April A. Goff, Norbert F. Kugele
If your company uses temporary workers through a staffing agency, how you structure your agreement with the agency can make a significant difference in whether your company has to pay any penalties under the Affordable Care Act’s employer responsibility or “play or pay” provisions.
When the play or pay regulations become enforceable in 2015, one of the complex questions many employers have to work through is: Who is responsible for providing coverage to workers obtained through a staffing agency? These workers pose special risks for employers because, under the IRS’s direction and control test, it is not always clear who the IRS will treat as the common law employer. While the final play or pay regulations do not add any greater clarity to this fundamental question, they do suggest a strategy for dealing with the risk.
In the preamble to the final regulations, the IRS seems to draw a distinction between “temporary staffing firms” and “staffing firms.” In a discussion about how the rules apply to temporary staffing firms, the IRS talks about these workers as the common law employees of the temporary staffing firm. Thus, where workers are obtained for short periods of time (for example, to meet temporary increases in production, or to cover for employees who are on short-term leaves of absence), the IRS seems comfortable with the idea that the workers are the common law employees of the temporary staffing firm, leaving the temporary staffing firm responsible for offering coverage and liable for paying penalties if coverage is not offered.
But later in the preamble, the IRS talks about professional employer organizations and other staffing agencies and states that, “in the typical case,” the professional employer organization or staffing firm is not the common law employer. The IRS does not reconcile this statement with its earlier discussion about temporary staffing agencies, but it certainly implies that if you use a worker from a staffing firm for anything other than a short-term, temporary assignment, the IRS may very well view that worker as your common law employee. If your company is the common law employer, you must count that worker when determining if your organization is subject to the play or pay requirement and if it owes any penalties.
The consequences of mischaracterizing workers from staffing firms can result in sizeable penalties for multiple years. For example, if starting in 2015 you do not include workers from staffing firms in your counts but the IRS in 2018 audits you and concludes that such workers are your common law employees, the IRS will re-characterize these workers not only for 2018 but also for past years. Even if the IRS re-characterizes a relatively small number of workers each year, this could change prior year calculations of whether your organization has been offering coverage to at least the minimum threshold of full-time employees.
In 2015, large employers with 100 or more full-time equivalent employees must offer coverage to at least 70% of full-time employees. In 2016, that threshold increases to 95% for all employers with 50 or more full-time equivalent employees. Since the penalties are based on the total number of full-time employees, the penalties for past years would be substantial.
The final regulations do offer some safe harbor solutions for minimizing this risk. A staffing firm could provide health plan coverage through a multiple employer welfare arrangement (MEWA), and a staffing firm’s offer of health coverage through a MEWA will be deemed to be an offer of coverage on your company’s behalf.
If your staffing firm does not use a MEWA, but does offer health plan coverage to the worker, the staffing firm will be deemed to be offering coverage on your behalf so long as the fee the staffing firm charges your company is higher for an employee enrolled in the staffing firm’s health plan than it is for the employee not enrolled in the plan.
Because of the uncertainty involved in determining the common law employer, a conservative approach is to structure your company’s contract with its staffing firm to incorporate one of these safe harbor solutions. If the contract is structured correctly, you will be deemed to be offering coverage through the staffing agency – even if the worker is your common law employee.
If you need assistance with the play or pay regulations, structuring contracts with your staffing firms or with other Affordable Care Act compliance issues, please contact Norbert F. Kugele (firstname.lastname@example.org or 616.752.2186), April A. Goff (email@example.com or 616.752.2154) or any other member of Warner’s Employee Benefits Practice Group.