Founder Health Coverage Before the First Hire
Until a company signs its first employee, a founder’s health coverage is a personal policy rather than a company benefit. This guide covers the routes founders use in that stretch: an individual plan, the enrollment window that opens after leaving a job, COBRA from a former employer, and the tax deduction for self-employed premiums.
Why an owner-only company has no group plan yet
Under 29 CFR 2510.3-3, a plan whose only participants are not common-law employees is not an employee benefit plan under Title I of ERISA. The same regulation says an individual and their spouse are not employees of a business wholly owned by that individual or by the couple, whether or not it is incorporated. Partners and their spouses are not employees of the partnership.
Read together, a group health plan generally needs at least one covered employee who is not an owner or an owner’s spouse. Covered California for Small Business follows the same pattern, asking for at least one W-2 employee who is not the owner’s spouse. Most small-group plans need at least one non-owner employee, so founders usually look at individual coverage until payroll starts.
The individual Marketplace for self-employed founders
HealthCare.gov counts a person as self-employed when the business brings in income but has no employees. Founders before their first hire fit that description. A self-employed person with no employees buys coverage in the individual Marketplace. The small-business SHOP Marketplace is reserved for businesses with at least one employee, and paying contractors does not make the company an employer for that purpose.
In California, the individual-market exchange is Covered California. One detail matters for a young company with uneven revenue: Marketplace savings are based on your estimated net income for the year you will be covered, not on last year’s return. After leaving a salaried role, update that estimate as the company’s income becomes clearer.
Special enrollment after leaving a job
Losing job-based coverage opens a special enrollment period, so there is no need to wait for open enrollment. Covered California lets you apply up to 60 days before the old coverage ends or up to 60 days after it ends. Applying ahead of the end date helps avoid a gap, because the new plan can begin soon after the old one stops.
Covered California treats the loss of coverage as qualifying whether it followed a layoff, a firing or a resignation to start the company, and HealthCare.gov takes the same position. The Marketplace may ask for proof that the job-based coverage ended and will tell you if documents are needed, so keep a record of the date your old plan stopped.
Keeping a former employer’s plan through COBRA
HealthCare.gov presents two main options after leaving a job: COBRA or a Marketplace plan. COBRA lets you stay on the same plan, but you pay the full premium yourself, including the share your employer used to pay, plus a small administrative fee. Federal COBRA generally applies to employers with 20 or more employees and, after a job ends, usually runs up to 18 months. You have at least 60 days to elect it.
If the former employer was smaller, California’s Cal-COBRA law covers group plans of employers with fewer than 20 employees. When COBRA runs out, a new 60-day Marketplace special enrollment period opens. Dropping COBRA voluntarily does not open one, though losing it early for a reason outside your control, such as the former employer ending its plan, does.
Deducting your own premiums
The self-employed health insurance deduction is an adjustment to income rather than an itemized deduction. It is open to a self-employed person with a net profit for the year, a partner with net self-employment earnings, or a more-than-2% S corporation shareholder who received wages from the company. It can cover medical, dental and qualified long-term care premiums for you, your spouse and your dependents, plus a child under 27 at the end of the year even if that child is not a dependent.
Two limits apply. No deduction is allowed for any month you were eligible for an employer-subsidized health plan, including one through a spouse’s job, even if you did not enroll. The deduction also cannot exceed the net earnings of the business under which the plan is set up, or the S corporation wages for a shareholder. Most filers figure it on a worksheet in the Form 1040 instructions, Form 7206 is required in some cases, and the result goes on Schedule 1. The right treatment depends on how the company is organized, so check it with a tax professional.
When the first hire changes the picture
The first employee who is not an owner or an owner’s spouse is the moment team coverage becomes possible. A small-group plan, an exchange plan or a reimbursement arrangement can then be considered. Health benefits for startups compares the options, ICHRA and QSEHRA for startups explains the reimbursement route, and small employer benefits rules lists the notices that come with a plan.
The first hire brings the commercial side too. California requires workers’ compensation from the first employee, part-time staff included, and the policy should start by the first day of work. We request workers’ compensation for the business, and the insurer decides terms after reviewing payroll and duties. Hiring your first employee puts each step in order, and our page on insurance for startups covers the policies a company needs at each stage.
An introduction when you are ready to cover a team
Our benefits-partner introduction is for team coverage, so it fits once you have employees or an offer letter about to go out. For your own policy before then, founders usually look at the individual Marketplace or COBRA, described above. Our employee benefits for small businesses section explains team options.
When the first hire is close, send the details through the quote form on this page, including where the team will live and how many people it covers, and we will pass them to a benefits partner that handles international and remote-team health coverage. Eligibility, plan options and pricing are settled by that partner with the insurer.
A few useful answers
Common questions
Can a founder with no employees buy a small-group health plan?
Usually not. Most small-group plans need at least one employee who is not an owner or an owner’s spouse, and Covered California for Small Business requires at least one such W-2 employee.
How long do I have to choose a Marketplace plan after leaving my job?
In California, losing job-based coverage lets you apply up to 60 days before that coverage ends or up to 60 days after. The reason you left the job does not change your eligibility.
What is the difference between COBRA and a Marketplace plan?
COBRA keeps your former employer’s plan, but you pay the whole premium, including the employer’s old share, plus a small administrative fee. A Marketplace plan is new individual coverage, with savings based on your estimated net income for the coverage year. Voluntarily dropping COBRA does not open a Marketplace special enrollment period.
Can I deduct my health premiums as a self-employed founder?
Often, yes. The self-employed health insurance deduction is an adjustment to income for people with a net profit, partners with self-employment earnings and more-than-2% S corporation shareholders paid wages. It is not allowed for months you could have joined an employer-subsidized plan, including a spouse’s.
When does a benefits introduction make sense for a startup?
Once you have employees, or a first hire is close. The introduction is for team coverage, and a benefits partner that handles remote and international team cover works out eligibility, plans and pricing with the insurer. Before that, a founder’s own cover usually comes from the individual Marketplace or COBRA.