House Passes Bill Redefining Small Employer

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Effective January 1, 2016, the definition of small employer changes as required by the Affordable Care Act (ACA).  Under the new definition, a small employer is one with an average of 100 or fewer employees.  Current law in most states defines a small employer as one with an average of 50 or fewer employees.

The change is notable because employers with 51-100 employees shifting from the large group to the small group market in 2016 could see changes in premium costs because of ACA requirements that are not applicable in the large group market.  For example, the ACA restricts the rating factors that can be used to set premiums in the individual and small group markets to include only age, geographic location, family size and tobacco use.  Other rating factors commonly used in the large group market, such as claims experience, group size, industry and gender, cannot be used for 51-100 employees groups shifting into the small group market in 2016.

In response to concerns that the change could end up raising premiums in the small group market, the House of Representatives passed H.R. 1624, the Protecting Affordable Coverage for Employees Act (PACE), which would amend the ACA requirement that employers with 100 or fewer employees be treated as small employers.  It remains to be seen whether PACE will be adopted by the Senate and signed by the President.

Even if PACE is signed into law, it’s unclear what impact it will have on California employers with 51-100 employees.  States will still have the option to expand the definition and, as discussed in our July 2015 Briefing, California law already incorporates the new definition of small employer.  At this point, it’s unclear if the state Legislature will take action to revert back to the old definition.