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How Much Does Health Insurance Cost for a Small Business per Employee

cost of employee health insurance

As a small business owner, one of your utmost priorities is to offer your employees comprehensive health insurance coverage. This showcases your dedication to their well-being and is pivotal in attracting and retaining top talent. However, when budgeting for employee health insurance, it’s essential to understand the costs involved.

Like many aspects of health insurance, the answer to this question is not straightforward. In this article, we will explore the factors that influence the cost of health insurance for small businesses and provide practical tips for navigating the intricate landscape of employee health coverage. So, let’s dive in and discover how much your small business can anticipate paying for health insurance per employee.

Types of Health Insurance Plans

Types of health insurance plans

Health insurance plans come in different shapes and sizes, with varying coverage levels and costs. Here are some of the main types of health insurance plans you can consider for your small business:

Health Maintenance Organizations (HMOs)

Health Maintenance Organizations (HMOs) are popular with many small businesses due to their cost-effectiveness and structured plan design. These plans typically require participants to select a Primary Care Physician (PCP) from a network of providers, and this PCP becomes the gatekeeper for all health services. The upside is that HMOs generally offer lower premiums and out-of-pocket costs, but there’s a catch: your employees’ options are limited to the network’s doctors and hospitals.

For example, if an employee needs to see a specialist outside the network, they must pay for it out-of-pocket. This can be a significant limitation for some employees, especially if they have specific health needs that require specialized care. However, HMOs are ideal for small businesses operating on a tight budget as they offer predictable and reasonable costs.

Preferred Provider Organizations

Preferred Provider Organizations (PPOs) are another popular option for small business health insurance plans. They offer more flexibility than HMOs, as participants can visit both in-network and out-of-network providers without a referral from a PCP. This means employees can choose their doctors and hospitals, making it a favorable choice for individuals with specific healthcare needs or preferences. However, this flexibility comes at a higher cost as PPOs generally have higher premiums and out-of-pocket expenses than HMOs.

For example, let’s say an employee requires surgery for a pre-existing condition. With a PPO plan, they can visit any specialist or hospital without prior approval. While this provides more freedom of choice, the employee must pay a higher deductible and co-insurance. This can add up quickly, making PPOs more expensive than HMOs in the long run.

Point of Service Plans

Point of Service Plans (POS) are the chameleons of health insurance. They possess the remarkable ability to adapt to any situation. These plans combine the best of both worlds, blending the structure of HMOs with the flexibility of PPOs. In POS plans, participants must choose a Primary Care Physician (PCP) within the network, just like in HMOs.

However, here’s the intriguing twist: POS plans also allow referrals to out-of-network specialists when necessary, offering a PPO-like flavor. This is applicable when the PCP deems it necessary and provides a referral. POS plans can be an excellent option for small businesses, balancing costs with flexibility.

High-Deductible Health Plans

High-deductible health plans (HDHPs) are becoming increasingly popular with small businesses due to low premiums. These plans have a high deductible, meaning employees must pay for all healthcare services out-of-pocket until they reach the deductible amount set by the insurance provider. After that, the plan covers eligible expenses per the policy’s terms.

HDHPs are typically paired with a health savings account (HSA), where employees can contribute pre-tax funds to pay for medical expenses. Some employers also contribute to their employees’ HSAs, making it an attractive option for both parties. However, HDHPs come with a considerable risk if the employee requires costly procedures or treatments before reaching the deductible amount.

Factors that Influence the Cost of Employee Health Insurance for Small Businesses

Factors that influence the cost of employee health insurance for small businesses

Before we delve into specific numbers, it’s important to understand the various factors that can impact the cost of health insurance for small businesses. These factors include the following:


The industry in which your small business operates plays a major role in determining the cost of health insurance per employee. This is because different industries have varying levels of risk associated with them. For instance, companies operating in hazardous industries such as construction or manufacturing may face higher insurance premiums due to the increased likelihood of workplace injuries.

On the other hand, businesses in low-risk industries such as consulting or technology may have lower group health insurance costs. For example, a small business owner who runs a landscaping company can expect to pay more for employee health benefits than an entrepreneur who owns an accounting firm. This is because working with heavy machinery and exposure to chemicals puts landscapers at a higher risk of injuries and accidents, leading to potentially higher healthcare costs.


The geographical location of your small business also plays a significant role in determining the cost of employer-sponsored health insurance. Insurance providers consider the average healthcare costs in each state when calculating premiums. For instance, if your business generally has higher healthcare costs, you can expect to pay more for employee health insurance than in states with lower healthcare costs.

Additionally, specific cities or regions within a state may have higher healthcare costs due to population density and cost of living. For example, a small business owner in San Francisco can expect to pay more for employee health insurance than one in a rural area of California.

Plan Type

The type of health insurance plan chosen by the small business owner significantly impacts the cost per employee. There are various plans to consider, each with unique advantages and trade-offs. For instance, Preferred Provider Organization (PPO) plans offer greater flexibility in choosing healthcare providers without needing referrals, but they are more expensive. On the other hand, Health Maintenance Organization (HMO) plans generally have lower premiums but require referrals and limit employer-sponsored coverage to a specific network of providers.

A third option could be a high-deductible health plan (HDHP) coupled with a Health Savings Account (HSA). These plans usually have lower monthly premiums but higher deductibles. They are designed to give employees more control over their healthcare spending, as they can use the HSA to pay for qualified medical expenses tax-free. For example, you own a small tech startup with young, healthy employees who don’t anticipate needing extensive medical care. An HDHP with an HSA might be a cost-effective choice in this case. This way, your employees can save money for future healthcare needs while you keep your monthly premiums low.

Number of Employees

The number of employees enrolled in your small business’s health insurance plan can also affect the average health insurance cost per employee. Generally, the more employees you have, the lower the average cost for each individual. This is because insurance providers spread risk across a larger pool of individuals, making it less likely for them to face significant losses from medical claims.

However, some insurance providers may also offer discounts for small businesses with fewer employees. For instance, you may be able to negotiate lower rates if you have less than 50 employees. So, it’s crucial to explore different options and weigh the pros and cons of each before deciding on a plan.

Age of Employees

The age of your employees is a significant factor that can impact your health insurance costs. Generally, the older your workforce, the higher your insurance premiums. This is because older individuals are statistically more likely to need medical care than their younger counterparts. As a result, insurance companies consider them a higher risk, leading to increased premiums.

Conversely, a younger workforce often benefits from lower premiums due to their expected lower healthcare usage. For example, if you run a tech startup with an average employee age of 25, you may find that your health insurance costs per employee are significantly lower compared to a business in the same location, industry, and size but with an average employee age of 50.

Health of Employees

The health status of your employees is another crucial factor that can influence the cost of health insurance. Insurance providers will consider pre-existing conditions or chronic illnesses when calculating average annual premiums. For instance, having a few employees with a history of medical issues could increase your overall costs.

On the other hand, businesses with healthy employees may benefit from lower insurance costs. Some insurance providers even offer wellness programs or discounts for small businesses that promote employee family coverage and well-being.

Employer Contributions

The employer’s contribution to employee premiums also plays a significant role in determining the cost of health insurance per employee. In most cases, employers cover a portion of their employees’ healthcare costs, with the remaining balance paid by the employee through payroll deductions.

The percentage of employer contribution can vary, with some businesses covering a higher percentage than others. A higher employer contribution generally results in lower employee costs and may lead to more comprehensive coverage options.

What is the Average Cost of Employee Health Insurance?

What is the average cost of employee health insurance?

Now that you better understand the factors that impact the group health insurance cost for small businesses, it’s time to start budgeting. While there is no one-size-fits-all answer, experts recommend setting aside at least $6,000-$7,000 per employee annually for health insurance costs.

However, this average can vary greatly depending on the factors mentioned above. For instance, a small business with five employees in their 20s and located in a state with lower healthcare costs may only need to budget around $4,500 per employee per year. On the other hand, a business with 50 employees, mostly in its 40s and located in an area with higher healthcare costs, may need to budget closer to $9,000 per employee per year.

It’s important to remember that these figures are just estimates and can vary based on individual circumstances. It’s always best to consult with a reputable insurance provider and discuss your specific needs before setting a budget for employee health insurance. Plus, it never hurts to shop around and compare quotes from multiple providers to ensure you get the best coverage at a competitive price.

Benefits of Offering Health Insurance for Your Employees

Benefits of offering health insurance for your employees

While the cost of providing health insurance for your employees may seem daunting, it’s essential to remember the valuable benefits it offers. As a small business owner, offering health insurance can significantly impact employee satisfaction in the following ways:

Attracts Top Talent

Offering health insurance as a part of your company’s benefits package can be a powerful magnet for attracting top-tier talent. In an increasingly competitive job market, prospective employees are not just looking for a paycheck but a comprehensive package that caters to their overall well-being. A robust health insurance plan shows that you care about your employees’ health and futures, which can be a decisive factor for top professionals when considering job offers.

For example, if a marketing agency offers health insurance along with other benefits such as flex time and remote work options, it can be more attractive to potential candidates compared to another agency that only offers a higher salary but no health insurance. In this way, offering health insurance can give your business an edge in attracting high-caliber employees and staying competitive.

Boosts Retention and Reduces Turnover

In addition to attracting top talent, offering health insurance can boost employee retention and reduce turnover rates. Covered workers are likelier to stay with a company that provides comprehensive benefits, including health insurance. When employees feel valued and supported by their employers, they are less likely to seek employment opportunities elsewhere.

Moreover, high turnover rates can be costly for businesses as it involves recruiting, training, and onboarding new employees. By offering to pay for health insurance, you may be able to retain valuable employees and avoid the costs associated with hiring and training new ones.

Improves Employee Morale

Offering health insurance to employees shows that you care about their well-being and can also improve workplace morale. Employees with access to quality healthcare are more likely to feel secure and valued by their employers. This can lead to increased job satisfaction, motivation, and overall productivity.

For example, if an employee at a small accounting firm knows they have comprehensive health insurance coverage, they may feel less stressed about potential medical expenses and can focus more on their work. This sense of security and support from the employer can create a positive work environment and boost employee morale.

Tax Benefits

Businesses that offer health insurance to their employees may also be eligible for tax benefits. The Small Business Health Care Tax Credit is available for businesses with fewer than 25 full-time employees and average annual wages below $50,000. This credit can help small businesses offset the cost of health insurance premiums.

Additionally, employer-provided health insurance is a tax-deductible expense for businesses. This means that offering health insurance can benefit your employees and provide financial benefits for your business through tax savings.

Promotes Employee Health and Well-being

One of the most significant benefits of offering health insurance is promoting employee health and well-being. With access to quality healthcare, employees can receive preventive care and treat illnesses early, leading to fewer sick days and improved overall health.

Additionally, some health insurance plans may offer wellness programs and resources to help employees manage chronic conditions, maintain a healthy lifestyle, and reduce healthcare costs in the long run. This can also have a positive impact on employee satisfaction and productivity.

Protects Against Legal Risks

In some states, small businesses are required to provide health insurance to their employees or face penalties. By offering health insurance, you can ensure your business complies with state laws and protect yourself from legal risks.

Furthermore, offering health insurance can protect against lawsuits from employees who may have incurred medical expenses while working for your company. This added layer of security can give small business owners peace of mind and mitigate potential financial risks.


In conclusion, while the initial cost of providing health insurance for your small business may seem steep, the long-term benefits are undeniable. From attracting top talent, bolstering employee retention, and improving morale to enjoying tax incentives and fostering a healthier, more productive workforce, health insurance is a worthwhile investment. Not to mention, it’s a legal requirement for businesses in certain states.

So, don’t let the price tag intimidate you. Instead, view it as a strategic decision that will ultimately contribute to your business’s success and growth. Remember, it’s not just about the numbers; it’s about the people behind those numbers. Your employees are the lifeblood of your business, and investing in their health is a step towards ensuring the vitality and longevity of your business.