Small employers aren’t required by law to provide health insurance coverage to their employees, but such benefits play an essential role in attracting and retaining the type of high-quality workforce you want.
Some smaller companies may fear that health insurance is cost-prohibitive. But, between the opportunity to purchase group coverage through the federal government’s Small Business Health Options Program (SHOP) and the availability of Small Business Health Care Tax Credit, eligible employers may find it more affordable than they suspect.
This post explains which employers are eligible for small group health insurance and many of the specifics an eligible employer must consider.
What is small group health insurance?
As the name suggests, it’s a form of group health insurance, which is a plan that covers your employees and potentially their dependents. Small employers generally are defined as those with one to 50 full-time equivalent (FTE) employees.
How can I buy small group health insurance?
One option for small employers is to purchase group health and dental insurance coverage for small businesses through SHOP. SHOP plans are offered by private insurance companies, cover essential health benefits, and aren’t allowed to exclude coverage for treatments for pre-existing conditions. If you decide to go this route, you’ll either work with a SHOP-registered agent or broker or directly with an insurance company.
You also can purchase non-SHOP plans from private insurers — but you’ll miss out on the potential for significant tax savings.
Is my business eligible for SHOP?
Generally, to purchase SHOP coverage, you must:
- Have an office or employee worksite in the state where you’re buying coverage. If your business operates in more than one state, you can choose one multi-state plan to cover all of your employees or offer different SHOP plans in each state where you have employees working.
- Have at least one employee enrolling in coverage who isn’t an owner, business partner, or spouse of the owner or business partner.
- Have one to 50 FTEs. Some states allow employers with as many as 100 FTE employees to use SHOP. (If you have more than 50 employees and don’t know if you’re eligible for SHOP, you can contact your state Department of Insurance or call the SHOP Call Center at 1-800-706-7893.)
- Offer SHOP coverage to all of your full-time employees. You aren’t required to offer it to employees who average fewer than 30 hours per week or seasonal workers (although you can).
- Enroll at least 70 percent of the employees to whom you offer coverage in the plan (certain states have different thresholds; see below for more information).
Why might I prefer to purchase coverage through SHOP?
There’s one pretty strong reason to use SHOP to purchase your small group coverage — you must go through SHOP if you want to qualify for the Small Business Health Care Tax Credit. The credit is worth up to 50 percent of the premiums qualified employers pay for their employees’ health insurance.
You can still claim a business expense deduction for your share of employees’ premiums for non-SHOP plans, but that only reduces your taxable income. Tax credits, on the other hand, reduce your actual tax liability on a dollar-for-dollar basis.
To qualify for the Small Business Health Care Tax Credit, you also must:
- Employ fewer than 25 FTE employees (for purposes of this credit, one FTE equals 40 hours per week of work).
- Pay an average employee salary of less than $56,000 per year (the threshold is adjusted annually for inflation).
- Pay at least 50 percent of your full-time employees’ premium costs.
How do I calculate the number of FTEs I have?
An FTE for purposes of SHOP eligibility means 30 hours per week of work. When calculating the number of FTEs, you should include:
- All full-time employees of a group if: a) your business is affiliated with another employer, b) under common ownership, or c) part of a controlled group.
- Any employees under a common group in other states, even if you’re enrolling in separate state SHOPs.
But you don’t include:
- Owners of a sole proprietorship
- S-corporation shareholders who own than 2 percent of the business’s shares
- Owners of more than 5 percent of other businesses
- Family members or members of the household who qualify as dependents on the individual income tax return of a person listed above, including a spouse, child (or descendant of a child), sibling or step-sibling, parent (or ancestor of a parent), step-parent, niece or nephew, aunt or uncle, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.
- Seasonal workers who work 120 days or fewer in a year
- Independent contractors
- COBRA and retired enrollees
Note that these employees may still qualify for coverage through the SHOP Marketplace.
This FTE Calculator can help you determine your number of FTEs. You’ll need to know:
- 1) the average number of full-time employees you had in the previous calendar year, and
- 2) the average weekly hours worked by each part-time employee for the previous calendar year.
How do I determine my minimum participation requirement?
When determining whether you’re enrolling enough employees in a SHOP plan, you can count both employees who opt for your coverage and those who have other coverage. (For example, a family member’s work health care plan, Medicare, Medicaid, TRICARE, veterans programs, or individual health insurance.)
- Iowa: 75 percent
- Kentucky: 75 percent
- Mississippi: 0 percent
- New Hampshire: 75 percent
- South Dakota: 75 percent
- Tennessee: 50 percent
- Texas: 75 percent
- Utah: 75 percent
The SHOP Minimum Participation Rate Calculator will help you calculate how many of your employees must accept your offer of coverage. It takes into account your particular state’s rules. To obtain an accurate figure, you’ll need to know:
1) how many of your employees are interested in the insurance plan you’re considering, and
2) how many employees already have coverage from another source.
What if I fall short of the applicable minimum participation requirement?
There’s good news — you can enroll in SHOP from November 15 to December 15. The requirement isn’t enforced during that period, so, if you’re worried you won’t reach the required minimum participation, that’s the time to enroll.
What if I hire more employees?
Once enrolled through SHOP, you can renew even if your workforce exceeds 50 FTEs.
When can I purchase a SHOP policy?
Unlike other types of health insurance, SHOP plans aren’t subject to an open enrollment period. You can start offering SHOP coverage to your workers at any time of the year.
Do I have any alternatives to small group health insurance?
Small group health insurance isn’t the only vehicle for providing your employees with health coverage. For example, although it’s more common for larger employers, you could choose to self-insure. Self-insured employers collect premiums from enrollees and assume the responsibility for paying their medical claims. You can contract with a third-party administrator to handle tasks like enrollment and claims processing or administer the plan yourself.
Or you can offer a qualified small employer health reimbursement arrangement (QSEHRA) or an individual coverage health reimbursement arrangement (ICHRA) to reimburse employees for qualified medical expenses, including insurance premiums and coinsurance. Both QSEHRAs and ICHRAs are exempt from the sometimes cost-prohibitive coverage requirements of the Affordable Care Act, but they have some critical differences you’ll need to understand.