Small Business Health Insurance Facts You Must Know In 2020

Danielle Antosz
Last Updated on October 22, 2020
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In the United States, medical insurance coverage is most often provided by employers. This creates an issue for the more than 57 million freelancers and independent contractors and the owners and employees of the 30.2 million small businesses in the country.

Too often, the premiums are sky-high and the coverage is minimal. Are there any good options for small business owners or freelancers when it comes to getting health insurance coverage?

Yes! The good news is you have more options than you realize. Here’s what you need to know, including where and how to buy coverage and how to benefit from the tax credit.

Quick Takeaway

We get it: small business owners are busy. Here are the key takeaways from our guide:

  • Buying business health insurance through an online agent like is probably your easiest, most convenient option
  • If you’re self-employed, you may be able to purchase group insurance as a “Group of 1”
  • If you have fewer than 50 employees, you are not required by law to provide health insurance to those employees.
  • Can’t afford health insurance? We found some great non-traditional options.
  • The government SHOP marketplace has been shut down. You still need to fill out an eligibility determination form. (You’ll receive a response by email.)

Who is Eligible For Purchasing Small Business Health Insurance?

While the requirements may vary a bit by state, in general, businesses with fewer than 50 employees are eligible to purchase group health insurance plans.

Buying Insurance With No Employees

If you are a sole proprietor or freelancer (meaning you have no employees), you have two main options for purchasing healthcare coverage: group plans or a Health Care Reimbursement Account (HRA). However, the details are a bit nuanced.

Options include:

  • Purchase insurance as a “Group of 1”: This option is only available in about half of all states. (See the list of states here.)
  • Healthcare.gov: Purchase individual coverage through the Affordable Care Act’s health insurance exchange
  • Freelancer’s Union: Buy group coverage with other freelancers. Note: there are a number of negative reviews for this insurance option.
  • Health Care Reimbursement Account (HRA): Offers basic coverage and reimburses you, tax-free, for medical expenses.

Buying Health Insurance For Employees

If you are a small business owner with employees who will also need coverage, your health coverage options include:

  • Qualified Small Employer Health Reimbursement Account (QSEHRA): Similar to an HRA, this option is available to small businesses with up to 49 employees. The business owner will offer basic coverage and sets an allowance for the QSEHRA. Employees submit medical expenses for reimbursement. The government caps reimbursements at $5,150 a year for individuals and $10,450 per year for families.
  • Group Insurance Plan: There is a wide variety of group plans, including managed plans, high deductible plans, and indemnity health insurance plans. We will go into more detail about each option in the next section.

How many employees do you need to qualify for group health insurance?

A group (for health care purposes) varies by state. Sixteen states, including New York, Colorado, Connecticut, Delaware, Florida, and Hawaii allow self-employed individuals to purchase insurance as a “group of one.”

Alabama, Alaska, Arizona, and many other states consider a group to be at least two. Visit the National Association of Insurance Commissioners site to find out the rules in your state.

What is a small group health plan?

Small group health plans are medical insurance plans for businesses with fewer than 50 employees. Insurers are limited from using group medical history to set premiums and are limited in the amount they can charge older employees.

Do small businesses have to offer health insurance?

According to the Affordable Care Act, businesses with fewer than 50 employees do not have to provide healthcare insurance for employees.

If your business has more than 50 full-time employees, it is required to offer healthcare coverage. (The IRS calls these businesses “Applicable Large Employers.”)

Generally, a full-time employee is defined as working 30 hours per week. However, there are nuances to consider when calculating who qualifies as a full-time employee. See this IRS guidance for more information.

If an Applicable Large Employer does not offer healthcare coverage, they are liable for the IRS’s “no coverage penalty,” which amounts to $2,500 per full-time employee.

What Are the Coverage Options?

Health care coverage options for small businesses include an HRA or a group insurance plan. We’ve outlined the details of an HRA above, so this section will focus on group coverage options.

Group Insurance Plans

Group insurance plans include the following options.

Managed Care Health Insurance Plans

  • PPO: Preferred Provider Organization plans feature a network of providers that are considered “in-network,” but allows some flexibility for “out of network” providers.  You do not need a referral to see a specialist. These plans generally have a higher premium and have a deductible.
  • HMO: Health Maintenance Organization plans have stricter in-network provider rules as they negotiate lower rates with specific providers. Seeing a specialist generally requires seeing your primary care provider first. Premiums are generally lower, and there may or may not be a deductible.
  • POS: Point-of-Service Plans combine the features of a PPO and HMO, with limited care options and lower costs. You may go to an out of network provider, but your coverage will be limited.

Indemnity Health Insurance Plans

Also known as fee-for-service (FFS) plans, these plans offer far more flexibility when choosing a provider and the insurance company pays a portion of your costs.

Although they are managed plans, the company does not negotiate with providers for lower rates. This means your out of pocket costs could be higher. However, you gain greater control over the care you receive.

High Deductible Health Plans (HDHP)

These plans have a much higher deductible (the amount of care you pay for out of pocket before coverage kicks in) but feature lower monthly premiums.

HDHP plans are often paired with a Health Savings Account (HSA), which allows you to save a portion of your pretax income for medical costs. (The money in an HSA account rolls over year-to-year and also earns interest.)

Supplemental Health Insurance Plans

Supplemental insurance may include vision, dental, and long-term disability plans.

Most small businesses do not offer this type of coverage. It could be a way for an employer to stand out and attract top talent in a tight labor market.

How Do I Buy Small Business Health Insurance?

When it is time to purchase your small business insurance, you have three options:

  1. Buy through an agent
  2. Go directly through an insurance company
  3. Buy through a purchasing alliance (aka a purchasing pool).

Previously, small business owners could enroll through the federal government’s Small Business Health Options Program (SHOP) marketplace. However, in 2019, HealthCare.gov’s SHOP website — including the enrollment and payment portal — closed.

You can still buy SHOP insurance. But you must do so through an agent, rather through the old website.

Buying Through an Agent

Agents can help you compare plans. They earn a commission from the insurance companies.

The more options the agent has access to, the likelier it is you’ll find coverage that’s a good fit your budget and your employees.

Online Services That Function as Agents

There are also several online services that function as agents. This seems to be the easiest way for small businesses to compare and get health coverage.

These options include:

  • HealthMarkets and eHealthInsurance, which provide an easy application process and hundreds of plan options. They can provide an agent for you plus 24/7 assistance.
  • HR software and service providers like Gusto and Zenefits provide healthcare quotes, get you set up with a plan, and administer your programs.
  • “PEOs” or Professional Employer Organizations, like JustWorks also provide this service. PEOs are considered “co-employers” because they share legal responsibility for compliance and other matters. This means they’ll have the authority to make changes to plans.


This easy-to-understand video from Gusto explains how their business health insurance program works.

Buying Directly Through an Insurance Company

Buying directly through an insurance company can be time-consuming. But if you know exactly what coverage you want, you can save money this way.

Realize though, that some insurance companies will only work with agents.

Buying Through an Alliance

These private, non-profit organizations allow small businesses (and sometimes individuals) to pool their numbers to purchase cheaper coverage.

More About SHOP — the Small Business Health Options Program Market Place

SHOP was created by the Affordable Care Act. “SHOP” and the “SHOP Marketplace” are two different things. The latter is what’s been shut down.

  • Previously, small business owners could purchase group health insurance via the Small Business Health Options (SHOP) Marketplace — an online website that was managed by the U.S. government.
  • That website — which includes the SHOP enrollment and payment portal — closed in 2019.
  • You will still need to fill out the government’s SHOP Eligibility Determination Form. (You’ll receive a determination via e-mail.)
  • You will need to work with an agent to purchase SHOP insurance.
  • SHOP plans are not available in all counties. The Department of Health and Human Services has reported: “SHOP Exchanges in an increasing number of counties across the United States do not have any QHPs [qualifying health plans] available . . . “

How much is health insurance for small businesses?

Costs vary by plans, of course, however, a 2018 eHealth study found that the average per-person premium for small businesses with less than 5 employees was $419 per month.

As the number of employees goes up, the average premium declines. For example, the average premium for businesses with 6-29 employees was $364.

Premiums are typically covered by a combination of employer and employee contributions.

Average deductibles have increased by 24% since 2015; the figure now stands at $3,140.

Can I get health insurance through my LLC?

In general, no. However, you can purchase an individual health insurance plan. The same group size rules apply for an LLC as they do for sole proprietors and other small businesses.

As mentioned in this article, 16 states allow you to purchase insurance as a “Group of 1.”

Generally, the cost of your individual health insurance plan can be deducted from your taxes, but check with a tax professional for specific guidance. Governing factors will include the tax classification of your LLC.

How Does the Small Business Health Care Tax Credit Work?

This tax credit is designed to help small businesses offer coverage for their employees. You can claim a credit of up to 50% of the premiums you paid.

To qualify, you must:

  • have fewer than 25 employees
  • pay an average salary of $54,000 or less
  • pay at least 50% of employees’ premiums, and provide qualifying coverage for all full-time employees.

You’ll need to file IRS form 8941 to claim the tax credit.

Note: There’s an increasing number of counties in the U.S. that do not offer any SHOP plans. If your business is in one of these counties you’ll want to be aware of this IRS guidance on tax credits.

Better yet, have your CPA or accounting service handle this.

Can a small business write off health insurance?

Yes, small businesses can write off:

  • Payments made for group health insurance premiums
  • Payments made through established programs like HSAs (Health Savings Accounts) and HRAs (Health Reimbursement Arrangements).

Is personal health insurance a business expense?

Yes, in general, a self-employed person who is not eligible for coverage through a spouse or family plan can deduct the cost of health insurance premiums. Talk to a tax professional to get specific guidance for your situation.

Can I deduct my health insurance premiums if I am self-employed?

In most cases, yes. However, there are some eligibility requirements. For example, you cannot deduct premium costs if you are eligible to be covered under your spouse’s employer plan.

Alternative Options for Employee Health Benefits

Many small businesses struggle to balance the cost of health care with their desire to provide coverage for employees (or themselves). In those cases, these alternative options may be a good choice.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

This reimbursement option (discussed above) is for small businesses that don’t offer group health plans. QSEHRA allows small businesses to set aside pretax dollars and reimburse employees for medical expenses.

Employees can also use QSEHRA to cover their individual health insurance premiums.

The IRS sets the limits for maximum QSEHRA contributions. These currently stand at $5,150 for single coverage or $10,450 for family coverage.

All costs need to be documented.

Stand-Alone Health Reimbursement Account (HRA) (for sole proprietors)

A stand-alone HRA account is not connected to a medical insurance plan and uses pre-tax money from the business to reimburse employee’s medical expenses.

Since sole proprietors are not employees, they cannot generally get an HRA account. However, if their spouse is a W-2 employee, the spouse may set up a standalone HRA and list the sole proprietor as a dependent.

Low-Cost, Non-Traditional Options

Looking for other options? These non-traditional medical care plans — including remote medical care and cash-only doctors— may be right for you.

Simply offering information on these options to your employees may benefit them.

  • 98point6: Subscription-based app that allows you to access a primary care physician at any time and anywhere. You can purchase a personal plan for $120 per year (discounts may apply for the first year).
  • Dr. on Demand: Online medical care for urgent care issues, preventative care, chronic care, and behavioral health. They work with insurance plans and without. Medical visits are billed at a flat fee of $75.
  • Forward: High-tech preventative healthcare for $99 – $149/month. Features included unlimited visits, same-day appointments, DNA testing, and 24/7 remote medical care.  Nurse Practitioners offer text-based support, as well.
  • Cash Only Doctors: Also called direct-pay providers, these doctors do not accept insurance, which gives them the flexibility to set their own rates, decide how long to spend with each patient, and take back control of the services they provide from the insurance companies. Increasing numbers of local doctors are offering monthly “subscription” plans at very low rates.
  • Sam’s Club’s “Care Accelerator”: A new discount program that gives Sam’s Club members access to more affordable health care and transparent pricing. “Healthcare bundles” range between $50 and $240 per year and offer benefits such as prescription drug coverage, $1 preventive screenings, and discounts on dental and eye visits. The pilot program launched in October 2019 in Michigan, North Carolina, and Pennsylvania. Watch for nation-wide rollout.

Can I reimburse my employees for health insurance?

Yes, a law passed in 2016 allows small employers that do not offer group plans to offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This can be used to reimburse employees for their health care costs.

Employees can also use QSEHRA to help pay for individual health insurance premiums.

Can I give my employees money for health insurance?

Yes, you can give your employees money for healthcare. There are two ways to do this. You can provide a taxable stipend (essentially a bonus to cover health care costs). Or you can reimburse their medical expenses through a tax-free program like a QSEHRA.

The maximum amount you can reimburse through QSEHRA is capped by the government: $5,150 for an individual and $10,450 for family coverage.

Summary

Don’t let the complexity of healthcare insurance options for small businesses, freelancers, and sole proprietors turn you off from finding coverage.

With so many plans, including traditional and non-traditional options, there is likely an affordable plan that will work for your needs.

Have questions? Drop a comment below!

Reference: States That Allow “Group of 1”

These 16 states allow self-employed individuals to purchase group insurance. They define a “group” as being between 1-50 people.

  • Colorado
  • Connecticut
  • Delaware
  • Florida
  • Hawaii
  • Iowa
  • Louisiana
  • Maine
  • Massachusetts
  • Mississippi
  • New Hampshire
  • New York
  • North Carolina
  • Rhode Island
  • Vermont
  • Washington
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