The IRS Clarifies Affordable Care Act’s Employer Mandate Penalties | DCR Workforce Blog

The IRS Clarifies Affordable Care Act’s Employer Mandate Penalties

The IRS Clarifies Affordable Care Act’s Employer Mandate Penalties

The Affordable Care Act (ACA) has always kept employers on a high alert, since its inception in 2010, with all the changes it wrought in employee benefits. The ACA, also known as Obamacare, has singlehandedly required many plans to be eliminated, benefits to be added, made changes to different rules, and brought about many delays in implementing some of its requirements. With all the negative press it received, the Act is here to stay. The Congressional Budget Office’s prediction of an estimated deficit of $353 billion, should the Act be repealed by any new government which may be formed in 2017, is bound to ensure that the law will survive and stay in force. With Obamacare’s Cadillac tax scheduled to become effective in 2018, the cost of healthcare increasing, and insurance premiums rising; employers cannot delay making some difficult decisions about their benefit plans in compliance with the ACA’s play-or-pay requirements, individual mandate, and eligibility standards for public exchange subsidies.

Under the ACA, large employers (with 50+ FTEs) who do not offer coverage for all of their full-time employees, or offer unaffordable minimum essential coverage or offer plans with high out-of-pocket costs could face tax penalties. Employers who fail to comply with the ACA pay fines called “employer shared responsibility payments”. The employer may also be subject to a tax penalty if there is at least one full-time employee certified as having purchased health insurance through an exchange and was eligible for a tax credit or subsidy. The speculation and suspense with regard to employer mandate penalties under the Affordable Care Act have finally come to an end.

The Internal Revenue Service (IRS) has finally confirmed that the penalties, adjusted for inflation, for failing to offer minimum essential coverage to fulltime employees comes to $2080 and the penalty for failing to offer minimum value affordable coverage comes to $3120 in 2015. These penalties will hit $2160 and $3240 respectively for 2016. It has also clarified the application of ACA market reform requirements to various types of employer healthcare arrangements, payment plans and reimbursement arrangements. It helps determine the full-time status of an employee.

Wondering how this would impact the use of contingent workers and what the pay or play rules for them are? Let’s find out.

Pay or Play Mandate for Contingent Workers:

The IRS has introduced some new rules related to the employment of contingent workers, be they temporary workers or independent contractors 1099.

  • As with full time employees, contingent workers also are determined according to the definition laid down by the IRS, which bases its classification of a common law employee if the entity which employs the worker has the right to control the individual’s performance or services. The final regulations exclude leased employees, sole proprietors, partners in a partnership, certain direct sellers and real estate agents and some others from the definition of employee.
  • To verify compliance under the pay-or-play mandate, when the client is the common law employer, an offer of coverage from the temporary staffing firm “on behalf of” the client employer will be considered to be an offer of coverage by the client employer.
  • To prove that the offer of coverage was made “on behalf of” the client employer, the client employer must pay a higher fee to the temporary staffing firm for those employees who enroll in the temporary staffing firm’s plan. Thus, if the contract provides for a flat fee per employee placement irrespective of whether the employee enrolls in the staffing company’s coverage, the employer will not be considered to have made an offer of coverage. This exposes the client employer to the pay-or-play mandate’s $2000 per full-time employee “no coverage offered” penalty if more than 5% of its full-time employees (30% in 2015) are employed through the staffing agency, or as per the new rates for 2015 and 2016, just release by the IRS.
  • Employers are not required to offer coverage to independent contractors. An adverse misclassification decision against an employer would make the IRS consider these 1099 employees as misclassified common law employees. In an earlier post, we have looked at the significant penalty exposure to the employer in such a context. Employers who engage a significant number of “1099 employees” run a tremendous risk of incurring the pay-or-play mandate’s $2,000 per full-time employee “no coverage offered” penalty, even when they offer coverage to all of the employees they categorize as full-time. If the number of 1099 employees who are reclassified as common law employees exceeds 5% of the employer’s full-time workforce (30% in 2015), the “no coverage offered” penalty could also become effective.
  • The law is willing to avoid imposing penalties on an employer for worker misclassification which was (i) based on a consistent treatment of the workers in question as independent contractors, (ii) compliant with the Form 1099 tax reporting requirements for independent contractors and (iii) based on a reasonable argument for treating the workers as independent contractors. But, any relief under Sec 530 for employers that hire independent contractors is completely ruled out by the ACA’s regulations. The ACA regulations specifically reject the availability of Section 530 relief for purposes of the pay-or-play requirements.
  • Despite the requirement for a reasonable basis as a condition for Section 530 relief, the IRS based its decision on the concern that allowing Section 530 relief would incentivize worker misclassification. Given the lack of available relief, employers should carefully review their contractual arrangements with service providers to ensure that they have been properly classified as independent contractors as opposed to common law employees under the more traditional common law tests.
  • The ACA’s waiting period rules expect an employer to offer coverage within 90 days from date of hire. The IRS expects that short-term employees (other than seasonal employees) who are reasonably expected to work full-time (30 hours or more per week) at date of hire must generally be offered coverage within 90 days.
  • When the temporary worker is a variable hour employees with no set schedule (generally working 6 months or less on a seasonal basis), the employer (staffing company) can use a determination period of 3 to 6 to 12 months to determine an individual’s full-time status for a following so-called “stability period” of 6 or 12 months. Considering the difficulty with having a single worker assigned to several client employers during the period, the final regulations provide for a staffing company to determine which new employee would be considered as a ‘variable hour’ worker, at the time of hire. Factors governing this determination could be varied and range across the staffing company’s experience with similar employees, their right to reject assignments, periods of lull between assignments, varied lengths of assignments and typical lengths of assignments.

Employers need to make sure that they consider the various options available to them under the ACA and decide whether to pay or play. Please comment and share your decisions and reasoning with our readers.

The content on this blog is for informational purposes only and cannot be construed as specific legal advice or as a substitute for competent legal advice. They reflect the opinions of DCR Workforce and may not reflect the opinions of any individual attorney. Do contact an attorney for advice specific to your issue or problem.
Lalita is a people/project manager with extensive experience in operations, HCM and training and development across industries like banking, education, business consulting, BPO and information technology. She believes in a dynamic approach to life and learning as change is the only constant.