Are California Employers Required to Offer Health Insurance?

Whether a California employer is required to offer health insurance depends largely on the size of the employer under the federal Affordable Care Act. Smaller employers are generally not subject to the ACA employer shared responsibility provisions, while businesses that qualify as Applicable Large Employers can have additional coverage and reporting responsibilities.

Quick answer: Employers with fewer than 50 full-time employees, including full-time-equivalent employees for purposes of determining employer size, are generally not subject to the federal ACA employer mandate. Employers averaging at least 50 full-time employees, including full-time equivalents, during the prior calendar year are generally considered Applicable Large Employers and may be subject to the ACA employer shared responsibility provisions.

For a broader overview of group coverage, plan options, costs, eligibility and employer considerations, see our complete guide to small business health insurance in California.

Does California Require Every Employer to Offer Health Insurance?

No. A California business is not automatically required to offer health insurance simply because it has employees.

The major employer health coverage requirement affecting many businesses comes from the federal Affordable Care Act, commonly called the ACA.

Under the ACA's employer shared responsibility provisions, certain larger employers can be required to offer qualifying health coverage to full-time employees and their dependents or potentially owe an employer shared responsibility payment to the IRS.

Smaller employers that fall below the Applicable Large Employer threshold are generally not subject to these federal employer shared responsibility provisions.

For a broader explanation of group coverage, see our California Employer Health Insurance Guide.

What Is the 50-Employee Health Insurance Rule?

The number 50 is important because the ACA generally defines an Applicable Large Employer, commonly called an ALE, as an employer that averaged at least 50 full-time employees, including full-time-equivalent employees, during the preceding calendar year.

If an employer averaged fewer than 50 full-time employees, including full-time equivalents, during the prior calendar year, it generally is not an ALE for the current calendar year and is not subject to the ACA employer shared responsibility provisions.

If the employer averaged 50 or more, it generally is an ALE and must evaluate its obligations under the employer shared responsibility rules.

Does 50 Employees Mean 50 People on Payroll?

Not necessarily.

The ACA calculation includes both full-time employees and full-time-equivalent employees.

This means a business can potentially reach the 50-employee threshold even if it has fewer than 50 employees who individually work full time.

Hours worked by part-time employees can be combined when determining the employer's number of full-time equivalents.

What Is a Full-Time Employee Under the ACA?

For purposes of the ACA employer shared responsibility provisions, an employee is generally considered full time for a calendar month if the employee averages at least 30 hours of service per week or at least 130 hours of service during the month.

This definition is specifically important for the ACA employer mandate and should not automatically be assumed to apply to every other employment law or employee benefit rule.

What Is a Full-Time-Equivalent Employee?

A full-time-equivalent employee, or FTE, is a calculation used to account for hours worked by employees who are not individually considered full time.

For purposes of determining whether an employer is an Applicable Large Employer, the IRS generally calculates monthly full-time equivalents by:

1. Adding the hours of service for employees who are not full time, subject to a maximum of 120 hours for any one employee for the month
2. Dividing the total by 120

The resulting full-time equivalents are added to the employer's full-time employees when determining employer size.

Example of Full-Time-Equivalent Employees

Suppose a business has 40 full-time employees and 20 additional employees who each have 60 hours of service during a particular month.

The 20 employees produce 1,200 combined hours of service:

20 employees × 60 hours = 1,200 hours

Dividing 1,200 by 120 produces 10 full-time equivalents:

1,200 ÷ 120 = 10 full-time equivalents

For that month's employer-size calculation, the business would therefore have:

40 full-time employees + 10 full-time equivalents = 50

This illustrates why simply counting full-time employees may not determine whether a business is an Applicable Large Employer.

Are Part-Time Employees Included in the 50-Employee Calculation?

Yes, their hours can count toward the calculation of full-time-equivalent employees.

However, this does not mean every part-time employee becomes a full-time employee or that an Applicable Large Employer must necessarily offer coverage to every part-time employee to avoid an employer shared responsibility payment.

Full-time equivalents are primarily used to determine whether the employer reaches the ALE threshold.

Which Year Is Used to Determine Employer Size?

Applicable Large Employer status is generally determined each calendar year using the employer's average workforce during the preceding calendar year.

An employer generally determines its number of full-time employees and full-time equivalents for each month of the prior calendar year and uses those figures to calculate its average workforce size.

Special rules can apply to new employers and certain seasonal workforces.

What Happens if a Business Has 50 or More Full-Time-Equivalent Employees?

If a business qualifies as an Applicable Large Employer, the ACA employer shared responsibility provisions apply.

Generally, an ALE must offer qualifying health coverage to its full-time employees and offer coverage to their dependents, or it can potentially owe an employer shared responsibility payment to the IRS if the applicable requirements for a payment are met.

The rules involve several concepts, including:

• Minimum essential coverage
• Affordability
• Minimum value
• Offers of coverage to full-time employees and their dependents
• Employer information reporting

Whether an employer actually owes a payment depends on additional circumstances and is not determined solely by reaching 50 employees.

Does an Applicable Large Employer Have to Offer Coverage to Everyone?

The ACA employer shared responsibility rules focus on offers of coverage to full-time employees and their dependents.

For one component of the employer shared responsibility rules, an ALE generally needs to offer minimum essential coverage to at least 95% of its full-time employees and their dependents to avoid potential liability under that portion of the law.

Separate affordability and minimum-value requirements can affect potential liability involving individual full-time employees.

Because these rules can have significant tax consequences, employers near or above the ALE threshold should review their specific obligations with an appropriate benefits, legal or tax professional.

What Does Affordable Employer Coverage Mean?

Applicable Large Employers are subject to ACA affordability requirements.

The affordability standard is adjusted periodically and involves the employee's required contribution for applicable employer-sponsored coverage.

Because an employer generally does not know an employee's total household income, federal rules provide affordability safe harbors that employers may be able to use when evaluating their coverage offers.

The applicable affordability percentage can change by year, so employers should use the current IRS standard rather than relying on an older percentage.

What Does Minimum Value Mean?

In general, an employer-sponsored plan provides minimum value when it is designed to pay at least 60% of the total allowed cost of benefits expected to be incurred under the plan and meets applicable federal requirements.

Minimum value is different from the monthly premium and different from the affordability requirement.

A plan can therefore need to satisfy multiple standards when an Applicable Large Employer evaluates its ACA responsibilities.

What if a Business Has Fewer Than 50 Full-Time-Equivalent Employees?

A business below the Applicable Large Employer threshold is generally not required by the ACA employer shared responsibility provisions to offer health insurance.

However, the business can still choose to provide employer-sponsored coverage.

California's small-group health insurance market generally serves employers with 1 to 100 employees, subject to applicable eligibility requirements.

See Small Business Health Insurance in California: Eligibility, Costs and Requirements for more information about voluntarily establishing coverage.

Is the Small-Group Market the Same as the Employer-Mandate Threshold?

No. These are two different concepts.

California's small-group insurance market generally extends to employers with up to 100 employees, while the federal ACA Applicable Large Employer threshold generally begins at 50 full-time employees, including full-time equivalents.

As a result, a business can fall within California's small-group insurance market while also being large enough to qualify as an Applicable Large Employer under federal law.

This distinction is important because the terms small group and Applicable Large Employer are used for different purposes.

Can a Business With Fewer Than 50 Employees Voluntarily Offer Health Insurance?

Yes.

Many California businesses below the ACA employer-mandate threshold voluntarily offer health insurance as an employee benefit.

Eligible businesses may obtain small-group health insurance through insurance carriers or through Covered California for Small Business when program requirements are satisfied.

Employers that voluntarily offer coverage still need to follow the rules applicable to the health plan and insurance arrangement they establish.

Do Related Businesses Count Separately?

Not always.

Federal aggregation rules can require businesses with certain common ownership or other relationships to be treated as a single employer when determining Applicable Large Employer status.

This means an owner cannot necessarily evaluate each related company independently when determining whether the 50-employee threshold has been reached.

For example, two related companies that each individually have fewer than 50 employees could potentially be treated together for purposes of determining ALE status if the applicable aggregation rules apply.

Are There Special Rules for Seasonal Workers?

Yes. The ACA contains a seasonal-worker exception that can affect whether an employer is considered an Applicable Large Employer.

In general, an employer may avoid ALE status under this exception if its workforce exceeds 50 full-time employees, including full-time equivalents, for 120 days or fewer during the preceding calendar year and the employees in excess of 50 during that period are seasonal workers under the applicable rules.

The ACA also uses the terms seasonal worker and seasonal employee in different contexts, so employers with seasonal workforces should review the specific IRS rules rather than assuming all temporary or seasonal employees are excluded.

Do Applicable Large Employers Have Reporting Requirements?

Yes. Applicable Large Employers generally have ACA information-reporting responsibilities regarding the health coverage offered to employees.

This commonly involves IRS Forms 1094-C and 1095-C.

These reporting requirements are separate from actually enrolling employees in health coverage and can apply even when an employer believes it has satisfied its coverage obligations.

What Happens if an Applicable Large Employer Does Not Offer Qualifying Coverage?

An Applicable Large Employer can potentially owe an employer shared responsibility payment to the IRS if the requirements for a payment are met.

Potential liability depends on circumstances including the employer's offer of coverage and whether at least one full-time employee receives a premium tax credit for individual Marketplace coverage.

The IRS determines and assesses employer shared responsibility payments. Employers do not simply calculate a penalty and automatically include it with an information return.

If the IRS determines that an employer may owe a payment, the employer generally receives notice and has an opportunity to respond before liability is assessed.

Does Offering Health Insurance Automatically Satisfy the Employer Mandate?

No.

For an Applicable Large Employer, simply offering some type of health insurance does not necessarily satisfy all ACA employer shared responsibility requirements.

The coverage and offer may need to satisfy requirements involving:

• Who receives an offer of coverage
• Minimum essential coverage
• Affordability
• Minimum value
• Dependent coverage

Employers should evaluate the actual plan and contribution structure rather than assuming any group health plan automatically satisfies every requirement.

How Much Does Employer Health Insurance Cost?

Whether an employer is required to offer health insurance and how much that insurance costs are separate questions.

Group premiums can vary based on factors such as employee ages, locations, carrier, provider network and plan selection.

The employer's actual expense also depends on how much of the premium the business contributes.

See How Much Does Small Business Health Insurance Cost in California? for a detailed explanation.

What Should California Employers Check?

Employers reviewing their health insurance responsibilities can consider the following:

• Determine the number of full-time employees
• Calculate full-time-equivalent employees
• Review the prior calendar year's average workforce
• Determine whether related businesses must be aggregated
• Review any applicable seasonal-worker rules
• Determine whether the business qualifies as an Applicable Large Employer
• If applicable, review affordability and minimum-value requirements
• Review ACA information-reporting responsibilities
• Confirm employee eligibility and enrollment procedures

Frequently Asked Questions

Are California employers required to provide health insurance?

Not every employer is required to offer health insurance. Employers with fewer than 50 full-time employees, including full-time-equivalent employees for purposes of determining employer size, are generally not subject to the federal ACA employer shared responsibility provisions.

How many employees trigger the ACA employer mandate?

An employer that averaged at least 50 full-time employees, including full-time-equivalent employees, during the preceding calendar year is generally considered an Applicable Large Employer for the current year.

Is a full-time employee someone who works 40 hours per week?

Not for purposes of the ACA employer shared responsibility provisions. Under these rules, an employee is generally considered full time if the employee averages at least 30 hours of service per week or at least 130 hours of service during a calendar month.

Do part-time employees count toward the 50-employee threshold?

Yes. Hours from employees who are not full time are combined to calculate full-time-equivalent employees when determining whether an employer reaches the Applicable Large Employer threshold.

If I have 49 full-time employees, am I automatically exempt?

Not necessarily. Hours worked by part-time employees can produce full-time equivalents that push the employer to 50 or more for purposes of determining ALE status. Related-employer aggregation rules can also affect the calculation.

Does having 50 employees mean the employer automatically owes a penalty?

No. Reaching the Applicable Large Employer threshold makes the employer subject to the employer shared responsibility provisions. Whether a payment is actually owed depends on additional factors involving the employer's coverage offer and employee circumstances.

Can an employer with fewer than 50 employees still offer group health insurance?

Yes. California small employers can voluntarily offer group health insurance even when they are not subject to the federal employer mandate.

Is a California business with 50 employees considered a large-group employer?

Not necessarily. The ACA's Applicable Large Employer definition and California's insurance-market definitions serve different purposes. A business can qualify as an Applicable Large Employer under federal law while still obtaining coverage within California's small-group insurance market, depending on its circumstances.

This article is for general educational and informational purposes and is not legal, tax or accounting advice. Employer shared responsibility requirements depend on workforce calculations, business relationships, coverage arrangements and other circumstances, and applicable standards can change over time. Employers should review current IRS and applicable California guidance and consult appropriate legal or tax professionals regarding requirements specific to their business.