Starting in 2014, the health-plan landscape changes dramatically:
Individuals will either have to carry health insurance or pay a tax.
Health Insurance Marketplaces will offer coverage to those who need it, including subsidized coverage for families below 400% of the federal poverty level.
Employers with more than 50 full-time-equivalent employees will either have to offer affordable health-plan coverage to at least 95% of their full-time employees and their dependents or pay a contribution to help fund the subsidies offered through the Marketplace.
This employer mandate is formally known as the “employer responsibility” requirement, but is often referred to as the “play-or-pay” requirement.
Many aspects of the play-or-pay requirement depend on the number of workers who are considered your common-law employees. Thus, if you are determining whether you are subject to the play-or-pay requirement, weighing whether you should offer coverage or pay the penalties, or even just trying to figure out to which employees you must offer coverage, you must correctly identify all of your common-law employees; otherwise, you could find yourself subject to significant, unexpected penalties.
One area that is particularly confusing is the status of temporary workers that you obtain through a staffing agency.
Who is the “Common-Law” Employer of a Temp?
Under IRS regulations, the question of who is the employer is resolved under common-law principles, which focus on who has the right to control and direct the individual — not only as to the result to be accomplished, but also as to the details and the means by which that result is accomplished. If your company is providing (or simply has the right to provide) day-to-day direction in what the temporary worker does and how he or she does it, then your company could be the common-law employer of that worker.
In its guidance on this issue, the IRS cites a 1970 Revenue Ruling as an illustration of facts and circumstances under which a temporary staffing agency is considered the common-law employer. In that case, the temporary staffing agency not only hired and supplied workers to a company, but also trained the workers and provided a supervisor at the worksite who directed their day-to-day activities.
In most cases, the answer to the question of who is the common-law employer will not be as clear cut as in the 1970 Revenue Ruling. Courts have developed a 20-factor test, which is primarily designed to distinguish between independent contractors and employees. But the test has some subjective components to it, which leads to inconsistent results. One court might conclude that the staffing agency is the common-law employer while another court looking at the same set of facts could come to a different conclusion. Unless you have a situation as clear cut as in the 1970 Revenue Ruling, there is risk that the IRS or a court of law might disagree with your conclusion.
Impact on Determining Whether You Are Subject to the Play-or-Pay Requirement
If you are small employer trying to decide whether you are subject to the play-or-pay requirement, making a mistake as to whether temporary workers are your common-law employees could leave you vulnerable to a substantial penalty.
For example, suppose that XYZ Company has 40 regular full-time workers and uses 30 full-time temporary workers. If XYZ counts only its regular, full-time workers, it would conclude that it is not subject to the play-or-pay provisions and does not have to offer its workers health benefits. But if XYZ has sufficient control over the day-to-day activities of the 30 temporary workers, XYZ may be the common-law employer of those workers. Because XYZ would now meet the threshold requirement of having at least 50 full-time-equivalent employees, it would be subject to penalties for failing to offer coverage to at least 95% its full-time workforce. XYZ’s penalty would be $2,000 times the number of its full-time employees less 30, which translates into an $80,000 annual penalty.
Impact on Determining Who Must Be Offered Coverage
For larger employers who are clearly subject to the play-or-pay requirement, failing to account for temporary workers could mean that the employer is not offering coverage to enough workers.
For example, suppose that ABC Company has 400 regular full-time employees, plus it uses an additional 10 full-time temporary workers. While it offers its regular full-time employees health plan benefits, ABC does not offer any benefits to the temporary workers. If ABC were the common-law employer of these temporary workers, it would have to pay a $3,000 penalty for each one of the temporary workers who obtained subsidized coverage through the Health Insurance Marketplace. If all 10 obtained subsidized coverage, the penalty would be $30,000.
But the impact can be even greater. Suppose that instead of using only 10 temporary workers, ABC Company uses and is considered the common-law employer of 30 temporary workers. In this case, the temporary workers represent nearly 7% of ABC’s full-time workforce. Even if ABC offers coverage to all 400 regular full timers, it is no longer considered to be offering coverage to at least 95% of its full-time employees. ABC will have to pay the penalty for failure to offer coverage ($2,000 times the number of full-time employees less 30), which in this case equals an $800,000 annual penalty!
Reducing the Risk
Because of the business need for temporary workers, it may not be practical to make these temporary workers company employees or to offer them coverage under your company’s health plan. In that case, your strategy may be to assume that these temps will be treated as your common-law employees but to try and limit the risk that these workers will expose you to employer responsibility penalties.
This strategy revolves around making sure that your contract with the staffing agency requires it to offer affordable coverage to these workers, generally within 90 days of the date they started working for your company. As long as the temporary workers are eligible for affordable coverage (that is, coverage that costs no more than 9.5% of household income and meets minimum value requirements), these workers will not be eligible for subsidized coverage through the Health Insurance Marketplace and will not trigger any penalties against your company.
Additionally, when employers start reporting health-plan coverage and eligibility information to the IRS in 2015, the agreement should require the staffing agency to report these workers to the IRS as the staffing agency’s employees.
While this strategy reduces the risk of penalties, it does not eliminate the risk entirely. For example, your company could still be subject to the penalty for failure to offer coverage to at least 95% of your full-time employees (including the temporary workers) if you have other full-time workers who are able to obtain subsidized coverage through the Health Insurance Marketplace. To reduce the risk even more, your company should make sure that all workers who average at least 30 hours per week are being offered affordable coverage.