Kentucky’s small-employer definition counts employees, and the section of the Insurance Code that sets that definition attaches no hours test to the count. It defines a dependent by relationship to a participant, and a participant as an employee or former employee. Who sits on your payroll is the question; who sits on the coverage is a different one.
What Kentucky counts, in its own word
Kentucky sets its small-employer line at KRS 304.17A-005(44), which describes an employer who employed an average of at least two (2) but not more than fifty (50) employees on business days during the preceding calendar year and who employs at least two (2) employees on the first day of the plan year
. The section is served at KRS 304.17A-005.
The word to hold onto is the one the statute repeats: employees. Both limbs of that definition count employees, and neither attaches a qualifier to the word. There is no eligible-employee formulation in the band, no full-time carve-out written into it, and no separate counting formula sitting beside it in the definition.
That is a narrower observation than it first sounds, and the next section says exactly how narrow.
What the definitions section does not attach to the count
KRS 304.17A-005 is the section that governs definitions for the whole of Subtitle 17A. It is long, and it defines a great many terms — dependent, employee benefit plan, group health plan, large group, participant, small employer, small group and more.
What it does not do is define who an employee is. It contains no definition of employee, no definition of eligible employee, no definition of employer and no definition of owner. It attaches no hours test to the count in subsection (44) and no separate aggregation formula to it.
State that precisely, because the imprecise version is wrong. The accurate sentence is that the Kentucky definitions section governing this subtitle does not define an employee and attaches no hours test to the count in its small-employer definition. The inaccurate sentences — that Kentucky counts everyone, that part-time employees count in Kentucky, that Kentucky has no aggregation rule — are affirmative claims built out of a silence in one section, and this page does not make them. What the silence licenses is a question to ask your insurer and your accountant, not an answer to give them.
Why a Kentucky group health plan is wider than a Kentucky small employer
The second definition an employer has to keep straight is the one describing the arrangement rather than the employer. KRS 304.17A-005(16) defines a group health plan as a plan, including a self-insured plan, of or contributed to by an employer, including a self-employed person, or employee organization, to provide health care directly or otherwise to the employees, former employees, the employer, or others associated or formerly associated with the employer in a business relationship, or their families
.
Read those two definitions side by side and the trap is obvious once you have seen it. The group health plan definition expressly reaches a plan of or contributed to by a self-employed person. The small-employer definition at KRS 304.17A-005(44) is written far more narrowly than that. They are two definitions doing two different jobs, and merging them tells a Kentucky sole proprietor something that is not true.
The correct reading: what Subtitle 17A calls a group health plan is defined broadly, what it calls a small employer is defined narrowly, and the narrow one is the one that decides which market rules apply. If you are working out which of those you are, the first group health plan walkthrough is the place to start.
Dependents are defined off employees, not the other way round
Kentucky builds this chain in the opposite direction from the one most employers expect.
A dependent, at KRS 304.17A-005(9), is any individual who is or may become eligible for coverage under the terms of an individual or group health benefit plan because of a relationship to a participant
. A participant, at KRS 304.17A-005(36), is any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become eligible to receive a benefit of any type from an employee benefit plan which covers employees of the employer or members of the organization, or whose beneficiaries may be eligible to receive any benefit as established in Section 3(7) of ERISA
.
So the statute reaches coverage through employment. A dependent is defined by a relationship to a participant, and a participant is an employee or a former employee. A dependent is never counted toward the employer count, because the definition points the other way.
The practical version of that, for the person building the census: a family member on your payroll is a payroll question, and a family member on your coverage is a dependent question. They will be answered by different people and they do not interact. Mixing them is the most common way a first census comes back wrong.
Former employees are still participants
One clause in the participant definition is easy to read past and is worth naming on its own. The definition reaches a former employee, not only a current one.
That is not a statement that a former employee sits inside your small-employer count — the count in KRS 304.17A-005(44) is written about employees the employer employed on business days during the preceding calendar year and employs on the first day of the plan year. It is a statement about who the plan is written to reach. When a Kentucky employee leaves, the statutory vocabulary does not simply stop applying to them, and the questions that follow a departure are questions about the plan rather than questions about the band.
If you lease your workforce, Kentucky says who the employer is
Employers who staff through a professional employer organization ask this question in a sharper form: if the arrangement puts our people on somebody else’s books, whose employees are they?
Kentucky answers it directly. KRS 336.246(3) provides:
For purposes of sponsoring retirement and welfare benefit plans for its covered employees, a professional employer organization shall be considered the employer of all of its covered employees, and all covered employees of one (1) or more clients participating in a health benefit plan sponsored by a professional employer organization shall be considered employees of that professional employer organization.
And KRS 336.246(2) adds that a fully insured welfare benefit plan offered to the covered employees of a professional employer organization shall be treated for the purposes of state law as a single employer welfare benefit plan
. The section is at KRS 336.246.
Two cautions travel with that. It is an attribution rule — it says who counts as the employer when such an organization sponsors the plan, and nothing more. It does not require any employer to use one, it says nothing about whether doing so is a good idea, and it says nothing about the count in KRS 304.17A-005(44).
Owners, partners and shareholders: what this page will not tell you
The question every closely held Kentucky business asks next is whether the owner counts, and this page declines to answer it.
That is deliberate. As set out above, KRS 304.17A-005 defines no employee, no eligible employee, no employer and no owner. Whether a sole proprietor, a partner, an LLC member or an S-corporation shareholder is an employee is a federal tax characterization question, it is answered differently for different entity types, and nothing in Kentucky’s definitions section resolves it. An article that gave you a confident answer would be giving you somebody else’s answer.
What to do instead is straightforward: ask your accountant how each owner is characterized for payroll purposes, write that down, and hand it to whoever is preparing the group health submission. It is a five-minute conversation that decides whether your census is right.
One more phrase Kentucky uses and does not define
There is an asymmetry inside the definitions section itself, and it is worth flagging rather than filling.
Alongside the employee-based definitions above, the same section uses the phrase eligible members when it describes an affiliated group or association. KRS 304.17A-005 does not define eligible member anywhere. That is a different route to coverage, governed by provisions this page has not read, and nothing here describes it. If somebody has offered you coverage through an association arrangement, treat the counting rules for it as an open question rather than assuming they run the same way as the employer rules above.
What to have ready when someone asks for your census
The census is where all of this becomes concrete, and a good one answers the questions above before anyone asks them.
Have your payroll list as your payroll system holds it, with each person’s status as your accountant characterizes it. Have the owners identified as owners rather than folded silently into the headcount. Have dependents kept separate from employees, because they answer different questions. And if a professional employer organization is in the picture, say so at the start rather than at the quote stage, because KRS 336.246 changes who the sponsoring employer is.
If you want that read against Kentucky’s own definitions before it goes to an insurer, the Kentucky page has the state-level detail, and you can get in touch and we will go through the list with you.
The bottom line
Kentucky counts employees, and the section of the Insurance Code that sets the small-employer definition attaches no hours qualifier to the word. It builds dependents off participants and participants off employees, so a family member on the payroll and a family member on the coverage are answers to two different questions — and if a professional employer organization sponsors the plan, Kentucky says by statute who the employer is.
Frequently asked questions
Does Kentucky count part-time employees toward the small-employer definition?
KRS 304.17A-005(44) counts employees, and KRS 304.17A-005, the section that governs definitions for the whole subtitle, attaches no hours test to that count. That is a statement about what the defining section contains, not a rule that every part-time worker counts — the honest answer is that Kentucky’s defining section does not draw the line, and your insurer and your tax adviser are the ones who will.
Do my dependents count toward the employee count?
No. Kentucky defines a dependent at KRS 304.17A-005(9) by reference to a relationship to a participant, and a participant at KRS 304.17A-005(36) as an employee or former employee. The chain runs from employment outward, so a dependent is never counted toward the employer’s own count.
What if a family member is on our payroll?
Then the question is a payroll question, not a dependent question. Kentucky counts employees in KRS 304.17A-005(44); whether a particular person on your payroll is an employee for that purpose is a characterization question, and it is the one to settle with your accountant before the census goes out.
We lease our staff through a professional employer organization. Who is the employer?
KRS 336.246(3) provides that for purposes of sponsoring retirement and welfare benefit plans for its covered employees, a professional employer organization is considered the employer of all of its covered employees, and KRS 336.246(2) treats a fully insured welfare benefit plan it offers them as a single employer welfare benefit plan under state law. That is an attribution rule; it does not require anyone to use such an arrangement.
Do owners, partners or S-corporation shareholders count as employees in Kentucky?
This page does not answer that, in either direction. KRS 304.17A-005 defines no employee, no eligible employee, no employer and no owner, so the Kentucky definitions section does not resolve it — and the question turns on federal tax characterization, which is a matter for your own tax adviser.
Is a group health plan in Kentucky the same thing as a small employer plan?
No, and the difference matters. KRS 304.17A-005(16) defines a group health plan broadly enough to reach a plan of or contributed to by a self-employed person, while KRS 304.17A-005(44) defines a small employer narrowly. The broad definition says what kind of arrangement you have; the narrow one decides which market rules apply to it.
About the author
Nate Jones, CPCU, is the founder of Wexford Insurance and Wexford Health Insurance, an independent agency placing small-business group benefits in 9 states. Nate builds the census that a Kentucky small group quote is actually produced from, which means separating payroll questions from coverage questions before an insurer ever sees the spreadsheet. Start with the Wexford Health Insurance quote form.