Alternatives to Employer Health Insurance: 6 Options for 2026

For many small companies, fully insured group plans are the default, with 77% of small employers with health insurance using one. The options often come from the payroll provider or broker they already use, so other ways to structure coverage never enter the conversation.

Ignition's Benefits Blind Spot survey found that 19% of SMB leaders weren't familiar with ICHRA, level-funded, or self-funded models, and another 30% had never considered them.

That leaves many companies with the same question: what are the alternatives to employer health insurance? ICHRA, level-funded plans, self-funded plans, and other approaches give employers different ways to structure coverage and manage costs. Below, we'll break down how each option works, what it costs, and which companies it fits.

What Are the Alternatives to Employer Health Insurance?

The six main health insurance alternatives for small businesses are ICHRA, QSEHRA, health stipends, level-funded plans, health sharing plans, and PEO health insurance. Measure each one against the plan most small companies start with: a fully insured group plan, where you pay a carrier a fixed premium and the carrier keeps whatever it doesn't spend on claims.

Do You Have to Offer Health Insurance?

Only if you're an Applicable Large Employer (ALE). Under the Affordable Care Act (ACA), an ALE averaged 50 or more full-time employees, including full-time equivalents (FTEs), in the prior calendar year. FTEs combine part-time hours: two employees working 60 hours a month each count as one FTE.

ALEs must offer coverage to at least 95% of full-time employees, or the Internal Revenue Service (IRS) can assess a penalty when an employee gets a Marketplace subsidy. The coverage must also pass the ACA cost test: for 2026 plan years, the employee's share of the cheapest self-only plan must stay at or under 9.96% of household income.

Under 50, benefits are a choice. Most small companies offer them anyway: 53% of SMB leaders in the Benefits Blind Spot survey say rising health costs have made it harder to win talent.

1. ICHRA

How It Works

An ICHRA lets you give employees a tax-free monthly allowance to buy their own individual health insurance, on or off the ACA Marketplace. Employees pick a plan, and you reimburse up to the amount you set.

You can vary allowances by employee class, such as full-time, part-time, or work location, and by age and family size within a class. You can't offer the same class a choice between an ICHRA and a group plan.

Costs and Tax Treatment

Federal rules set no minimum or maximum contribution. Reimbursements are tax-free to employees and deductible for you. If you're an ALE, your allowance must keep the cheapest local silver plan under 9.96% of household income for 2026 and 10.22% for 2027.

The catch is the individual market. KFF found Marketplace benchmark premiums rose 26% on average for 2026, and insurers are proposing a median increase of about 15% for 2027. Your allowance stays flat until you change it, so every premium jump lands on employees' paychecks first.

Who It Fits

Remote or multi-state teams, part-time-heavy workforces, and companies that want a fixed benefits line on the P&L. The HRA Council reports more than 20,000 U.S. businesses offered an ICHRA or QSEHRA in 2026. Nearly a third of small employers using ICHRA moved over from a small group plan, so the switch away from group coverage is a well-worn path.

The drawback: employees shop for their own plan and check their doctors' networks every year.

2. QSEHRA

How It Works

A QSEHRA works like a smaller, capped ICHRA. Employers with fewer than 50 full-time employees that don't offer a group plan can reimburse premiums and qualifying medical expenses tax-free.

You must offer it on the same terms to all eligible employees, with amounts allowed to vary by age and family size. You also send employees written notice 90 days before each plan year.

Costs and Tax Treatment

For 2026, IRS Revenue Procedure 2025-32 caps QSEHRA reimbursements at $6,450 for self-only coverage and $13,100 for family coverage. Reimbursements stay tax-free only if the employee has minimum essential coverage (MEC), meaning a plan that meets ACA standards. The QSEHRA amount also reduces any Marketplace premium tax credit the employee receives.

Compare that cap with the $9,325 average single premium for employer coverage in 2025 from KFF. The maximum QSEHRA covers about 69% of a typical single plan, so employees pay the rest on most policies.

Who It Fits

Companies under 50 that want a first benefit without group-plan participation rules. The HRA Council found 93% of employers newly offering QSEHRA in 2026 had offered no health coverage before, so it often serves as a company's first health benefit.

The drawback: you outgrow it. Once you become an ALE, QSEHRA eligibility ends.

3. Health Insurance Stipend

How It Works

A health insurance stipend is extra cash in each paycheck that employees can spend on coverage or anything else. You sponsor no plan, so you administer nothing.

Costs and Tax Treatment

Stipends count as taxable wages. A $500 monthly stipend for an employee in the 22% federal bracket leaves about $352 after federal income tax and the employee's 7.65% FICA (Social Security and Medicare tax), before any state tax. You also pay your 7.65% employer share on top.

You can't require employees to spend the money on insurance or pay their premiums directly. The IRS treats that as an "employer payment plan," a noncompliant group health plan that can trigger a $100 per day, per employee excise tax. A plain pay increase with no coverage condition attached stays outside those rules.

Who It Fits

Teams under 10 people, or companies bridging to a real plan within a year. In the example above, about 30% of the stipend goes to taxes before your employee buys a policy with no group pooling behind it, which makes stipends a weak long-term recruiting tool.

4. Level-Funded Health Insurance

How It Works

Level-funded health insurance is a self-funded plan sized for smaller groups. You pay a fixed monthly amount that covers a claims fund, stop-loss insurance that caps your exposure to large claims, and administration. Depending on the contract, part of any unused claims money comes back to you at year-end.

KFF reports 37% of covered workers at firms with 10 to 199 employees were in a level-funded plan in 2025, so carriers already quote it for companies your size. Our guides to level-funded vs. fully insured and level-funded vs. self-funded go deeper.

Costs and Tax Treatment

Tax treatment matches a regular group plan: your contributions are deductible, and employees pay their share pre-tax. The carrier prices the plan through underwriting, using your workforce's age, location, and claims history.

Benefits Blind Spot respondents on level-funded or self-funded plans estimated paying $5,914 per employee per year, about $2,100 less than the $8,005 reported on fully insured plans. 

On a 40-person team, that gap adds up to roughly $84,000 a year you could put toward headcount (self-reported estimates, so treat them as directional).

The structure needs active management. In the CFO Leadership survey run with Ignition, only 5% of CFOs on level-funded plans said they were satisfied, and 45% said the market dictates what they pay.

Who It Fits

Companies with 10 to 200 employees and a younger, healthier team on a fully insured plan. Light Labs, a 29-person lab technology company in Austin, faced a 21% renewal increase. A level-funded Aetna plan turned that into an 8% decrease and saved $113,115 in year one, while the top plan's deductible dropped from $350 to $0.

5. Health Sharing Plans

How It Works

Health sharing plans, also called Health Care Sharing Ministries (HCSMs), are membership organizations, typically religious, where members pay a monthly "share" toward other members' medical bills. Ministry guidelines often exclude preexisting conditions.

Costs and Tax Treatment

Monthly shares often run below insurance premiums, and that price reflects what members give up. The National Association of Insurance Commissioners (NAIC) states that HCSMs can't guarantee payment of claims and that state insurance regulators don't supervise them.

HCSMs don't count as insurance, so they can't serve as the individual coverage an ICHRA requires or the MEC a QSEHRA requires. For an ALE, offering one doesn't satisfy the employer mandate.

Who It Fits

Very few companies. It can suit an individual who shares the ministry's beliefs and can absorb an unpaid bill. As a company benefit, it moves the full risk of a large claim onto employees.

6. PEO Health Insurance

How It Works

A PEO co-employs your team, runs payroll and HR, and enrolls your employees in its master health plan alongside other client companies. Rippling, Justworks, TriNet, and Insperity all run PEOs.

The National Association of Professional Employer Organizations (NAPEO) counts more than 233,000 client businesses and 5.4 million worksite employees in its 2026 research. That scale is the appeal: a 12-person company gets large-group plan options it couldn't buy alone.

Costs and Tax Treatment

You pay premiums plus a PEO service fee, usually per employee or as a percentage of payroll. Our breakdown of how much a PEO costs covers the fee models. Tax treatment matches a regular group plan.

The PEO's pool sets your rates, which helps early on and works against a healthy team as it grows. In the Benefits Blind Spot survey, 49% of PEO companies that named their renewal number took a double-digit increase, compared with 34% of companies working directly with a carrier or broker. PEO companies were also more than twice as likely to delay or cancel a hire to cover it (23% vs. 10%).

PEO companies did report negotiating a better deal more often (45% vs. 31%), though they started from larger increases.

Who It Fits

Companies under roughly 50 employees with no HR staff. As you approach 50, price your PEO renewal against the open market. Our guides to the pros and cons of a PEO and the best PEOs for health insurance cover the decision in detail.

How to Choose the Right Alternative

Headcount

Under 50, no federal mandate applies, and every option on this list is open. At 50 or more full-time employees and FTEs, you become an ALE: QSEHRA goes away, and every option must pass the ACA cost test. If you'll cross 50 in the next 12 months, pick a structure that still works on the other side.

Cost and Risk Tolerance

ICHRA, QSEHRA, and stipends cap your cost and push premium increases onto employees. Level-funded plans can cost less for a healthy team, and a bad claims year shows up in your next renewal. Fully insured and PEO plans hand the risk to a carrier, and you pay for that in the premium. Our comparison of self-funded vs. fully funded plans walks through the trade-off.

Workforce Location

A team in one metro area can get strong group-plan networks. A team spread across states gets more from an ICHRA, since each employee shops plans that work where they live. Costs also swing by region: Benefits Blind Spot respondents in the Northeast estimated $9,014 per employee per year, compared with $6,362 in the West, so a national average tells you little about your own price.

Admin Capacity

Level-funded plans need someone to read quarterly claims reports. ICHRA and QSEHRA need an administrator and annual notices. PEOs and stipends ask the least. See our guide to small business benefits management for the workload behind each.