Coverage for Employees of a Small Employer

More than half of Americans under age 65 have coverage through an employer-sponsored plan. However, because of high costs and limited options, many small businesses struggle to offer health insurance to their workers, and the number of small businesses doing so has declined over time. A small business is generally defined to include at least one but no more than 50 employees, but this may depend on your state.

The Affordable Care Act builds on a prior federal law—the Health Insurance Portability and Accountability Act, or HIPAA—to improve the accessibility, adequacy and affordability of health insurance for small businesses through a series of reforms. Many of the Affordable Care Act’s reforms apply to small business health insurance but not to large businesses. To see what applies to small employers versus large employers, see the ACA Consumer Protections for Private Coverage page. Note that states can choose to enact stronger consumer protections.

Specific reforms include:

  • Modified community rating. Insurers are no longer allowed to charge higher premiums based on the health status or claims experience of a small employer group. However, insurers may charge more if the employer group is older than average (up to three times more) or if a number of employees use tobacco products and the employer doesn’t offer tobacco users services to help them quit.
  • Prohibition on pre-existing condition exclusions. Prior to the Affordable Care Act, some small employer plans would refuse to cover care for employees’ pre-existing conditions. In many states this period could last for up to 12 months. Under the Affordable Care Act, health insurers are no longer allowed to exclude pre-existing conditions from covered benefits under the plan.
  • Minimum essential benefit standard. Insurers are required to cover a minimum set of benefits within at least the following 10 categories: ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance use disorder services, including behavioral health treatment; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services, including oral and vision care. Additionally, insurers must cover recommended preventive services with no cost-sharing.
  • Minimum level of coverage. Small employer coverage must provide a minimum level of financial protection for health costs, at least 60 percent of total average costs for covered benefits. Further, the Affordable Care Act requires plans to be offered at specified coverage levels, so that employers and employees can more easily compare them. The lowest level of coverage (60 percent) is called the bronze level. A silver level plan will cover 70 percent of total average costs for covered benefits, a gold plan covers 80 percent, and a platinum plan covers 90 percent.
  • Maximum out-of-pocket costs. Insurers are required to limit how much consumers can pay in out-of-pocket costs (including deductibles, co-payments, and co-insurance) for covered benefits in a given year. In 2024, the limits are $9,450 for individuals and $18,900 for families.
  • Creation of a Small Business Health Options Program (SHOP). Through the SHOP Marketplace, employers can obtain a determination of eligibility for SHOP coverage and a determination of whether they qualify for a small business health care tax credit worth up to 50 percent of premium costs.

Employer-sponsored Health Reimbursement Arrangements (HRAs). Small employers may offer employees an HRA in lieu of a group health plan. An HRA is an employer-funded tax-preferred account for employees to use to purchase non-group health insurance coverage. There are different potential types of HRAs for small employers, including:

  • Qualified Small Employers HRA (QSEHRA). Small employers can fund a QSEHRA to pay or reimburse employees for individual health insurance coverage that complies with the ACA. The QSEHRA must be solely funded by the employer and in 2023 the amount of funding cannot exceed $6,150 per year ($12,450 for family coverage), and contributions can only vary based on an employee’s age or the number of family members. Employees with these HRAs may still be eligible for Marketplace premium or cost-sharing subsidies, but the amount of those subsidies are reduced based on the employer’s HRA contribution. (26 U.S.C. § 9831; 42 U.S.C § 36B(c)(4); IRS Rev. Proc. 2023-34).
  • Individual Coverage HRA. As of January 1, 2020, employers may offer employees an individual coverage HRA, which allows employees to use the account to pay for premiums or other medical expenses associated with an individual plan that meets Affordable Care Act requirements.

Excepted Benefit HRA. Employers can also offer an “excepted benefit” HRA, which allows employees to use an HRA funded with no more than $2,100 annually to buy ancillary insurance, such as dental or vision coverage, a fixed indemnity or other excepted benefit policy, or a short-term plan that is not subject to Affordable Care Act standards. These policies are meant to be provided in addition to, and not as a replacement for, a comprehensive health benefit plan. (26 C.F.R. § 54.9831-1; 26 C.F.R. §54.9802-4; IRS FAQs for New Coverage Options for Employers and Employees; IRS Rev. Proc. 2023-23).

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