Did you know? A whopping 94% of employers with 50 or more workers offered health insurance benefits in 2023, according to the Kaiser Family Foundation (KFF). Even among smaller firms, more than half (53%) extended health benefits. This might have you asking, “What are the rules around offering health benefits to employees?”
Rules for Offering Health Insurance to Employees
Here are three things you need to know.
1: There’s a mandate for Applicable Large Employers (ALEs).
The Affordable Care Act (ACA) requires ALEs to either:
- Offer minimum essential coverage that is “affordable” and provides “minimum value” to your full-employees and their dependents, or
- Make an employer shared responsibility (penalty) payment to the IRS.
The shared responsibility provisions are also often referred to the “employer mandate” or “the pay or play provisions” of the ACA.
Whether your business is an ALE depends on the size of your workforce in the preceding calendar year. To be an ALE, you must have had an average of at least 50 full-time employees (including full-time-equivalent employees). Employers that fall below the ALE threshold for the number of employees during the preceding calendar year are not subject the mandate.
According to the IRS, all types of employers could be ALEs, including tax-exempt organizations and government entities. If an ALE is comprised of multiple employers, the ALE members are aggregated. That means they are considered together in determining ALE status.
If you need help determining your ALE status, there are multiple online resources available.
- IRS Website: Determining if an employer is an Applicable Large Employer
- gov: Find out if your small business qualifies for SHOP (the Small Business Health Options Program) – this page includes a link to an FTE calculator
- com: ACA full-time equivalent (FTE) employee calculator
Your employee benefits broker, insurance agent, or CPA are other resources for you. If you don’t have a broker, use our Find a Broker tool.
2: If you’re not an ALE, you are not subject to the federal employer mandate.
If you had fewer than 50 full-time employees, including full-time equivalent workers, on average last year, your business is not subject to the employer mandate. But just because you’re not required to offer benefits by the employer mandate, that doesn’t mean there aren’t good reasons to consider employee health insurance.
Health insurance and other employee benefits can help you differentiate your business from others in your community and help you attract and retain workers.
3: The California Personal Health Mandate does not require employers to offer health insurance to employees.
Starting in 2020, California joined the ranks of a few select states that instituted an individual mandate for health insurance coverage. This mandate does not apply to employers, but rather to state residents.
To comply with the Personal Health Mandate, California residents must:
- have qualifying health insurance coverage;
- get an exemption from the requirement to have coverage; or
- pay a penalty when filing state income tax returns with the California Franchise Tax Board.
If you offer health insurance to your workers and it is Affordable Care Act compliant, that coverage will help your workers comply with the state mandate.
Coverage purchased by your employees on their own through the state’s public exchange, Covered California, or directly from an insurer also qualifies. Medicare (Part A and C) and most Medicaid plans also meet the state’s Personal Health Mandate. For complete information on the types of plans that qualify as minimum essential coverage, visit the California Department of Managed Health Care website.
If employees have no health insurance (or it does not qualify as ACA compliant), and they do not have an exemption, they must pay a penalty when filing their California taxes each year. Penalties are due for each month an individual or family went without health insurance during the tax year. For example, when filing in 2024 for tax year 2023, the penalties are at least $900 per adult and $450 per dependent child under 18 in the household. Without an exemption, a California family of four without health insurance for a full year would face a penalty of at least $2,700. The penalty would be higher for higher-income individuals as it would be based on a percentage of the household income. For more information about the penalty amount and exemptions, visit the California Franchise Tax Board web page. Again, it’s important to note that penalties are paid by individuals, not employers, when filing a state income tax return.
More Reasons to Offer Employee Health Insurance
Even if it’s not mandatory for your business to provide health insurance to employees, you may still want to consider it. Here’s why:
- Recruiting and Retention: Benefits can play a key role in helping you attract new employees and keep your current workforce. Health insurance consistently ranks among “must have” benefits for employees. That includes multiple MetLife Annual U.S. Employee Benefit Trends studies and research by the Society for Human Resource Management (SHRM).
- Tax Deduction: In general, premiums you pay for employees’ health insurance (and their eligible dependents) are 100% deductible as an ordinary business expense. That applies to your business’s federal income taxes as well as your state taxes. Consult your professional tax advisor concerning premium deductibility.
- Lower Payroll Taxes: Tax savings do not end with your business’s premium contributions for employees’ health insurance. If you offer a Section 125/Premium Only Plan (POP), you can reduce your payroll taxes, while giving employees the ability to fund their premium contributions with pre-tax money. That means employees could spend less than buying comparable coverage through the individual health insurance marketplace.
If your employees enroll in a High Deductible Health Plan (HDHP) and take part in a Premium Only Plan (POP), they can add a Health Savings Account (HSA) and reduce their taxes further. Together, an HDHP, POP, and HSA can yield a substantial payroll deduction.
Learn More by Talking with a Broker
Offering health insurance and other employee benefits sets an employer apart in the race to attract top talent. Talk with a benefits professional to learn more about your options. And be sure to ask about CaliforniaChoice and how you can access up to eight different health plans through our program. If you don’t have a broker, you can search for one on the MyCalChoice website.
