Update: Governor Jerry Brown signed SB 125, discussed below, on June 17, 2015.
In 2016, when California’s small group insurance market expands to include employers of up to 100 employees, employers in the state will use the same method of counting full time and full-time equivalent employees towards that threshold, as is required under the ACA’s employer shared responsibility rules. This will be the effect of Senate Bill 125, which has been enrolled and sent to Governor Brown for signature. It is expected that he will sign the bill into law, and the bill is effective upon enactment.
Current California Insurance and Health and Safety Code provisions define a “small employer” as an employer that, on at least 50 percent of its working days during the preceding calendar quarter or preceding calendar year, employed at least one, but no more than 50, ‘eligible employees,’ the majority of whom were employed within California.” An “eligible employee” is in turn defined as “any permanent employee who is actively engaged on a full-time basis . . . with a normal workweek of an average of 30 hours per week [or at least 20, at the employer’s option] over the course of a month” at the employer’s regular place of business, and who has met any applicable waiting period requirements.” When it first enacted ACA-compliant measures in the 2011-2012 legislative session (AB 1083), California opted to postpone expansion of this definition — from employers of up to 50, to up to 100 employees — until January 1, 2016, which is the latest expansion date that the ACA allows.
Notably, the current manner of counting employees towards the 100 employee threshold does not take into account full-time equivalent (FTE) employees, which are counted towards the definition of an Applicable Large Employer (ALE) subject to ACA employer shared responsibility (or “pay or play”) duties, as set forth in Internal Revenue Code § 4980H, and final regulations thereunder. FTEs are determined by totaling hours of service worked in a month by employees (including seasonal workers) who average under 30 hours of service per week (but not exceeding 120 hours/month for any single employee), and dividing the total by 120, such that 10 employees averaging 15 hours per week would result in 5 FTEs. ACA health exchange regulations require that the ACA definition apply for purposes of policies that are sold on the small group exchange (SHOP) but not with regard to non-exchange policies. SB 125 makes the ACA counting method applicable to all small group market policies sold in the state, whether or not offered on SHOP:
“For plan years commencing on or after January 1, 2016, the definition of small employer, for purposes of determining employer eligibility in the small employer market, shall be determined using the method for counting full-time employees and full-time equivalent employees set forth in Section 4980H(c)(2) of the Internal Revenue Code.”
California Insurance Code § 10753(q)(3); California Health and Safety Code § 1357.500(k)(3), both as amended by SB 125. Both measures apply only to nongrandfathered health plans.
As a result, and with one important exception noted below, California employers will only need to do one set of calculations to be able to determine their status as Applicable Large Employers subject to ACA pay or play rules, and their status with regard to California’s small or large group markets.
The exception is with regard to counting employees of related entities. Both California Code provisions amended by SB 125 require employers to count employees employed by “affiliated companies” that are eligible to file a combined tax return for purposes of state taxation. However, the test for joint filing under the California Revenue and Taxation Code is not the same as “controlled group” status under federal law, which is expressly incorporated into the employee counting rules in Code Section 4980H(c)(2). It is possible that this was an unintended drafting discrepancy that future guidance will resolve, but in the meantime, California employers with related entities should consult their state and federal law tax advisors to make sure they are counting employees properly for California small group eligibility and ACA shared responsibility purposes.
This exception aside, SB 125 brings welcome simplification at a time when employers with between 51 and 100 employees are calculating the likely costs and complications of losing access to large group coverage, and entering a market subject to rating restrictions and mandated coverage of essential health benefits. Although legislative measures are afoot to allow states to further postpone, past 2016, the expansion of the small employer definition, California is unlikely to adopt any such change, should it become available.
SB 125, which was sponsored by California Senator Ed Hernandez (D-West Covina) also changes the annual open enrollment period for California’ state health exchange, Covered California™ , from October 15-December 7 of the year preceding the coverage year, to November 1 of the year preceding the coverage year, through January 31 of the new coverage year. This is also consistent with the ACA, specifically with the Final HHS Notice of Benefit and Payment Parameters for 2016. The new open enrollment period will first apply on November 1, 2015 through January 31, 2016, for the 2016 coverage year.