The ACA & The Perils of Engaging Independent Contractors
Feb
17
Written by:
2/17/2014
Employers who
engage a significant number of 1099 employees run a tremendous risk of incurring
the no insurance penalty, even when they offer coverage to all of the employees
they categorize as full-time.
Why? Because the regulators may disagree with the independent contractor
classification used by the employer and deem all of the 1099 employees to be
“common law employees” of the employer. If the number of 1099 employees who are
reclassified as common law employees exceeds 30% in 2015 or 5% in 2016 and
beyond of the employer’s full-time workforce, the no insurance penalty may be
tripped.
As noted, in the Final Regulations, the IRS has provided a bit of a breather
(perhaps) on this issue for 2015. In 2015, only a large number of percentage
(i.e., 30% or more) of the workforce being misclassified will trip the penalty.
However, employers with a significant number of 1099 employees should check the
percentages for 2015 and start to implement appropriate steps in 2015 if it
looks like the concentration of 1099 employees will be greater than 5% starting
in 2016 (and begin now to make changes for 2015 if the concentration is greater
than 30%).
Consider this example: in 2016, a hospital employs 3,000 full-time employees. It
offers self-insured insurance coverage to 100% of these 3,000 employees and
their families. It subsidizes a significant portion of the premium cost and its
group health care spend is in the tens of millions of dollars per year. The
insurance is also “affordable” for ACA purposes, so the hospital believes that
it has no exposure to the ACA’s so-called “pay or play penalties.”
To meet the demands or needs of about 200 clinical staff, the hospital has
created a pool of 1099 employees. These are individuals who work full-time but
for personal, financial or other reasons, have agreed with the hospital to be
treated as “independent contractors” and to forego eligibility for benefits,
including health insurance, perhaps in exchange for a higher hourly rate of pay.
Let’s say up front that the IRS (and other regulators) takes a very dim view of
these relationships and the agreement described above is generally disfavored by
the IRS and other regulators because of tax, withholding and potential wage and
hour abuses. The IRS, in general, determines whether an individual is a common
law employee based on a host of factors, including:
-
The
amount of control exercised by the employer over when, where and how the
individual works;
-
The
worker’s opportunity (or lack thereof) to incur profit or loss;
-
Whether
the employer can fire the individual;
-
Whether
the work is part of the employer’s regular business; and
-
The
permanency of the relationship.
Note that
this is a short list—other factors may be used to determine “employee” status.
Also, note the hospital setting is used as an example. There are many industries
that have similar arrangements. For example, it is not uncommon in education to
find that part-time teachers and coaches are classified as 1099 employees. It is
often the case that these individuals would be treated as common law employees
by the IRS.
In the hospital example described above, it might be difficult to avoid these
1099 employees being reclassified as common law employees. If that happens, the
results rival any of the perils that the heroine in Perils of Pauline may have
encountered.
If the 200 1099 employees the employer treated as non-eligible are determined to
be common law employees, and any full-time employee obtained subsidized coverage
on an ACA exchange, then the penalty assessed against the hospital would be a
whopping $6,340,000 per year!
Why? Because the hospital would be deemed to have had 3,200 full-time employees,
200 of whom were not eligible for insurance. 200 is 6.25% of 3200—so the
hospital would have offered coverage to about 94% of the full-time workforce and
therefore the no insurance penalty would be assessed under the ACA. This would
be the case even though the hospital had been spending tens of millions of
dollars per year to offer good insurance to those who wanted insurance.
Employers who engage 1099 employees may want to review whether these workers are
appropriately classified before they find themselves on the wrong side of the
guys in black hats when the pay or play requirements go into effect in 2015. And
even if they are well below the 30% range with 1099 employees for 2015, they
clearly have to check to see whether they will be below 5% of 2016 and beyond.
If not, they should look carefully and with a keen eye to determine whether
these individuals aren’t really common law employees.
The author of this blog is Peter J. Marathas, Jr., Esq. Mr. Marathas is a
partner at Proskauer Rose LLP and chairs the firm’s Health Care Reform Task
Force. Mr. Marathas speaks and writes frequently on the requirements of the
Affordable Care Act. He provides counsel and assists Prosential agencies with
compliance support. Mr. Marathas can be reached at [email protected] or
(617) 526-9704. © 2014 Proskauer Rose LLP. All Rights Reserved. Used by
permission.
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