Hiring Your First Employee: What to Do About Health Benefits

You are not required to offer coverage

There is no federal requirement for a business with fewer than 50 full-time equivalent employees to offer health insurance. The employer mandate only applies to applicable large employers, and the IRS explains how to count in its guide to determining if an employer is an applicable large employer. With one employee, you are nowhere near it.

A few states have their own rules. Hawaii, for example, has a long-standing state requirement for many employers. Most states don't, including Florida, Texas and Georgia. If you hire in another state, I check that state's rules before we pick anything.

So the question is not whether you have to. It is whether you want to, and how much you can spend without hurting the business.

First, make sure it is really an employee

Before benefits, confirm the job is a W-2 role. A 1099 contractor is not your employee, and you generally don't offer them benefits at all. If you are not sure which one you are hiring, talk to your CPA first. The 1099 vs W-2 guide covers what each side means for health insurance.

Option 1: a small-group plan

A small-group plan is the traditional answer. The business buys one plan, and eligible employees join it.

• Everyone is accepted. Group plans don't ask health questions for enrollment, which matters if your new hire or their family has a condition.
• You usually have to pay a set share. Insurers commonly require the employer to cover a minimum portion of the employee's premium, often around half.
• Participation rules apply. Insurers want a minimum share of eligible employees to enroll, though waivers for people with other coverage usually count.
• The owner can join. Once you have a real employee who is not an owner or an owner's spouse, the owner can generally be on the group plan too.

The downside is cost and control. Renewals can jump, and one network has to work for everyone.

Option 2: a QSEHRA

A QSEHRA lets a business under 50 full-time equivalents reimburse an employee's individual health insurance up to an annual IRS limit, with no group plan. For 2026, the cap is $6,450 for self-only coverage and $13,100 for family coverage. It is simple to run, the budget is fixed, and the employee picks their own plan. The QSEHRA guide covers the limits, the 90-day notice and how it affects the Marketplace credit.

Option 3: an ICHRA

An ICHRA also reimburses individual coverage, but it has no federal dollar cap and works at any size. It suits owners who want to spend more than a QSEHRA allows or who plan to grow fast. If the ICHRA is affordable for the employee, they cannot take a Marketplace credit, so the allowance has to be set with care. Being offered an ICHRA also opens a special enrollment period, so a new hire is not stuck waiting for open enrollment. The ICHRA and QSEHRA stipend guide explains the affordability test.

Option 4: a raise instead of a benefit

Some owners just pay more. A higher salary is simple, and the employee can buy any plan they want. The trade-off is tax: extra wages are taxable to the employee and subject to payroll tax for both of you. General information, not tax advice — confirm with your CPA based on your specific entity structure.

One warning. Don't pay an employee's individual premiums directly, or reimburse them informally, outside a proper QSEHRA or ICHRA. That kind of arrangement can run into federal penalties. If you want to help with premiums, use a structure built for it or simply raise pay without tying it to insurance. General information, not tax advice — confirm with your CPA based on your specific entity structure.

How each choice affects your own coverage

This is the part most articles skip. Your choice for the employee can change things for you.

If you are a sole proprietor, partner or S-corp owner, you generally cannot use a QSEHRA or an ICHRA for yourself, because you are not treated as an employee for those arrangements. Offering one to your hire leaves your own coverage where it was. Many owners keep their individual plan, often a private plan, and offer the employee an HRA. The S-corp owner guide covers how shareholders handle their own premiums. General information, not tax advice — confirm with your CPA based on your specific entity structure.

If you choose a group plan, you can usually join it. That can be good news if you have a health condition, because group enrollment doesn't depend on health answers. It can also be a worse deal if you are healthy and already on a private plan priced on your own health. I price both before you switch.

If your spouse works for another company, remember the employer-plan rule. Any month you are eligible for a subsidized plan through your spouse's job, the self-employed health insurance deduction is generally off the table. Joining your own company's group plan changes the math again. General information, not tax advice — confirm with your CPA based on your specific entity structure.

Hiring your spouse as the first employee

Some sole proprietors hire a spouse as their first real employee and cover the family through a reimbursement plan for that employee. It can work, but it has to be a genuine job with real duties and reasonable pay. It does not work the same way in an S corporation, where a spouse is generally treated as an owner for these benefits. This is one to set up with your CPA, not on your own. General information, not tax advice — confirm with your CPA based on your specific entity structure.

A simple way to decide

1. Set the monthly budget you can afford per employee without strain.
2. Look at the hire. Their age, family and whether they already have coverage through a spouse all change the answer.
3. Look at yourself. Your health and current plan matter, because a group plan may pull you in.
4. Compare a group quote with an HRA allowance at the same budget.
5. Think a year ahead. If you plan to hire three more people, pick something that scales.

For one employee and a modest budget, a QSEHRA is often the cleanest start. If the hire has a health condition, a group plan can be kinder. If you want flexibility and growth room, an ICHRA usually wins.

Timing the start

Group plans generally start on the first of a month, and insurers need the application in advance. A QSEHRA needs the written notice at least 90 days before the plan year, or by the hire date for a new employee. If your new hire is coming off a former employer's plan, they likely have a special enrollment period on the Marketplace, and a private plan can start any month if approved. Plan the date so nobody has a gap.

What it costs beyond the premium

The monthly premium or allowance is the number owners focus on. It is not the only cost.

A group plan comes with renewals every year, and a single large claim on a tiny group can affect the next renewal. Someone has to handle enrollment, new hire paperwork and terminations. An HRA usually means paying an administrator a monthly fee, plus the time to send notices and check proof of coverage. A raise costs payroll tax on top of the extra pay.

Then there is the cost of doing nothing. In a tight labor market, a good candidate may pick the employer that helps with health insurance. Even a modest allowance can tip that decision. I would rather you offer something small and sustainable than something generous you have to take back next year.

Where I fit

I don't run payroll or draft plan documents. I compare the coverage: a group quote, the plans your employee could buy with an allowance, and what all of it means for your own policy. I work by phone and video in the 31 states where I am licensed. The small business owner guide covers the bigger picture as your team grows.

When you are ready, request a quote and tell me about the hire. I will lay out the options side by side.