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What Employees Are Counted for Purposes of COBRA’s Small Employer Exception?

EBIA  

EBIA  

QUESTION: We understand there is a small employer exception to COBRA for employers with fewer than 20 employees. What employees should we count for purposes of this exception?

ANSWER: A group health plan is not subject to COBRA for any year if all employers maintaining the plan together employed fewer than 20 employees on a typical business day during the preceding year. Here are some general guidelines for which employees must be counted:

  • Count All Employees, Not Just Plan Participants. Be sure to count the number of employees working for all employers maintaining the plan, not just the number of employees covered by the group health plan.
  • Count Only Common-Law Employees. Only common-law employees are counted as “employees” for purposes of COBRA’s small employer exception. Do not count self-employed individuals, independent contractors, or members of a corporate employer’s board of directors, unless those individuals are also common-law employees of the employer. Keep in mind that common-law employee status is not determined solely by a worker’s payroll status, title, or job description but depends on various factors enumerated by the IRS and the courts, including whether the organization controls the manner in which the individual provides services.
  • Count Part-Time Employees. A part-time employee counts as a fraction of an employee. The fraction is equal to the number of hours that the part-time employee works divided by the number of hours that an employee must work to be considered a full-time employee. The number of hours that must be worked for an employee to be considered full-time is determined in a manner consistent with the employer’s general employment practices (but cannot be more than eight hours a day or more than 40 hours a week). You may count employees for each typical business day, or you may count employees for a pay period and attribute the total number of employees for that pay period to each typical business day that falls within the pay period. You also may count part-time employees on an aggregate basis (rather than on an individual basis) by totaling the hours worked by part-time employees and dividing that sum by the number of hours required for one worker to be considered full-time. However, you must use the same method for all employees and for the entire year for which the small employer plan determination is made.
  • Count Employees of Related Entities (and Successors). You must count all employees of all entities that are related to your company under the Code § 414 rules. These “controlled group” rules are complicated, but if your company is related to another entity, you’ll need to determine whether employees of the related entity must be counted. If so, you’ll also need to include employees of “successors” of those entities, i.e., entities that “result from a consolidation, merger, or similar restructuring.”
  • Count Employees and Related Entities Outside the United States. The controlled group rules do not exclude entities outside the United States, so employees of a foreign entity must be counted if the entity otherwise qualifies as a member of the controlled group. Similarly, employees working outside the United States must be counted.

The rules for counting employees are complex, and if you mistakenly rely on the small employer exception, the consequences can be significant. Noncompliance can result in lawsuits and penalties, as well as the obligation to provide COBRA coverage to former employees and others without insurance or stop-loss coverage. If you are in doubt as to your company’s status, you’ll want to seek professional advice. For more information, see EBIA’s COBRA manual at Section IV.C (“Small Employer Exception”). See also EBIA’s Self-Insured Health Plans manual at Section XXVII.B (“COBRA Considerations for Self-Insured Health Plans”).

Contributing Editors: EBIA Staff.

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