By now the Affordable Care Act may be a familiar headache for many corporate compliance officers. In 2015, however, even the best-prepared companies can expect fresh pain.
What starts in 2015? New mandates, more recordkeeping requirements, new penalties. The fear is that these changes, ranging from subtle to major, will catch companies by surprise.
“There are going to be many that find themselves in at least technical non-compliance,” says John Haslinger, vice president of strategic advisory services for payroll and benefits provider ADP. “They thought they understood it, but they didn’t do it right. It is hard to predict whether that is going to be 20 percent of companies or 80 percent, but a pretty significant number are going to find out they didn’t quite get it right.”
Topping the list of concerns in 2015: the employer mandate, a requirement to provide adequate health insurance coverage to all full-time employees or pay a fine, begins. Among the obstacles to compliance is determining who a full-time worker actually is, which is not simply a matter of counting hours.
“It has been a bit of a struggle in terms of employers trying to understand what measurement period they are going to pick and how they determine who is a full time employee,” says John Barlament, a partner at law firm Quarles & Brady.
One mistake companies make is to assume they can use scheduled hours, instead of hours of service, when deciding whether someone counts as “full-time” under the ACA, Haslinger says. The formulation may be simple, but not all employees actually work within that allotment of hours and the IRS will require more detailed accounting.
Companies that use independent contractors and report pay via the IRS Form 1099, rather than a traditional W-2, could face costly ramifications in the months ahead. Merely using a 1099 doesn’t mean a worker is truly independent; the IRS has a list of 20 criteria to determine who is an employee or independent contractor. For example, if your company is that worker’s only source of income, he or she will still count as an employee and may trigger benefit obligations.
“There are going to be many that find themselves in at least technical non-compliance. They thought they understood it, but they didn’t do it right.”
John Haslinger, Vice President, ADP
Haslinger suggests for any company using freelancers or independent contractors, legal counsel, accountants, and compliance personnel pore through the IRS guidance and be able to prove you made a good-faith effort to classify workers correctly. “If it turns out, after the fact, they were really employees, the company may not know that until after the year is over and will have triggered a full year of penalties,” he says.
Work with a staffing agency? You may also have to count those employees for ACA purposes. “Companies aren’t quite sure whether the staffing person is their common law employee or the agency’s,” Barlament says. “It can be unclear as to how that works.”
Businesses need to make sure the contracts they have with a staffing agency are “crystal clear” that workers are employees of the agency, and it is responsible for all employment-related compliance, Haslinger says. It is also critical to keep IRS-worthy records on any cost differential between benefits that the agency provides versus the company contribution.
Costs Add Up
Continually evolving reporting requirements will likely force companies to take on the cost of additional staff and consultants. IRS recordkeeping requirements for each employee can encompass more than 200 data elements, and more could be on the way. IRS forms related to ACA compliance have yet to be issued, but are expected soon. “We really need those forms so employers know what they need to report and then they can track the data and make sure they are capable of reporting it,” Barlament says.
The cost of recordkeeping and audits may pale in comparison to the penalties for non-compliance. In 2015, employers will be penalized if they fail to demonstrate they offered coverage to at least 70 percent of ACA-defined full-time employees. That’s the easy part.
INDEPENDENT CONTRACTOR OR EMPLOYEE?
The following are the 20 factors the Internal Revenue Service relies upon to assess employment status. These determinations will factor into decisions on what employees need to be offered healthcare coverage in accordance with the Affordable Health Care Act.
1. Instructions: If the person for whom the services are performed has the right to require compliance with instructions, this indicates employee status.
2. Training: Worker training (e.g., by requiring attendance at training sessions) indicates that the person for whom services are performed wants the services performed in a particular manner (which indicates employee status).
3. Integration: Integration of the worker’s services into the business operations of the person for whom services are performed is an indication of employee status.
4. Services rendered personally: If the services are required to be performed personally, this is an indication that the person for whom services are performed is interested in the methods used to accomplish the work (which indicates employee status).
5. Hiring, supervision, and paying assistants: If the person for whom services are performed hires, supervises or pays assistants, this generally indicates employee status. However, if the worker hires and supervises others under a contract pursuant to which the worker agrees to provide material and labor and is only responsible for the result, this indicates independent contractor status.
6. Continuing relationship: A continuing relationship between the worker and the person for whom the services are performed indicates employee status.
7. Set hours of work: The establishment of set hours for the worker indicates employee status.
8. Full time required: If the worker must devote substantially full time to the business of the person for whom services are performed, this indicates employee status. An independent contractor is free to work when and for whom he or she chooses.
9. Doing work on employer’s premises: If the work is performed on the premises of the person for whom the services are performed, this indicates employee status, especially if the work could be done elsewhere.
10. Order or sequence test: If a worker must perform services in the order or sequence set by the person for whom services are performed, that shows the worker is not free to follow his or her own pattern of work, and indicates employee status.
11. Oral or written reports: A requirement that the worker submit regular reports indicates employee status.
12. Payment by the hour, week, or month: Payment by the hour, week, or month generally points to employment status; payment by the job or a commission indicates independent contractor status.
13. Payment of business and/or traveling expenses: If the person for whom the services are performed pays expenses, this indicates employee status. An employer, to control expenses, generally retains the right to direct the worker.
14. Furnishing tools and materials: The provision of significant tools and materials to the worker indicates employee status.
15. Significant investment: Investment in facilities used by the worker indicates independent contractor status.
16. Realization of profit or loss: A worker who can realize a profit or suffer a loss as a result of the services (in addition to profit or loss ordinarily realized by employees) is generally an independent contractor.
17. Working for more than one firm at a time: If a worker performs more than de minimis services for multiple firms at the same time, that generally indicates independent contractor status.
18. Making service available to the general public: If a worker makes his or her services available to the public on a regular and consistent basis, that indicates independent contractor status.
19. Right to discharge: The right to discharge a worker is a factor indicating that the worker is an employee.
20. Right to terminate: If a worker has the right to terminate the relationship with the person for whom services are performed at any time he or she wishes without incurring liability, that indicates employee status.
The IRS has identified three categories of evidence that may be relevant in determining whether the requisite control exists under the common-law test and has grouped illustrative factors under these three categories: (1) behavioral control; (2) financial control; and (3) relationship of the parties.
“It is going to be very hard to blow the 70 percent threshold,” Haslinger says. “But in 2016, it goes right up to 95 percent. If you are misclassifying people and you miss that 95 percent threshold by even one person, you are going to get hit with a $2,000 annualized penalty on every one of your full-time people.” For a large company, where the chance of a single employee falling through the cracks is substantial, those penalties could hit tens of millions of dollars.
“You could legitimately have 50 percent of your workforce getting a subsidy, especially in the retail and restaurant industries,” Haslinger adds. “But you had better be prepared to document and demonstrate that.”
Another complexity to address is that not all workers fall under a single Federal Employer Identification Number. For companies that split an employee’s time between units or subsidiaries, those hours need to be aggregated. Many industries have their own payment quirks, too, that need to be resolved for ACA reporting. Some transportation companies, for example, might pay by the number of miles driven or the weight of a truck’s load. “You now have to come up with a reasonable measurement to translate that into hours,” Haslinger says. Unfortunately, IRS guidance on such matters, aside from demanding “reasonable” accounting, fails to elaborate.
Not-So-Well Wellness Programs
Another dilemma that has emerged in recent weeks is whether companies can continue to offer wellness programs and health incentives to employees. Those programs, offering health education and screening, were a centerpiece of the ACA’s goal to help lower healthcare costs, and employers were encouraged to offer financial incentives for participation.
The Equal Employment Opportunity Commission, however, is taking a different view of these programs. In October, it sued Honeywell International on the basis that its wellness program wasn’t voluntary and therefore violated federal law.
As part of Honeywell’s wellness program, employees and spouses must be tested for cholesterol, glucose, and nicotine levels and undergo weight and blood pressure evaluations. A refusal to take these tests triggers a $500 surcharge on health insurance premiums and the potential loss of up to $1,500 in company contributions to an employee’s health savings account. A $1,000 “tobacco surcharge” is also imposed for refusing to be tested.
“Under the Americans with Disabilities Act, medical testing of this nature has to be voluntary,” the EEOC said in a statement.
In November a federal district court judge opted not to issue a temporary restraining order that would have halted the programs for 2015. Until the debate is fully resolved, however, companies face yet another layer of confusion.
“We’ve had conflicting messages from the government,” says Steve Wojcik, vice president of public policy for the National Business Group on Health, a non-profit organization that advocates for large employers. “The administration and the ACA promote employer-sponsored wellness programs, but the EEOC has always been lurking in the background and chosen now to spring into action. Businesses are thrown for a loop.”
Should the EEOC prevail, repercussions will be felt across all industries. Eighty-eight percent of employers with 500 workers or more offer some sort of wellness plan, according to a recent survey by the benefits consultant Mercer; 42 percent of them offer financial incentives to undergo screening.
“The EEOC situation is going to be defining in how wellness programs are shaped in the future,” says Kaya Bromley, an attorney and consultant who focuses her practice on healthcare.