Signed into law in December 2014 and effective January 1, 2016, the Small Business Efficiency Act (“SBEA”) provides welcome federal statutory recognition of Professional Employer Organizations (“PEOs”). PEOs, who act as “co-employers”, are becoming popular for many small to mid-size businesses struggling to maintain compliance with an ever-increasing volume of regulations impacting human resources and benefits compliance.
In the past, many states individually recognized PEOs through licensing or registration statutes, and there were only a handful of pieces of federal guidance concerning how PEOs should be treated under federal law. The SBEA changes the federal legal landscape by instituting a voluntary certification process for PEOs. By completing this voluntary certification process, a PEO has clear statutory authority to collect and remit taxes on behalf of their clients. Businesses can breathe a sigh of relief as certified PEOs will also assume sole liability for the collection and remission of federal taxes.
In order to become certified, the SBEA requires PEOs to meet a number of financial standards, including bonding and independent financial audit requirements. The IRS has been working to determine the exact procedures and information system changes necessary to implement the new law, and the window for submitting comments on this process just closed earlier this month. At this point, it seems aggressive, but the IRS claims that it will begin accepting applications for certification on July 1, 2016 (only a year after it was directed under the terms of the statute).
The parameters of this certification process is particularly important as PEOs are seeing ever-increasing interest these days as many businesses require assistance with the Affordable Care Act (“ACA”) requirements. Small and midsize employers are also looking to access large-group benefits as PEOs can leverage their size to negotiate more favorable rates with insurers.
One question for businesses that remains to be fully addressed is whether a PEO (certified or not) can take over sole liability for ACA’s “play-or-pay” employer mandate under Section 4980H? Since its enactment in 2010, the ACA has cast uncertainty on its impact with third-party staffing arrangements. Additionally, the final rule and preamble implementing the employer mandate uses the term “professional employer organization” in a manner that may not be reflective of the IRS-stamp of approval PEOs we now have in 2016.
The final rule attempted to address this issue by indicating that, when the PEO client organization (i.e., the employer engaging the PEO) is the “common law employer” but wants to have the offer of coverage made by the PEO treated as the offering having been made by the PEO client organization, then the PEO client organization must pay a higher fee for those employees who enroll in the health coverage (as compared to those employees who do not so enroll).
Under the “common law employer” standard, whether a common law employment relationship exists is a facts and circumstance analysis which requires consideration of “the right to control and direct the individual who performs the services.” Language found in the SBEA specifically tip-toes around this issue, stating “nothing in this section shall be construed to affect the determination of who is an employee or employer.” Nonetheless, it is generally understood that under most arrangements PEOs treat employees as the PEO client organization’s common law employees. In cases where a PEO is not the common law employer of the employee (either in place of or in addition to the PEO client organization), however, the PEO has another path to offer coverage on behalf of a client and satisfy the client’s employer mandate obligation so long as the client pays the PEO an extra fee for individuals who enroll in the PEO’s health plan.
Additional guidance from the IRS in relation to these certified PEOs and how, if at all, they will impact the employer mandate would certainly be welcome and may help clear up some of these issues, but until that time companies should remain diligent and be aware of the potential legal risks.