Do Small Businesses Have to Offer Health Insurance?

The 50-employee line: applicable large employers

The Affordable Care Act (ACA) rule that pushes employers to offer coverage is called the employer shared responsibility provision, often shortened to the employer mandate. It applies only to applicable large employers (ALEs). You are an ALE for this year if you had at least 50 full-time employees, including full-time equivalent employees, on average during the prior year. The IRS notes that the vast majority of employers fall below that line.

Companies with a common owner, or that are otherwise related under the tax code’s controlled group rules, are generally combined and counted as one employer. A brand-new company becomes an ALE in its first year if it reasonably expects to employ, and actually does employ, an average of at least 50 full-time employees, including equivalents.

How to count full-time and full-time equivalent employees

Count your full-time employees for each month of the prior year. Full-time means an average of at least 30 hours of service a week, or at least 130 hours in the month.
For the same month, add up the hours of everyone who is not full-time, counting no more than 120 hours for any one person.
Divide that total by 120. The result is your full-time equivalent (FTE) count for the month.
Add up the full-time counts for all twelve months, add up the FTE counts for all twelve months, add those two totals together, and divide by 12.
Round a fraction down to the next whole number. If the result is 50 or more, you are an ALE for the current year.

Example: 40 full-time employees plus 12 part-timers who each work 80 hours a month. The part-timers add 960 hours, which divided by 120 is 8 FTEs. That is 48 in total for the month, so if every month looks the same, you are under 50. There is a narrow seasonal worker exception: if you went over 50 for 120 days or fewer, and the extra people in that period were seasonal workers, you are not an ALE.

What applicable large employers have to do

An ALE may owe the IRS a payment in two situations:

It does not offer minimum essential coverage to at least 95% of its full-time employees and their dependents, and at least one full-time employee gets a premium tax credit for Marketplace coverage.
It does offer coverage, but the coverage is not affordable or does not provide minimum value, and a full-time employee gets a premium tax credit.

ALEs also file Forms 1094-C and 1095-C with the IRS each year and give each full-time employee a Form 1095-C describing the coverage offered. For the 2025 calendar year, statements were due to employees by March 2, 2026, and electronic filing with the IRS was due by March 31, 2026. Anyone filing 10 or more information returns must file electronically.

Under 50: your options if you want to help with health costs

Offering nothing is legal for a small business, but most competitive hires will ask. These are the main routes:

Ways a small employer can help with health coverage
Option	Who can use it	Key points
Small group plan through the Small Business Health Options Program (SHOP)	Small employers	A traditional group plan. Buying through SHOP is generally the only way to qualify for the Small Business Health Care Tax Credit.
Small Business Health Care Tax Credit	Fewer than 25 FTEs, average wages under the IRS limit ($67,000 per FTE for 2025 tax years), paying at least 50% of employee-only premiums for SHOP coverage	Worth up to 50% of premiums paid (35% for tax-exempt employers), for two consecutive tax years.
Qualified Small Employer HRA (QSEHRA)	Employers with fewer than 50 employees that do not offer a group health plan	Reimburses employees tax-free for individual coverage and medical costs, up to $6,450 for self-only and $13,100 for family coverage in 2026.
CHOICE arrangement (formerly called the Individual Coverage HRA, or ICHRA)	Employers of any size with at least one employee who is not an owner or an owner’s spouse	No annual maximum. Employees must have their own individual coverage, such as a Marketplace plan. You can vary the offer by class of employee (for example full-time versus part-time, or by work location).

An HRA (health reimbursement arrangement) pays employees back for health costs instead of buying them a group plan. With a CHOICE arrangement, employees must get a written notice when they become eligible, and current employees must get one 90 days before each plan year starts.

State rules to know

Hawaii: the Prepaid Health Care Act requires employers to provide health coverage to employees who work at least 20 hours a week and earn at least 86.67 times the Hawaii minimum wage in a month. Coverage starts after four consecutive weeks of employment.
Massachusetts: every employer, in state or out of state, with six or more employees in Massachusetts during the past 12 months must file the Health Insurance Responsibility Disclosure (HIRD) form each year, between November 15 and December 15, through MassTaxConnect. The state says the form is not used to impose fines related to the coverage an employer offers, or does not offer.

If you do offer a plan: COBRA and state continuation

Once you have a group health plan, other rules follow it. The federal continuation law, COBRA, applies to group health plans of employers with 20 or more employees in the prior year: departing employees and their families can keep the coverage for a time at their own cost, and you have notices to send. See when you need to offer COBRA.

Common questions

Do part-time employees count toward the 50-employee threshold?

Yes, through the full-time equivalent calculation. Their monthly hours (up to 120 per person) are added together and divided by 120, and the result is added to your full-time count.

Is there a penalty for a small business that does not offer health insurance?

Not under federal law if you are not an applicable large employer. The employer shared responsibility payment applies only to employers with 50 or more full-time employees, including equivalents.

Can a small business just pay employees extra to buy their own insurance?

You can raise pay, but a QSEHRA or a CHOICE arrangement is the purpose-built way to reimburse employees for individual coverage, with its own rules on who qualifies, notices and limits.

Do I have to file Form 1095-C if I have fewer than 50 employees?

Forms 1094-C and 1095-C are filed by applicable large employers. If you are below the ALE threshold, you do not file them as an employer.

How MambaHR handles this

MambaHR keeps your employee records and answers federal and state employment-law questions like this one with the law cited, sending unclear cases to a person. When someone leaves, it prepares the COBRA continuation notices as part of offboarding.

Book a demo See pricing

Sources

Last reviewed October 2, 2026. This page is general information, not legal advice. Laws change and exceptions apply, so check the sources above or an employment lawyer before you act on a specific case.