Starting this week, as part of the health care overhaul, companies with 50 or fewer employees will have access to new online health insurance marketplaces in most states, which are intended to help drive down the cost of coverage for small businesses.

Meanwhile, a separate provision of the law requires companies with 50 or more full-time employees, including what are known as full-time equivalents, to start offering coverage to their workers by 2015.

So, how do you determine whether your firm fits under the law’s all-important 50-employee cap? It turns out, it can get awfully complicated.

Determination of “applicable large employer” status

An employer will be considered an “applicable large employer” if it employed at least 50 full-time employees, including full-time equivalents (FTEs), during the preceding calendar year.

So, because the employer penalties will become applicable in 2015, an employer’s status as a large employer will be based on the number of full-time employees and FTEs employed in 2014.

To calculate the number of full-time employees for this purpose, an employer must take into account (a) all employees who work at least 30 hours per week, and (b) all remaining employees (part-timers who work less than 30 hours per week).

To determine the number of FTEs for a particular month, the employer must add up the number of hours of service for all employees who were not employed on average at least 30 hours per week for that month, and then divide that number by 120. The result is the number of FTEs for that calendar month. All fractions are disregarded (for example, 49.5 full-time employees (including FTEs) for the preceding calendar year would be rounded down to 49 employees).

For example, if the aggregate number of hours for all employees who do not work on average 30 hours per week is 1200, the number of FTEs for that month would be would be 10 (1200/120). The employer would then add those 12 FTEs to the number of employees who are employed on average at least 30 hours per week, to determine if the employer is an “applicable large employer.”

It is also important to note that large employer status is determined on what is called a controlled group basis; in other words, all companies with a common employer as treated a single company.

Consequently, if the total number of full-time employees (including FTEs) for the entire group is at least 50, then each entity in the controlled group will be considered an applicable large employer and subject to the penalty provisions, regardless of the number of employees employed by each inidividual business.

Which employees must be offered health coverage?

If the employer is an applicable large employer, it must offer affordable health coverage to at least 95 percent of its full-time employees. But for this purpose, only full-time employees are counted, not FTEs.

Proposed regulations issued by the IRS allow employers to use a measurement period for determining full-time status. Under this approach, an employer would determine each employee’s full-time status by looking back at a prior “measurement period” of 3 to 12 months.

If the employee is employed on average at least 30 hours per week during that period, the worker must be considered a full-time employee for a subsequent “stability period,” which must last at least 6 months and can be no shorter than the measurement period.

Employees who were not employed on average at least 30 hours per month during the measurement period are not considered full-time employees in the following stability period, even if the employee works more than 30 hours per week during the stability period.

The proposed rules also incorporate an administrative period between the end of the measurement period and beginning of the stability period to allow the employer to determine which employees are eligible for coverage and then to enroll such employees. This administrative period may be no longer than 90 days.

As a practical matter, many employers will likely use the plan year of the group health plan as the stability period. For example, assuming a Jan. 1-Dec. 31 plan year, an employer may choose a standard measurement period of Nov. 1-Oct. 31; an administrative period of Nov. 1-Dec 31, and a stability period of Jan 1-Dec 31.

An employer would thus determine an employee’s full-time status during the measurement period of Nov. 1, 2013-Oct. 31, 2014. If the employee averages 30 hours per week during this measurement period, the employee would use the administrative period to enroll the employee in the health plan by Jan. 1, 2015.

That employee would be considered a full-time employee for the entire stability period (Jan. 1, 2015-Dec. 31, 2015), regardless of the number of hours worked during this period.

When the employer performs this calculation for the next measurement period (i.e., Nov. 1, 2014-Oct. 31, 2015), if the employee does not average at least 30 hours per week, the employee will not be considered full-time and no longer must be offered coverage for the stability period beginning on Jan. 1, 2016.

Clearly, the rules for determining applicable large employer status and full-time employee status are very complex. During this transition period in which the penalties will not be imposed, it is important for employers to start calculating their full-time employee base, reviewing their health plan coverage options and thinking about “pay or play” strategies.

Lori Basilico is a partner at Chicago-based law firm Edwards Wildman. She focuses her practice on employee benefits and advises clients with respect to the design and legal compliance of executive compensation programs and other state and federal rules.

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