Applicable large employers faced with the prospect of complying with the Affordable Care Act’s employer shared responsibility rules must grapple with and understand what is means to make an offer of minimum essential coverage under an eligible employer-sponsored [group health] plan to their full-time employees. Final regulations implementing these rules determine an individual’s status as an “employee” by applying the “common law” standard, the contours of which were examined in a previous post. Identifying an employer’s common law employees in a two-party arrangement is a simple matter. But this is not always the case in three-party arrangements (i.e., those in which workers are hired from or through commercial staffing firms or professional employer organizations). Three-party arrangements invite the question—whose employee is it? Where the Act’s employer shared responsibility rules are concerned, the answer to that question tells us which entity must make the requisite offer of coverage when assessing exposure for assessable payments.
The final regulations provide a special rule governing outsourced employees or “offers of coverage on behalf of other entities.” This rule is welcome to be sure, but it also appears to be widely misunderstood, systematically over-utilized, and in a few cases subject to interpretations that (seem to us, anyway) stray pretty far from the text.
Recognizing the unique challenges posed by three-party employment arrangements, the preamble to the final regulations explains the problem and introduces the regulatory solution as follows (79 Fed. Reg. p. 8,566 (Feb. 12, 2014)):
“[I]f certain conditions are met, an offer of coverage to an employee performing services for an employer that is a client of a professional employer organization or other staffing firm (in the typical case in which the professional employer organization or staffing firm is not the common law employer of the individual) . . . made by the staffing firm on behalf of the client employer under a plan established or maintained by the staffing firm, is treated as an offer of coverage made by the client employer for purposes of section 4980H. For this purpose, an offer of coverage is treated as made on behalf of a client employer only if the fee the client employer would pay to the staffing firm for an employee enrolled in health coverage under the plan is higher than the fee the client employer would pay to the staffing firm for the same employee if the employee did not enroll in health coverage under the plan. (Emphasis added).
The rule itself appears in Treas. Reg. § 54.4980H-4(b)(2), and it provides, again in relevant part, as follows:
For an offer of coverage to an employee performing services for an employer that is a client of a staffing firm, in cases in which the staffing firm is not the common law employer of the individual and the staffing firm makes an offer of coverage to the employee on behalf of the client employer under a plan established or maintained by the staffing firm, the offer is treated as made by the client employer for purposes of section 4980H only if the fee the client employer would pay to the staffing firm for an employee enrolled in health coverage under the plan is higher than the fee the client employer would pay the staffing firm for the same employee if that employee did not enroll in health coverage under the plan. (Emphasis added).
Neither the preamble nor the final regulations explain the rationale for the requirement of an additional fee. The backstory has it that the Treasury Department and the IRS were worried about giving a common law employer who neither offered nor paid for coverage credit for Code § 4980H purposes for coverage provided by another entity. The rules governing offers of coverage by unrelated entities also apply to collectively bargained multiemployer plans, which too are offered by separate, unrelated legal entities but into which the common law employer makes contributions based on the terms of a bargaining or joiner agreement. There is, however, an important difference. While contributions to a multiemployer plan are set by the collective bargaining process, the final regulations offer no indication of what an appropriate additional fee might be in the context of a staffing firm or professional employer, or even how and when that fee must be assessed.
Application of the Rule
(1) Is the rule being overused?
Clients of staffing firms and professional employers in many cases are insisting on applying the rules governing third-party offers by contract, often without first asking whether the rule is applicable. Where a staffing firm is the common law employer of the workers that it places with its client, then there is no need to charge the added fee. In an earlier article, we explored this question at length. To vastly oversimplify our argument, we claim that in the vast majority of cases, contract and temporary employees placed by traditional staffing firms with client organizations are the common law employees of the staffing firm. In professional employer organizations, however, the opposite is true: in most cases the professional employer organization is the common law employer. But concerns about “getting it wrong” have led many users of third-party staffing firms to insist on complying with the rule (despite the potential increase in cost) in all their contracts and arrangements.
There are of course instances in which, based on all of the facts and circumstances, a client organization has legitimate concerns over the proper classification of workers placed with the client. In these cases, it makes perfect sense to take advantage of the rule governing third-party offers of coverage. But there are, in our view, many more instances where the rule is clearly not needed. For example, there is little reason to believe that workers recruited by a staffing firm and placed in short-term or high-turnover assignments would be the common law employees of the client organization. Nor would we draw the line here, since employee tenure is but one of several factors involved in common law employer analysis and by no means determinative.
Past precedents show that “control” is the key. A handful of older IRS general counsel memoranda and private letter rulings (which can’t be relied on) generally agree that the staffing firm is the employer, at least where the staffing firm exercises the degree of control typical of most temporary staffing arrangements. In fact, one recent federal appeals court found the requisite control factors even in a PEO arrangement – factors that are typical of non-PEO staffing arrangements. Blue Lake Rancheria v. United States, 653 F. 3d 1112 (9th Cir. 2011).
(2) What is the proper amount of the additional fee?
For the first few years following the Act, there arose a debate about the extent to which the costs of ACA compliance would be shifted to clients. Early on, clients appeared to resist the idea that they would need to shoulder these costs. But in the run up to 2015, when the employer shared responsibility rules take effect, there appears to have been a shift in attitude. Clients are generally willing to subsidize the costs of ACA compliance, but they are insisting that their staffing firms rein these costs in with smart compliance strategies, and they are demanding transparency in pricing.
The additional fee requirement gives staffing firms a basis to pass through at least some of the costs of compliance. At one end of the spectrum, the additional fee could equal the substantiated cost of compliance. At the other end, the additional fee could be a nominal amount per hour (or some other period). But to date, no standard has emerged to tell us how much the additional fee ought to be.
(3) When and how should the fee be charged?
To the question, “when and how should the additional fee be charged,” there seem to be as many answers as there are staffing firms. The regulators, speaking informally and off the record, clearly envision a detailed accounting (e.g., line-by-line in periodic invoices). This approach would constitute a “gold standard” of compliance. A “silver” standard might involve charging an aggregate amount each billing cycle, not broken down by employee, that is subject to review by the client. (The staffing firm would still need to be able to demonstrate compliance on review or audit.) Another approach we have encountered simply adds a percentage increment to the hourly billing rate or load as a proxy for the fee. While we suppose that it is possible to fashion an argument for this approach based on the lack of detail in the rule, this is not an approach we would endorse.
Nor does it appear that the additional fee must be charged periodically. We are aware, for example, of instances in which the parties are planning to provide for a back-charge at the end of the year or some other fixed period that is correlated to the periodic billing cycle under the statement of work, contract or other arrangement.
Some client organizations have objected to the approach we dub the gold standard (i.e., line-by-line in periodic charges) based on their concerns that this level of detail would run afoul of the HIPAA privacy rules. The HIPAA privacy and security rules generally impose requirements on covered entities that include employer-sponsored group health plans. HIPAA does not regulate employers directly, but it does limit the instances in which the extent to which “protected health information” or “PHI” may be disclosed to employers. Where an item of information is determined to be PHI, certain steps are required in order for the plan to share information with the employer. But if the information in question is not PHI, HIPAA does not apply.
Enrollment and disenrollment information is PHI when held by a group health plan, but not when an employer performs the enrollment function. In this latter case, the employer acts on behalf of the employee and not on the plan. But even if one assumes that this exception is too narrow to accommodate compliance with the rule governing third-party coverage (a point we are unwilling to concede), it is still entirely possible to comply with the final Code § 4980H rules governing third-party group health plan coverage by following the HIPAA plan sponsor disclosure rules. These latter, HIPAA rules permit disclosures to the employer/plan sponsor for plan administration purposes. (Complying with the final Code § 4980H rules governing third-party group health plan coverage is in our view quintessentially administrative, since it is integral to the plan enrollment process.)
On another note relating to HIPAA, it appears that many staffing firms (among others) are gravitating toward Code § 4980H compliance solutions that involve self-funded group health plans. While HIPAA does not stand in the way for Code § 4980H purposes, it is worth keeping in mind that the HIPAA privacy and security rules impose a series of obligations directly on self-funded plans to which sponsors (read, employers) need to adhere.
Edward A. Lenz