Counting Variable Hour Employees in California

Employers all across America are preparing for the new “Play or Pay” rules coming next year.  Under these rules, employers must count their employees, first to determine if the Play or Pay rules apply to them, and second, to know which employees might be subject to a penalty if they are not eligible for medical benefits.

Assuming an employer has at least 50 employees, the employer must offer health insurance coverage to substantially all full-time employees or face significant penalties.

Determining which employees are full time therefore is critical.  If you expect that an employee will work at least 30 hours, they count as a full-time employee.  If you expect that an employee will work less than 30 hours, that employee is a part-time employee.  Part-time employees, if not eligible for benefits, do not subject an employer to penalties.

But sometimes, employees’ hours are so variable that the employer cannot tell if they will work at least 30 hours.  For these employees, regulations describe how to count hours to determine whether or not they are full-time.  Specifically, you must set a “look-back” period, called a standard measurement period, during which you track actual hours.  If hours average at least 30 hours per week over the standard measurement period, the employee is deemed full-time and the period for which the employee must remain “full time” must be at least the duration of the standard measurement period.  This is called the Stability period.  Counting variable hour employees is complicated, time consuming and requires excellent recordkeeping.  Standard measurement periods can be as long as 12 months.

There is a Big Question for California Employers:   Although the ACA provides for it, does California law allow for the use of a standard measurement period and stability period for variable hour employees?

We do not provide tax or legal advice, but here is our understanding.

California group health policies issued or renewed January 1, 2014 may not impose an eligibility waiting period longer than 60 calendar days (and may not impose different waiting periods on different classes of employees).  These provisions were made part of the California Insurance Code and California Health and Safety Code due to AB 1083 and subsequent legislation.

State insurance laws, including California’s 60-day waiting period law, apply to health insurers and HMOs (and not to the employer).  The CA Department of Managed Health Care (DMHC) and the CA Department of Insurance (CDI) have authority to regulate and enforce the laws.  Each insurer or HMO issuing coverage in CA works with the appropriate regulatory agency for guidance and to get approval of it group applications, contract language, etc.  The employer, as policyholder, may rely on its carrier’s interpretation of the law.  For details about applying waiting periods, the employer must refer to the insurer/HMO that issues the group contract in question.  The employer also will want to confirm that the insurer/HMO defines an eligible employee appropriately in its contract, so that the carrier’s definition is consistent with employer’s practices.

In our experience, most California carriers advise their group policyholders that the plan’s waiting period begins when the employee first becomes eligible.  In most cases, the employee becomes eligible upon hire, but not always.  For instance, the employee may be hired for a part-time position (not eligible) and then promoted to a full-time position (eligible), so that the waiting period, if any, would begin on the date the employee becomes a full-time (eligible) employee.  Similarly, variable-hours employees would first become eligible at the end of employer’s initial measurement period, and the waiting period, if any, would begin on day the employee becomes eligible.  (Note that the CA statute does define when eligibility begins with respect to certain employees under small group plans (usually groups under 50 employees).  This usually is not relevant, however, outside of the small group market.  The typical employer using measurement periods for variable-hours employees is a large employer (generally 50 or more full-time-equivalent employees) and therefore not affected by California small group rules.)

In summary, state insurance laws apply to the carrier/HMO and not directly to the employer.  Most state laws are easily understandable and all carriers adopt the requirements in the same manner, but occasionally there is some confusion and AB 1083 has been a confusing one.  California’s law does not provide a safe harbor for special treatment of variable hour employees and therefore it is risky to employ one.  But since this law governs insurance and not employers, an employer will need to consult with its specific carrier, or with carriers offering bids, regarding exactly how the California waiting period provision will apply to that employer’s group policy or HMO contract.  Self-funded plans are not subject to this law and can use the variable hour safe harbor.

Instructions for counting employees total more than 30 pages and I would also recommend viewing our 90-minute video training on the topic before proceeding with variable hour calculations. It seems harsh but considering the complexity, many employers now just manage the problem by mandating that employees who fall into this category must work fewer than 30 hours.

Lastly, note that a new bill (SB 1034) has been introduced in the CA Senate which may change or eliminate California’s waiting period rule for 2015 and forward.  The proposed bill may be revised as it goes through the various committees and houses (Senate and Assembly) as part of the legislative process.  CA carriers and brokers will be monitoring the progress of this bill.

Robert Recchia, CLU ChFC
President, California Corporate Benefits Insurance Serivces

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