Providing Health Insurance to Employees: What You Need to Know

Can one benefit change hiring, morale, and the bottom line at once? Many employers underestimate how much a strong benefits package shapes recruiting and retention.

Employer-sponsored coverage remains the dominant route for Americans to access care. In 2023, about 60.4% of non-elderly people—roughly 164.7 million—had coverage through a job, either as workers or dependents.

Group plans win favor because employers can secure broader options and a tax edge under Sections 105 and 106. Recent surveys show firms that offer health benefits report better performance, and workers rank employer-covered care as a top priority.

This guide previews the key decisions: choose traditional group plans, an HRA like ICHRA or QSEHRA, or a taxable stipend; weigh costs, administration, and compliance with ACA rules. By the end, you’ll have a clear framework for selecting and running a plan that delivers meaningful coverage while managing time and resources.

Key Takeaways

• Employer-sponsored coverage is the primary way many U.S. families get care.
• Group leverage and federal tax rules often make workplace plans more efficient than cash wages.
• Options include group plans, ICHRA/QSEHRA HRAs, or stipends—each affects costs and admin differently.
• Surveys tie offering health benefits to better worker performance and higher retention.
• The guide will cover ACA compliance, funding models, and practical enrollment steps.

Why offering health benefits matters for U.S. employers today

When firms prioritize benefits, they reduce hiring friction and build a more stable workforce.

Retention gains are clear: 92% of workers say employer-sponsored benefits matter, and 81% call the package critical when accepting a job. That demand cuts turnover and lowers hiring costs for employers.

Productivity and wellness improve: Covered workers use preventive care, take fewer sick days, and stay more engaged. Better access to primary care and mental care supports steady performance and fewer disruptions.

Tax advantages that boost total compensation

Employer contributions are excluded from federal income and payroll tax under Sections 105 and 106. That tax treatment makes each dollar spent on a plan worth more than the same dollar in wages.

Practical takeaway: Employers can benchmark local offerings, set contributions that match market norms, and use tax-exempt benefits to stretch income and enhance coverage value for employees.

• High offer rates among large firms set expectations smaller firms should track.
• Benefits signal a culture of care and lower downstream cost by encouraging preventive services.

Understanding the employer-sponsored insurance landscape

How an employer funds coverage largely determines who bears claim risk and how stable yearly costs will be.

Insured plans are bought from a state-licensed carrier. The insurer handles claims and sets predictable premiums. This shifts financial risk away from the employer and simplifies administration.

Self-funded plans mean the employer pays claims directly. Employers often add stop-loss coverage to cap catastrophic losses and limit volatility. Self-funding offers flexibility but needs stronger cash flow and admin capacity.

Plan types and networks

Closed-network options like HMOs and EPOs keep services in-network to control cost and utilization. Open-network plans—PPOs and POS—let workers see out‑of‑network providers but raise cost sharing and balance-billing risk.

Small group vs. large group differences

Federally, small groups are typically under 50 full-time employees; some states expand that threshold to 100. The small group insured market faces tighter rating rules and essential benefit requirements.

Large employers often favor self-funding. They can customize plan design and predict costs more reliably as risk pools grow. Yet they must meet ACA offer rules for full-time staff or face penalties.

• Operational note: insured plans give budgeting ease; self-funding gives control.
• Design levers: deductibles, copays, networks, and pharmacy choices shape worker costs and access.
• Practical step: document your chosen funding model and network strategy early and review options with a broker for alignment with goals and compliance.

For a deeper walkthrough on plan selection and compliance, see understanding employer health coverage.

Providing health insurance to employees: a step-by-step approach

Take a structured approach so choices match your workforce and goals.

Assess your workforce and benefits goals

Start with an audit of headcount by site, role, and the mix of full‑ and part‑time workers. Capture dependent counts, turnover, and common care needs.

Set goals—retention, attraction, wellness, or cost stability—so plan selection aligns with what matters most.

Map budget, timelines, and internal resources

Model likely cost across plan tiers or an HRA allowance, include admin fees, and build a reserve for year‑over‑year cost changes. Establish a vendor-to-open enrollment timeline and list required notices and payroll steps.

• Assign ownership: plan administrator, broker or HRA partner, and payroll contact.
• Compare admin lift: group plans need forms and premium remittance; HRAs with software cut time and errors.
• Create a clear communication plan with dates, coverage highlights, and help channels.

Document decision criteria and outcomes so stakeholders can measure how the selected plan meets benefits goals and guide future renewals.

Know when you must offer coverage under the Affordable Care Act

Determining mandate responsibility starts with counting full‑time equivalents.

Who is an ALE? If your organization averages 50 or more full‑time employees and equivalents in a year, federal employer rules apply. ALEs must offer minimum essential coverage to at least 95% of full‑time employees and their dependent children or risk a penalty.

ALE status, full-time employees, and employer mandate penalties

Two separate penalties can apply. One hits employers that fail to offer essential coverage to the required share of full‑time workers. The other applies when offered plans are unaffordable or lack minimum value.

Recent guidance sets amounts and indexing. For example, a 2024 penalty may be $2,970 per full‑time worker after the first 30 if any worker receives APTC. A different penalty can reach about $3,750 for each worker who gets subsidized Marketplace help.

Minimum essential coverage, minimum value, and affordability

Minimum essential coverage meets ACA definitions for qualifying plans. Minimum value means a plan covers at least 60% of expected costs for a standard population.

Affordability is tested against household income and updates annually (example: 9.12% in 2023). Recent fixes address the family glitch by considering the cost of family coverage when measuring affordability.

State nuances and multi-state workers

Some states add rules. Hawaii’s Prepaid Health Care Act, for instance, requires offers for eligible staff regardless of ALE size. Multi-state employers must track varying mandates, notices, payroll and benefits compliance.

Practical steps: determine ALE status, confirm that plans meet minimum value and affordability, and document offers and eligibility. For federal guidance on employer duties under the care act, see IRS employer rules.

Budgeting and controlling premium costs

Rising premiums can derail a small employer budget unless leaders set clear contribution rules.

Employer vs. employee contributions and cost-sharing

Design a contribution strategy that balances what the employer can afford with competitive premiums for workers. Use defined employer shares, tiered contributions (employee-only, spouse, family), and cost-sharing levers like deductibles and copays.

Consider pairing high-deductible plans with employer-funded HSAs or HRAs to lower monthly premiums while helping staff manage out-of-pocket costs.

Predictability strategies for small and mid-sized employers

Stress-test budgets for several renewal scenarios and set corridors for variability. That helps you adjust contributions or plan design without disrupting coverage.

• Set fixed monthly allowances via an HRA to cap employer premium exposure.
• Explore level-funded or partial self-funding with stop-loss for mid-sized groups.
• Use enrollment and claims data when negotiating rates and pharmacy management.

Communicate clearly so workers understand cost shares, how to minimize pocket exposure, and why the plan design matches your compensation approach. For more on group premium trends, see group premium trends.

Comparing your benefit options: group plans, HRAs, and stipends

Choosing between group plans, HRAs, and stipends means weighing predictability, flexibility, and tax treatment.

Traditional group health insurance and SHOP

Group plans give uniform coverage, broad networks, and steady admin. Small firms can buy through SHOP for simplified enrollment and pooled rates.

But premiums can rise yearly and participation rules may affect pricing and eligibility.

Stand-alone HRAs: ICHRA vs. QSEHRA

ICHRA lets an employer set varying allowances by class and has no annual cap. Workers must buy individual coverage that meets minimum essential coverage.

QSEHRA suits under-50 FTE employers, has annual caps, and must be offered to all full-time W‑2 staff. Reimbursements are tax-free and stay with the employer if unused.

Taxable health stipends and when they fit

Stipends are simple but taxable. They do not meet the ACA offer requirement and will not disrupt APTC for workers using Marketplace subsidies.

Use stipends for mixed workforces, international contractors, or when preserving subsidy eligibility matters more than employer tax benefits.

Compliance checkpoints and documentation

Clear documentation and timely notices are the backbone of any compliant benefits program.

Start with ERISA basics. When a private employer sponsors a plan that offers health benefits, ERISA duties apply. Maintain written plan documents and a current Summary Plan Description so workers understand coverage and rights.

ERISA responsibilities and disclosures

Fiduciaries must act in participants’ best interest. That means reasonable fees, consistent administration, and honest claims handling.

• Create and store plan documents, SPD, and service agreements.
• Issue required disclosures: eligibility, claims procedures, and material changes.
• File Form 5500 when applicable and keep records for audits.

COBRA considerations at a glance

COBRA can require continuation coverage after qualifying events like termination or reduced hours. Employers must provide timely election notices and track payment windows.

Practical tip: centralize documents and partner with an experienced administrator or broker to manage notices, multi-state rules, and compliance calendars. This reduces risk and keeps coverage stable for employees and employers.

Designing contributions, payroll, and tax treatment

How you run payroll deductions and reimbursements shapes take‑home pay and compliance risk.

Pre‑tax treatment under Sections 105 and 106

Employer and employee payments for group coverage can be excluded from federal income and payroll tax under 26 U.S.C. §§105 and 106.

This exclusion lowers taxable income and raises the effective value of compensation delivered as coverage. Coordinate with payroll so premium shares are taken pre‑tax and documented in a cafeteria plan.

Small business tax credit eligibility

Small employers with fewer than 25 full‑time staff may qualify for a small business health care tax credit when they buy coverage and meet wage and contribution tests.

Participation through SHOP can simplify claiming the credit. Review eligibility each year and model how the credit affects net costs and premiums.

Tip: use safe harbors under the affordable care act to test affordability and avoid unintended subsidy triggers.

• Set employer contribution tiers that support affordability tests for single coverage.
• Integrate ICHRA or QSEHRA reimbursements with payroll records to keep pre‑tax and taxable flows separate.
• Communicate how pre‑tax deductions change take‑home pay and W‑2 reporting.

Selecting plans and partners

Choosing the right mix of plans and partners sets the tone for enrollment success and long-term cost control.

Working with a licensed broker or advisor

Engage a licensed broker who knows the small and mid-size market. Brokers solicit competitive proposals and compare group, level-funded, and self-funded options with stop-loss.

Choosing funding model, networks, and plan tiers

Match funding choices to cash flow and risk tolerance. Large firms often self-fund with stop-loss; smaller firms may prefer fully insured SHOP plans for stability.

Compare network types (HMO, EPO, PPO, POS) and plan tiers by premiums, deductibles, and provider access.

• Factor pharmacy design, mental care access, and telehealth in value assessments.
• Run affordability checks for ALEs so the lowest-cost self-only coverage meets income benchmarks.
• Document the final selection and service‑level expectations for enrollment, compliance, and renewals.

“A trusted advisor turns complex comparisons into clear choices that fit workforce needs and budget limits.”

Implementation, enrollment, and employee communication

Clear rules on who qualifies and when they enroll cut errors and keep coverage active.

Eligibility rules for full-time, part-time, and dependents

Define eligibility based on ACA full-time standards for consistency. State and industry norms may guide rules for part-time workers and dependents.

Note the 2023 trends: many small firms limit offers for part‑time staff while most extend coverage to dependents. Document any waiting periods and classes of eligibility in writing.

Enrollment timelines, notices, and ongoing administration

Build a clear calendar: new-hire windows, open enrollment, and qualifying events. Align each step with required notices and COBRA deadlines for qualifying events.

Use systems that manage elections, vendor file feeds, terminations, and COBRA notices so coverage changes post promptly and records stay audit-ready.

Tip: offer live sessions, recorded webinars, and FAQs so workers understand plan details, premiums, and out‑of‑pocket costs before deadlines.

• Coordinate with brokers or HRA admins to reduce errors and speed responses.
• Track enrollment metrics and feedback to refine communications and improve adoption.
• Address multi‑state nuances: add any extra notices or eligibility rules per state law.

Final step: publish plain‑language guides that explain coverage, how to find in‑network services, contribution mechanics, and where workers can get help year-round.

Conclusion

Smart plan design links budgets, compliance, and worker access into a single business decision.

A strong,clear choice about health insurance and benefits yields outsized returns: better recruiting, higher retention, and steadier care access for workers while aligning with employer fiscal goals.

Major pathways—traditional group plans, stand‑alone HRAs (ICHRA or QSEHRA), or taxable stipends—each fit different workforces, budgets, and admin capacity. Keep ACA tests (affordability, minimum essential coverage, minimum value), ERISA rules, and COBRA timelines top of mind.

Use the step‑by‑step approach: set goals, map budgets, pick funding and networks, and communicate clearly. Lean on licensed brokers and HRA admins to ensure proper tax treatment under Sections 105 and 106 and to pursue credits that lower net costs.

Measure premiums, cost trends, and worker feedback. Finalize timelines and partners so you can implement coverage confidently and deliver a benefit workers value immediately.