Health insurance for startups isn’t just a perk — it’s a powerful tool to attract and keep top talent. In fact, the Thatch Health Insurance Industry Trends revealed that 62% of employees say health benefits are important when choosing a job, according to a Thatch report. But offering benefits isn’t always easy when you’re just starting out.
Startups face unique challenges. Small teams, tight budgets, and fast-changing needs make it hard to pick the right plan. Traditional group plans can also feel too rigid or expensive. But there are newer, more flexible options now that may be a better fit.
Modern startup health benefits can take many forms. The real challenge isn’t finding options it’s choosing one that fits your stage, risk tolerance, and team model.
From group plans and HRAs to self-funded plans and professional employer organizations (PEOs), each option has pros and cons. Here’s a quick overview of top small business health insurance options:
| Feature | Group plans | ICHRAs | QSEHRAs | Self-funded | PEOs |
|---|---|---|---|---|---|
| Employer size | Best for 20+ employees | Any size | Fewer than 50 employees | Typically 100+ employees, with some options for 25+ | Any size, often <100 |
| Employee choice | Limited | High — employees choose their own plan | High — employees choose their own plan | Moderate — depends on plan design | Moderate — options vary by PEO |
| Cost control | Lower | High cost control — employer sets budget | High cost control — employer sets budget (IRS limits apply) | High cost control — but with more risk | Moderate cost control — shared with PEO |
| Administrative burden | Moderate | Low — especially with Thatch | Low — simple to manage | High — complex setup and compliance | Low — outsourced to PEO |
| Flexibility | Low | High — fully customizable | Moderate — subject to limits | High — full control over plan design | Moderate — depends on PEO's offerings |
| Tax benefits | Yes | Yes — tax-free reimbursements | Yes — tax-free reimbursements | Yes — includes deductions and savings | Yes — similar to group plans |
| Risk | Low | Low — fixed reimbursements | Low — fixed reimbursements | High — employer assumes claims risk | Low to moderate — risk shared with PEO |
1. Traditional group health insurance
Best for: Startups with steady cash flow and five or more full-time employees
Traditional group health insurance offers a straightforward way for founders to provide comprehensive benefits. It works by pooling your team's health risks, which helps achieve more predictable costs.
As the employer, you choose a plan and pay a portion of the premiums. Your employees then share the rest of the cost and pay for things like deductibles and copayments.
There are a few main types of group plans:
Health maintenance organization (HMO): Lower costs but limited to a specific network of doctors and hospitals — usually requires referrals
Preferred provider organization (PPO): Higher costs but more flexibility to see providers in or out of network — no referrals needed
Exclusive provider organization (EPO): Lower costs than PPOs, but only covers services within a specific network — doesn’t require referrals
On the downside, group plans can be expensive, especially for early-stage startups. The fixed monthly premiums and limited plan flexibility can be hard to manage as your team grows or changes. If you're exploring startup or small business health insurance, a group plan might be right, but it’s not the only choice.
2. Individual coverage health reimbursement arrangements (ICHRAs)
Best for: Startups that want flexibility, cost control, and employee choice
ICHRAs are quickly becoming a go-to option for startup health insurance. They offer a fresh, flexible approach that fits the changing needs of growing teams. Instead of picking one plan for everyone, you set a budget and let employees choose the individual health insurance plan that works best for them.
Here’s how it works:
You decide how much to reimburse employees each month
Employees buy their own health insurance plans
You may choose to reimburse them for qualified medical expenses (QMEs), such as premiums or copays
There are no minimum or maximum contribution limits, and any employer of any size can offer an ICHRA. This makes ICHRAs a great option for small, growing teams that need a scalable and affordable solution.
Download our free ICHRA guide to learn about compliance considerations, implementing an ICHRA, and more.
3. Qualified small employer health reimbursement arrangements (QSEHRAs)
Best for: Startups with fewer than 50 full-time employees that want a simple, budget-friendly option
QSEHRAs are designed specifically for small businesses. Like ICHRAs, they allow you to reimburse employees for qualified medical expenses, including individual health insurance premiums. However, QSEHRAs have set annual contribution limits and are only available to employers with fewer than 50 full-time employees.
Here’s what makes QSEHRAs stand out:
You control how much to reimburse, within the annual IRS limits
Employees choose their own individual plans
Reimbursements are tax-free for both the employer and employees
No group plan is required
A key differentiating factor when comparing QSEHRA vs. ICHRA is that QSEHRAs are limited to smaller employers and have IRS-mandated contribution caps. The financial commitment for both QSEHRAs and ICHRAs is determined by the allowance amount the employer chooses to offer.
If you're a very small startup and want to offer health benefits with predictable, IRS-capped contributions, a QSEHRA could be the right fit.
4. Self-funded plans
Best for: Larger startups with predictable cash flow and in-house support for managing employee benefits
Self-funded health plans let employers take full control of healthcare costs. Instead of paying premiums to an insurance company, the startup pays for employee healthcare claims directly. This can lead to savings, but it also means taking on more financial risk.
Most companies use a third-party administrator (TPA) or employee benefits broker to handle claims and paperwork. To protect against large or unexpected claims, many also buy stop-loss insurance. This coverage kicks in if healthcare costs go beyond a certain amount.
Self-funding offers some big advantages, such as:
Lower long-term costs if your team stays healthy
Full control over your plan design and benefits
More transparency into where your money goes
But these plans are not ideal for every organization. Startups need to be prepared for higher risk and more administrative work. If you're still building your team and learning to manage startup health insurance, this option may be better for later growth stages.
5. Professional employer organizations (PEOs)
Best for: Startups that want to outsource HR and benefits to save time and access better coverage
PEO helps small businesses handle HR tasks like payroll, compliance, and employee benefits. When you work with a PEO, your startup joins a larger group of companies, which lets you pool risk and access benefits typically only available to big businesses.
These organizations take care of the heavy lifting, which makes PEO insurance a popular option for small businesses. They manage health insurance plans, handle paperwork, and often give you access to a wider range of benefits at competitive rates.
But there’s a tradeoff — you have less control over the details of your health plan. And while you may save money on some services, others can cost more than managing them in-house. Still, a PEO can be a smart move for busy owners who want fewer HR headaches.
Experience the future of benefits. Get started with Thatch today
Startup-specific considerations
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.
Health insurance is one of the most expensive and misunderstood line items in a startup’s budget. A recent survey by Thatch found that 36% of small business owners cite affordability as their biggest hurdle in providing employee health benefits.
Key factors you should consider:
Budget constraints and cash flow: Startups often operate with limited budgets. Fixed premiums of traditional group plans can strain finances. Flexible options like HRAs allow you to set predictable budgets.
Attracting and retaining talent: Offering health benefits can make your startup more competitive in the job market. Many employees value health insurance highly when considering job offers.
Employee demographics and needs: Consider the age, health needs, and preferences of your team. Younger employees might prefer plans with lower premiums, while those with families may need more comprehensive coverage.
Scalability and future growth: As your startup grows, your health insurance needs will evolve. Choose a plan that can scale with your company, accommodating more employees and changing requirements.
The best health insurance for startups based on the employee count:
| Seed stage (less than 20 employees) | Growth stage (20-50 employees) | Scaling stage (50+ employees) |
|---|---|---|
| HRAs (ICHRAs and QSEHRAs) | HRAs (ICHRAs and QSEHRAs) | ICHRAs |
How to choose the right health insurance for your startup
Choosing the right health benefits for startups isn’t one-size-fits-all. Each startup has different needs based on its size, team, and stage of growth. Before you commit to a plan, take time to weigh all your options and ask the right questions.
Factors to consider
When thinking about how your startup can offer benefits, it’s important to look beyond just the price tag. Here are the key consideration factors to help you find the best small business health insurance:
Company size and growth stage: Think about where your startup is today, and where it’s going. For example, HRAs (ICHRAs or QSEHRAs) might work for a 5-person team. While an ICHRA can grow with you no matter what size you reach, group plans or PEOs also become strong options when more employees are added.
Budget: What can you afford now, and how stable is your cash flow? Cost matters when picking health insurance for small business owners, especially in the early stages. HRAs can help you control spending with fixed monthly contributions.
Employee needs and demographics: Your team’s age, family status, and health conditions can impact the best plan. Giving employees choice, like through an ICHRA, may improve satisfaction and retention.
Coverage requirements: Decide how comprehensive your benefits need to be. Do your employees want low premiums, low deductibles, or access to specific doctors and hospitals? If your startup is growing quickly and you need more coverage, you can consider an ICHRA for your business.
Administrative complexity: Some plans, like self-funded ones, require more time and resources to manage. If your team is lean, outsourcing to a PEO or using a streamlined HRA solution may be smarter.
Compliance: Make sure your plan follows all local, state, and federal rules. This is especially important as you scale past 50 employees and ACA requirements kick in.
Tax implications: Many plans offer tax advantages to both employers and employees. HRAs and group plans allow pre-tax reimbursements or premiums to be paid, lowering your overall tax burden.
5 steps to successfully implement your chosen health insurance plan
Once you’ve decided on the right health insurance for your startup, the next step is implementing that plan. Here are the steps you can follow to ensure proper and effective implementation:
Assess your startup's needs and choose a plan type: Consider your team size, budget, growth stage, and employee preferences. Decide which type of plan — an ICHRA, a QSEHRA, or a group plan — best fits your goals.
Partner with a provider or administrator (like Thatch): Choose a trusted partner to help you manage the plan. Companies like Thatch specialize in helping startups set up flexible, modern health benefits with less hassle.
Determine contribution strategy and budget: Decide how much your startup will contribute toward employee coverage or reimbursements. Make sure the amount is sustainable and aligns with your financial plan.
Ensure ongoing compliance and administration: Stay on top of legal requirements, documentation, and employee communications. Your provider or administrator can help you stay compliant and avoid costly mistakes.
Educate and support your employees: Help your team understand their benefits and how to use them. Offer onboarding sessions, simple guides, or Q&As so employees feel confident and cared for.
Partner with Thatch for modern health benefits
Finding the best health insurance for startups can be tricky, but Thatch makes it easy. Our platform helps you design flexible, cost-effective benefits packages using tailored HRA solutions like ICHRAs. This means your employees can choose their own plans while you control costs.
With Thatch, you can scale your benefits as your startup grows, all while minimizing administrative tasks. Plus, offering modern health benefits can help you attract and retain top talent — 62% of employees say they would leave a job if they don’t get health insurance coverage.
Book a demo to see how Thatch can help you upscale your benefits.
FAQ about health insurance for startups
Do I need a benefits broker?
Not necessarily. While brokers can offer valuable guidance, especially for complex plans, startups often benefit from partnering with modern platforms like Thatch. These platforms simplify the process, making it easier to manage health benefits without the need for a traditional broker.
How much do startups pay for insurance?
The cost of health insurance for startups varies based on factors like plan type, employee count, and location. As of 2023, small firms paid an average of $8,435 annually for single coverage and $23,968 for family coverage. Employers and employees typically share these costs through paycheck deductions.
What are the compliance requirements for startups offering health insurance?
Startups with 50 or more full-time employees are required under the Affordable Care Act (ACA) to offer health insurance that meets minimum coverage and affordability standards. And if your startup handles protected health information (PHI), compliance with HIPAA is essential to safeguard sensitive data.
Does my startup’s location impact the cost of employee health insurance?
Yes, geographical location can significantly influence health insurance costs. Healthcare expenses and regulations vary by state, affecting premium rates. Startups operating in multiple states or with remote teams should consider regional differences when selecting health plans.
