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California Adopts FT/FTE Counting Method to Determine Small Group Market Eligibility

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.

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New Cafeteria Plan Guidance Eases Transitions to Exchange Coverage

IRS Notice 2014-55, issued September 18, 2014, permits two new types of mid-year changes in cafeteria plan elections (other than health flexible spending account elections) that will enable employees to drop employer group coverage in favor of individual coverage offered on state and federally-facilitated health exchanges (collectively, “the Exchange.”)  Making that transition primarily will appeal to employees with household incomes in ranges that qualify them for financial assistance on the Exchange, in the form of premium tax credits and cost sharing.  Those ranges are between 100% and 400% of federal poverty level in states that have not expanded Medicaid, and between 138% and 400% of federal poverty level in states that have expanded Medicare.

Recap of Existing Change in Status Rules

Under existing cafeteria plan regulations, a participant may make a mid-year change in their plan elections only in the event of a “change in status,” and only to the extent that the election change is both “on account of” and “corresponds with” the change in status.  This latter requirement is referred to as the “consistency rule.”  An example of a change in election that satisfies the consistency rule is removing a spouse from coverage as a result of a change in status that is a legal separation or divorce.  By contrast, the participant dropping his or her own coverage in that situation would not satisfy the consistency rule.

Existing regulations set forth a finite list of changes in status that trigger the right to a mid-year cafeteria plan election.  The list does not currently include a change in employment status – such as a transition from full-time to part-time status – that is not accompanied by a loss of group health plan eligibility. In addition, under special enrollment rights that were introduced with HIPAA, employees may enroll in their employer’s plan in the event they lose other coverage (for instance, through exhausting COBRA coverage), may add to their coverage a dependent newly acquired through birth, marriage, or adoption, and may make mid-year cafeteria plan changes that are consistent with these events.  HIPAA’s special enrollment rights do not contain provisions that relate to availability of individual coverage on the Exchange.

Please note that references below to “changing cafeteria plan elections” may more accurately be described as revoking an election to make pre-tax salary deferral elections towards the purchase of group health premiums.

Notice 2014-55

Effective immediately, although at the option of employers, Notice 2014-55 permits mid-year cafeteria plan election changes in two different situations that are related to Exchange coverage.

The first situation applies when an employee who has been classified as full-time for ACA coverage purposes (averaging 30 or more hours of service per week) has a change in status which is reasonably expected to result in the employee averaging below full-time hours, without resulting in a loss of their group health coverage.  Under the look-back measurement method, as set forth in final employer shared responsibility regulations, an employee who averages full-time hours during an initial (following hire) or standard (ongoing) look-back measurement period generally will be offered coverage for the entire related initial or standard stability period (and associated administrative period) without regard to the actual hours worked during the stability period, such that a schedule reduction would not impact coverage.

Now, under Notice 2014-55, full-time employees whose average weekly hours are “reasonably expected” to remain below 30 – and whose reduced earnings may now qualify them for premium assistance on an Exchange, or increased assistance –  may revoke group coverage for themselves and covered dependents, provided it is for the purpose of enrolling in Exchange coverage or other “minimum essential coverage” that will take effect no later than the first day of the second month following the revocation.   (Minimum essential coverage is not limited to exchange coverage and may, for instance, include group health coverage offered by a spouse’s employer.)  Employers may rely on employee’ representations regarding the purpose of the election change.  Changes to health FSA elections are not permitted in this situation.

The second situation has two variations.  The first applies when an employee has special Exchange enrollment rights, including as a result of marriage, birth or adoption.  Similar to HIPAA special enrollment rights, these permit purchase of Exchange coverage outside of Exchange open enrollment. The second applies under a non-calendar year cafeteria plan when an employee wants to enroll in Exchange coverage during the Exchange open enrollment period, effective as of the first of the following calendar year.

In either instance an employee may prospectively revoke group health coverage for him or herself and family members, provided it is for the purpose of enrolling in Exchange coverage that will take effect no later than the day immediately following the last day of the original coverage that is revoked.  Employers may rely on employee’ representations regarding the purpose of the election change.  Changes to health FSA elections are not permitted in this situation.

Plan Amendments and Effective Dates

The IRS intends to amend cafeteria plan regulations to reflect the guidance in Notice 2014-55.  Employers may rely on the terms of the Notice until new regulations issue.

Employers who want to incorporate the new election changes into their cafeteria plans must amend their plan documents in order to do so.   Employers who put the changes into effect between now and the end of 2014 may amend their plan documents any time on or before the last day of their 2015 plan year (December 31, 2015 for a calendar year plan).  The amendment may be retroactive to the date the change went into effect, provided that participants are informed of the amendment and provided that, in the interim, the employer operates its plan in accordance with Notice 2014-55, or with subsequent issued guidance.

Employer Shared Responsibility Considerations

As mentioned, the first permitted change primarily relates to applicable large employers who use the look-back measurement period to identify full-time employees.  To minimize “pay or play” liability, these employers should continue to monitor, over subsequent measurement periods, the average hours worked by employees who migrate to Exchange coverage, and offer affordable, minimum value coverage over corresponding stability periods to those whose hours average 30 or more per week, or 130 or more per month.

Interestingly, this portion of Notice 2014-55 refers to individuals who were “reasonably expected” to average 30 or more hours of service prior to the change, but who are “reasonably expected” to average below that after the change.  This “reasonably expected” language  – which implies a measure of employer discretion – appears in the final shared responsibility regulations only in connection with assessment of an employee’s likely status (full-time, part-time, seasonable or variable hour) upon initial hire.   After an employee has remained employed throughout an entire standard stability period (which generally corresponds to the plan or policy year), he or she is an “ongoing employee” and his or her status as full-time or not full-time is determined solely based on average hours worked over the preceding look-back measurement method, or, under the “monthly” measurement period, over the preceding calendar month.  In other words, employer discretion is removed from the ongoing measurement process.  Now, it is reintroduced by Notice 2014-55 in the limited context of a schedule reduction during a stability period.

If the second permitted change is adopted by an applicable large employer, presumably that employer will continue to monitor employees who have migrated to the Exchange using the measurement method under which the employee previously qualified for an offer of group health coverage.

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“Notice of Exchange” Deadline Postponed Until Further Guidance Issues

Employers will have additional time in which to provide written notice to employees of the availability of health exchanges, per a “Frequently Asked Questions” issued on January 25, 2013 by the tri-agencies administering the Affordable Care Act (HHS, DOL and IRS).

Specifically, the guidance extends the initial notice deadline from March 1, 2013, to sometime after the Department of Labor issues regulations describing the notice requirements in more detail.  Per the guidance this will likely be in the “late summer or fall of 2013.”  Subsequent to the initial Notice deadline, which applies to all active employees, employers will be required to provide the notice to each new hire.  The Notice must:

  • Inform employees of the existence of the exchanges, describe the services they provide, and the manner in which the employee may contact the exchanges to request assistance;
  • Inform employees that they may be eligible for a premium tax credit or for cost-sharing reductions if the employer’s plan provides less than 60% actuarial value and they purchase coverage through an exchange; and
  • Inform employees that, if they purchase coverage through an exchange, they may lose the employer contribution (if any) to any health plan sponsored by the employer, and that unlike exchange coverage, which is purchased with after-tax dollars, all or a portion of the employer contribution towards coverage under its own plan, if received, would be excludable from the employee’s income for Federal income tax purposes.

The new guidance states that the Department of Labor may issue a model Notice of Exchange along with the coming regulations, but in the meantime suggests that employers may want to adapt for this purpose a proposed template that summarizes employer-sponsored coverage options for purposes of determining eligibility for financial aid on the exchanges.[1]

The template consists of pages 34 – 38 of the recently released streamlined individual application for exchange coverage, Medicaid and CHIP (CMS 10440).   The data elements that it contains include the following:

  • Employer name
  • EIN
  • Employer contact information
  • Hours worked per week  (e.g., full-time, or not)
  • Whether an offer of health coverage is made
  • Date of future enrollment
  • Name of lowest cost plan providing minimum value; and
  • Employee contribution amount and frequency

Employers can either provide this information on each streamlined application presented to them by an employee, or can pre-populate a template themselves for this purpose.  It is the pre-populated template that the FAQ guidance suggests as a temporary stand-in for the Notice of Exchange.  Presumably an employer adapting the template for use as a Notice of Exchange would add to these data elements the three exchange-related disclosures described above.

The Notice of Exchange requirement is set forth in Section 18B of the Fair Labor Standards Act (FLSA), which was added by the Affordable Care Act.  As such it applies to “employers” as defined under the FLSA.  The FLSA defines employers in a fashion similar to that under ERISA:  as “any person acting directly or indirectly in the interest of an employer in relation to an employee.”  See 29 U.S.C. § 203(d); ERISA Section 3(5).

Note that employers will fall within this broad and somewhat circular definition of an “employer” – and hence will be obligated to provide the Notice of Exchange – even if they are not subject to the FLSA’s minimum wage provisions, described here.

[1] Such subsidies, in the form of premium tax credits and cost-sharing measures, are available when employer coverage is either “unaffordable,” or has an actuarial value of less than 60%.  More information on affordability and actuarial value is available at this earlier post.