A Michigan business with 2 to 50 employees can offer a real group health plan without paying anything toward the premium. Employees pay through payroll, pre-tax, and get group networks and plan choices they cannot buy on their own. Here is how it works and who comes out ahead. When enrollment and payroll are connected through payroll integration, deduction mismatches largely disappear.
Key takeaways
- You can offer coverage without contributing. A Michigan business with as few as one W-2 employee can start a group plan on the first of any month, with no requirement that the employer pay toward it.
- Employees usually pay less than the sticker price. Premiums deducted under a Section 125 plan come out before federal income tax, Social Security, Medicare and Michigan income tax, so the same premium costs a typical employee roughly a fifth to a third less in take-home pay.
- It can cost the owner less than nothing. Pre-tax deductions are not subject to the employer’s share of payroll tax either, so the business saves 7.65% on every dollar employees put toward premium.
What an employee-paid group plan is
Most owners of small businesses assume health insurance is something they either pay for or do not offer. There is a third option. The business sponsors a group health plan, selects the carrier and plan designs, and handles enrollment through payroll, while each employee pays the full premium for the coverage they choose. The business contributes $0.
For a longer view of cost, see how a year-round health and cost strategy works between renewals.
It is still a genuine group plan, not a discount card or a referral to the marketplace. Employees get group plan designs, group networks and an ID card from the carrier, and the business gets something to put in a job posting that it did not have before. For the wider picture of plan types, contribution approaches and setup steps, see our guide to health insurance for employees.
You do not have to wait for a special window
Many owners assume a group plan needs a big headcount, a set employer contribution or a once-a-year sign-up date. It does not. A business with as few as one W-2 employee can start a group plan on the first of any month, and the plan can be fully employee-paid from day one.
That makes the decision a practical one rather than a calendar one: gather a census, compare carriers and plan designs, set up payroll deductions, and pick a start date that suits the business.
Why employees can come out ahead
They pay with pre-tax dollars
An individual policy bought on the marketplace is paid from take-home pay. A group premium deducted under a written Section 125 plan comes out before tax. For an employee in the 12% federal bracket, that removes 12% federal income tax, 7.65% Social Security and Medicare, and Michigan’s 4.25% income tax from every premium dollar.
An illustrative example: on a $550-a-month employee-only premium, those three taxes come to about $131. The employee’s paycheck goes down by roughly $419, not $550. The exact figure depends on the employee’s bracket and the plan chosen, but the direction does not change.
They get plan and network choices the individual market does not offer
Michigan’s 2026 individual marketplace is mostly HMOs: of the six carriers selling there, only two offer a PPO. The small-group market gives an employer access to PPO designs with statewide and national networks, as well as HMO options, so employees who want to keep a particular doctor or who travel have more room to choose.
They can enroll when they are hired
Marketplace coverage is tied to the annual open enrollment period unless something qualifies a person for a special enrollment. A new hire joining a group plan enrolls when they become eligible under the plan’s waiting period, and coverage continues through payroll without anyone having to remember a renewal date.
Who may still be better off on the marketplace
An employee-paid group plan is not the right answer for every employee, and a good broker should say so. Employees whose household income qualifies them for a marketplace premium tax credit can sometimes buy coverage for less than they would pay for the group plan, even after the tax savings.
Offering the group plan does not take that option away from them. An employer offer blocks the tax credit only if it is affordable, meaning the employee’s cost for the lowest-priced self-only plan is at or below 9.96% of household income for 2026 (10.22% for 2027). With no employer contribution, lower-paid employees often sit above that line, so they keep their eligibility for the credit and can choose whichever option is cheaper for them.
The picture has also shifted toward the group plan for many households. The enhanced marketplace subsidies expired at the end of 2025, and for 2027 the original rules apply, including the cutoff at 400% of the federal poverty level. Employees above that cutoff receive no credit at all, which is exactly where a pre-tax group premium tends to compare best.
What it costs the owner
The premium cost to the business is zero. Because pre-tax premium deductions are also exempt from the employer’s 7.65% share of Social Security and Medicare, the business pays slightly less payroll tax for every employee who enrolls. On the illustrative $550 premium above, that is about $42 a month per enrolled employee.
What the owner does take on is the paperwork that comes with sponsoring any group plan, and it should be set up correctly from the start:
- A written Section 125 plan document, without which the deductions cannot be taken pre-tax.
- ERISA plan documents and a Summary Plan Description, which apply from the first covered employee.
- Distribution of each plan’s Summary of Benefits and Coverage at enrollment.
- COBRA continuation coverage once the business has 20 or more employees.
- Payroll set up to take the deductions and send enrollment changes to the carrier on time.
None of this is heavy for a business of this size, but it is where do-it-yourself setups tend to go wrong. Our page for employers with 2 to 50 employees covers the rest of the rules that apply at this size.
Why it helps with hiring and keeping people
For a small employer competing with larger ones, “health insurance available” in a job posting changes who applies. An employee-paid plan lets a business make that offer honestly, pass along group rates and plan options its people could not get on their own, and leave the door open to adding an employer contribution later if the budget allows. Some owners start here and add a contribution later.
How to set it up
- Pull a census now. Names, dates of birth, home ZIP codes and who is interested in coverage.
- Compare carriers and plan designs. Small-group premiums are set by age and rating area, so a quote built on your actual census is the only useful number.
- Check each employee’s alternative. Employees who qualify for a large marketplace credit should know that option is still open to them.
- Put the Section 125 plan and plan documents in place before the first deduction.
- Pick a start date. Coverage can begin on the first of any month.
More plain-English benefits explainers
- What Is Form 1094-C?: the employer transmittal and the 95% offer test
- What Is Form 1095-C?: the employee statement, its codes and deadlines
- What Is an ASO Health Plan?: how administrative services only, self-funded plans work
- How Much Does COBRA Insurance Cost?: averages, deadlines and cheaper options
- What Is a PBM?: how pharmacy benefit managers make money
- What Is EBSA?: the Department of Labor agency that enforces ERISA
- What Is a Broker of Record Letter?: how to change brokers without changing your plan
Questions owners ask about employee-paid group plans
Can a small business offer health insurance and pay nothing toward it?
Yes. A Michigan business with as few as one W-2 employee can start an employee-paid group plan on the first of any month without contributing toward the premium.
Is a group plan cheaper for employees than the marketplace?
Often, for employees who do not qualify for a large premium tax credit, because group premiums are paid pre-tax through a Section 125 plan. Employees who qualify for a significant credit may still do better on the marketplace, and an employee-paid offer that is unaffordable to them does not remove that option.
Does the business save anything?
Yes. Pre-tax premium deductions are not subject to the employer’s 7.65% share of Social Security and Medicare tax, so the business pays slightly less payroll tax for each employee who enrolls.
What happens if we want to contribute later?
You can add an employer contribution at a renewal, or whenever the budget allows. Some owners start employee-paid, see who enrolls, and decide on a contribution from there.
See what it would cost your employees
CFH Insurance Consultants is an independent employee benefits firm. We are licensed insurance brokers, and for proper coverage of an account we work in teams of five. Send us a census and we will show you what an employee-paid plan would cost your people, carrier by carrier, and which of them would do better on the marketplace. Start here, call 248.370.8853, or book a 30-minute call.
This article is general information, not tax or legal advice. Tax savings depend on each employee’s circumstances, and carrier rules and federal thresholds change each year.
