Small business health insurance in California

Overview of small business health insurance in California

In California, small businesses seeking to provide health insurance for their employees have an array of options to consider, each with distinct advantages and disadvantages. Ensuring employees have access to quality health insurance coverage is paramount. This shows your employees you’re invested in their well-being, helping them to sustain a positive work environment.

Employers in California can select from various coverage types, such as health maintenance organizations (HMOs), preferred provider organizations (PPOs), exclusive provider organizations (EPOs), and point of service (POS) plans.

Traditional group health insurance remains a staple for many businesses. It gives employees a standard level of coverage and eases the group’s collective healthcare costs. However, not every small organization can afford to offer its employees a group plan, or it may not meet the minimum requirements. An alternative to this is offering a defined contribution plan like a health reimbursement arrangement (HRA), which allows employers to provide tax-free reimbursements for qualified medical expenses and individual health insurance premiums.

Understanding the array of affordable options is essential for making informed decisions about health insurance benefits. This, in turn, can help in managing monthly health benefits costs.

Importance of small business health insurance

Small businesses are the backbone of the California economy, and offering health insurance is pivotal in nurturing a strong and competitive workforce. We’ll review the most important reasons for offering health benefits to your team.

The employer mandate

While the federal government doesn’t require small businesses in California to offer health insurance, the Affordable Care Act imposes an employer mandate on applicable large employers (ALEs).

Organizations with 50 or more full-time equivalent employees (FTEs) must offer affordable health benefits that meet minimum essential coverage (MEC) to at least 95% of full-time employees. If you don’t offer MEC to at least 95% of full-time employees and at least one of those employees gets a subsidy on the individual health insurance market, you could face steep penalties.

You could also face penalties as an ALE if your employer-sponsored coverage doesn’t pay for at least 60% of the covered healthcare expenses for the standard population. This is known as minimum value.

Small businesses and nonprofits in California with fewer than 50 FTEs don’t need to legally offer health coverage. However, doing so can help you attract and retain top-quality staff.

The California individual mandate

While the federal government has since repealed the ACA’s individual mandate, which required individuals to have health insurance overage, California has its own state-specific requirements. This rule operates independently of an individual’s employment status and pertains to all individuals in the state. Failing to maintain coverage can subject individuals to penalties on their tax returns.

As an employer, you can help your employees avoid penalties by offering qualifying health coverage.

Benefits of providing health insurance to employees

Offering health insurance to employees comes with various benefits beyond compliance with the employer mandate.

Providing your employees with health benefits can offer numerous advantages to you and your workforce, including the following:

• Attract and retain qualified employees
• Tax advantages
• Improved wellness and productivity

Health insurance is pivotal for fostering job satisfaction and promoting employee engagement. When your employees feel cared for and appreciated, they’re more likely to stay at your organization instead of looking for new opportunities, reducing turnover and the high cost of replacing an employee.

Offering a quality health benefit can also help you attract new employees. According to our 2024 Employee Benefits Survey, 81% of employees said an employer’s benefits package is an important factor in whether or not they accept a job with an organization. Additionally, 92% of employees rated health benefits as somewhat or very important.

Productivity is another top concern for employers. Providing employees with health coverage is an excellent way to promote productivity because employees can get the care they need. This reduces the number of times they’ll be out sick or worrying about unforeseen medical expenses.

Small business health insurance options in California

Navigating the health insurance landscape in California can be challenging for smaller organizations. With an array of coverage options designed to meet varied business needs, it’s important to understand the ins and outs of each approach.

Some of the options available to small businesses include:

• Traditional group health insurance
• Health reimbursement arrangements (HRAs)
• Supplemental benefits, like dental and vision insurance, health savings accounts (HSAs), and flexible spending accounts (FSAs)

Each option has its unique features, advantages, and considerations, enabling small business owners to tailor their health insurance offerings to reflect their financial capabilities and workforce needs.

Employers will want to consider the following as they review the available business health insurance plan options:

• Health insurance costs, such as monthly premiums
• Provider networks for employees
• The level of coverage available to employees
• Minimum participation requirements

Group health insurance in California

Traditional group health insurance is a well-established route for small businesses in California looking to offer health benefits. Employers can share the cost of premiums with employees, often covering a larger portion of it, leading to more affordable coverage options for their team. You can also extend coverage to employees’ spouses and dependents.

There are four main types of group plans in California:

• Preferred provider organization plans (PPOs): A PPO is historically the most common type of plan. They give their policyholders a network of preferred healthcare providers they contract with to provide care at a lower price. Members can seek care outside of their network but at a much higher cost.
• Health maintenance organization plans (HMOs): HMO plans offer a wide range of healthcare services through a network of providers that either contract exclusively with the HMO or agree to provide services to members. Members must select a primary care physician (PCP) and get referrals to see a specialist.
• Exclusive provider organization plans (EPOs): An EPO combines the network of preferred providers of an HMO with the freedom of seeing a specialist without a referral that a PPO offers. These plans don’t cover care from out-of-network providers.
• Point of service plans (POSs): With a POS plan, you pay less if you see in-network doctors. Like an HMO, you must get a referral from a primary care doctor to see a specialist.

The plan that’s best for you and your employees depends on what you want and how much you’re willing to spend.

Many larger organizations offer group health coverage because it provides members with cheaper monthly insurance premiums because the plan spreads the risk of insuring its members across the entire group. These plans generally require at least 70% of your employees to opt into coverage. Otherwise, you won’t be able to offer the plan.

Employers and employees split the cost of premiums. According to KFF, on average, employers covered 83% of their employees’ self-only premiums and 72% of family insurance premiums in 2023.

While these plans are common, they come with high costs, especially for small employers. Many small organizations don’t meet the minimum participation requirements or may have too small of a group to make the coverage affordable.

You have some options if a group plan is too expensive for your organization. A high deductible health plan (HDHP) has cheaper premiums than low deductible plans, but higher deductibles that your employees must meet before the insurance company begins to cover a portion of their costs. So, while it can benefit your budget, it can put extra financial strain on your employees.

Offering a group coverage HRA (GCHRA) can help your employees with their increased out-of-pocket expenses. This allows you to reimburse your employees tax-free for their qualifying out-of-pocket medical expenses.

Qualifying small businesses can also explore a range of medical plans that are compliant with the ACA through the Covered California Small Business Health Options Program (SHOP) marketplace, providing essential health benefits to employees. These plans are available to organizations with fewer than 50 FTEs and can be cheaper than non-SHOP group plans. Those with fewer than 25 employees whose average annual employee salary is less than $56,000 may also qualify for the Small Business Health Care Tax Credit.

The following companies offer small group health plans or SHOP plans in California in 2024, according to HealthCare.gov’s rate review site and Covered California.

Taking advantage of individual health insurance with an HRA

Group health insurance is expensive and doesn’t provide employers or employees with the flexibility they need to satisfy their needs. Thankfully, employers aren’t stuck with a one-size-fits-all traditional group plan. Health reimbursement arrangements (HRAs) present a flexible and affordable method for small businesses in California to offer health benefits.

With an HRA, employers can reimburse their employees tax-free for qualifying out-of-pocket costs and, depending on the type of HRA they offer, individual health insurance premiums. Employees can select individual health insurance plans that best fit their unique needs, giving them more control over their healthcare.

Employers save money by not buying a group plan and instead offering a fixed monthly allowance that fits their budget. HRAs have no minimum contribution requirements, and there’s no need to pre-fund an account. Employers only pay when employees submit qualified medical expense receipts for reimbursement.

Two types of HRAs that allow you to reimburse employees for their insurance premiums are:

• The qualified small employer HRA (QSEHRA): The QSEHRA allows organizations with fewer than 50 FTEs to reimburse their employees tax-free for qualifying out-of-pocket expenses and insurance premiums. The IRS caps maximum allowances and adjusts the limit annually for inflation. Employees must have MEC to participate, which includes individual plans or coverage through a spouse’s or parent’s group plan. You can differ allowances by employee family status, such as single or married. This is the perfect on-ramp for employers looking to offer their first health benefit.
• The individual coverage HRA (ICHRA): The ICHRA is for organizations of all sizes. It works like a QSEHRA but offers employers more flexibility and customization options. There’s no maximum contribution limit, so you can offer your workers more than you can with a QSEHRA. You can also differ allowances and customize eligibility with 11 employee classes. Employees must have individual coverage to participate in the benefit.

Supplemental benefits

California employers can also offer supplemental benefits alongside primary health plans to strengthen the overall benefits package. These benefits cover specific services and situations that traditional health insurance may not cover.

Our 2024 Employee Benefits Survey found that 91% of employees value dental insurance, and 81% value vision insurance. This shows the importance of offering these benefits to employees. While you can reimburse your employees for their dental and vision expenses with an HRA, there are other types of benefits you can offer.

Some of the most common types of ancillary health benefits include the following:

• Critical illness insurance: This provides coverage for medical emergencies regular insurance may not fully cover, such as cancer, stroke, and kidney failure. It provides a lump sum to cover medical bills or lost wages.
• Vision insurance: Most major medical plans don’t cover vision expenses for adults. Supplemental vision coverage can help your employees get the eye care they need.
• Dental coverage: Like vision coverage, most medical plans don’t cover adult dental care. Dental insurance can help your employees pay for exams and dental treatments, which can affect your employees’ overall health and well-being.
• Health savings account (HSA): An HSA is an employee-owned account that you and your employees can contribute to tax-free. Employees can use their HSA funds to pay for future qualifying medical expenses. However, HSAs require an HSA-qualified high deductible health plan (HDHP).
• Flexible spending account (FSA): A healthcare FSA works like an HRA and HSA, where you can help your employees pay for out-of-pocket costs tax-free. It covers many of the same items as an HRA, except for insurance premiums.

The average cost of health insurance in California

Many factors can influence the cost of health insurance in California, like age, your employees’ locations (rating areas), and the plan’s actuarial value. The type of plan, like an HMO or PPO, can also affect premiums.

According to KFF’s 2023 Employer Health Benefits Survey, the average annual premium in the U.S. was $8,435 for single coverage and $23,968 for family coverage. This is roughly $702.92 and $1,997.33 per month, respectively. These numbers point to the substantial financial commitment of employers looking to provide group health benefits to their employees.

Offering an HRA and reimbursing your employees for their individual health insurance premiums up to their set monthly allowance can help you better control your costs. You simply set an allowance that fits our budget. If you’re an ALE, you’ll need to adjust your employees’ allowances to meet the affordability guidelines.

The table below shows the lowest-cost premiums for each metal tier for a 40-year-old who purchases self-only individual health insurance on the Covered California exchange, according to KFF.

The cost of individual plans differs by age, location, the insurance company, and the metallic tier of coverage. Bronze plans have lower monthly premiums on average than silver or gold plans but have higher deductibles. These tiers reflect levels of coverage and premiums but not the quality of care. All plans on the public exchanges must provide at least MEC and cover the 10 essential health benefits. 

There are also plan options like catastrophic plans that can save your employees, and therefore, you, money on premiums if they qualify.

What plans are available on the individual market in California?

Individuals and families in California searching for health insurance coverage have many options to choose from on the individual market. Residents can use the state’s Covered California exchange to find a plan. More than 1.7 million residents enrolled in individual health insurance plans through Covered Califonia during 2023 open enrollment.

The following is a list of insurance carriers offering individual plans in the state.

All table data from Covered California.

You can enroll in a plan during the annual open enrollment period, which runs from November 1 through January 31 in California. If you experience a qualifying life event, you can use your special enrollment period to choose a plan. However, the availability of these plans may be based on your county, making it important to check your local health insurance options.

Individuals and families with marketplace plans may be eligible for federal premium tax credits. In 2023, 90% of residents using the exchange qualified for premium subsidies.

COBRA in California

The federal Consolidated Omnibus Budget Reconciliation Act of 1985 safeguards former employees and their dependents, allowing them to retain their group health coverage for a specific period if they experience a qualifying event.

Here’s how federal COBRA works:

• Eligibility: Former employees who quit, retire, or are terminated for reasons other than gross misconduct and employees with a reduction in hours may qualify for COBRA. Covered dependents may also be eligible for COBRA due to the death of an employee, divorce, the employee becomes eligible for Medicare, or if the dependent turns 26.
• Coverage duration: Up to 18 months, but eligible employees and dependents can extend this under certain circumstances.
• Applies to: All organizations with 20 or more FTEs

However, California mandates that more employers provide this coverage, ensuring individuals and their families experience no immediate loss in their health benefits. Cal-COBRA is a state-specific extension of the requirements that applies to all employers with group health plans with two to 19 employees.

Here’s a snapshot of how Cal-COBRA works:

• Coverage duration: Up to 36 months. If the organization must offer federal COBRA, they can extend COBRA coverage for another 18 months under Cal-COBRA if the employee or dependent chooses.
• Applies to: All organizations with two or more FTEs that offer health coverage.

All monthly premium payments under COBRA are the individual’s responsibility, not the employer's. This encompasses both the employer’s and employee’s portion of premium contributions, in addition to an administrative charge.

How PeopleKeep can help California employers

If you’re ready to offer flexible, cost-effective health benefits to your employees in California and beyond, PeopleKeep can help. Our HRA administration software makes it easy for small and mid-sized organizations to set up and manage their benefits in minutes each month.

With PeopleKeep, businesses design HRAs that meet their specific needs and budget, providing employees with the flexibility to choose the healthcare options that work best for them. This customization capability allows businesses to control costs and ensures that employees receive the coverage they need.

We handle the hard work for you, including reviewing your employees’ reimbursement requests. This saves you time and ensures compliance with the ACA, ERISA, HIPAA, and IRS regulations.