8 Traps To Avoid When Choosing Healthcare for Your Small Business

Startup owners know health benefits attract talent, but have limited resources. Discover eight common health insurance mistakes to avoid overspending.

More small businesses are offering healthcare benefits to attract and retain top talent, with more organizations looking to follow suit.

SHRM’s 2022 Employee Health Benefits survey found that healthcare is the most important benefit an organization can offer its workers, followed by retirement and leave benefits.

Knowing this, many startups make the fatal mistake of spending too much at once on a competitive benefits package. It’s easy to get carried away and end up allocating too many resources to healthcare, which in the long run, could lead to your startup failing

So while you want to reap the benefits of high-quality healthcare, you also have to be smart about how you design your benefits program to prevent costly financial mistakes. 

We know it can be daunting to try and puzzle out health insurance as a startup founder. That’s why we'll walk you through the most common startup health insurance mistakes for you to avoid. 

Insurance Mistakes To Avoid

These are some of the most common pitfalls:

Having Too Little Coverage in the Beginning

Cost can be an issue when you sign up for a group health insurance plan — but getting the lowest-tiered plan is a rookie mistake.

Higher-tiered plans can be way out of budget for startups that need more funding. But getting a bare-bones plan can cost you long-term, especially when you start hiring full-time employees.

Four out of ten employees say they feel satisfied by comprehensive health coverage.

Most startup entrepreneurs tend to use health benefits only when absolutely necessary and believe their employees will do the same. The problem is that everyone has different needs.

If you’re unwilling to improve your healthcare plan as your company grows, you and your employees might end up paying more, especially on a high-deductible plan.


  • Consult with different insurance providers. Small business owners don’t always understand the difference between insurance pricing. Did you know some plans allow you to get double the coverage at a minimal cost?

That’s where insurance providers come in. They’ll help you find the perfect plan that grows with your startup’s needs. Shop around for different plans so you can compare their prices.

Covering 100% of the Costs Upfront

Although on the opposite side of the spectrum, another health insurance mistake you can make is choosing an insurance policy that covers 100% of your employees’ costs.

Average annual worker and employer premium contributions for family coverage, 2012, 2017, and 2022. 

A 2022 Kaiser Family Foundation (KFF) report found that employers covered nearly 73% of premium contributions for family plans in 2022. That’s up from 69% in 2017. 

Workers, on the other hand, only paid 27% on average for premium contributions in 2022. Down from the 30% they paid in 2017. The average premiums have also increased by 20% over the last five years and 43% in the last 10 years. 

It can be very hard to walk these policies back if you want to save money on insurance benefits or offer varied healthcare plans in the future.


  • Find group plans with just enough health coverage. To give you an idea, the 2022 KFF Employee Health Benefits Survey (EHBS) found that, on average, employers cover 84% of the premium for single coverage (the national average) and 72% of the premium for family coverage.

When in doubt, consult with insurance providers. They can help you choose policy types, coverage limits, and deductibles that fit your needs.

Signing Up for Insurance Too Soon

If you are a solo founder with no employees, it's tempting to sign up for a group health plan to attract talent, but hold off until you’ve hired your first W2 employee.

You might spend a lot of time trying to get health insurance only to get rejected by a carrier.


  • Get an individual plan. Suppose you want to have medical insurance before hiring your first employee. In that case, the easiest thing to do is to get an individual plan from an ACA marketplace until your company qualifies for group coverage.

Using Small Insurance Networks

Another common startup health insurance mistake is picking a smaller local insurance carrier rather than a big national brand.

Smaller insurance networks have limited coverage areas, making it difficult to find the right doctors or get adequate healthcare services. 

You’ll find this especially challenging when you’re running a remote team, as the coverage might not exist in the state where one of your employees lives.


  • Consider using one of the large national carriers, such as Blue Cross Blue Shield or United. These health carriers have a larger network that covers multiple states.
  • Consider choosing a preferred provider organization (PPO) plan over a health maintenance organization (HMO) if your team is spread out geographically. PPOs may be more expensive insurance options, but they give plan holders more flexibility and the choice of healthcare professionals when making doctors visits. 

If your team is spread out and you are after cost savings, Pebble can help you find the right PPO plan.

Sticking With the Same Provider Every Year

A trap you can fall into when it comes to getting employee health insurance for startups is choosing the same provider year after year.

We get it — choosing from among different providers’ benefits and costs can be overwhelming. Coverage plans also change year-to-year, which adds additional confusion.

But the fact that plans change annually is exactly why you should consider changing providers. Why stick with the same provider year after year if they aren’t adequately meeting your needs?


  • Ask for help from your insurance provider. They can help you decide which plan makes the most sense for your business.

If you would like to avoid the administrative part of handling insurance, health insurance experts like Pebble include third-party administrator (TPA) services, allowing you to outsource admin tasks associated with health benefits. 

  • Switch plans. As a startup, you can switch anytime if your plan doesn’t work for you or your employees. Just have a new provider lined up, so there are no breaks in insurance coverage.

Getting Too Many or Too Expensive Incidental Benefits

Offering too many additional benefits as an early-stage company can be tempting. After all, indirect compensation helps attract and retain talent. 

The 2022 MetLife Employee Benefit Trends study found that 51% of employee respondents would stay at their current employer longer if they had a wider selection of benefits.

And most employers do provide more than single-option plans — the CBIZ 2022 Employee Benefits Report shows that most employers go beyond the basics regarding health benefits.

The type of benefits employers offered employees in 2021. ‍

Some employees may get overwhelmed by all the additional options and sign up for insurance they don't need, which is a problem when the extra benefits aren’t being used.

Brokers charge huge markups for insurance, so holding on to plans that aren't a good fit for your team means you’re essentially throwing money away.


  • Consult your employees regarding their needs and budgets to create a competitive benefits package. Pebble can help conduct surveys to help personalize benefits.

Having a Non-Compliant Plan

Non-compliant (or non-qualified) plans are those that don’t meet Affordable Care Act (ACA) or  Employee Retirement Income Security Act (ERISA) standards.

The good news is the ACA offers small business tax credits to help offset the cost of premiums. 


  • Check whether your insurance plan is ACA-compliant. You can check your state’s website or exchange site. You can also purchase directly from qualified insurance companies, brokers, and navigators. This tool can help you. shares other ways to verify whether your insurance is ACA-compliant.

  • Make sure your practices are ERISA-compliant. You can check ERISA requirements on the Department of Labor website. This law mandates that companies offer the same health benefits to every employee.

Offering reimbursements for healthcare directly to employees is a common way that companies violate ERISA, so you should always avoid this practice. 

To make sure you are following the rules, ask a benefits professional, your legal counsel, or Pebble to help you navigate these requirements.

Getting Insurance in the Wrong State

Today’s startup companies have the advantage of working from anywhere, allowing them to choose where to operate their business.

If you are very early-stage and have not decided where your company headquarters will be, include healthcare costs as one of your main considerations. 

Each state has different policies. States like Massachusetts, New Jersey, Vermont, California, Rhode Island, and the District of Columbia (Washington D.C.) have some kind of individual or family health insurance requirement and charge tax penalties for non-compliance.

Health plan prices also differ from state to state. For example, plans in the state of New York can cost 2-3x as much as an equivalent plan in the state of Washington ($9,312 per year vs. $5,640 per year). 

Average cost of health insurance per state (2023 data). 


  • Consult with a professional. A licensed health insurance professional is your best bet for finding an affordable plan in your state.

Pebble can help you find plans that fit your budget and needs.

Final Thoughts: 8 Common Health Insurance Mistakes Startup Founders Make

Health insurance for startup founders is tricky.

It’s all about optimizing for the best protection with limited resources while avoiding scams. We listed eight common health insurance mistakes and how to address them, so you can avoid wasting resources.

Here at Pebble, we’re all about helping small business owners find the right health insurance plan to fit their needs. 

Contact us today and learn how much you could be saving.