California small businesses are not always required to offer health insurance, but companies with 1–50 employees can compare small group plans, SHOP options, contribution strategies, and carrier portfolios. By doing so, you may find that offering health insurance is more than just a good idea: it’s affordable, too. Running your small business in California is often a balancing act between growing your company, maintaining all necessary compliance, and recruiting and retaining top tier talent. Offering a comprehensive benefits package is one of the best ways to attract and retain outstanding employees, which in turn can help you grow.
If you’re a new business owner, you may not know exactly what you’re legally required to offer, what you can add, or how much you need to budget for health insurance. J.C. Lewis and team are here to help you cut through the legal regulatory language and see your options. We specialize in helping keep employees covered in California for small business clients.
The Legal Requirements: Do You Actually Have to Offer Insurance?
Many business owners, rightfully so, are very concerned about failing to be in compliance with state and federal laws. Under the Affordable Care Act, employer mandates are tied to company size, which means many smaller businesses don’t need to fear facing penalties.
Businesses with 1 to 49 Full-Time Equivalent (FTE) Employees
If you have fewer than 50 full-time employees, legally you don’t have to offer health insurance at all. There are no penalties in California for small business owners who decide not to offer health insurance as a benefit. However, there are reasons you may want to offer a plan since benefits do help attract and retain amazing employees.
Businesses with 50 or More FTE Employees
If you do have 50 or more employees who are classified as FTE, your business becomes classified as an Applicable Large Employer (ALE). An ALE is legally mandated to offer a health insurance plan that meets minimum essential coverage requirements. You have to offer this benefit to at least 95% of your full-time employees. If you don’t, you will be hit with some fairly steep penalties.
It’s important to note the wording here: a “full-time equivalent employee” may not necessarily be an employee who works 40 hours a week. Determining your FTE count is not the same as simply adding up how many employees you have. If you have a number of part-time or seasonal employees, you could be classified as an ALE without realizing it. We can help you determine your categorization so you don’t get hit with surprise non-compliance fines.
Defining the Baseline Rules for California Small Group Plans
If you do decide to offer small business health insurance in California and you have fewer than 50 FTE employees, you do still have to meet certain participation and contribution levels as established by both insurance carriers and the state.
Participation Requirements
Insurance carriers usually require a certain number of your eligible employees to enroll in the plan in order to avoid adverse selection, which occurs when the only employees to sign up for health insurance are those with immediate medical needs. In California, most carriers require that 70% of your eligible employees have to participate. However, there are some exclusions: employees who already have coverage through a spouse’s policy, Medi-Cal, or Medicare are typically not counted as an eligible employee.
Minimum Employer Contribution
In addition to a minimum number of participating employees, you are expected to contribute a minimum amount towards the lowest-cost plan premium. In California, this is traditionally 50% of the employee-only premium cost. There are no requirements for covering the premiums for dependents (spouses/children), although business owners can decide to do so as an added benefit.
Navigating Plan Options: HMO, PPO, HSA, and SHOP
When shopping for small business health insurance in California, you will find most carriers offer various tiers. These are typically classified as Bronze, Silver, Gold, and Platinum plans. Each plan splits cost between the plan and the employee differently. They also make use of different system structures that you will have to pick between.
HMO (Health Maintenance Organization)
HMO plans make use of a specific network of doctors, hospitals, and other healthcare facilities. Your employees will select a Primary Care Physician (PCP) who they will work closely with and who will refer them to specialists as needed. Because these networks are tightly managed, HMO premiums are often the most cost-effective option for small businesses on a budget.
PPO (Preferred Provider Organization)
PPO plans are the most flexible option. Employees don’t have to select a PCP, nor do they need referrals to see specialists. They can go to care providers outside of the plan’s network, though they will pay higher out-of-pocket costs. Because they are more flexible, though, PPOs also come with higher premiums.
HSA-Compatible Plans (Health Savings Accounts)
An HSA-compatible plan is a combination of a High-Deductible Health Plan (HDHP) and a tax-advantaged savings account. On the employer side, the premiums are lower. On the employee side, employees can contribute pre-tax dollars to the account to cover qualified medical expenses and deductibles. This is a good middle ground that gives employees choices while keeping premiums manageable for you.
Small Business Health Options Program (SHOP)
The Small Business Health Options Program (SHOP) is a marketplace where small business owners can purchase health plans. One of its advantages is that it gives you access to the Small Bus8iness Health Care Tax Credit, which can provide a rebate of up to half of your premium contributions. To qualify, you have to have fewer than 25 FTE employees who make a specific average wage.
Cost Factors and Designing a Budget
One of the biggest questions our clients have is “How much should I budget for insurance?” Premiums for small groups in California are typically determined by age rather than medical condition. This means that if your team is primarily older individuals, the insurance carrier is going to set your premiums a little higher. Other factors including the location of your headquarters and the specific plan tier.
To keep your budget under control, many employers use what is called a Defined Contribution Strategy. This model sets a fixed dollar amount per employee per month or a flat percentage of the baseline selected plan. Employees can then apply that contribution towards whichever plan fits their needs. If they want to enroll in a platinum-level PPO, they can, but they will have to pay the difference between that higher premium and your contribution. On the other hand, employees who may not need as much access to healthcare may opt for a lower-level bronze plan that your contribution fully covers.
Taking the Hassle Out of the Small Group Setup Process
Trying to navigate the insurance process, compare multiple carriers, figure out the jargon, understand the regulations, and calculate the various employee percentages can be a headache. Even with this information, there’s still no objectively “best” plan. What’s best for you may not be the best for another company.
If your business is close to the FTE or wage threshold, do not guess. J.C. Lewis can review your group details, identify whether SHOP belongs in the comparison, and help coordinate ne4xt steps with your tax professional. We’ll also assist you in understanding your compliance requirements and potential tax incentives. Providing health benefits to your team doesn’t have to be a nightmare. If you need to make certain your team is covered in California on a small business budget, reach out to JC Lewis today to start the discussion.
