If you're running a small business with fewer than 50 employees, you've probably noticed something: health insurance is expensive, confusing, and getting more complicated every year. The good news? You have options beyond the traditional fully-insured group plans that might be pricing you out. Whether you're offering coverage for the first time or looking to switch from a plan that's bleeding your budget dry, understanding your choices can save you thousands—and help you compete for the talent your business needs to grow.
Here's the reality: the share of small businesses offering health insurance dropped from 47% in 2000 to just 30% in 2023. It's not because employers don't want to provide benefits—it's because premiums have skyrocketed 182% over that same period. But here's what many business owners don't realize: there are three main pathways designed specifically for employers like you, each with different trade-offs around cost, flexibility, and administrative burden.
The SHOP Marketplace: Tax Credits and Simplicity
The Small Business Health Options Program, or SHOP, was created under the Affordable Care Act specifically for businesses with 1 to 50 full-time equivalent employees. The big selling point? If you have fewer than 25 employees and pay average wages below a certain threshold (around $60,000 as of 2024), you may qualify for a tax credit worth up to 50% of your premium costs. For non-profits, that credit is up to 35%.
Here's the catch: SHOP availability has become spotty. Most states using the federal marketplace (Healthcare.gov) don't have SHOP-certified plans available in 2025, though states running their own exchanges often do. If your state has active SHOP options, you can enroll any time of year—there's no waiting for open enrollment. The plans themselves work like traditional group coverage: you choose a plan, employees can add dependents, and you decide how much of the premium to cover.
The downside? SHOP plans don't offer the cost transparency or refund potential of newer alternatives, and premiums are still climbing fast—the median increase proposed for 2026 is 11%. But if that tax credit applies to you, it can offset a significant chunk of your costs, especially in your first two years of offering coverage.
Level-Funded Plans: Transparency and Potential Refunds
If you've got a relatively healthy workforce and you're tired of throwing money at premiums without knowing where it goes, level-funded plans might be your best bet. These hybrid plans sit between fully-insured coverage and true self-insurance. You pay a fixed monthly amount that covers expected claims, administrative fees, and stop-loss insurance (which caps your risk if someone has catastrophic medical expenses). Here's the game-changer: if your employees' claims come in lower than projected, you get money back at the end of the year—typically 5% to 10% of premiums for groups with good claims experience.
Level-funded plans have exploded in popularity precisely because they work for small employers. Adoption jumped from 13% in 2020 to 40% by 2023, and in 2024, 37% of workers in companies with 10 to 199 employees were covered by level-funded plans. Why? Because you get detailed claims data—anonymized, but specific enough to spot trends and manage costs. You can see if high emergency room visits or specific chronic conditions are driving expenses, then implement wellness programs or care management to address them.
The trade-off? Level-funded plans work best when your team is generally healthy and your claims are stable. If you have an older workforce or employees with ongoing high-cost conditions, you might not see those refunds, and your premiums will be priced accordingly. But for companies with stable claims, the transparency alone is worth it—you're not just blindly paying whatever the insurer demands at renewal.
PEO Partnerships: Pooling Power for Better Rates
Professional Employer Organizations offer a completely different approach: they bundle your employees with those of other small businesses to create a large risk pool, giving you access to the same kind of rates and plan options that big companies get. Through a co-employment model, the PEO becomes the employer of record for certain HR purposes—handling payroll, benefits administration, compliance, and more—while you retain control over day-to-day operations and management.
The numbers are compelling: businesses using PEOs see an average 27% return on investment, with the biggest savings coming from health insurance costs. In 2024, the average premium for small businesses was $746 per month for single coverage and $2,131 for family coverage, with employers typically covering 83% and 63% of those costs respectively. PEOs can often beat those rates because they're negotiating on behalf of hundreds or thousands of employees across multiple client companies.
Here's why this matters: 85% of millennials say health benefits are absolutely essential or very important, and 65% of small businesses that don't offer insurance cite cost as the main barrier. A PEO can turn health benefits from an impossible expense into an affordable recruiting and retention tool. The catch? You're giving up some control and paying fees for the full suite of PEO services, which include HR support, payroll, compliance, workers' comp, and more. For many small businesses, especially those without dedicated HR staff, that's actually a feature rather than a bug.
What's Driving Costs Up (And What You Can Do About It)
Let's be honest: health insurance for small businesses is getting more expensive, and it's happening fast. Employer health coverage costs are expected to surge more than 9% in 2025—the largest increase in at least 15 years. For 2026, small group insurers are proposing median premium increases of 11%. The culprits are familiar: rising healthcare costs, prescription drug prices, higher utilization of services, labor expenses for medical staff, and general inflation.
Small businesses get hit especially hard because you lack negotiating power. Small firms pay roughly twice as much for health insurance as large employers, and insurers have been pulling out of the small group market entirely—companies like Humana and the Cigna-Oscar partnership announced exits from group coverage in 2025. This shrinking market means fewer choices and less competition to keep prices down.
What can you do? First, don't just auto-renew. Shop around every year, and consider switching to one of the models above if you're currently on a traditional fully-insured plan. Second, invest in employee wellness and preventive care—catching health issues early reduces expensive emergency care down the line. Third, look at alternative funding arrangements like HRAs (Health Reimbursement Arrangements), which let you reimburse employees for individual coverage or medical expenses up to a set amount. HRA adoption nearly tripled between 2020 and 2024, and more than 80% of employers using them do so to offer benefits for the first time.
How to Choose the Right Path for Your Business
Start by asking yourself a few questions. First: Do you qualify for the SHOP tax credit? If you have fewer than 25 employees earning under the wage threshold, that credit could save you tens of thousands of dollars. Second: How healthy is your workforce, and do you want transparency into claims? If the answer is yes, a level-funded plan gives you data and potential refunds. Third: Do you need help with HR, payroll, and compliance beyond just health insurance? If so, a PEO packages all of that together with better insurance rates.
Don't go it alone—work with a benefits broker or consultant who specializes in small businesses. They can run the numbers on all three options, show you real quotes, and explain the fine print. And remember: you're not locked in forever. Many businesses start with SHOP for the tax credits, then move to level-funded plans as they grow and their workforce stabilizes, or partner with a PEO when they need comprehensive HR support. The key is making an informed choice now, then revisiting it every year as your business and the market evolve.
Health insurance for small businesses is challenging, but it's not impossible. With the right structure—whether that's SHOP, level-funded, or a PEO—you can offer competitive benefits without breaking the bank. Your employees will notice, your recruiting will improve, and you'll build the kind of company where people want to stay. Get quotes, compare your options, and make 2025 the year you finally get this figured out.
