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The David Fluker
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Gilroy, California
CA Insurance Lic # 0B58920
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CA Insurance Lic # 0B58920
Tel 408-847-6139 Fax 408-762-4450 Toll-Free 800-509-0659
Establishing A Qualifying Small Group in California
Establishing A New Small Group Business In California (Husband & Wife, Partners, Siblings, Etc.) Qualifying For AB 1672 Guaranteed-Issue Group Health Coverage In California
Establishing A New Small Group Business In California (Husband & Wife, Partners, Siblings, Etc.) Qualifying For AB 1672 Guaranteed-Issue Group Health Coverage In California
A topic that has come up quite frequently in recent months is whether it is possible to establish and small business and obtain small group benefits if the business consists of spouses, partners or siblings. Undoubtedly the interest in creating a small business has been increased due to corporate downsizing, layoffs and a rather insecure employer environment in California.
In short, yes it is possible for a husband and wife, life partners, business partners, siblings and others to establish a small business that will qualify for group benefits. The key factors under which this can be done include type of business, organization of the business, amount of time working in business, timeline, and whether or not there would be any additional employees.
Remember, a small group must consist of at least 2 full-time employees and/or owners in a business. In most circumstances, at least 2 must enroll for coverage. Carriers require 75% of eligible employees to enroll (valid enrollment waivers not effecting participation requirements include: Medicaid, Medicare, Other Group Coverage (spousal), and VA.
I have outlined below important information for those considering creating a small business or those who already have a small business and are not sure if they could qualify for small group benefits.
1. Type of Business
The first, and most critical step in establishing a qualifying business is to be sure that your business provides a tangible good or service to the public. Business such as consulting, real estate, tech support and others would be considered as valid businesses. While there is no true list of qualifying business types, and most business would qualify, certain types of businesses will stand out as unacceptable to a small group health underwriter. For example, businesses conducting illegal activities or businesses that cannot demonstrate a real good or service would not be allowed.
2. Organization of Business
How you establish your business is very important in determining what requirements you will have to meet. Because there are several types of business organizations, I have listed them below with the corresponding requirements and ease of establishing group benefits.
Sole Proprietorship - this is the most common business organization as it is easiest to establish and dissolve. However, it is also the most difficult in terms of small group qualification. The reason is that a sole proprietorship can, by rule, have only one owner/officer. Therefore, any spouse or partner would have to be an employee and placed on payroll. This would require the spouse or partner to be paid a wage, appear on a DE-6, and possibly subject to your providing workers' compensation and unemployment insurance, and file payroll taxes.
Documentation required for small group coverage:
*Ficticious Business Listing or California Business License
*DE-6 Quarterly payroll tax report (if in business long enough) or 30- days employee payroll records
*SoleProprietor/Partner/Corporate Officer Statement Form
*Owner's Current Schedule C (if in business long enough)
Partnerships (General & LLP) - this is the most common approach to forming a small business, especially spouses, life partners and partners. Partnerships are fairly easy to establish and dissolve, although somewhat more difficult than a sole proprietorship. The advantage to this arrangement is that spouses and/or partners can all be owners/officers in the business without need for any additional employees. Limited Partnerships (LPs) are no advised as all limited partners must be on payroll and cannot be considered as owner/officer-partners as would be the case under general and LLP.
Documentation required for small group coverage:
Partnership
*Partnership Agreement and Federal Tax ID Appointment Letter or, if in business long enough:
*Current Schedule K-1 (if in business long enough)
*SoleProprietor/Partner/Corporate Officer Statement Form
*DE-6 (if available and any employees on payroll)
Limited Liability Partnership (LLP)
*Partnership Agreement
*SoleProprietor/Partner/Corporate Officer Statement Form
*DE-6 (if available and any employees on payroll)
*Current Schedule K-1 (if in business long enough) or, of not in business long enough:
*Partnership Agreement and Federal Tax ID Appointment Letter
Corporations & LLCs (S-Corp, C-Corp, LLC) - these arrangements are the most complex and are more difficult to dissolve when compared to proprietorships or partnerships (especially C-corporations). The advantage to a corporation is similar to a partnership, in that all partners or spouses can be corporate officers without any need to retain additional employees.
When structuring your business, be sure to consult with and seek the advice of a legal professional.
From a small group health insurance standpoint, partnerships and corporations offer the most advantageous business structure to qualify for coverage without the need to hire additional employees.
Documentation required for small group coverage:
Limited Liability Company (LLC)
*Articles of Organization with Operating Agreement, or, if in business long enough,
*Current Schedule K-1
*SoleProprietor/Partner/Corporate Officer Statement Form
*DE-6 (if available and any employees on payroll)
Corporations (S-Corp, C-Corp)
*Articles of Incorporation filed and stamped listing names of all officers
*Statement of Domestic Stock (if in business long enough)
*SoleProprietor/Partner/Corporate Officer Statement Form
*DE-6 (if available and any employees on payroll)
3. Amount of Time Working In The Business & The Significant Income Rule
The next critical element of your business deals with two conditions that must be met in order to qualify for small group coverage.
The amount of time working in the business deals with your and all owners/partners/officers involvement in the business. Each must certify on the SoleProprietor/Partner/Corporate Officer Statement Form that they are working at least 20 hours per week in the business. This demonstrates to the health insurance company each owner's commitment to the group.
The significant income rule quite simply requires that any owners, partners or officers are not deriving a significant portion of their income from other employment. This is also attested to on the SoleProprietor/Partner/Corporate Officer Statement Form. This rule exists to prohibit Californian's from creating a business in which they are not actively working in order to purchase guaranteed-issue small group coverage. This does not pertain to passive income, but to earnings income from employment.
4. Business Timeline
The last key element of creating your qualifying small business has to do with date of establishment and waiting period for guaranteed-issue health coverage under AB 1672.
You may apply for coverage immediately after formation of the business however this may subject your small group business to underwriting and the possibility of a decline. State law (AB 1672) requires that a group 2-50 employees that has been in business (documentation will be needed) at least one-half of the previous calendar quarter be enrolled under a guaranteed-issue basis and cannot be declined as long as the business qualifies. Calendar year deadlines would be as follows for guaranteed-issue small group coverage:
Business created as of February 15th -- can get guaranteed-issue group coverage on April 1st
Business created as of May 15th -- can get guaranteed-issue group coverage on July 1st
Business created as of August 15th -- can get guaranteed-issue group coverage on October 1st
Business created as of November 15th -- can get guaranteed-issue group coverage on January 1st
Certain types of business may prefer to offer small group coverage to selected employees as opposed the entire employee population. Service business such as restaurants and catering businesses (to name just a few) often struggle with moderate to high employee turnover and find employee stability only in the upper echelon.
In these cases, it may be desirable to offer health benefits to those only in the upper echelon as a reward and incentive for retention. Separating a segment of your employee population and providing separate benefits to them is referred to as a "carve-out". You are literally carving out a class of employees from the rest of the employee population. Most health insurance carriers have specific rules regarding carve-outs and these can be quite stringent. The general rules require a minimum of eight employees in the carve-out and may subject those carved-out employees to rigorous underwriting and the possibility of decline.
Lastly, A Few Notes About Small Group Arrangements
*Group plans under AB 1672 guaranteed-issue law may have their monthly premiums adjusted to reflect the risk the group poses to the insurer. Since your group cannot be declined for coverage, the health insurance company can select a rate between 90% and 110% of the standard cost. Generally, groups under 5 enrolling employees/owners will be rated at the highest risk adjustment factor (RAF) of 110% of standard cost. Groups larger than 5 may be able to obtain rates down to 90% of standard cost depending on overall health and risk. Spousal, life partner, partner groups of 2-3 should anticipate a rating of 110% and should be quoted that rate.
In short, yes it is possible for a husband and wife, life partners, business partners, siblings and others to establish a small business that will qualify for group benefits. The key factors under which this can be done include type of business, organization of the business, amount of time working in business, timeline, and whether or not there would be any additional employees.
Remember, a small group must consist of at least 2 full-time employees and/or owners in a business. In most circumstances, at least 2 must enroll for coverage. Carriers require 75% of eligible employees to enroll (valid enrollment waivers not effecting participation requirements include: Medicaid, Medicare, Other Group Coverage (spousal), and VA.
I have outlined below important information for those considering creating a small business or those who already have a small business and are not sure if they could qualify for small group benefits.
1. Type of Business
The first, and most critical step in establishing a qualifying business is to be sure that your business provides a tangible good or service to the public. Business such as consulting, real estate, tech support and others would be considered as valid businesses. While there is no true list of qualifying business types, and most business would qualify, certain types of businesses will stand out as unacceptable to a small group health underwriter. For example, businesses conducting illegal activities or businesses that cannot demonstrate a real good or service would not be allowed.
2. Organization of Business
How you establish your business is very important in determining what requirements you will have to meet. Because there are several types of business organizations, I have listed them below with the corresponding requirements and ease of establishing group benefits.
Sole Proprietorship - this is the most common business organization as it is easiest to establish and dissolve. However, it is also the most difficult in terms of small group qualification. The reason is that a sole proprietorship can, by rule, have only one owner/officer. Therefore, any spouse or partner would have to be an employee and placed on payroll. This would require the spouse or partner to be paid a wage, appear on a DE-6, and possibly subject to your providing workers' compensation and unemployment insurance, and file payroll taxes.
Documentation required for small group coverage:
*Ficticious Business Listing or California Business License
*DE-6 Quarterly payroll tax report (if in business long enough) or 30- days employee payroll records
*SoleProprietor/Partner/Corporate Officer Statement Form
*Owner's Current Schedule C (if in business long enough)
Partnerships (General & LLP) - this is the most common approach to forming a small business, especially spouses, life partners and partners. Partnerships are fairly easy to establish and dissolve, although somewhat more difficult than a sole proprietorship. The advantage to this arrangement is that spouses and/or partners can all be owners/officers in the business without need for any additional employees. Limited Partnerships (LPs) are no advised as all limited partners must be on payroll and cannot be considered as owner/officer-partners as would be the case under general and LLP.
Documentation required for small group coverage:
Partnership
*Partnership Agreement and Federal Tax ID Appointment Letter or, if in business long enough:
*Current Schedule K-1 (if in business long enough)
*SoleProprietor/Partner/Corporate Officer Statement Form
*DE-6 (if available and any employees on payroll)
Limited Liability Partnership (LLP)
*Partnership Agreement
*SoleProprietor/Partner/Corporate Officer Statement Form
*DE-6 (if available and any employees on payroll)
*Current Schedule K-1 (if in business long enough) or, of not in business long enough:
*Partnership Agreement and Federal Tax ID Appointment Letter
Corporations & LLCs (S-Corp, C-Corp, LLC) - these arrangements are the most complex and are more difficult to dissolve when compared to proprietorships or partnerships (especially C-corporations). The advantage to a corporation is similar to a partnership, in that all partners or spouses can be corporate officers without any need to retain additional employees.
When structuring your business, be sure to consult with and seek the advice of a legal professional.
From a small group health insurance standpoint, partnerships and corporations offer the most advantageous business structure to qualify for coverage without the need to hire additional employees.
Documentation required for small group coverage:
Limited Liability Company (LLC)
*Articles of Organization with Operating Agreement, or, if in business long enough,
*Current Schedule K-1
*SoleProprietor/Partner/Corporate Officer Statement Form
*DE-6 (if available and any employees on payroll)
Corporations (S-Corp, C-Corp)
*Articles of Incorporation filed and stamped listing names of all officers
*Statement of Domestic Stock (if in business long enough)
*SoleProprietor/Partner/Corporate Officer Statement Form
*DE-6 (if available and any employees on payroll)
3. Amount of Time Working In The Business & The Significant Income Rule
The next critical element of your business deals with two conditions that must be met in order to qualify for small group coverage.
The amount of time working in the business deals with your and all owners/partners/officers involvement in the business. Each must certify on the SoleProprietor/Partner/Corporate Officer Statement Form that they are working at least 20 hours per week in the business. This demonstrates to the health insurance company each owner's commitment to the group.
The significant income rule quite simply requires that any owners, partners or officers are not deriving a significant portion of their income from other employment. This is also attested to on the SoleProprietor/Partner/Corporate Officer Statement Form. This rule exists to prohibit Californian's from creating a business in which they are not actively working in order to purchase guaranteed-issue small group coverage. This does not pertain to passive income, but to earnings income from employment.
4. Business Timeline
The last key element of creating your qualifying small business has to do with date of establishment and waiting period for guaranteed-issue health coverage under AB 1672.
You may apply for coverage immediately after formation of the business however this may subject your small group business to underwriting and the possibility of a decline. State law (AB 1672) requires that a group 2-50 employees that has been in business (documentation will be needed) at least one-half of the previous calendar quarter be enrolled under a guaranteed-issue basis and cannot be declined as long as the business qualifies. Calendar year deadlines would be as follows for guaranteed-issue small group coverage:
Business created as of February 15th -- can get guaranteed-issue group coverage on April 1st
Business created as of May 15th -- can get guaranteed-issue group coverage on July 1st
Business created as of August 15th -- can get guaranteed-issue group coverage on October 1st
Business created as of November 15th -- can get guaranteed-issue group coverage on January 1st
Certain types of business may prefer to offer small group coverage to selected employees as opposed the entire employee population. Service business such as restaurants and catering businesses (to name just a few) often struggle with moderate to high employee turnover and find employee stability only in the upper echelon.
In these cases, it may be desirable to offer health benefits to those only in the upper echelon as a reward and incentive for retention. Separating a segment of your employee population and providing separate benefits to them is referred to as a "carve-out". You are literally carving out a class of employees from the rest of the employee population. Most health insurance carriers have specific rules regarding carve-outs and these can be quite stringent. The general rules require a minimum of eight employees in the carve-out and may subject those carved-out employees to rigorous underwriting and the possibility of decline.
Lastly, A Few Notes About Small Group Arrangements
*Group plans under AB 1672 guaranteed-issue law may have their monthly premiums adjusted to reflect the risk the group poses to the insurer. Since your group cannot be declined for coverage, the health insurance company can select a rate between 90% and 110% of the standard cost. Generally, groups under 5 enrolling employees/owners will be rated at the highest risk adjustment factor (RAF) of 110% of standard cost. Groups larger than 5 may be able to obtain rates down to 90% of standard cost depending on overall health and risk. Spousal, life partner, partner groups of 2-3 should anticipate a rating of 110% and should be quoted that rate.
| 2-Person (spousal & family) group rules basic summary | Anthem Blue Cross | Health Net California | Kaiser Permanente CA |
| Sole Proprietorship | YES One spouse or partner on payroll and DE-6 |
YES Both spouses named on Schedule C or spouse or partner on payroll and DE-6 OR Both Spouses on Business License or Ficticious Lisitng |
YES Both spouses named on Schedule C or spouse or partner on payroll and DE-6 OR Both Spouses on Business License or Ficticious Lisitng |
| 1099s | Not Allowed | YES with conditions |
Not Allowed |
| Partnership | YES Both spouses or partners listed as full partners on Partnership Agreement |
YES Both spouses or partners listed as full partners on Partnership Agreement |
YES Both spouses or partners listed as full partners on Partnership Agreement |
| Corporations | YES Both spouses or partners listed as officers on Articles of Incorporation |
YES Both spouses or partners listed as officers on Articles of Incorporation |
YES Both spouses or partners listed as officers on Articles of Incorporation |
| Guaranteed-Issue Start Date | 1st of month after meeting 1/2 previous calendar quarter requirement | 1st of month after meeting "previous 6 weeks" requirement | 1st of month immediately following document filing (License, Ficticious, Partnership, Corp) |
| Group/Class Carve-Out Under Guaranteed-Issue | Minimum 5 employees in carve-out class, never guaranteed-issue always underwritten | Minimum 2 employees in carve-out class, guaranteed-issue if group meets "previous 6 weeks" requirement | Minimum 2 employees in carve-out class, guaranteed-issue 1st of month following documentation filings |
David J. Fluker, Licensed Life & Health Insurance Agent. California State License # 0B58920
Authorized Independent Agent Serving California Residents.
Web Site ©1999 - 2010 by David Fluker - The David J. Fluker Insurance Agency. All Rights Reserved.
Authorized Independent Agent Serving California Residents.
Web Site ©1999 - 2010 by David Fluker - The David J. Fluker Insurance Agency. All Rights Reserved.
Anthem Blue Cross is an independent licensee of the Blue Cross Association (BCA). The Blue Cross name and symbol are registered service marks of the BCA.
Blue Shield of California Life & Health Insurance Company is an independent licensee of the Blue Shield Association.
Blue Shield of California Life & Health Insurance Company is an independent licensee of the Blue Shield Association.
| A Note Concerning Qualification for Group Coverage I want to clear up some apparent confusion concerning eligibility for spousal small groups. To be clear, spousal groups require both spouses to be active full-time and principally engaged in the business under which they seek a group coverage plan (Sole Prop, Partnership, Corp or LLC). Both spouses or partners MUST derive their income from that business. They cannot derive substantial earned income from any other employment. Also, neither spouse/partner/officer may be eligible for group coverage from any other employment. |