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Table of contents
Table of contents
Key takeaways:
- Employer-sponsored health insurance provides employees with health coverage through their workplace, with employers typically paying part of the premium.
- Employers and employees usually share premium costs. Eligible employee contributions can be deducted pre-tax through a properly established Section 125 plan.
- Most small businesses aren’t subject to the ACA’s employer shared responsibility rules. Larger employers generally must offer qualifying coverage or potentially owe a payment.
- Compare provider networks, premiums, deductibles, and out-of-pocket costs to choose coverage that fits your workforce’s needs and business budget.
- Offering health benefits includes educating employees, managing enrollment, coordinating payroll deductions, and meeting applicable administrative and reporting requirements.
As a small business grows, health insurance often becomes one of the first major benefits decisions an owner makes. It affects your budget, your ability to compete for talent, and how you manage payroll each pay period.
Choosing coverage means balancing what your business can afford with what employees need. A lower premium may help your monthly budget, for example, but a higher deductible could make care more expensive for employees.
This guide explains how employer-sponsored health insurance works, how costs are shared, which requirements may apply, and how to offer coverage to your team.
What is employer-sponsored health insurance?
Employer-sponsored health insurance is health coverage offered through an employer, typically through a group health plan. The employer usually pays part of the premium, and employees pay the remaining amount.
The employer selects the coverage options available to eligible employees. Depending on the plan, employees may also enroll eligible dependents.
Some employers support individual health coverage through reimbursement arrangements instead of offering a traditional group insurance policy. These options include individual coverage HRAs and qualified small employer HRAs, discussed below.
How does employer-sponsored health insurance work?
Employers start by evaluating their workforce’s coverage needs and the business’s budget. From there, they select coverage, explain enrollment options, and manage the plan’s ongoing administration.
The employer evaluates needs and selects coverage
Consider employees’ locations, access to doctors, family coverage needs, and out-of-pocket costs alongside what the business can contribute. These factors help you compare plan types, provider networks, premiums, and deductibles.
Work with a broker or benefits advisor to confirm which Affordable Care Act (ACA) requirements apply. For employers subject to the ACA’s employer shared responsibility rules, this includes reviewing minimum essential coverage, minimum value, and affordability.
Employees enroll
Eligible employees select from the coverage options offered and enroll eligible dependents. Plans that offer dependent child coverage generally must make it available until the child turns 26.
Employees generally have the following opportunities to enroll:
- During the employer’s annual open enrollment period: The employer communicates the dates, available options, and deadline for making elections. This schedule is separate from the individual Health Insurance Marketplace’s enrollment period.
- When first eligible: New hires enroll according to the plan’s eligibility rules and enrollment deadlines, with coverage beginning after any applicable waiting period.
- After a qualifying life event: Events such as marriage, birth, adoption, or loss of eligibility for other coverage may allow special enrollment outside the annual window.
Clearly communicate when coverage begins, what employees need to submit, and whom to contact for enrollment help.
The employer pays premiums.
The employer pays its share of the premium directly to the insurance carrier.
Premium payments and payroll deductions are processed
For a fully insured group plan, the employer generally arranges payment of the premium to the insurance carrier, including any employee contributions collected through payroll.
When offered through a properly established Section 125 cafeteria plan, eligible employee premium deductions can be made pre-tax. This can reduce the employee’s taxable income and the employer’s payroll tax liability.
Work with your payroll provider, accountant, or benefits administrator to confirm that the plan is properly documented and payroll deductions follow its requirements.
The employer administers the plan
Employers typically coordinate with their insurer, broker, or plan administrator to handle ongoing responsibilities, including:
- Enrolling eligible new hires and updating dependent information
- Processing coverage changes after qualifying life events
- Managing annual open enrollment and communicating plan changes
- Ending active coverage when employees leave or otherwise lose eligibility
- Coordinating required notices and continuation coverage under COBRA or applicable state law
- Arranging nondiscrimination testing, where required
- Maintaining records and completing applicable benefits reporting
Types of employer-sponsored health plans
Most small businesses choose from several common health plan structures. Here's how they generally compare:
Alternatives to group coverage: ICHRA and QSEHRA
Employers can also help employees pay for individual health insurance through a health reimbursement arrangement (HRA). The employer establishes an allowance and reimburses eligible expenses under the arrangement’s rules.
Individual coverage HRA (ICHRA)
An ICHRA allows employers of any size to reimburse eligible individual health insurance premiums and other qualified medical expenses. Employers choose their contribution amount without a federal annual contribution cap.
Rules govern employee eligibility and how employers can offer an ICHRA to certain employee classes while providing group coverage to others. Employees generally cannot be offered a choice between an ICHRA and a traditional group plan within the same class. HealthCare.gov now refers to these as CHOICE Arrangements.
Qualified small employer HRA (QSEHRA)
A QSEHRA is available to eligible small employers that aren’t applicable large employers under the ACA and don’t offer a group health plan.
Employers set a reimbursement allowance within annual IRS limits. Employees must maintain minimum essential coverage to receive tax-free reimbursements for eligible expenses, which can include health insurance premiums. Review the QSEHRA eligibility and contribution requirements before choosing this option.
Both arrangements require employee notices, documentation, and reimbursement administration. They can also affect employees’ eligibility for Marketplace premium tax credits. A benefits advisor can help you compare these options with traditional group coverage.
How are employer-sponsored health insurance costs shared?
Employers and employees typically share the cost of employer-sponsored health insurance. The exact split depends on the plan the employer offers.
- Employer contribution. Employers usually pay a significant portion of the premium for employee-only coverage. If dependent or family coverage is offered, employees often pay a larger share of those premiums.
- Employee contribution. Employees generally pay the remaining premium through payroll deductions.
- Potential tax credits. Some small employers may qualify for the Small Business Health Care Tax Credit if they meet eligibility requirements. You can use the Small Business Health Care Tax Credit Estimator to calculate your potential credit.
Is a small business required to offer health insurance?
Many small businesses aren’t required to offer coverage under the ACA’s employer shared responsibility rules.
These rules generally apply to applicable large employers (ALEs): employers averaging at least 50 full-time employees, including full-time-equivalent employees, during the previous calendar year. Related businesses may need to be counted together when determining ALE status.
ALEs must offer coverage that meets applicable requirements or potentially owe an employer shared responsibility payment. Whether a payment applies depends on factors including the coverage offered and whether a full-time employee receives a Marketplace premium tax credit. Review the IRS employer shared responsibility guidance with your advisor.
State requirements may also apply. Even when offering coverage is optional, employers must follow applicable rules once they establish a plan.
ACA reporting responsibilities
ALEs generally must report the health coverage they offer to full-time employees using Forms 1094-C and 1095-C, even when employees decline coverage.
Maintain accurate records of employee eligibility, coverage offers, employee premium costs, and enrollment. Work with your payroll provider or benefits administrator to confirm filing deadlines and employee statement requirements using the IRS instructions for Forms 1094-C and 1095-C.
Smaller employers generally aren’t subject to ALE reporting, but those sponsoring self-insured plans may have separate coverage-reporting responsibilities.
Pros and cons of offering health insurance
Health insurance can strengthen your benefits package, but it also requires an ongoing financial and administrative commitment.
How to offer health insurance to your employees
Use these steps to build a benefits offering your business can support:
- Understand your workforce’s needs. Consider employee locations, provider access, family coverage needs, and affordability. Employee feedback can help identify priorities.
- Set a budget. Decide how much the business can contribute and whether contributions will differ for dependents. Account for administrative costs and potential renewal increases.
- Compare coverage approaches. Work with a broker or benefits advisor to evaluate group coverage and, where appropriate, reimbursement arrangements such as ICHRA or QSEHRA.
- Select coverage and confirm requirements. Review plan documents, eligibility, contributions, and applicable ACA, tax, and state requirements.
- Educate employees and manage enrollment. Explain premiums, deductibles, networks, coverage start dates, and deadlines. Give employees a clear point of contact for questions.
- Set up payroll and administration. Connect enrollment elections to payroll, verify deductions, and establish processes for premium payments, coverage changes, notices, and reporting.
- Review the offering each year. Assess renewal costs, employee feedback, and whether the coverage still fits your business.
How QuickBooks Workforce can help you offer health insurance
Once you've chosen a plan, QuickBooks Workforce helps keep employee benefits, payroll, and HR connected in one place. You can enroll employees, manage payroll deductions, and keep benefits information up to date without switching between systems.
Through QuickBooks Workforce, you can also compare and purchase health insurance options from Allstate Health Solutions for your team.*
Whether you're offering health insurance for the first time or looking to simplify how you manage it, QuickBooks Workforce gives you a foundation that brings benefits, HR, and payroll administration together.
*Insurance products are offered through Allstate Health Solutions. Availability, plan options, eligibility, and terms vary by state and carrier.
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