A small business can offer health benefits without a traditional group plan. The four main alternatives are an ICHRA, a QSEHRA, a level-funded health plan, and a defined-contribution stipend. ICHRAs and QSEHRAs let the employer reimburse employees tax-free for individual coverage. Level-funded is still a group plan but with a more predictable cost structure. A taxable stipend is the simplest option but the least tax-efficient.
This guide walks through each alternative, explains how it works in plain English, and shows when each one makes sense. It also links to deeper guides on ICHRAs and level-funded plans for employers who want to take the next step.
Last updated: June 2026.
Key takeaways
- Small employers have several ways to offer health benefits beyond a traditional group plan.
- ICHRAs and QSEHRAs let the employer reimburse employees tax-free for individual coverage they choose.
- Level-funded plans are still group plans, but with a more predictable monthly cost and possible refund if claims run low.
- Self-funded plans give the most control and the most variability, with stop-loss insurance to cap the downside.
- A taxable stipend is the simplest path but the least tax-efficient for both the employer and the employee.
Small business health coverage options at a glance
| Option | How it works | Best fit |
|---|---|---|
| Traditional group plan | The employer sponsors one or more group health plans and shares the premium | Employers who want a single employer-chosen plan and may qualify for group pricing |
| ICHRA (individual coverage HRA) | The employer reimburses employees tax-free for individual health plans they choose | Employers of any size who want budget control and employee choice |
| QSEHRA (qualified small employer HRA) | A small-employer HRA that reimburses individual premiums and medical costs up to an annual IRS limit | Employers with fewer than 50 full-time-equivalent employees and no group plan |
| Level-funded plan | A fixed monthly payment split into a claims fund, administration, and stop-loss insurance, with refund potential if claims run low | Healthy small groups that want savings potential with capped risk |
| Self-funded plan | The employer pays actual claims plus administration, usually with stop-loss insurance to cap risk | Employers who want maximum control and can handle month-to-month variability |
Do Small Businesses Have to Offer Health Insurance?
No. The ACA Employer Shared Responsibility mandate only applies to Applicable Large Employers, which the IRS defines as employers with 50 or more full-time equivalent employees. Businesses below that threshold are not required to offer health insurance. According to the KFF Employer Health Benefits Survey, only about half of the smallest employers offer health coverage, mostly because of cost.
But offering a benefit is one of the most powerful retention and hiring tools a small employer has. The alternatives below let you do it without committing to a traditional fully insured group plan.
What Are the Main Alternatives to a Traditional Group Plan?
1. ICHRA (Individual Coverage Health Reimbursement Arrangement)
An ICHRA is a federally approved benefit that lets an employer reimburse employees tax-free for individual health insurance premiums and (optionally) qualified medical expenses. The employer sets a monthly budget, the employee buys their own ACA plan, and reimbursements are tax-free for both sides.
- No employer-size limit, no minimum participation.
- Works well for multi-state and remote teams.
- Satisfies the ACA employer mandate if the contribution is affordable under IRS rules.
Read the full guide: ICHRA: A Small Business Owner's Guide.
2. QSEHRA (Qualified Small Employer HRA)
QSEHRA is the original small-employer HRA, created by Congress in 2016. It works like an ICHRA but is limited to employers with fewer than 50 full-time equivalent employees, and the IRS caps the annual employer contribution (separate caps for self-only and family coverage). The IRS updates these limits each year. The current numbers are published by the IRS in an annual Revenue Procedure (search "QSEHRA contribution limit" plus the current year on IRS.gov for the exact figures).
- Only for employers with fewer than 50 FTEs.
- Annual contribution capped by the IRS.
- Same plan must be offered on equal terms to all eligible employees.
- Reimbursements are tax-free.
3. Level-Funded Health Plan
A level-funded plan is still a group medical plan, but the funding mechanism is different. The employer pays a fixed monthly amount that bundles three things: an estimated claims fund, stop-loss insurance to protect against catastrophic claims, and the carrier's administration fee. If actual claims come in below the estimate, the employer can receive a refund at the end of the plan year. If claims spike, the stop-loss insurance covers the overage.
- Predictable monthly cost like a fully insured plan.
- Potential year-end refund if the group is healthy.
- Usually a better fit for healthier groups with at least 10 to 15 enrolled lives.
- Employer chooses one plan design, similar to traditional group coverage.
Read the full guide: Level-Funded Health Plans Explained for Small Employers.
4. Defined-Contribution (Taxable) Stipend
The simplest option is to add a flat monthly amount to each employee's paycheck and let them buy whatever coverage they want. There is no plan document and no compliance work, but the stipend is taxable wages to the employee, the employer pays payroll taxes on it, and it does not satisfy the ACA employer mandate for Applicable Large Employers. It is also not a substitute for an offer of coverage. Most small employers who consider this option end up choosing an ICHRA instead, because an ICHRA delivers the same flexibility tax-free.
When Does Each Alternative Make Sense?
| Situation | Best fit |
|---|---|
| 1 to 10 employees, multi-state or remote | ICHRA |
| Under 50 employees, smaller budget | QSEHRA (lower contribution cap) or ICHRA |
| 10 to 50 employees, generally healthy group, want one plan | Level-funded |
| Want zero compliance work and willing to pay taxes | Taxable stipend |
| Employees would qualify for large ACA subsidies | Often no formal plan, point employees to ACA subsidies |
How Do These Alternatives Compare to a Traditional Group Plan?
A traditional fully insured group plan gives the employer one negotiated plan, one network, and one renewal each year. The downsides are well known: renewal rate hikes, minimum participation rules, and a single plan that rarely fits every employee. The alternatives above each address one or more of those pain points.
- ICHRA and QSEHRA trade the single group plan for employee choice and a fixed employer cost. For a side-by-side cost breakdown, see ICHRA vs Traditional Group Health Insurance: Cost Comparison.
- Level-funded keeps the single group plan structure but improves cost predictability and gives the employer upside if claims are low.
- A taxable stipend trades tax efficiency for simplicity.
📚 Related Reading
- ICHRA: A Small Business Owner's Guide
- QSEHRA vs ICHRA: Which One Fits Your Small Business?
- ICHRA vs Traditional Group Health Insurance: Cost Comparison
- How to Switch From Group Health Insurance to an ICHRA
- Self-Funded vs Level-Funded vs Fully-Insured: A Plain-English Comparison
- Level-Funded Health Plans Explained for Small Employers
- Health Insurance for the Self-Employed
- COBRA vs. Marketplace: Which Should You Choose?
Frequently Asked Questions
Can a small business offer health insurance without buying a group plan?
Yes. The main alternatives are an ICHRA, a QSEHRA, a level-funded plan, or a defined-contribution stipend. ICHRAs and QSEHRAs are federally approved, tax-free reimbursement arrangements. Level-funded is a real medical plan with more predictable costs than fully insured group coverage.
What is the cheapest way for a small business to offer health benefits?
For most businesses under 50 employees, a QSEHRA or ICHRA with a modest monthly contribution is the lowest-cost way to offer a real, tax-advantaged benefit. The exact cost depends on the contribution the employer chooses.
Do I have to offer health insurance as a small employer?
No. The ACA employer mandate only applies to employers with 50 or more full-time equivalent employees. Smaller employers are not required to offer coverage.
What is the difference between an ICHRA and a QSEHRA?
Both reimburse employees tax-free for individual coverage. QSEHRA is only for employers with fewer than 50 employees and has an annual IRS-set contribution cap. ICHRA has no employer-size limit and no contribution cap.
Is a level-funded plan considered a group plan?
Yes. It is still a group medical plan, but the funding structure (fixed monthly payment plus stop-loss insurance) gives the employer more predictable costs and a potential refund if claims are low.
Can I just give employees cash for health insurance?
You can, but any cash stipend outside a compliant HRA is taxable wages and does not satisfy the ACA employer mandate. An ICHRA delivers the same flexibility tax-free.
Want help deciding which option fits your business? I'm a licensed independent agent based in Omaha. I can walk you and your team through ICHRAs, QSEHRAs, level-funded, and traditional group plans, then quote the ones that fit. Free consultation, no obligation, no pressure.
Book a free consultation with Nick Depke or call (402) 680-6171.