Do Small Businesses Have to Offer Health Insurance? Rules by Size

By Michael Sprague, Licensed Health Insurance Agent · Reviewed by Heather Sprague, Licensed Health Insurance Agent

Small businesses with fewer than 50 full-time employees, including full-time equivalents, do not have to offer health insurance under federal law. The Affordable Care Act employer mandate only applies to applicable large employers with 50 or more.

That said, if you do offer coverage, several rules apply. This guide explains the 50-employee test, how to count part-time workers, the few state exceptions and the requirements that come with offering a plan. Questions? Call 888-730-6031.

The 50-Employee Rule

Under the ACA, an applicable large employer (ALE) is one that had an average of at least 50 full-time employees, including full-time equivalents, during the prior calendar year. ALEs must offer affordable, minimum-value coverage to at least 95% of full-time employees and their dependents, or risk an IRS penalty.

If you are under 50, the employer mandate does not apply to you. You can choose whether to offer coverage at all.

How to Count Employees

The IRS counts full-time employees plus full-time equivalents:

• A full-time employee works an average of at least 30 hours a week or 130 hours a month.
• To find FTEs, add the monthly hours of part-time workers (up to 120 hours each) and divide by 120.
• Add full-time employees and FTEs for each month, then average over 12 months.
• Related companies with common ownership may be combined.
• A seasonal worker exception applies if you exceed 50 for 120 days or fewer due to seasonal staff.

Example

A restaurant has 35 full-time employees and 20 part-time employees who each work 60 hours a month. The part-timers add 1,200 hours. Divided by 120, that equals 10 FTEs. The total is 45, so the business is not an ALE.

State Rules That Go Further

Hawaii's Prepaid Health Care Act requires most employers to provide coverage to employees who work at least 20 hours a week for four consecutive weeks. A few cities, such as San Francisco, have health spending requirements for some employers. Massachusetts has its own reporting rules. Check your state and local rules.

What Changes When You Reach 50

If your average reaches 50 or more full-time employees and FTEs in a calendar year, you become an ALE for the next year. Then you must:

• Offer minimum essential coverage to at least 95% of full-time employees and their children up to age 26.
• Make sure the coverage is affordable and provides minimum value. For 2026, the IRS affordability percentage is 9.96% of household income for the employee's self-only share. Employers usually use a safe harbor based on W-2 wages, rate of pay or the federal poverty line.
• File Forms 1094-C and 1095-C with the IRS and give 1095-C forms to full-time employees.
• Track hours carefully, especially for variable-hour workers.

Penalties for Large Employers

An ALE that does not offer coverage to enough full-time employees may owe a penalty if at least one full-time employee buys a Marketplace plan and gets a premium tax credit. A separate penalty can apply when coverage is offered but is unaffordable or lacks minimum value. The IRS adjusts the amounts each year. Small employers under 50 do not face these penalties.

Rules That Apply If You Choose to Offer Coverage

• Eligibility must be consistent. You can set classes, such as full-time only, but must apply them evenly.
• Waiting periods cannot exceed 90 days for eligible employees.
• Nondiscrimination. Plans paid pre-tax cannot favor highly compensated employees.
• Summary of Benefits and Coverage must be given to employees.
• COBRA or state continuation may apply. Federal COBRA covers employers with 20 or more employees. Many states have mini-COBRA laws for smaller groups.
• HRA notices. QSEHRA and ICHRA require written notice, usually 90 days before the plan year.
• Do not reimburse individual premiums informally. Paying employees' premiums without a formal HRA can create tax problems and penalties.

Why Many Small Businesses Offer Coverage Anyway

KFF found that 59% of small firms with 10 to 199 workers offered health benefits in 2025. Benefits help you compete for workers, lower turnover and support a healthier team. Premiums are generally tax deductible, and some small employers qualify for the small business health care tax credit.

Low-Cost Ways to Start

• Use the November 15 to December 15 small business open enrollment window to skip participation and contribution minimums.
• Offer a QSEHRA with a modest allowance.
• Offer employee-paid dental, vision and supplemental benefits through payroll.
• Set a fixed allowance with an ICHRA.

Small Business Health Insurance Requirements: FAQ

Is a business with 10 employees required to offer health insurance?

No, not under federal law. Hawaii is the main exception.

Do part-time workers count toward 50?

Yes, as full-time equivalents. Their hours are added together and divided by 120 each month.

Is there a penalty for not offering coverage?

Not for employers under 50 FTEs.

Can I offer insurance only to managers?

Not if the plan is paid pre-tax and favors highly compensated employees. You can use legitimate classes like full-time and part-time.

If I offer coverage, do I have to cover dependents?

Small employers are not required to. Many offer dependent coverage with the employee paying more of the cost.

Next Steps for small business health insurance requirements

If you have fewer than 50 FTEs, offering health insurance is your choice. If you decide to offer it, compare a group plan with an HRA. For the full overview, see our guide to small business health insurance.

Want a licensed agent to help? Call 888-730-6031, Monday through Friday, 9 a.m. to 6 p.m. Eastern, or request a free quote.

Sources

1. IRS: Determining if an employer is an applicable large employer
2. IRS: Employer shared responsibility provisions
3. Hawaii Disability Compensation Division: Prepaid Health Care
4. KFF 2025 Employer Health Benefits Survey

Related Guides

• Small business health insurance
• Part-time health insurance
• Small business open enrollment
• ICHRA vs QSEHRA vs group

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