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Covered CA

Can a small business with several partners and no W-2 employees qualify for Covered California for Small Business?

In order to be eligible for the Covered California for Small Business, an employer must be a “small employer” as defined in state law.  (10 CCR 6522(a)(1)). A “small employer” is defined as an any person, firm, partnership that … employed at least one, but no more than 100 eligible employees, … and in which a bona fide employer-employee relationship exists. (See Health and Safety Code 1357.500(k) and Insurance Code 10753.14). With a group of one, or a group of several, but all are owners or partner, a bona fide employer-employee relationship does not exist.

Likewise, federal rules preclude this type of group from qualifying as a “small employer” eligible to participate in the Covered California for Small Business. Section 1304 of the Affordable Care Act defines “small employer” as an employer who employed “at least 1 employee on the first day of the plan year,” but no more than 100 employees on average in the preceding calendar year. (ACA § 1304(b)(1)( 2); 42 U.S.C. § 18024(b)(1)(2)). In the preamble to the final rules on this issue, the federal government explains that the regulations and the ACA have based the definitions of “employer,” “employee,” and “small employer” on long-standing definitions in section 2791 of the Public Health Service Act (PHS Act). (77 Fed. Reg. 18399 (March 27, 2012)). Specifically, the definition of “employee” in the PHS Act is incorporated by reference to section 3(6) of the Employee Retirement Income Security Act (ERISA), which defines the term employee the same as it is defined under common law to mean “any individual employed by an employer.” (29 U.S.C. § 1002(6); See also Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992) (holding that the term “employee” as used in ERISA refers to common law principles)). Thus, to be eligible for Covered California for Small Business “the employer must employ at least one common law employee.” (77 Fed. Reg. 18399 (March 27, 2012)).

Therefore, under both state and federal law, a group must employ at least one employee and must have some sort of employer-employee relationship. In the case where there is only one individual, or several individuals who are owners or partners, irrespective of whether any of them is issued a W-2, an employer-employee relationship does not exist and is therefore not eligible for Covered California for Small Business coverage.