When it comes to providing health insurance for employees, many small business owners consider getting a group health insurance plan. Group health insurance plans allow small businesses to band together to get better rates and coverage options compared to what they could obtain individually. However, group health insurance plans do have requirements for the number of eligible employees a company must have in order to qualify. So how many employees do you need for a group health insurance plan?
What is a Group Health Insurance Plan?
A group health insurance plan provides health insurance coverage to a group of people, usually employees of a company. With a group health plan, the company contracts with a health insurance provider to cover the group of employees under a single plan. Employees then receive health insurance coverage at a group rate.
Group plans are usually much more affordable than individual health insurance plans. By pooling together a group of employees, the overall risk is reduced which allows the insurer to offer lower premiums. Many group plans also do not require employees to undergo medical underwriting, unlike individual plans where pre-existing conditions can affect eligibility and rate.
There are several different types of group health insurance plans:
- Employer-sponsored group health plans: These are group plans offered by a private employer. The employer negotiates with health insurance companies for rates and coverage options for their employees.
- Union-sponsored plans: Labor unions often sponsor group health plans for union members.
- Association plans: Professional organizations or industry trade groups sometimes offer group plans for association members.
No matter what type of group plan it is, the insurance company evaluates the group as a whole when determining rates and eligibility. Lower risk groups get better rates. Employer-sponsored group plans are by far the most common type used by small businesses looking for an affordable employee health insurance option.
What are the Minimum Employee Requirements for Group Health Insurance?
In order to qualify for a group health insurance plan, employers must meet certain minimum participation requirements as mandated by state and federal regulations. Rules can vary somewhat by state and type of group plan, but in general here are the standard minimum employee requirements for a group health insurance plan:
- At least 2 employees – Most states require at least 2 full-time equivalent employees to form a group insurance plan. Some states may only require 1 common law employee, which would include owners and partners. But 2 employees is the standard rule of thumb.
- 75% participation – 75% of eligible employees must enroll in the group health plan after applicable waiting periods. Some states may only require a 50% participation rate. If enrollment drops below the minimum requirement, the plan could be discontinued.
- No sole proprietors – Sole proprietors with no employees cannot purchase true group health insurance. However, some states do offer special plans for self-employed individuals.
- Common law employees – To count towards participation requirements, employees must meet the IRS definition of common law employee. Independent contractors do not generally count.
In summary, to be eligible for a standard group health insurance plan, a business must have at least 2 common law employees enrolled on the plan. Of course, the more eligible employees who participate, the better the rates and risk pool for the group.
What Types of Employees Count Towards Group Plan Eligibility?
When looking at minimum employee requirements, what types of workers actually count as an eligible employee? Here are some general rules on which employees qualify under group plan eligibility guidelines:
- Full-time employees who work 30+ hours per week
- Part-time employees working a minimum # of hours per week, as defined by the company (usually 15-20 hours)
- Seasonal workers and temporary employees who meet hourly requirements
- Union employees (if part of a union-sponsored plan)
- Active employees only (retirees and COBRA participants do not count)
Self-employed individuals such as sole proprietors, partners, and LLC member/owners cannot participate in a group plan by themselves since they do not meet the definition of an employee. However, many states allow self-employed individuals to join a group plan so long as they have at least one common law employee enrolled as well.
Companies should be sure to consult their state laws and group health insurance carriers to confirm which workers qualify as eligible employees towards participation requirements.
Do Retirees, Part-Time, Seasonal and Temporary Employees Count?
Retirees, part-time, seasonal, and temporary employees can be included in a group health insurance plan, but they generally do not count towards minimum participation requirements. Here are some key facts on how these types of workers impact group eligibility:
- Retirees – Most retired employees cannot be counted towards group minimum participation requirements. However, many group plans allow businesses to cover eligible retirees through their active employee plan.
- Part-Time – Part-time employees usually can enroll in a group health plan, but may need to meet hourly requirements such as working 15+ hours a week. Each carrier may have different rules regarding part-timers.
- Seasonal – Seasonal workers can join a group health plan if they meet hourly eligibility requirements. But seasonal employees likely do not count towards participation minimums.
- Temporary – Temporary and contract employees may be eligible for coverage if they meet hourly requirements. But most carriers exclude temps from participation calculations.
The main takeaway is that part-time, seasonal and temporary employees can often enroll in a group health plan, however they usually do not count towards the 75% minimum participation requirements. Only full-time active employees meeting minimum hours thresholds are used for participation rate calculations in most cases.
Are There Penalties for Not Meeting Group Plan Requirements?
If a company’s group health insurance plan does not continuously meet minimum participation and contribution requirements, it could put the plan and employee’s coverage at risk.
If participation drops below state-defined levels, the insurance carrier may decide to increase premiums, discontinue the group policy altogether, or take other actions to bring the plan into compliance. Maintaining group size and participation minimums is key.
There are no specific tax penalties for failing to meet participation requirements. However, the company may lose tax benefits associated with providing group health insurance if the plan is terminated. Employees would also have to obtain coverage elsewhere.
To avoid compliance issues, companies should properly track employee hours to identify eligible workers, encourage participation, and promptly report changes in workforce or hours to their group health insurance provider.
How are Eligible Employees Counted Towards Requirements?
Calculating the number of eligible employees to determine if group plan participation requirements are met can sometimes be tricky. Here are a few rules on how eligible employees are typically counted:
- Only employees who meet the plan’s eligibility requirements are counted, such as meeting hourly thresholds for full or part-time status.
- Eligible employees are counted whether enrolled in the health plan or not.
- Each individual worker counts as one employee, regardless of FTE percentage. Two half-time employees equal two eligible employees.
- Part-time employees may count as a fraction of an FTE, but still count as one employee towards the eligible employee count.
- Owners and partners are eligible employees in states that require only 1 common law employee.
Companies need to look at their workforce on a periodic basis and identify exactly how many individual workers meet the definitions for eligible employee status under their specific group health plan requirements. This number is used to determine if participation thresholds are being met.
How are FTEs Calculated for Group Plan Eligibility?
While each individual employee counts as one eligible employee regardless of hours worked, calculating FTEs is still an important part of determining group plan eligibility. Here is how full-time equivalent employees are determined:
- Each employee working 30+ hours per week counts as 1 FTE
- For part-time staff working less than 30 hours/week, combine total hours worked and divide by 30
- Ex: 3 part time employees working 10 hours/week each = 30 combined hours. 30/30 = 1 FTE
- Owners/partners count as 1 FTE if they meet common law employee definitions
- Seasonal or temporary workers are not included in FTE calculations
While FTEs do not impact participation calculations, they may be used by insurance carriers in determining premiums or eligibility for certain group plan types. Companies need to be able to calculate both eligible individual employees and FTEs.
How are New Employees Handled Under Group Plan Rules?
As a company grows and adds additional employees, there are important things to know about how new hires impact group health plan eligibility and participation requirements:
- New employees are subject to any waiting periods before they can enroll in the group health plan.
- Once the waiting period has passed, new staff must be added to the group health plan or offered enrollment within 30 days if other eligibility requirements are met.
- New eligible employees count towards minimum participation as soon as any applicable waiting periods end.
- Adding a new eligible employee could help meet participation requirements if the company was below minimum thresholds.
The key is that as soon as new hires meet eligibility criteria such as working full-time hours, they should be informed about their plan options and added to the group health policy upon enrollment. New employees who meet standards must be counted towards participation calculations.
How Do Waiting Periods Affect Group Plan Eligibility?
Many group health plans have defined waiting periods before new employees can get coverage. Waiting periods impact eligibility in the following ways:
- The Affordable Care Act limits waiting periods to 90 days for group health plans.
- During waiting periods, the employee is not eligible to enroll in the group health plan.
- Once the waiting period ends, enrollment in the group plan must be offered within 30 days if eligibility requirements are met.
- Employees in waiting periods do not count towards group plan participation minimums.
Waiting periods give employers time to evaluate new hires before providing health benefit coverage. But once waiting periods have passed, eligible employees must be counted towards participation requirements.
Can Employers Set Eligibility Requirements for Group Health Plans?
Yes, employers generally have flexibility to set additional eligibility requirements for employees to enroll in group health coverage. Common eligibility rules include:
- Requiring full-time status of 30+ hours per week
- Setting minimum hours requirements for part-time employees such as 20 hours a week
- Having a probationary period for new employees before group plan eligibility starts
- Implementing an orientation or training period before eligibility begins
- Excluding certain job classifications such as interns, seasonal workers
However, any additional eligibility requirements set by the employer must align with Affordable Care Act regulations and not conflict with state and federal non-discrimination laws regulating group health plans. Requirements must be applied consistently across employee groups.
How are Different Business Structures Handled for Group Eligibility?
Whether a business is a sole proprietorship, partnership, corporation, or LLC can impact eligibility for group health insurance. Here is an overview:
- Sole proprietorships – Sole proprietors cannot get group health insurance on their own. They must have at least one common law employee enrolled on the plan.
- Partnerships – Rules for partnerships are similar to sole proprietors. Partner owners alone don’t qualify for group plans. They need at least one common law employee.
- S corporations – S corporation shareholders are considered employees. But they still need at least one other common law employee for group eligibility.
- C corporations – C corporations need to meet the same group plan requirements as other businesses. Owner employees alone do not qualify.
- LLCs – LLCs are treated either as sole proprietors, partnerships, S corps or C corps depending on election. Rules for those entities would apply.
In summary, self-employed individuals need at least one common law employee enrolled in addition to themselves to qualify for true group health insurance. This requirement applies across business entity types.
Do Owners Count as Employees for Group Health Insurance?
Whether owner-employees of a company count towards group health plan eligibility requirements depends on a few factors:
- Sole proprietors cannot count themselves as the one eligible employee needed for group insurance.
- Partners in a partnership also do not count as eligible employees by themselves.
- S corporation shareholders count as employees and could meet state rules requiring just one eligible employee.
- C corporation owner-employees count as common law employees and can be part of a group plan.
In summary, sole proprietors and partners can enroll in group coverage but cannot count solely as eligible employees for participation minimums. S corporation shareholders and C corporation owners can count themselves toward eligibility requirements in most states.
Do Employee Family Members Count Towards Group Eligibility?
Employee spouses and dependents who are covered under a group health insurance plan are not counted towards meeting eligibility requirements. Only common law employees can count as eligible employees.
While employee family members certainly impact the overall group enrollment size, insurance carriers only look at eligible employees, not their dependents, when determining if participation minimums are met. The 75% participation threshold applies to eligible employees only.
Strategies for Meeting Employee Requirements for Group Health Plans
Here are some tips employers can use to meet and maintain minimum employee requirements for group health insurance plans:
- Set eligibility criteria that encourages participation, such as having a low hourly threshold for part-timers to enroll
- Communicate benefits clearly so employees understand the coverage available to them
- Offer competitive compensation and benefits to attract and retain full-time staff
- Limit or exclude job classifications such as temporary workers from group eligibility
- Set enrollment deadlines to encourage employee sign-up before renewal
- Track employee hours and eligibility status closely every month
- Develop a process to add newly eligible employees at open enrollment
Monitoring group eligibility requirements should be an ongoing process. Being diligent about tracking employee eligibility and participation can help ensure your company’s group health plan stays in compliance.
What Happens if an Employer Does Not Meet Group Plan Requirements?
If a company’s group health insurance plan drops below the minimum participation or contribution requirements, there can be serious consequences including:
- The insurance carrier discontinuing the group policy
- Premium increases due to low participation
- Loss of pooled lower rates since the group is too small
- Employees losing health coverage
- Administrative headaches to find new group or individual plans
Falling out of compliance with group eligibility rules can disrupt employees’ health benefits and burden the employer with finding alternative options. Careful monitoring and understanding of requirements is key to keeping group health insurance intact.
Conclusion
Group health insurance can be an attractive option for small employers to provide quality affordable benefits. But group plans come with eligibility requirements for the number and types of employees who must enroll. While rules can vary, most carriers require at least two common-law employees with 75% participation to issue and maintain a small group policy. Careful tracking of employees and proactive benefits communication can help organizations meet and maintain requirements.
