If you’re running a small business, you’re probably feeling the pressure of rising costs everywhere — and your HR budget is no exception. Health plan renewals are coming in higher than expected, voluntary benefits are shifting, and the economy still feels a little unpredictable. Add in the lingering effects of layoffs and market adjustments, and it’s no wonder small business owners are being cautious about 2026. The good news? With a little foresight, you can plan smarter and protect your people investment.
Health benefits are getting more expensive (again)
We’ve seen this coming for a while. According to Mercer and Willis Towers Watson, overall employer health costs are projected to rise 6–8% in 2026, but for small businesses, the story is even tougher. The Kaiser Family Foundation reports that small-group health insurance premiums could climb 10–11% next year, depending on your state and carrier. That’s being driven by higher prescription drug prices, hospital costs, and a post-pandemic uptick in elective procedures. For our clients at Red Clover, we’re seeing some small group plan renewals coming in as high as 22% and are working with our broker partners to survey the market for alternatives.
What to do: Start modeling your renewals now. If you offer a high-deductible health plan (HDHP), consider pairing it with a more generous employer HSA contribution — that’s a big win for employees and can soften the blow of premium increases. And remember, you don’t have to overhaul everything. Work with your benefits broker or HR team to identify opportunities to add perceived value without blowing up your budget.
Legal and compliance updates worth watching
Regulators are busy again, and that means more to think about in your HR budget. The Department of Labor’s 2024 overtime rule, which proposed increasing the salary threshold for exempt employees to roughly $58,656 per year, was struck down in federal court late last year (Texas v. DOL, 2024). For now, the 2019 threshold of $35,568 remains in effect. The current administration has indicated it will re‑evaluate the rule, but there’s no new proposal on the table yet.
So what does that mean for you? It’s not time to reclassify employees just yet, but it’s smart to budget for the possibility that new salary levels could come back in some form. Use this as an opportunity to review job descriptions and salary bands to ensure consistency — even if nothing changes legally. Also, make sure that you are up to date with any changes at the state level. Your HR partner can help here.
The economy isn’t bad — it’s just weird
After a few rocky years, the economy heading into 2026 looks… complicated. Layoffs in tech and media have made headlines, but many small businesses are still struggling to fill jobs. The unemployment rate crept up to 4.4% in late 2025, but that’s still considered healthy. Wage growth is finally stabilizing, which gives small employers some breathing room, but financing remains tight as lenders stay cautious.
So what does that mean for your HR budget? You might not need to plan for huge pay jumps next year, but this is the time to double down on retention. Development, training, and clear communication about career paths will keep your best people engaged and prevent costly turnover down the road.
Rethinking total rewards and flexibility
It’s no surprise that employees still want flexibility and financial stability above all else. Gallup’s 2025 survey found that 64% of workers value flexible scheduling more than job titles or perks. For small businesses, that’s good news — you can compete on culture and autonomy instead of big-company benefits.
Think about where your dollars have the biggest impact. A flexible work schedule or wellness allowance might matter more to your team than adding another insurance option. Ask your employees what benefits they actually use, and cut the ones that don’t move the needle. When every dollar counts, data-driven decisions build trust and show transparency.
Practical planning tips for your 2026 HR budget
- Start now. If you haven’t already started your budget planning, you’re running late. Especially if you’re headed into open enrollment in November.
- Collaborate with finance. HR and finance should be working from the same numbers. Build a shared model that connects benefits, compensation, and turnover to business performance.
- Model scenarios. Plan for a 7% increase (worst case), 5% (middle), and 3% (best). Add a few different wage increase assumptions to see the impact. This will be industry dependent so work with HR to understand your market.
- Review vendor contracts. Look for auto-renew clauses or built-in cost escalators that might surprise you. When possible, lock in pricing on multi-year contracts.
- Plan for uncertainty. Small shifts in healthcare or labor policy could have budget implications. Build in a small contingency — even 1–2% of payroll — to cover new requirements or adjustments.
The bottom line
For small businesses, 2026 HR budgeting is about balance — controlling costs without losing sight of your people. The numbers might look daunting, but small businesses have something big companies don’t: the ability to pivot quickly. Start early, plan thoughtfully, and stay transparent with your team. You’ll not only manage your costs, but you’ll also strengthen your culture along the way.
