What Is the Small Business Health Options Program?

The Small Business Health Options Program (SHOP) is a marketplace designed to help small businesses and nonprofit organizations provide health insurance to their employees. It was established under the Affordable Care Act (ACA) to offer employers an accessible way to compare and purchase health plans while potentially qualifying for tax credits to lower costs.

How SHOP Works

SHOP is available to businesses with 1 to 50 full-time equivalent (FTE) employees in most states, although some states allow participation for companies with up to 100 employees. The program enables small businesses to offer medical and dental coverage to employees and, in some cases, their dependents. Unlike individual health plans purchased on the Health Insurance Marketplace, SHOP allows employers to choose coverage levels, contribution amounts, and whether employees have multiple plan options or a single plan selection.

Employers must meet basic eligibility requirements to participate:

• The business must have a primary office location in a state where SHOP coverage is offered.
• It must have at least one common-law employee who isn’t an owner, partner, or family member of the employer.
• The company must enroll in a SHOP-certified plan through a participating insurance provider.
• The employer must offer coverage to all full-time employees (defined as those working 30 or more hours per week).

Unlike individual plans, SHOP does not impose open enrollment periods, meaning businesses can sign up for coverage at any time during the year.

Benefits of SHOP for Employers

One of the biggest advantages of using SHOP is the Small Business Health Care Tax Credit. This tax credit is designed to help small businesses lower the cost of providing health insurance to employees. To qualify, a business must:

• Have fewer than 25 full-time equivalent employees
• Pay average wages below a set threshold, which is adjusted annually for inflation
• Cover at least 50% of employee-only health insurance premiums

Eligible businesses can receive a tax credit of up to 50% of employer-paid premiums (or 35% for tax-exempt organizations). However, this credit is only available for plans purchased through SHOP and can be claimed for a maximum of two consecutive years.

Beyond tax savings, SHOP gives employers flexibility in plan selection. Businesses can:

• Offer a single health plan for all employees, ensuring consistency in coverage.
• Use a defined contribution model, where employees can choose from multiple plans within a designated coverage level while the employer sets a fixed contribution amount.

All SHOP plans comply with the ACA, meaning they cover essential health benefits such as preventive care, emergency services, maternity care, mental health treatment, and prescription drugs. They also cannot deny coverage or charge higher premiums based on pre-existing conditions, making it a more secure option for both employers and employees.

Average Wage Requirement for the SHOP Tax Credit

To qualify for the Small Business Health Care Tax Credit, a business must pay average wages per full-time equivalent employee that fall below a certain threshold, which increases slightly each year due to inflation adjustments. The wage limits for recent years are:

• 2018: $54,000
• 2019: $55,000
• 2020: $56,000
• 2021: $56,000
• 2022: $58,000
• 2023: $62,000

To determine if a business qualifies, the average wage is calculated by dividing total wages paid to all employees by the number of FTE employees, excluding owners and their family members.

The tax credit is progressive, meaning businesses with lower average wages receive a higher credit percentage. As wages increase, the credit amount gradually decreases.

Since these limits change annually, businesses should check the IRS website or consult a tax professional to get the latest wage thresholds before applying.

How Employees Benefit

Employees covered under SHOP receive the same essential health benefits as those in individual market plans. If their employer contributes to the premium, their out-of-pocket costs for coverage are reduced. Additionally, employees cannot be denied coverage based on health status, and they retain the ability to enroll in coverage even if they have pre-existing conditions.

One key limitation is that employees of businesses offering SHOP coverage do not qualify for premium tax credits if they opt to purchase individual coverage through the ACA Marketplace instead. However, if the employer plan is deemed unaffordable (costing more than 9.12% of the employee’s household income in 2023), employees may still be eligible for subsidies in the individual market.

State-Specific Variations

While SHOP is a federal program, some states run their own health insurance marketplaces, which may have different rules or additional plan options for small businesses. Employers should check whether their state uses Healthcare.gov for SHOP enrollment or a state-based exchange. Some states may also have different definitions of small business size, affecting eligibility.

Challenges and Declining Participation

Over time, SHOP enrollment has declined, primarily because many insurers stopped offering SHOP plans in certain states due to low participation rates. As a result, some small businesses now purchase comparable small-group health insurance directly from insurers instead of using SHOP. Despite this, SHOP remains an option for businesses that qualify for the Small Business Health Care Tax Credit, since the credit is only available for SHOP-certified plans.

The Bottom Line

The Small Business Health Options Program provides small employers with a structured way to offer ACA-compliant health insurance while potentially benefiting from valuable tax credits. It offers flexibility in coverage options and removes many barriers that small businesses previously faced when securing group health insurance. However, due to limited insurer participation, not all states have active SHOP plans, and many small businesses now seek alternative coverage options. Business owners considering SHOP should evaluate its availability, cost-effectiveness, and potential tax advantages before deciding whether it’s the right fit for their employee benefits strategy.