Small Business Health Insurance Requirements Across States

One of the most common questions is whether small businesses are required to offer health insurance to their employees. The short answer under current law is no – small employers (generally those with fewer than 50 full-time equivalent employees) are not obligated by the ACA or by most state laws to provide health coverage. All the states discussed here (Florida, California, Texas, New York, Illinois, Pennsylvania) follow this general rule: if you are a small business under the ACA threshold, you won’t face penalties for not offering a health plan. The ACA small business exemption means these employers won’t incur the employer mandate tax penalties that large employers might​. For example, a 10-person company in Florida, a 30-person startup in California, or a 40-employee shop in Texas has no federal requirement to offer insurance and likewise no state law in those states compelling them to do so.

There are a couple of notable exceptions in the U.S. outside of those major states:

• Hawaii – Under the Hawaii Prepaid Health Care Act (a law predating the ACA), virtually all employers in Hawaii are required to provide health insurance to employees who work 20 or more hours per week, regardless of the size of the employer​. This is a unique state mandate; Hawaii is the strictest state, requiring even very small businesses with just 1 employee to offer coverage if that employee works at least 20 hours. Hawaii’s law also sets minimum standards for the insurance (e.g., the employer must pay at least 50% of premium, and the plan must be a certain richness). This is an outlier case – none of the mainland states have such a broad employer mandate on small firms.

• Massachusetts – During the era of its 2006 health reform (RomneyCare), Massachusetts had a “Fair Share Contribution” requirement where employers with 11 or more employees had to make a “fair and reasonable” contribution toward health coverage or pay a fee. That specific mandate was repealed in 2013 after the ACA took effect​. Massachusetts still has an employer medical assistance contribution (EMAC) to help fund public health costs, but it’s not a direct requirement to offer insurance. Massachusetts also requires employers to offer a Section 125 cafeteria plan so employees can buy coverage pre-tax. But effectively, Massachusetts no longer penalizes small employers for not offering a health plan (aside from that modest EMAC tax applicable to most employers).

For the vast majority of states (including NY, CA, FL, TX, IL, PA), small businesses have no legal mandate to offer health insurance. However, many small businesses do choose to offer coverage for competitive reasons. Offering health benefits can help attract and retain good employees – it’s often a key part of a compensation package. In fact, statistics show that a significant percentage of businesses with under 50 workers voluntarily provide health insurance to their staff. They may do this to be an employer of choice or because their industry norms expect it.

Small Business Health Options

Small employers that do want to offer insurance have resources and incentives available:

• They can shop in the ACA’s SHOP Marketplace (though in some states the SHOP is just direct-enroll with insurers now). SHOP plans are guaranteed issue and follow small-group rules. Some states (like California’s Covered California for Small Business, or New York’s NY State of Health SHOP) facilitate this.
• If the business has fewer than 25 employees with relatively lower average wages, it may qualify for the Small Business Health Care Tax Credit worth up to 50% of the employer’s premium contributions. To get this credit, coverage must be purchased through a SHOP marketplace and the employer must contribute at least 50% of the premium.
• Small employers have flexibility in plan design and contribution. There’s no federal requirement that they cover dependents (though many do) or pay a certain portion (though insurers often require 50% of employee premium). Employers can also choose a waiting period up to 90 days for new hires before they become eligible.
• Alternatives like QSEHRA (Qualified Small Employer HRA) allow employers with <50 employees to give employees a fixed reimbursement for healthcare, which employees can use to buy their own insurance. This can be a simpler way to help with health costs without sponsoring a full group plan.

Are Small Businesses Ever Penalized for Not Offering Coverage?

Not under federal law in terms of direct penalties. They just won’t get tax credits if they don’t offer, and employees of a small employer can go to the individual marketplace and potentially get subsidies without any repercussion to the employer. The only indirect “penalty” might be in competitive disadvantage or potentially the new Individual Coverage HRA setup where if a small employer doesn’t offer a group plan, employees might expect higher salaries or other compensation. But legally, no ACA penalties hit an employer below 50 full-time employees.

It’s also important to clarify that offering health insurance is generally optional for small employers, but if they do offer it, they must adhere to certain rules. For instance, if a small business decides to offer coverage to any full-time employees, under federal nondiscrimination rules and ERISA they likely need to offer it to all similarly situated full-time employees – they cannot arbitrarily exclude someone. Some states explicitly say that if an employer offers a health plan, it must offer to all full-time employees (e.g., Texas requires coverage be offered to all “eligible” employees as defined, preventing cherry-picking who gets covered​).

Likewise, employers cannot contribute more for the highest-paid employees and less for lower-paid in a discriminatory way (at least for fully-insured plans, the ACA’s non-discrimination rules are pending enforcement, but self-insured plans have long-standing non-discrimination tests under IRS rules). So a small business has a lot of flexibility to not offer a plan, but if it does, fairness and compliance considerations come into play.

Finally, small businesses should be aware that providing health insurance, while a cost, can confer tax advantages – employer contributions are tax-deductible for the business and not counted as taxable income for employees (except in the case of domestic partner coverage in some states which might be taxable at the federal level). This tax-favored status, along with improving employee well-being and morale, often encourages even small employers to offer health benefits if they can afford it.