How Does Health Insurance Work for Small Businesses?

Gusto Editors

For many folks, health insurance can be a mixed bag.

Long appointments, cold waiting rooms, and unexpected bills. But once you dig a little deeper, you’ll find a lot of great things swirling inside.

In this article, we’ll walk you through everything from Obamacare requirements to data on which benefits employees want most.

Do I need to offer health insurance?

This is where it all begins. To get your answer, you first need to see if the Affordable Care Act, or ACA, requires you to offer your team health insurance. The ACA is a piece of legislation that helps people get their hands on more affordable medical coverage. It explains how carriers, employers, individuals, and other entities can help make health insurance happen.

Specifically, the employer mandate is where companies can find out what they have to do. The mandate tells employers they need to offer comprehensive and affordable health insurance if they have 50 or more people on staff. If companies don’t follow the rules, they’ll have to pay the IRS a penalty called the shared responsibility payment. Complying is way better than getting socked with fines.

Does the employer mandate apply to me?

To find out if the rule applies to you, you first have to figure out how many full-time equivalent (FTE) employees you have on your team. Use the formula below to crack the code on your FTE number:

(Total hours worked by part-time employees each week / 30) + # of full-time employees = Your FTE number)

If you need a little more help, you can also jump through the steps below:

  1. How many hours do each of your part-time employees work each week? Add them all up.
  2. Divide the result you get by 30.
  3. Round down to the nearest whole number.
  4. How many full-time employees do you have?
  5. Add this number to what you got above.
  6. Bravo — you’ve just successfully figured out your FTE number!

The number you just got is your formula for figuring out your ACA requirements. Now, use it to find where you fit on this chart:

I have 49 or fewer FTE employees:
Nope, you don’t have to provide health coverage. That being said, many companies proudly offer insurance to their teams even though the ACA doesn’t explicitly require them to.
I have 50 or more FTE employees:
Yep, you do have to offer health coverage! Ninety-five percent of your full-time employees have to be covered.

Think back to how big your team was in the previous year. That number will help you find out if you’re required to offer insurance today.

Should I offer health insurance?

Keeping your team healthy is one of the most important ways to show them that you appreciate everything they do. Even if companies aren’t required to provide coverage under the Affordable Care Act, many do so regardless. A little over one in four companies with fewer than 50 employees provide health insurance, and a promising 22 percent plan on rolling it out next year.

Here are a few reasons why offering benefits is such a great decision:

It’s what your team wants

Glassdoor recently surveyed employees on how 54 benefits influenced their satisfaction. They found that health insurance was, by far, the most important of all the benefits that exist. The top three benefits that make employees feel satisfied? Health insurance, paid time off, and retirement plans.

It helps keep you compliant

If you have 50 or more full-time equivalent employees, then the ACA requires you to offer health coverage. It’s a clear-cut rule that makes everything clearer. All you have to do is figure out how many FTE employees you have. No worries, we’ve got you.  

It makes your culture shine

When someone starts a new job, fussing with all the intricacies of health insurance can feel overwhelming. If an employer handles that part, new employees can focus their time on getting used to their new role instead.

Saves you money on taxes

Do you have 24 people or less on your team? Then you may be eligible for hidden money through the small business health care tax credit. The credit equals up to half of your premium contributions if you’re a small employer, and for tax-exempt companies, it covers up to 35 percent.

If you can safely check off each box below, then the tax credit could be in your future.

  • You buy your plan through the Small Business Health Options Program, called SHOP
  • Your team has an average salary of $54,000 or less
  • You pay at least half of everyone’s premiums

Be sure to check with your accountant or broker to get a final call on your eligibility status. They’ll also be able to help you take advantage of any retroactive tax credits you’re be entitled to.

How do I get small business health insurance?

Once you know you’re ready to offer insurance, you sign up for a small business plan in a few different places:

  1. The SHOP federal or state marketplace (if you live in a state that offers it)
  2. A service like Gusto
  3. Directly through your insurance carrier

Your health insurance setup checklist

To streamline your setup process (or just get a quote), you’ll want to have a few bits of information handy:

  • Company tax information (federal EIN)
  • Current and appropriate levels of workers’ compensation coverage
  • North American Industry Classification (NAICS) code
  • Proof of payroll
  • Number of employees eligible for health insurance
  • Details for each employee: name, address, age, and number of dependents to insure

Whether you’re a health insurance beginner or a bonafide master, you’ll now be able to decide if you should offer health insurance once and for all. And then, you can see what you should consider if you move ahead with that decision.

Gusto Editors Gusto Editors, contributing authors on Gusto, provide actionable tips and expert advice on HR and payroll for successful business management.
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