Understanding Small Business Health Insurance Requirements

One of the biggest questions we hear from employers is whether small businesses are legally required to offer health insurance. The answer depends on your company size, location, and the type of coverage you hope to provide. Below is a clear legal breakdown of federal rules, California-specific regulations, exemptions, and available tax credits—so you can make the best decisions for your business.

Federal Requirements Under the Affordable Care Act (ACA)

At the federal level, the Affordable Care Act does not require small businesses with fewer than 50 full-time equivalent employees (FTEs) to offer health insurance. The ACA’s Employer Mandate applies only to Applicable Large Employers (ALEs) —those with 50 or more FTEs.

If you have fewer than 50 FTEs:

• You are not legally required to provide health insurance.
• You will not face ACA penalties for choosing not to offer coverage.

If you have 50 or more FTEs:

• You must offer “affordable, minimum essential coverage” to full-time employees and their dependents.
• Failing to meet these requirements can lead to substantial IRS penalties.

Understanding where you fall in ACA calculations is essential. Many small businesses who think they’re “too small” may actually qualify as an ALE due to full-time equivalent rules.

California-Specific Rules Small Employers Should Know

California generally follows federal ACA guidelines—meaning small employers with fewer than 50 FTEs are not legally required to offer coverage. However, the state does have regulations that impact how benefits must be offered if you choose to provide them:

• Guaranteed availability: Carriers must offer small-group plans to eligible employers year-round.
• Minimum participation requirements: If you offer health insurance, most California carriers require a certain percentage of eligible employees to enroll (typically around 70%).
• Employer contribution rules: Carriers may also require employers to contribute at least 50% of the employee-only premium.

California also enforces strong protections for employees—including rules on waiting periods, eligibility definitions, and continuation coverage (Cal-COBRA).

Tax Credits for Small Businesses Offering Health Insurance

Even though health insurance isn’t mandatory for many small employers, there are financial incentives available. The federal Small Business Health Care Tax Credit helps eligible companies offset the cost of coverage.

Your business may qualify if:

• You have fewer than 25 full-time equivalent employees
• Your average wages are under $56,000 (indexed annually)
• You contribute at least 50% of the employee-only health premium
• You purchase coverage through Covered California for Small Business (CCSB)

This credit can cover up to 50% of your premium contributions for two consecutive years—making coverage more affordable for many employers.

Practical Guidance for California Small Businesses

Whether or not to offer health insurance is both a legal and strategic decision. Here’s what we recommend at Murillo Insurance Brokers:

• Know your ACA status. Calculate your full-time equivalents to determine whether the Employer Mandate applies.
• Factor in employee expectations. In today’s competitive hiring market, benefits often determine whether you keep or lose top talent.
• Explore cost-saving options. Small-group plans, level-funded plans, and supplemental benefits can help control expenses.
• Review compliance obligations. Even voluntary plans trigger certain notices, ERISA rules, and ACA reporting requirements.

Understanding your small business health insurance requirements can help protect your company from compliance issues while strengthening your benefits strategy.

Need Help Navigating Your Options?

At Murillo Insurance Brokers, we help Fresno-area employers make confident, informed decisions about group health plans, employee benefits, and compliance. Whether you’re weighing your first plan or reassessing your current coverage, our team can guide you step-by-step.

Ready to explore the best options for your small business? Contact us anytime for a personalized consultation.