Sep 01, 2013

ACA: Fewer than 95% = 95% Penalty

Even though the Affordable Care Act (ACA) has delayed its shared responsibility penalties to 2015, employers need to develop a clear understanding of the mandate and start acting now. Under the new legislation, employers with 50 or more full-time employees or full-time equivalent employees will be required to offer at least 95% of their full-time employees (and their dependents) health coverage meeting government-defined minimum standards.  Those who fail to do so must pay employer shared-responsibility penalties.

For some companies, the “Play or Pay” mandate becomes a question of weighing the cost of either playing by offering such coverage or paying the penalty, leading to a strategic choice about benefit structure and workforce composition. The “no coverage” penalty is set at $2,000 per year multiplied by the total number of full-time employees in excess of 30.

Let’s take a look at an example to demonstrate the possible costs of the penalty. If XYZ Corporation has 100 full-time employees, and provides health coverage for 90 of them; they would be faced with paying the penalties as they fall below the 95% mandate. The penalty of $2,000 per employee, which in this case would be 70 (subtracting the thirty not included in the penalty calculation), would equal a total fee of $140,000.

“73% of employers do not know enough about the play or pay mandate to make an informed decision”

Because penalties can be incurred if an employer does not offer coverage to its full-time employees, it is important for an employer to identify who its employees are for these purposes. The proposed regulations implementing the penalty provide that “employee” refers to a common-law employee. The IRS defines the term worker saying “anyone who performs services for you is your employee if you can control what will be done and how it will be done.”

To identify which workers are common law employees, the IRS takes the position that determination can only be made by “examining the relationship of the worker and the business.” To do this, the IRS looks at three aspects of the relationship:

1)     Behavioral Control

A company has behavioral control over a worker when it has the right to direct or control how the worker does the work, including the types of instruction given, degrees of instruction, evaluation systems and training.

2)     Financial Control

A company has financial control over the relationship if the company has the right to control the economic aspects of the worker’s job.

3)     Type of the Relationship

This criterion refers to how the worker and the company perceive their relationship to each other, and involves written contracts, employee benefits, permanency of the relationship and services provided as a key aspect of the business.

What This Means for Companies Who Engage Contingent Workers

This determination of a common-law worker is important for companies that use third-party agencies to handle parts of their staffing needs. If a company uses a staffing agency, leasing company, or other third-party to secure workers, it must consider the implications of the new employer penalties. Even though the third-party handles payroll and benefits and may have initially hired the worker, under the common-law criteria determination, the client company may be considered the common law employer of the contingent workers.

In the definition of “employee” as set forth by the proposed regulations for the “play or pay” requirement, the treatment of contingent workers merits special attention. The question is which entity is responsible for offering coverage – the temporary staffing organization or the client organization. Some issues worth considering are:

  • How are the contingent workers likely to be classified?

Looking at the criteria set by the IRS for identifying a common-law employee can help companies assess which contingent workers would likely be classified as a common-law employees of the client company versus the third-party.

  • Terms of the contingent worker agreement

Companies and staffing agencies both will want to consider the “play or pay” requirement when negotiating the terms of the contingent worker agreement, to minimize potential exposure and assign clear responsibilities.

  • Full-time employee reporting requirements

Beginning in January of 2016, employers will be required to report to the IRS who their full-time employees were in prior calendar years and whether they were offered health coverage.

  • Rehired Retirees

Often, a company’s retirees are rehired through a third-party process, thus possibly making them common-law employees. Companies need to look at their retiree plans to determine how to classify and cover these workers.

A recent survey shows that 45% of surveyed companies are concerned about their staffing suppliers’ ability to meet their ACA obligations. As for costs, 31% cited non-compliance penalties as their largest concern, while another 31% were worried about increased administrative burdens.

In order to fully comply with the Affordable Care Act and avoid unnecessary penalties, employers who work with third-party agencies for staffing needs must look closely at their current workforce composition to make strategic preparations for when ACA goes into full effect.

“The Affordable Care Act is a perfect example of how companies can be affected by the different types of relationships, from full-time to part-time to contracting.” ~Stephan Millard, Vice-President of Ventana Research.