If you're a business owner, do you count yourself when determining company eligibility under COBRA? The simple answer? It depends.
The federal Consolidated Omnibus Budget Reconciliation Act (COBRA) generally requires that group health plans sponsored by employers with 20 or more employees in the prior year offer employees and their families the opportunity for a temporary extension of health coverage (continuation coverage) in certain instances where coverage under the plan would otherwise end. The employee count (20 employees) includes all full-time and part-time employees (part-time employees count as a fraction of a full-time employee).
However, only common law employees are counted, and the following individuals are not included in the employee count because they are not common law employees:
- Partners in a partnership.
- Individuals who are self-employed within the meaning of I.R.C. § 401(c)(1).
- Independent contractors.
- Directors of a corporation.
According to the IRS, under common law rules, anyone who performs services for a business is an employee if the business can control what will be done and how it will be done. This is so even when the employee is given freedom of action. What matters is that the business has the right to control the details of how the services are performed.
Whether an individual is classified as an owner or as an employee depends upon the type of business:
- Corporation: An owner is also an employee if he or she actively works in a position in the corporation. An officer of a corporation is generally an employee, but an officer who performs no services or only minor services, and who neither receives nor is entitled to receive any pay, is not considered an employee.
- Limited liability company (LLC): Likely an owner (LLC owners are also categorized as members) and not an employee unless elected to be taxed as a corporation.
- Partnership: Owner, not employee.
- S Corporation: An owner is also an employee if he or she actively work in a position in the S Corporation.
- Sole proprietorship: Owner, not employee.