Group health insurance questions, answered

In most states, you need at least 2 eligible employees (sometimes the owner counts, sometimes not — varies by carrier and state). The maximum for “small group” status is 50 full-time-equivalent employees, after which ACA large group rules apply. Some states use different thresholds (California considers 1-100 employees small group). If you’re a sole proprietor with no employees, you typically can’t buy group coverage — you’d enroll in individual coverage through the marketplace instead.

The dividing line is 50 full-time-equivalent (FTE) employees. Under 50 FTEs, you’re a small group: subject to ACA small group market rules, community-rated premiums (rates can’t be based on health), defined plan tiers, guaranteed-issue. At 50 or more FTEs, you’re a large group: subject to the ACA employer mandate (must offer affordable, minimum-value coverage to FTEs), but with more plan design flexibility, access to level-funded and self-funded options, and more carrier choice.

A full-time employee is someone working 30 or more hours per week. To calculate FTEs from part-time employees: add up all part-time hours worked in a month, divide by 120 (or by 30 hours × 4 weeks). For example, four part-time employees working 15 hours each equal 60 total part-time hours per week, which divided by 30 = 2 FTEs. Add full-time count + part-time FTE conversion = total FTE count. This number determines your ACA group classification.

Employers with 50 or more full-time-equivalent employees must offer affordable, minimum-value health coverage to their full-time employees and their dependent children up to age 26 — or pay penalties to the IRS. “Affordable” means the employee’s contribution for self-only coverage doesn’t exceed about 9.5% of household income (adjusted yearly). “Minimum value” means the plan covers at least 60% of typical medical costs. Penalties are calculated per employee per month and can be substantial.

There’s no federal requirement, but most carriers require employers to contribute at least 50% of the employee-only premium for the lowest-cost plan offered. Some states have higher contribution requirements. Most employers contribute 60-100% of employee-only premiums, and may contribute toward dependent premiums as well. Higher employer contributions improve employee retention but increase business costs. We model multiple contribution structures so you can find the right balance for your budget and benefits philosophy.

Group plans typically have a first-of-the-month effective date. To meet a target effective date, applications and employee enrollment usually need to be completed 15-30 days in advance. The fourth quarter is the busiest time for group renewals (most plans renew January 1) — start the quote process at least 60 days before your target effective date, especially if quoting during peak renewal season. Mid-year starts are possible but enrollment can take longer due to medical questionnaire requirements.

Level-funded plans combine elements of fully-insured and self-funded plans. The employer pays a fixed monthly amount (like fully-insured) but a portion goes toward claims rather than to the carrier as premium. If actual claims come in lower than expected, the employer may receive a year-end refund. If claims exceed expectations, stop-loss insurance protects against catastrophic costs. Level-funded works well for healthier groups of 10+ employees who can benefit from their good claims experience without taking on traditional self-funded risk.

Fully-insured: the employer pays a fixed premium to a carrier, which assumes all the risk and pays all claims. Premiums are predictable but include the carrier’s profit margin. Self-funded: the employer pays for actual claims directly (usually through a Third-Party Administrator) and buys stop-loss insurance for catastrophic protection. Costs vary month-to-month based on claims, but can be lower for healthier groups. Self-funded plans aren’t subject to most state-level mandates and can be customized more — but require larger groups (usually 50+) to spread risk effectively.

Yes, for very small employers that meet specific criteria. To qualify: fewer than 25 full-time-equivalent employees, average annual wages below an inflation-adjusted threshold (around $56,000 in recent years), employer pays at least 50% of employee-only premium, and coverage is purchased through the Small Business Health Options Program (SHOP) marketplace. The credit can be up to 50% of premiums paid (35% for nonprofits) for two consecutive years. Few employers actually use it because of the SHOP requirement and tight wage threshold.

Most group health carriers require a minimum percentage of eligible employees to enroll for the group to be quoted and bound — typically 70-75% (sometimes lower in states with looser rules). Employees who have other coverage (spouse’s plan, Medicare, individual marketplace, etc.) usually don’t count against the participation requirement — they’re “valid waivers.” The requirement prevents adverse selection (only sick employees enrolling). Some carriers have lower requirements during certain “open window” periods like the fourth quarter.

Yes, in most cases. Most carriers and states allow employers to set eligibility hours — commonly 30+ hours/week, but sometimes 20+ — and exclude those below the threshold. However, large employers subject to the ACA employer mandate must offer coverage to anyone averaging 30+ hours/week (the federal definition of full-time for ACA purposes). You can have different eligibility tiers (e.g., management vs. hourly), as long as classifications are non-discriminatory under HIPAA and ACA rules.

Yes. Employer-paid health insurance premiums are generally fully tax-deductible as a business expense. Employee contributions made through a Section 125 (cafeteria) plan are paid with pre-tax dollars, reducing both employee and employer payroll taxes. Self-employed business owners can typically deduct their own health insurance premiums above the line on personal tax returns.

A Section 125 plan (cafeteria plan or premium-only plan) lets employees pay their share of health insurance premiums on a pre-tax basis. Both employer and employee save on payroll taxes (FICA, Medicare, and most state taxes). The setup is straightforward — a one-page plan document plus annual enrollment communications. Most employers offering group health benefits have a Section 125 plan in place. If you don’t have one, you’re leaving tax savings on the table. We can help establish one or refer you to a TPA.