Last updated on October 20, 2023

Deciding whether to provide health insurance to employees is a significant challenge that most startup founders will eventually face. Research clearly shows that employees highly value and expect employer-sponsored health insurance. According to a recent survey by the Protecting Americans Coverage Together campaign, 96% of Americans believe that it is “extremely important” or “very important” for employers to offer this benefit. As a result, startups that do not provide health insurance may struggle to recruit and retain top talent.

While incredibly important, deciding to offer health insurance requires a significant investment of money and time — two resources in short supply for many startups.  Purchasing health insurance can often feel risky for founders trying to balance tight budgets and grow their fledgling businesses. That’s why some wait to offer health insurance until their business is profitable or they have more employees who can help support a health plan.

This guide covers everything startup founders need to know about the challenges and advantages of offering health benefits. We also highlight level-funded health insurance, which can offer the right mixture of flexibility and safety for startups.

Spoiler alert: The pros of offering health insurance immediately far outweigh the cons.

Startup founders don’t always have a background in insurance, so navigating the complexities of health benefits can feel daunting. Here are three common challenges that founders often face when shopping for health insurance and ways to overcome them. 

The stages of a startup and how they affect health insurance options

Finding appropriate health insurance options is one of the main obstacles that startups encounter. People often use the term “startup” to refer to any early-stage business, but most startups go through distinct growth phases. At each stage, the available health insurance plans for employees can vary significantly. 

Here’s a quick breakdown of the startup lifecycle and options for health benefits: 

Stage	Number of eligible employees	Available health insurance plans
Solo Entrepreneur	One (the founder)	Solo entrepreneurs are considered self–employed and can enroll in health benefits through the Health Insurance Marketplace.
Single-household	May involve multiple members of the same household, such as the founder and their spouse	Single-household startups with 1 to 50 employees (in addition to the founder) may qualify for Small Business Health Options Program (SHOP) coverage. Businesses with 2-50 employees can also explore options such as QSEHRA or ICHRA, which are not group plans but multiple individual plans administered and offered through the employer and a TPA.
S-Corporation	No minimum or maximum number of employees	S-Corporations with 50 or more full-time (or full-time equivalent) employees must offer health insurance under the Affordable Care Act (ACA). S-Corps with one to 50 employees can choose to offer this benefit.  S-Corps can provide a variety of group health insurance plans, including Health Maintenance Organizations (HMO) and Preferred Provider Organizations (PPO).  In some states, S-Corps can’t purchase group health insurance policies if they only have one employee.
C-Corporation	No minimum or maximum number of employees	C-Corps are subject to the same ACA requirements as S-Corps and can offer the same group health insurance plans.

Tax implications

Startup founders often have two pressing questions when researching health insurance: “Can I get penalized for not offering health benefits?” and “Can I write health insurance off on my taxes?”

Tax penalties

Depending on the number of employees, tax penalties may apply to startups that fail to comply with ACA mandates. The ACA requires businesses with 50 or more full-time employees — also known as Applicable Large Employers (ALEs) — to offer affordable healthcare insurance that meets minimum value requirements. ALEs that don’t provide the necessary health insurance options may incur significant financial penalties.

Offering health insurance is optional for startups with 49 or fewer full-time employees. Additionally, solo entrepreneurs classified as self-employed no longer have to pay tax penalties for not purchasing health coverage.

Tax benefits

Startup founders who offer health insurance may qualify for several tax benefits, including:

• Small Business Health Care Tax Credit: Startups with fewer than 25 full-time employees may be eligible for a tax credit if they enroll in a Small Business Health Options Program. This tax credit could be worth up to 50% of the cost of their employees’ premiums. However, startups must meet certain criteria to qualify for this tax credit. For example, they need to offer health insurance to all full-time employees and pay workers an average salary of $56,000 or less. 
• S-Corporation Tax Deduction: S-Corps can offer health insurance as a tax-free benefit for non-owner employees who don’t have a share in the company. Shareholder-employees who own 2% or more of the company must count their health insurance as taxable income, but the S-Corp can deduct their health insurance premiums from its taxes. 
• C-Corporation Tax Deduction: Startups classified as C-Corporations can deduct the full cost of their employees’ health insurance premiums.

“If there’s one thing I wish I had known before, there are tax benefits to offering health insurance to your business. Not only is it a great way to get and keep top talent, but it’s also a great way to make money for your company. It’s something that a lot of startup founders don’t think about.”

-Matt Little, Entrepreneur and Co-owner, Damien McEnvoy Plumbing

Budget concerns

Many startup founders worry about the cost of health insurance, but it doesn’t have to break the bank. Many plans are surprisingly affordable, though the exact price depends on the type of plan and the number of covered employees. 

Solo entrepreneurs can purchase individual health insurance plans through the federal Health Insurance Marketplace. The price for these plans varies depending on location, age, coverage level, and other factors.

The price of group health insurance for startups varies by plan and type of employee. According to KFF, in 2022, these were the average annual premiums for covered workers at small businesses with three to 199 employees:

Plan type	Annual cost for single coverage	Annual cost for family coverage
HMO	$7,391	$21,136
PPO	$8,409	$23,147
POS	$7,804	$20,706
HDHP/SO	$7,707	$21,888

Let’s face it: Entrepreneurs often don’t have much free time to learn about the nitty-gritty details of health insurance. To speed up the research process, we’ve compiled this list of four essential facts about health insurance for startup founders.

1. Startups are never too small or too young to offer health insurance.

According to the 2023 SHRM Employee Benefits Survey, healthcare is the most important benefit an organization can offer its workers, followed by retirement and leave benefits. This is just as true for startups as it is for Fortune 500 companies, if not more so. 

Enterprise companies are more established than startups, which means they can offer greater job security on top of competitive benefits and salaries. For startups to have any hope of attracting the best and the brightest away from those corporations, offering employer-sponsored health insurance is non-negotiable. After all, attracting the best employees from day one will give your startup the best chance of scaling and thriving in the long run.

So, build health coverage into the business plan. Know what it costs on average, and budget for it from day one. Check out this entrepreneur’s advice to fellow small business owners about prioritizing health insurance right away.

2. Self-funded health plans with level-funding are ideal for startups.

Self-funded health insurance allows employers to pay directly for employee health claims as they occur throughout the term. Self-funding is more affordable  than fully-funded health insurance, which entails paying a high premium to an insurance carrier every month — even when employees don’t use their health plan. 

The catch is that self-funding can be risky and make budgeting difficult. If multiple employees have unexpected, catastrophic claims at once, the employer is suddenly on the hook for them.

Level-funded plans give startup founders the savings of self-funding with predictable monthly payments. Employers pay a fixed sum toward employee healthcare, and their annual risk is capped at their monthly premiums. If claims are lower than the employer’s contribution, the employer receives a refund or credit. If claims are higher, stop-loss insurance covers the overage. 

There are also tax benefits associated with level-funded plans: They are exempt from state taxes on premiums and the ACA health insurance tax (HIT) on premiums.

Because level-funded plans combine flexibility and security, they’ve grown steadily in popularity in recent years. In 2022, KFF estimates that 35% of employees of small firms were covered by a level-funded plan. 

Related: Self-Funded vs. Level-Funded plans: What’s the Difference?

3. A comprehensive benefits package can help startups contain employee healthcare costs.

Some startups offer additional benefits alongside health insurance. For example, businesses can provide flexible work hours, generous PTO policies, pet–friendly workspaces, casual dress codes, gym memberships, and mental health support programs. Some of these perks are free or low-cost, so they don’t put a dent in limited startup budgets. 

These extra benefits may seem like unnecessary frills, but they have several advantages: 

• Attract top employees: Benefits like wellness programs can make the overall compensation package even more attractive to prospective and current employees. Without these incentives, startups may not be able to lure top talent away from larger companies. According to a 2021 survey by Statista, 79% of employees believe that their company’s wellness programs increased their productivity, and 79% believe these initiatives helped them avoid illnesses. 
• Boost employee retention: Not only does finding low and no-cost care for employees’ mental and physical well-being improve their quality of life, but it is also a powerful employee retention tactic. Employees may remain more loyal to companies where they feel valued and supported. As a result, startups that offer health wellness benefits alongside health insurance may have lower turnover rates and reduced hiring expenses. 
• Improve employee health: Fitness programs, nutrition coaching, and other wellness benefits can improve employees’ mental and physical health. This benefit also helps employers. According to the Centers for Disease Control and Prevention, workplace health programs can decrease healthcare and workers’ compensation costs by up to 25%. 

Consider choosing an insurer that builds health and wellness programs into their plans so employees can enjoy $0 therapy, physical therapy, health coaching, and more.

4. Insurers that offer TPA services can save small businesses significant hours on administrative tasks.

Some insurance companies — like Sana — include third-party administrator (TPA) services as part of their health insurance offerings. These services save startup founders, and their brokers,  time and money by allowing them to outsource the bulk of administrative tasks associated with offering health benefits. 

TPAs can take over many complicated insurance duties, including: 

• Member enrollment
• Claims adjudication
• Cost containment 
• Customer support
• Health benefits reporting
• Plan customization
• Vendor negotiations 
• Data analysis
• Record keeping 

Additionally, TPAs have extensive knowledge of the latest regulations for health plans. They can ensure startups comply with all relevant mandates and avoid costly fines.

With a TPA handling plan and claims management, startup founders don’t have to become health insurance experts to offer the best benefits. They also don’t need to strain their budgets by hiring additional human resources staff. 

Typically, it’s best for startups to get TPA services from modern insurtech companies like Sana. These companies lead the way in level-funded health plans built specifically for smaller groups. They tend to be more tech-enabled than their legacy competitors, simplifying plan management and making their portals more user-friendly. 

Startup founders often assume that they can’t afford employee health insurance, especially at the beginning of their business ventures. However, this benefit is often more affordable than many people think. Additionally, the growing demand for employee-funded health insurance means that many startup founders can’t afford not to invest in this benefit — at least, not if they want to attract and keep top talent. 

“For fellow startup founde­rs, my advice on this matter is to reach out to profe­ssionals for guidance. Connect with insurance broke­rs or consultants who specifically deal with startup insurance solutions. The­y have the expe­rtise to help you navigate the­ intricate world of health insurance, customizing plans to suit your te­am’s requirements while­ potentially saving costs in the long term. Also, do not unde­restimate the significance­ of employee we­llness programs and preventative­ care. They can contribute to he­althier and more productive te­ams, ultimately benefiting your startup’s financial succe­ss.”

-Steven Wright, Co-Owner & Chief Editor, Lifestyle to the Max

Contact Sana to request a quote and learn more about how we can help startup founders provide affordable and flexible group health insurance.