cost, your employees may also make their premium payments “pre-tax” to reduce their income taxes.

What are the different types of employee healthcare options?

Here, you’ll see the most common employee healthcare options. Keep in mind that there may also be small business health plans available through your local chamber of commerce, business development organizations, or other state, local, or industry-specific organizations.

1. Group health insurance plans

These are the plans that most people are familiar with – an employer offers coverage through a designated insurer (or a choice of them).

Pros:

Employees get full coverage.
Most people understand how it works.
You can often offer different levels of coverage.

Cons:

It can be expensive.
There can be a lot of administrative work and documentation, which can be time-consuming for you as a small business owner.

2. Health Reimbursement Arrangements (HRAs)

This is when you’ll reimburse employees for qualified medical expenses up to a certain amount.

Pros:

This can be more affordable than traditional insurance.
It can give employees flexibility in how they use their healthcare dollars.
It may be easier to budget for your business.

Cons:

Often, this is only available as an add-on – employees may also need to be enrolled in a health insurance plan.
People aren’t as familiar with these, so there’s sometimes confusion about how they work and the money “left on the table.”

3. Health Insurance Marketplace and SHOP

Through the Small Business Health Options Program (SHOP), very small businesses can offer affordable health insurance for employees, and your business may qualify for tax credits.

Pros:

This was specifically developed to help meet the needs of very small businesses with 1-50 employees.
It allows you to benefit from cost savings typically offered only to larger businesses.

Cons:

Your business must meet specific eligibility requirements.
Insurance must be purchased through an eligible broker or insurance company, which adds another step in the process.

4. Professional employer organizations (PEOs)

PEOs are third-party human resource (HR) businesses that help small businesses manage payroll and benefits, including employee healthcare benefits.

Pros:

For small businesses that have grown or offer substantial benefits, PEOs can alleviate the work of administering benefits, payroll, and more.

Cons:

The cost may be too expensive, although the expense should be weighed against convenience and reliability.
It may mean giving up some control over your business’s HR functions.

5. Self-funded insurance plans

This option may be better for “larger” small businesses. With these, businesses can assume the risk of employee claims to reduce costs.

Pros:

A well-managed self-funded insurance plan may offer cost savings.

Cons:

These require careful oversight and cost management.
Businesses also need “stop loss” coverage in case of an unforeseen occurrence, like a pandemic or natural disaster.

What are the legal considerations?

In addition to being a hiring and retention tool and a great business practice, there may be federal or state requirements regarding healthcare offerings. Here are some of the important compliance considerations:

Affordable Care Act (ACA) requirements: If your business has 50+ employees, you must offer the minimum essential coverage.
Small Business Health Care Tax Credit: For small businesses with fewer than 25 employees and moderate-income levels, a tax credit may be available to support the cost of offering healthcare benefits.
Employee Retirement Income Security Act (ERISA): This guides most employer-sponsored health plans, ensuring transparency and accountability.
Consolidated Omnibus Budget Reconciliation Act (COBRA): COBRA is intended to fill healthcare coverage gaps that can occur when employees leave their jobs. Businesses with 20 or more employees must allow workers and their families to temporarily continue their health coverage after leaving the business under specific circumstances.
Family and Medical Leave Act (FMLA): This entitles eligible employees of small businesses with 50 or more employees to unpaid, job-protected leave for specific family or medical reasons, such as the birth of a child or serious health conditions. While not directly tied to healthcare plans, FMLA ensures employees can take leave without losing access to health benefits.
State-specific mandates: Some states have their own requirements regarding employee healthcare benefits, so be sure to check yours.

To make the best decision for your team and your business, it’s always a good idea to consult with your accountant, business attorney, or human resources professionals for additional guidance.

How to choose the right option for your business

Selecting an option may be obvious for some small businesses, but not for all. Here are some steps to guide you to making a good choice for your business and your team:

Ask your employees what they like most so that your resources are directed toward benefits they’ll value. For example, while most may want health insurance coverage, they may be less interested in wellness programs and gym memberships. Finding a balance can help you pick the right plan and manage costs.
Evaluate plans based on overall costs for you and your employees. Premiums are important, but so are deductibles, copays, and out-of-pocket maximums. Consider tiered plans or voluntary benefits to provide additional flexibility for employees.
Work on your budget to determine what you can afford. Also, ask employees about potential contributions, like what percentage of their pre-tax pay would they be willing to put toward healthcare benefits.
Consult with insurance brokers or use comparison tools to narrow down your options.

Although it can be a significant expense, employee healthcare benefits are more than health insurance for people: They’re long-term investments in the health of your business, too.

Pursuit can help

If insufficient funds are holding you back from offering employee healthcare, or you’re unsure what the next step is for your business, Pursuit can help.

With more than 15 business loans and a line of credit from $10,000 to $5.5 million, valuable resources, and business advisory services, we help businesses in New York, New Jersey, Pennsylvania, Connecticut, Nevada, Illinois, and Washington get the financing and support you need.