Applicable large employers – those with 50+ full-time employees (ALEs) – under the Affordable Care Act (ACA) must satisfy the law’s “employer mandate,” meaning that they may be assessed penalties for:
- Failing to offer minimum essential coverage to full-time employees and their dependents
- Offering eligible employer-sponsored coverage that is not affordable or does not provide minimum value, as defined under implementing guidance
The IRS rules under the ACA teem with definitional challenges for the terms “applicable large employer,” “minimum essential coverage,” “full-time employees,” “affordable” and even “dependent” and I won’t elaborate on the details here.
I want to focus here on what I consider to be the typical ALE that regularly uses the services of a staffing firm to fill some positions or even whole departments and the effect of those workers on the ALE’s compliance with the ACA.
I could go on for several paragraphs about the “control” test the IRS uses for determining whether a worker is an employee or independent contractor and, if an employee, by whom the worker is employed. But I won’t go into that detail in order to keep this post focused on an important relief provision of the IRS’ rules for ALEs that use staffing firms. For this purpose, I assume that the IRS would conclude that the workers involved are employees of the ALE and not of the staffing firm that supplies the workers to the ALE.
For legitimate business reasons, the ALE does not formally employ the workers and does not offer its group health plan coverage to them. But as far as the IRS is concerned, the workers provided by the staffing firm count as full-time employees of the ALE (assuming they actually work full-time jobs, i.e., 30+ hours each week, etc.). As a result, the ALE’s failure to offer coverage to those workers “counts against” the ALE when the IRS tries to figure out if the ALE owes any penalties. How can the ALE avoid that treatment?
The relief offered by the IRS is that an offer of group health coverage by the staffing firm to those workers will be treated as made “on behalf of” the ALE and can be considered as an offer of coverage made by the ALE but only if the fee the ALE would pay to the staffing firm for a worker enrolled in the staffing firm’s group health plan coverage is higher than the fee the ALE would pay to the staffing firm for the same worker if the worker did not enroll in the staffing firm’s group health coverage. The IRS doesn’t tell us how much higher the fee must be, how to calculate it or how the ALE demonstrates that it’s paying a higher fee. Until the IRS fills in the blanks on these questions, ALEs in this situation have to give it their best shot, i.e., come up with something reasonable aimed at satisfying the inquiring IRS agent.
The best way for the ALE to prove that it will pay a higher fee for an employee enrolled in the staffing firm’s group health plan is to actually pay a meaningful higher fee for the enrolled employee than for any other employee. And make sure the ALE’s services agreement with the staffing firm lays out the alternative fee structure that is updated at least once each year. But the ALE will want to make sure the following points also are covered in the services agreement:
- The staffing firm’s affirmative commitment to comply with the ACA with respect to all workers assigned to the ALE, without regard to exactly which entity is considered the common law employer. Make it specific, i.e., “Staffing firm shall offer minimum essential coverage that is affordable and provides minimum value, all as described in Section 4980H of the Internal Revenue Code, to all such workers who are full-time employees, and their dependents, all as defined and required by regulations under Section 4980H”
- Whether the staffing firm has to offer coverage to workers’ spouses (the ACA does not require employers to offer coverage to spouses)
- Mandate that the staffing firm identify full-time employees under the same method that the ALE uses and specify the method, i.e., under the look-back method or the monthly measurement method
- Stipulate that the staffing firm will report the coverage to satisfy the information reporting requirements of the ACA
- Compliance with all other aspects of the ACA and ERISA that apply to the staffing firm’s group health plan
- Indemnity in favor of ALE for any penalty or other loss that the ALE suffers due to the staffing firm’s failure to offer compliant coverage and otherwise comply with the agreement, and evidence of insurance coverage for same (and annual renewal)
This is a heavy burden for the staffing firm. If the staffing firm won’t agree to these terms, or the ALE doubts the staffing firm’s ability to comply, the ALE has limited choices, including: (a) find another vendor (perhaps easier said than done); (b) receive assurance that no supplied worker will work full-time for the ALE (e.g., consider whether the job may be satisfied with two part-time workers); (c) limit the number of workers supplied by staffing firms to less than 5% of the ALE’s full-time workforce so that even if they “count against” the ALE, it still complies with the ACA (must count very carefully); (d) play IRS audit lottery and hope the IRS doesn’t ask questions (definitely not recommended) or (e) don’t take any ACA risk with a staffing firm and hire the workers directly.