A guide to health insurance for startups

Navigating the health care system and health insurance plans for new businesses can feel daunting among the other daily tasks and decisions you’re required to make. However, understanding the nuances behind affordable health insurance for startups is important for compliance. Startup employee health benefits can be a compelling benefit for new hires, but it can also be costly if you don’t understand your options.

In this guide, we’ll discuss the considerations your team should keep in mind when seeking coverage and finding the best fit for your company’s size and needs. 

Are startups required to provide health insurance for employees?

Legal and Eligibility Considerations

When offering health insurance, startups must navigate various legal requirements and determine employee eligibility. The most significant law to keep in mind is the Affordable Care Act (ACA), which sets rules based on company size. Under the ACA, if your startup grows to 50 or more full-time equivalent employees (making you an “Applicable Large Employers ”), you are legally required to offer health insurance to your full-time staff or potentially face penalties​.

In practical terms, this means providing coverage to at least 95% of employees who work 30 or more hours per week. Failing to do so can result in hefty fines – on the order of up to ~$4,000 per employee per year that isn’t covered, according to ACA guidelines​

For startups with fewer than 50 employees, federal law does not require you to offer health insurance​. You have the flexibility to decide if and when to provide coverage in those early stages without an ACA penalty. However, if you voluntarily choose to offer health insurance as a smaller startup, you still need to comply with other aspects of the law. For instance, any group plan you offer should include the ACA’s essential health benefits, and you cannot discriminate by offering coverage only to certain full-time employees and not others.

Plans generally must be offered to all eligible employees in a fair manner​ – typically, this means all full-time employees (and their dependents up to age 26) should have an option to enroll. Even though the mandate doesn’t apply under 50 employees, it’s wise to document your offer of coverage and be aware of any state-specific regulations that might impose requirements at lower sizes (some states have their own healthcare mandates or reporting requirements for employers, so be sure to check local laws).

It’s also essential to clarify who is considered full-time vs. part-time on your team, as this affects both legal obligations and plan eligibility.

Key benefits of health insurance for startups and small businesses

While you may not be considered an Applicable Large Employer under federal law, there are still advantages to offering healthcare to your employees:

• Tax benefits. Offering health insurance may be tax deductible for the business. Some small businesses or startups might be able to qualify for tax credits.

• Recruiting. In some industries, providing employees with health insurance has become the norm. This can even affect the recruitment process, as some potential hires will prioritize roles in companies with employer-sponsored health insurance. A survey of U.S. workers by Willis Towers Watson, a multinational insurance advisory company, found that: 46 percent of worker respondents agreed that health benefits were an important factor in their decision to work for their employer.

• Pre-tax savings. Employees may be able to pay for their coverage using pre-tax dollars, which can save them cash in the long run.

• Retention. Caring for your employees’ well-being through health insurance coverage is just one way to show appreciation. This goodwill gesture could help retain employees in the long run. Clearly, health insurance is not just a perk but a critical component in attracting and retaining top talent. As a startup, understanding and utilizing health insurance options effectively can set you apart in the crowded marketplace.

Important factors for startups to consider when choosing health insurance

Interested in insuring your team? There will be several considerations to keep in mind as you shop around for plans.

Company size or number of employees

As mentioned above, if a company is not an Applicable Large Employer, federal law does not require that it offers health insurance. However, if it is, you’ll need to provide employees with the option of coverage.

Workforce

Startups often have a diverse workforce, including full-time, part-time, and contract employees. Understanding what kind of coverage this workforce needs might influence your decision-making. The decision to provide health insurance might come down to the makeup of your company’s workforce.

For example, are employees seeking family insurance, or are they single-insured employees? If it’s a mix of both, it could be wise to offer a wide range of options under the plan to cater to the needs of your employee base.

Similarly, depending on the size of your company and state regulations, it might also be possible to offer coverage to part-time employees as well. What’s more, there are more designations than simply full and part-time, as well as ways to cover them. For example, if your company offers ICHRA coverage to both full- and part-time employees, they can offer different plans and reimbursements based on their classification.

Budgets

When you’re looking for health insurance as a startup, you’ll want to consider budget from two fronts:

• Business budgets. While you might want to provide competitive benefits, you also have to consider the financial sustainability of health insurance for your employees. Whether that means covering a portion of an employee's premiums or opting for different packages, you’ll want to consider the long-term costs the company will incur for coverage.

• Employee contributions. It also helps to have an understanding of how willing employees are to pay for health insurance premiums. Your team could be more budget-minded or want expansive policies to cover their family. Having a sense of their needs and spending power will influence your choice.

Tax implications

Providing health insurance to employees can come with some tax benefits. Typically, health insurance premiums paid by employers are considered a tax-deductible business expense. Plus, as a small business offering health insurance, your company could qualify for additional tax credits, like the Small Business Health Care Tax Credit under the Affordable Care Act.

Employer-provided health insurance can also provide tax benefits to employees. Employees can make contributions to their premiums pre-tax, reducing their taxable income overall.

Location

Where your company is based can impact the coverage you receive. Factors such as state mandates, provider networks, and premium costs can all differ based on your startup’s location.

State-specific regulations, such as those in Florida, Texas or Georgia, significantly impact the health insurance options available to startups. Each state has its own set of rules and mandates that govern the types of health insurance plans that can be offered, the coverage requirements, and the regulatory oversight of insurance providers.

For example, some states have more stringent requirements for essential health benefits, affecting the comprehensiveness and cost of the plans available to startups in those locations.

Benefits management simplification

Startups often operate with lean teams, so minimizing administrative overhead is key. One way to achieve this is by leveraging automation tools to streamline health benefits management. Modern HR and payroll software (like Rippling, Deel, Quickbooks, etc) can automate many benefits administration tasks – from new hire enrollments and open enrollment periods to handling payroll deductions and compliance paperwork – which frees up your team’s time​. By automating these routine processes, startups spend less time on benefits paperwork and more on core business priorities.

Another strategy is to utilize Health Reimbursement Arrangements (HRAs) to simplify plan management while keeping costs in check. HRAs allow you to reimburse employees for their medical premiums or expenses up to a fixed allowance, giving you predictable budget control and tax advantages​.

Essentially, instead of managing a complex group insurance policy, the company sets aside a defined contribution for each employee’s health benefits. This not only offers flexibility and potential tax savings for both employer and employees, but also reduces the administrative burden compared to a traditional group plan​. For example, an Individual Coverage HRA lets employees pick individual plans that suit them, while the startup controls the allowance amount.

Implementing a centralized benefits management system can further ensure consistency and efficiency. Using an all-in-one platform (such as an HRIS with benefits integration) means all benefits data is in one place and updated in real time for both HR and employees​. HR teams can quickly make changes or additions to benefits, and employees can self-serve to view their coverage options and status at any time​. This centralization minimizes errors from manual data entry and keeps everyone on the same page.

By simplifying benefits management through automation and smart plan design, startups can significantly reduce the administrative load. Embracing technology (e.g., using software to auto-enroll employees or handle IRS filings) and flexible benefits like HRAs creates a more scalable benefits program. This means fewer hours spent on forms and troubleshooting, and more time devoted to strategic growth activities.

Communication with Employees

Even the best health insurance plan won’t deliver value if your team doesn’t understand or use it. Clear and effective communication with employees about their health insurance benefits is crucial. Many startups invest a lot in benefits only to find that employees underutilize them due to confusion or lack of awareness​.

One way to avoid this is to communicate early and often. Make sure employees have straightforward, jargon-free explanations of what health coverage you’re offering, what it costs, and how to enroll​.

Providing simple, accessible information helps reduce misconceptions and empowers staff to take full advantage of their insurance. Consider breaking down complex insurance terms and using examples so that everyone, regardless of their background, can grasp the coverage details​

It’s also important to engage employees through multiple channels and interactive resources. Different people prefer different communication methods – some might read an email newsletter, others may respond better to a quick webinar or an interactive benefits portal. By using various channels (emails, live Q&A sessions, internal chat announcements, even short videos), you ensure that each employee receives the information in a format that resonates with them​.

For example, you might introduce an online tool where employees can compare plan options side by side, or host a workshop to walk through the enrollment process. Offering resources like FAQ documents or decision guides can turn a typically dry topic into an interactive learning opportunity, keeping employees more engaged and informed.

Regular updates are another key part of effective benefits communication. Don’t limit communication to just the new hire orientation or the open enrollment period. Establish a habit of sending periodic reminders or updates about the health plan. This could include sharing tips on how to use the insurance (like finding in-network providers or utilizing preventive care benefits) or notifying the team about any changes in coverage. In fact, an effective benefits communication strategy starts well before open enrollment and continues throughout the year.

Maintaining an open dialogue year-round – for instance, reminding employees mid-year about wellness benefits or providing a refresher before the next enrollment window – keeps benefits top-of-mind. It also signals to employees that you’re invested in their well-being continuously, not just during enrollment time.

Finally, encourage feedback and personal assistance. Some employees might not voice their questions until you explicitly invite them. Creating a channel for employees to ask questions (via one-on-one meetings or an anonymous form) can surface concerns that you can address proactively.

You may find that different segments of your workforce have different concerns; for example, new graduates might need basic guidance on how health insurance works, whereas employees with families may ask about dependent coverage.

Remember, a well-informed employee is more likely to appreciate and utilize their health benefits. Studies have shown that when benefits are better understood and aligned to employees’ needs, satisfaction increases — 79% of employees want benefits tailored to their needs, boosting their satisfaction and overall health outcomes.

FAQs

Below are answers to some common questions that founders and HR teams at startups often have about offering health insurance:

Do startups offer health insurance?

It depends on the size and priorities of the company. Legally, very small startups (under 50 full-time employees) are not required to offer health insurance​ . However, many startups do choose to provide health insurance even when not required, because it can significantly boost recruitment and retention of employees​.

How much do startups pay for insurance?

The cost of health insurance for startups can vary widely based on the type of plan, the number of employees, and location. Generally, employers pay a sizable portion of the premiums. As a rough benchmark, in 2023 small firms paid about $8,700 per year for an individual employee’s health premium on average, and around $23,600 per year for a family coverage premium (these costs are often split with employees, who might pay part of the premium through paycheck deductions).

What are the best health insurance options for startups?

There is no one “best” option for every startup; it really depends on your company’s size, budget, and employee needs. Startups can choose from traditional group health plans, self-funded arrangements, or more flexible and modern options like Individual Coverage HRA (ICHRA)​.

Are ICHRAs a good option for startups?

Yes, Individual Coverage HRAs (ICHRAs) can be an excellent option for startups, especially those looking for flexibility and budget predictability. With an ICHRA, the startup reimburses employees for purchasing their own health insurance instead of providing a one-size-fits-all group plan. This model often ends up costing less while giving employees more personalized choices, effectively offering better health coverage options for less money​.

Health insurance for startups and ICHRAs

In the early days of a startup, finding the right health insurance can be a challenge. It’s a balance between meeting the needs of your team and keeping the budget in check for future growth.

But what if you could sidestep the insurance selection option while empowering your employees to pick the best coverage for themselves? ICHRAs offer better health options for less money, letting your employees pick the coverage they need while still benefiting from group pricing and tax deductions.

Learn more about how Thatch can help your team get the coverage they need.