AFFORDABLE CARE ACT UPDATE AND ISSUES FOR HEALTH CARE EMPLOYERS 1

Transcription

1 Healthcare Financial Management Assciatin Washingtn-Alaska Chapter February 25, 2016 AFFORDABLE CARE ACT UPDATE AND ISSUES FOR HEALTH CARE EMPLOYERS 1 By: Steven D. Nfziger, Esq.* 2016 Garvey Schubert Barer, P.C. 121 SW Mrrisn Street, Suite 1100 Prtland, OR snfziger@gsblaw.cm *Steven D. Nfziger is an Owner in Garvey Schubert Barer, P.C., a reginal law firm with ffices in Prtland, Oregn; Seattle, Washingtn; Washingtn, D.C.; New Yrk, New Yrk; Anchrage, Alaska; and Beijing, China. He wrks in the firm s Prtland, Oregn ffice. Mr. Nfziger practices in the areas f taxatin and emplyee benefits and is a frequent speaker and authr n tax and benefit matters. He is presently a member f the Tax Sectin f the Oregn State Bar Assciatin and is the Significant Issues Chair f the Prtland Chapter f the Western Pensin & Benefits Cuncil. Mr. Nfziger received a B.S. (summa cum laude) frm Linfield Cllege and a J.D. (Order f the Cif) frm the University f Oregn Schl f Law. 1 These materials are fr educatinal purpses nly and shuld nt be cnstrued as legal r tax advice r a legal r tax pinin relative t any specific situatin.

2 INDEX I. INTRODUCTION... 1 II. CURRENT AND FUTURE ISSUES... 1 A. IRS Frm 1094/1095 Reprting... 1 B. Cadillac Tax Update... 2 C. Eliminatin f Aut-Enrllment Requirement... 3 III. SELECTED ISSUES AND CONSIDERATIONS (AND PITFALLS TO AVOID)... 3 A. Emplyer Payment Plans and Premium Reimbursement Arrangements: Yu Have Been Warned!... 3 B. Threshld Issues Under the ACA Penalty Framewrk: Wrker Classificatin and Wh is the Emplyer? Cntrlled and Affiliated Service Grup Analysis: Wh is the Emplyer?... 7 b. Affiliated Service Grups... 8 c. Ownership Attributin, Anti-Abuse and Emplyee Leasing Rules Wrker Classificatin: Wh is the Emplyee? The Evlving Cmmn Law Definitin f Emplyee a. Behaviral Cntrl Factrs b. Ecnmic Cntrl Factrs c. Relatinship Factrs d. Additinal Cnsideratins Cnclusin C. Interactin f COBRA and the ACA; Cverage Affrdability Issues Terminatin f Emplyment Reductin in Hurs/Leave f Absence, but N Terminatin f Emplyment Affrdability Issues D. Hurs f Service; Breaks in Service; Special Unpaid Leave; On Call Hurs Hur f Service Breaks in Service a. Break f 13 r Mre Cnsecutive Weeks i

3 b. Rule f Parity Special Unpaid Leave On Call Hurs E. Recrdkeeping Issues IV. CONCLUSION ii

4 I. INTRODUCTION The Affrdable Care Act ( ACA ) is a cmplex web f legal, tax and insurance rules. Many new requirements have taken effect ver the past several years, and several requirements have yet t take effect. Althugh many emplyers are adjusting t the new framewrk, there are many ptential pitfalls, and there is little guidance in many aspects f the law. These materials will prvide an update n certain aspects f ACA faced by emplyers wh are in the health care industry and highlight ther issues that are f key imprtance. II. CURRENT AND FUTURE ISSUES A. IRS Frm 1094/1095 Reprting. Emplyers with 50 r mre full-time equivalent emplyees are Applicable Large Emplyers ( ALE s ) and subject t a variety f ACA requirements, including the emplyer-shared respnsibility penalties under Cde Sectin 4940H and the new annual cverage reprting requirements. Emplyers that were ALEs in 2015 r thse with self-insured health plans are first subject t the ACA s new IRS Frm 1094/1095 reprting requirements in These emplyers must prvide emplyees with an IRS Frm 1095 describing the cverage ffered and prvided during The emplyers must als file Frm 1095 with the IRS alng with a new Frm 1094 transmittal. (These frms are cnceptually much like Frms W-2 and W-3 that emplyers must file t reprt emplyee wages.) Althugh these frms are cnceptually simple t cmplete with respect t mst emplyees, there are a number f nuances that shuld be reviewed carefully (e.g., with respect t emplyees and dependents n (r ffered) COBRA cverage and certain safe harbrs fr Qualifying Offers f cverage and transitin relief ). Emplyers shuld be sure t btain advice if they have questins whether they are eligible t take advantage f these safe harbrs since IRS Frm 1094 is signed under penalties f perjury. Recgnizing that emplyers, insurers and ther prviders f health cverage are needing additinal time t cmply with the reprting deadlines, the IRS recently issued Ntice , 2 which extends the due dates t prvide IRS Frm 1095 and t file cpies with the IRS. Under Ntice : ALEs nw have tw additinal mnths until March 31, 2016 t prvide emplyees with cpies f Frms 1095-B and 1095-C (as applicable). The prir deadline was February 1, Applicable Large Emplyers nw have three (a)dditinal mnths t file the applicable Frms 1094 and 1095 with the IRS. The new deadlines are May 31, 2016, fr emplyers nt filing electrnically, and June 30, 2016, fr emplyers 2 A cpy f Ntice may be fund at: 1

5 filing electrnically. The prir deadlines were February 29, 2016, and March 31, 2016, respectively. In light f these extensins, the ntice states that existing rules regarding autmatic and permissive extensins f the deadline fr filing these frms will nt apply t the extended due dates. Failure t cmply with these extended due dates may result in penalties. Hwever, the IRS has previusly stated that penalties may be waived if an emplyer has made reasnable, gd faith effrts t prepare fr these new reprting requirements and prvide the necessary infrmatin t emplyees and the IRS. The IRS has als stated that, due t the delay, individuals wh file their incme tax returns prir t receiving Frm 1095, but using ther infrmatin abut their cverage frm their emplyer r cverage prvider, will nt be required t file amended tax returns fr 2015 nce they receive Frm Rather, they merely need t keep the infrmatin with their tax recrds. B. Cadillac Tax Update. On December 18, 2015, President Obama signed int law the 2016 Cnslidated Apprpriatins Act. Amng its numerus prvisins, the Apprpriatins Act included tw key changes t the IRC Sectin 4980I Cadillac Tax : Cadillac Tax Delay. The Cadillac Tax is a 40% excise tax that will be impsed n the value f emplyer-spnsred health plans ver certain dllar threshlds. The tax was scheduled t be effective fr tax years starting n r after January 1, The Apprpriatins Act delays the effective date until tax years beginning n r after January 1, Cmmentatrs have nted that given intense criticism and repeal effrts surrunding this tax since the ACA s enactment, the delay arguably gives ppnents tw (2) mre years repeal it, and it als establishes a precedent fr near-permanent pstpnement via successive delays in the manner that Cngress typically extends temprary prvisins in a year-end extenders bill. The Cngressinal Budget Office prjects the tw-year delay will result in a $17.7 billin revenue lss ver 10 years. A recent Twers Watsn analysis 3 that was issued prir t the delay estimated that almst half (48%) f large emplyers were expected t be subject t the ACA s Cadillac Tax in the 2018 percentage, with that percentage expected t rise t 85% by Cadillac Tax t be Deductible. As riginally enacted, the Cadillac Tax was a nndeductible tax under IRC 275(a)(6). The Apprpriatins Act remved the Cadillac Tax frm the list f nndeductible taxes. Thus, when the tax eventually is effective in 2020, any payments will be deductible fr incme tax purpses. In his current budget prpsal, President Obama has als prpsed mdifying the Cadillac Tax by allwing fr state-by-state cst threshlds t address reginal differences in the cst f health care 3 See with-82-percent-by

6 cverage. It will be interesting t see if this idea gains tractin r addresses the cncerns f its ppnents. C. Eliminatin f Aut-Enrllment Requirement. The Bipartisan Budget Act f 2015 signed int law Nvember 2, 2015, by President Obama, repealed the ACA s autmatic enrllment requirement fr large emplyers. The ACA riginally cntained a requirement under which emplyers with 200 r mre full-time emplyees that ffered a grup health plan wuld be required t autmatically enrll emplyees in the health plan. Emplyees wuld have been allwed t pt-ut f cverage and, similar t 401(k) plans with autmatic enrllment prvisins, there wuld have been a crrespnding emplyee ntice requirement t prvide infrmatin abut the autmatic enrllment prcess, the plan in which they wuld autmatically be enrlled, and the pprtunity t pt-ut f cverage. The prvisin was intended t encurage enrllment by emplyees wh might therwise frg cverage if they had t take actin t enrll n their wn. Hwever, the requirement never tk effect because it was unppular, a lw gvernment pririty, and the DOL and IRS had nt yet issued regulatins t address implementatin issues. Emplyers and advisrs saw tw key prblems with the rule: If emplyees were autmatically enrlled in their emplyer's health plan but had ther cverage (e.g., thrugh their spuse's plan), they culd end up with (and pay fr) duble cverage they did nt need r want. New emplyees culd ptentially lse access t lng-time health care prviders if the prviders were nt in-netwrk with the emplyer's health plan. Thus, with the repeal, larger emplyers will nt have t deal with ne mre future regulatry burden. III. SELECTED ISSUES AND CONSIDERATIONS (AND PITFALLS TO AVOID) A. Emplyer Payment Plans and Premium Reimbursement Arrangements: Yu Have Been Warned! Thrugh a series f ntices and FAQs, the IRS and DOL have been putting emplyers n ntice that certain emplyer payment plans i.e., arrangements where the emplyer pays r reimburses emplyees fr their individual health insurance premiums are nncmpliant with the ACA s market refrm prvisins and can lead t penalties f $100 per emplyee per day. In IRS Ntice , 4 the IRS first prvided guidance n these arrangements. The IRS explained that althugh emplyer payment r reimbursement f emplyee health insurance premiums n a pre-tax basis is generally allwed under Internal Revenue Cde ( IRC ) Sectin 106, the ACA cntains tw market refrm prvisins that limit the ability f emplyers t pay fr 4 IRS Ntice , available at: 3

7 emplyees individual health insurance premiums. Amng the ACA s varius market refrms, all grup health plans must prvide first-dllar preventive care and must nt be subject t lifetime r annual limits n essential benefits. The IRS and DOL cnsider a plan under which an emplyer pays fr r reimburses emplyees fr the cst f an individual health insurance plicy purchased by the emplyee as a type f grup health plan. Thus, even thugh the individual plicy may cmply with the ACA s preventive care and nt limit essential benefits, it cannt be integrated with the emplyer plan that pays fr the individual plicy. Thus, the emplyer plan is deemed nncmpliant. In FAQs, 5 the DOL subsequently prvided guidance addressing three scenaris: (1) emplyers ffering emplyees cash reimbursements fr the cst f their individual health insurance plicies; (2) emplyers ffering emplyees with high claims risk cash t pt ut f the emplyer s grup health plan; and (3) vendrs marketing a prduct t emplyers claiming that emplyers can cancel their grup plicies and set up a IRC Sectin 105 reimbursement plan under which health insurance brkers help emplyees select individual insurance plicies fr which the emplyer reimburses the emplyee fr all r a prtin f the cverage and fr which eligible emplyees may btain subsidized Marketplace cverage. In all three scenaris, the DOL said the prgrams vilated the ACA s market refrm prvisins and culd subject emplyers t penalties f $36,500 per year (i.e., $100 per day) per emplyee. The FAQs explained first situatin was previusly addressed in IRS Ntice , but the DOL reiterated it again. In discussing the secnd situatin, the DOL stated that such cash-r-cverage arrangements ffered nly t emplyees with a high claims risk is nt permissible benign discriminatin and will vilate HIPAA s nndiscriminatin prvisins, regardless f whether (1) the cash payment is treated by the emplyer as pre-tax r pst-tax t the emplyee, (2) the emplyer is invlved in the selectin r purchase f any individual market prduct, r (3) the emplyee btains any individual health insurance. In addressing the third scenari, the DOL nted that was aware f sme benefits cnsultants and vendrs marketing these types f prducts. In n uncertain terms, it stated that such arrangements are grup health plans and, therefre, emplyees participating in them are ineligible fr subsidized Marketplace cverage. It als reminds emplyers (and prmters f these plans) that the mere fact that the emplyer des nt get invlved with an emplyee's individual selectin r purchase f an individual health insurance plicy des nt prevent the arrangement frm being a grup health plan, since the existence f a grup health plan is based n facts and circumstances, including the emplyer's invlvement in the verall scheme and the absence f an unfettered right by the emplyee t receive the emplyer cntributins in cash. Finally, in Ntice , 6 the IRS prvided ne last bit f transitin relief and supplemental guidance related t emplyer payment plans. Under this guidance: 5 DOL FAQs Abut Affrdable Care Act Implementatin (Part XXII), available at 6 IRS Ntice , available at: 4

8 General Emplyer Payment Plan Guidance. Small emplyers ffering emplyer payment plans were granted relief frm the penalty until June 30, 2015, due t the slw implementatin f Small Business Health Optins Prgram (SHOP) Marketplace, which is intended t prvide small emplyers with better health plan alternatives. Ntice specifically states that emplyers will be liable fr penalties after July 1, The IRS als specifically nted that emplyers may increase an emplyee s cmpensatin fr the purpse f assisting the emplyee with purchasing individual health care insurance s lng as it des nt cnditin payment f the additinal cmpensatin n the purchase f health insurance r therwise endrse a particular plicy, issuer, r frm f cverage. Thus, the IRS endrsed this apprach as a way ut fr emplyers just give everyne additinal taxable cmpensatin. The IRS stated that it intends t publish additinal guidance in the future n hw emplyers shuld handle reimbursements fr 2 percent S crpratin sharehlders and that, until such guidance is issued, such arrangements will nt be subject t the afrementined penalties. Medicare and TRICARE Reimbursement Plan Guidance. The ntice als explained that the fllwing arrangements cnstitute an emplyer payment plan subject t the ACA s market refrms if they cvers tw r mre active emplyees: A Medicare premium reimbursement arrangements under which an emplyer pays r reimburses Medicare Part B r Part D premiums fr emplyees. An HRA under which an emplyer pays r reimburses medical expenses fr emplyees cvered by TRICARE. An emplyer payment plan may nt be integrated with Medicare cverage t satisfy the market refrms because Medicare cverage is nt a grup health plan. Hwever, an arrangement f this nature may be integrated with anther emplyer grup health plan fr purpses f satisfying the ACA s market refrms if: The emplyer ffers a majr medical (i.e., nn-excepted benefits) grup health plan that prvides minimum value; The emplyer payment plan is ffered nly t emplyees enrlled in Medicare Parts A and B r D; 5

9 The emplyee participating in the emplyer payment plan is actually enrlled in Medicare Parts A and B; and Reimbursements are limited t Medicare Part B r D premiums and excepted benefits, including Medigap premiums. Similarly, an HRA may nt be integrated with TRICARE t satisfy the market refrms because TRICARE cverage is nt a grup health plan. Hwever, an arrangement f this nature may be integrated with anther emplyer grup health plan fr purpses f satisfying the ACA s market refrms if: The emplyer ffers a majr medical (i.e., nn-excepted benefits) grup health plan that prvides minimum value; The HRA is ffered nly t emplyees enrlled in TRICARE; The emplyee participating in the emplyer payment plan is actually enrlled in TRICARE; and Reimbursements are limited t cst sharing and excepted benefits, including TRICARE supplemental premiums. The IRS als nted that any such Medicare reimbursement arrangements and TRICARE HRAs may be subject t ther laws including Medicare Secndary Payer rules and rules prhibiting ffering incentives t TRICARE-eligible emplyees t decline emplyer-prvided grup health cverage. Given the amunt f guidance n the issue f emplyers attempting t pay emplyees individual health insurance premiums, the IRS and DOL view this prblem as a significant cncern. Mrever, their cmments aimed specifically at certain arrangements prmted by certain cnsultants and insurance vendrs means that emplyers shuld be very wary f anyne prmting these types f arrangements. These plans and vendrs are ripe fr audit and will likely be targeted due t the perceived abuses. The hammer will likely be swift and the penalties severe. One aspect f these arrangements many emplyers may nt be thinking abut is in the cntext f emplyment agreements and severance packages. In is cmmn fr emplyers t pay r reimburse retiring r terminated executives fr the csts f their individual cverage. Such prvisins are ften part f an emplyment cntract r severance package. Emplyers shuld be aware that these arrangements culd ptentially run aful f the freging rules. Rather than agreeing t reimburse a retiring/terminated executive fr the cst f individual insurance cverage, a recmmended apprach wuld be: (a) t agree t pay fr the cst f COBRA cverage fr remaining n the emplyer s plan fr as lng as the retiring/terminated emplyee remains COBRA eligible; and (b) after COBRA cverage ends, r in lieu f COBRA initially, t agree t pay a fixed mnthly taxable amunt, which the executive can use t purchase cverage, 6

10 if desired, but nt require that the executive actually purchase cverage. Such an arrangement cmplies with the freging guidance. B. Threshld Issues Under the ACA Penalty Framewrk: Wrker Classificatin and Wh is the Emplyer? It is all t easy fr emplyers t make assumptins abut r verlk tw (2) key threshld aspects f the shared respnsibility penalty prvisins under the Affrdable Care Act: (1) wh is the emplyer fr these purpses; and (2) whether the emplyer has prperly classified its wrkers as emplyees r independent cntractrs. All entities treated as a single emplyer under IRC Sectins 414(b), (c), (m), r () are generally treated as a single emplyer fr purpses f the ACA, including the emplyer shared respnsibility penalties under Cde Sectin 4940H. Thus, the emplyees f all emplyers within a cntrlled grup f trades r businesses and/r an affiliated service grup are taken int accunt in determining whether the grup is an ALE. 1. Cntrlled and Affiliated Service Grup Analysis: Wh is the Emplyer? There are several types f cntrlled grups and affiliated service grups. These rules are extremely cmplex and take int accunt wnership attributin by related parties. The fllwing is a brief verview f the basic cncepts. a. Cntrlled Grups. There are three (3) types f cntrlled grups: a parent-subsidiary grup; a brther-sister grup; and a cmbined grup. Parent-subsidiary grup: A parent-subsidiary grup is chain f trades r businesses in which there is at least 80% wnership (direct r indirect) by a cmmn parent. Example: A wns 80% f B. B wns 80% f C. A, B and C frm a cntrlled grup. Brther-sister grup: A brther-sister grup exists if: (1) the same five r fewer persns wn at least 80% f each trade r business; and (2) taking int accunt the wnership f each such persn nly t the extent his wnership is identical with respect t each f the trades r businesses, these persns wn mre than 50% f each trade r business. 7

11 Example: Organizatins Individuals L GHI M W X Y Z A 100% 50% 100% 60% 40% 20% 60% B 0 40% 0 15% 40% 50% 30% C % 10% 10% D % 0 20% 0 E 0 10% % Cntrlled grups exist: GHI, X and Z (via wnership by A and B) X,Y and Z (via wnership by A, B and C) W and Y (via wnership by A, B, and D) L and M (via wnership by A) Cmbined Grup: Any cmbined grup is a grup f three (3) r mre rganizatins if: (1) each such rganizatin is a member f either a parentsubsidiary grup r a brther-sister grup; and (2) at least ne such rganizatin is the cmmn parent rganizatin f a parent-subsidiary grup and is als a member f a brther-sister grup. b. Affiliated Service Grups. While the cntrlled grup rules fcus n a high degree f cmmn wnership, the affiliated service grup rules fcus n a cmbinatin f cmmn wnership and the nature and extent f services perfrmed by ne rganizatin n behalf f, r fr the benefit f, anther rganizatin r its clients. An affiliated service grup is a grup cnsisting f a First Service Organizatin and: One r mre A Organizatins; One r mre B Organizatins; r One r mre A Organizatins and ne r mre B Organizatins. 8

12 A Organizatin: A service rganizatin is an A Organizatin if it: is a partner r sharehlder in a First Service Organizatin that prvides prfessinal services (i.e., thse perfrmed by accuntants, actuaries, architects, attrneys, medical dctrs, dentists, prfessinal engineers, ptmetrists, stepaths, pdiatrists, psychlgists, and veterinarians); and regularly perfrms services fr the First Service Organizatin, r is regularly assciated with the First Service Organizatin in perfrming services fr third persns. Example A Organizatin: Physician N is incrprated, and the crpratin is a partner in a medical practice. Physician N and his crpratin are regularly assciated with the medical practice in perfrming services fr third persns. The medical practice is a first service rganizatin and the crpratin is an A Organizatin. B Organizatin: A service rganizatin is a B Organizatin if: a significant prtin f the business f the rganizatin is the perfrmance f services fr the First Service Organizatin, fr ne r mre A Organizatins determined with respect t the First Service Organizatin, r fr bth; thse services are f a type histrically perfrmed by emplyees in the service field f the First Service Organizatin r the A Organizatins; and ten percent (10%) r mre f the interests in the rganizatin are held, in the aggregate, by persns wh are fficers, highly cmpensated emplyees, r cmmn wners f the First Service Organizatin r f the A Organizatins. An rganizatin may be a B Organizatin even thugh it is nt a service rganizatin. Example - B Organizatin: Partnership R is a dental practice that has 11 partners. Each partner f R wns five percent (5%) f the stck in Crpratin D, a dental lab. The crpratin prvides services t the partnership f a type histrically perfrmed by emplyees in the dental practice and a significant prtin f the business f the dental lab cnsists f prviding services t the dental practice. The partnership is a first service rganizatin and the crpratin is a B Organizatin. Multiple Affiliated Service Grups: If an rganizatin is a First Service Organizatin with respect t tw r mre A Organizatins r tw r mre B Organizatins, r bth, all f the rganizatins shall be cnsidered a single affiliated service grup, r there may be multiple affiliated service grups. 9

13 c. Ownership Attributin, Anti-Abuse and Emplyee Leasing Rules. In additin, there are als highly technical rules prviding fr wnership attributin frm and t family members, partnerships, crpratins, limited liability cmpanies, estates and trusts, as well as anti-abuse rules and rules surrunding emplyee leasing. Affiliated service grups are cmmn amng health care and ther prfessinal practices. Emplyers shuld btain legal advice if they have questins whether they are part f a cntrlled grup r affiliated service grup. 2. Wrker Classificatin: Wh is the Emplyee? Prper wrker classificatin is mre imprtant than ever, given the ACA s shared respnsibility penalty regime. Emplyers face significant additinal risks fr misclassifying wrkers. ACA penalties can arise in several misclassificatin scenaris, which can be best described thrugh examples: EXAMPLE 1: Emplyer X des nt ffer health insurance cverage and cncludes that it is nt an ALE because it emplys nly 45 full-time equivalent emplyees. Hwever, the results f an IRS audit indicate Emplyer X misclassified eight (8) f its full-time wrkers as independent cntractrs. Thus, Emplyer X is actually an ALE subject t the ACA s penalty and reprting regime. In additin t ther taxes and penalties, Emplyer X faces substantial ACA penalties due t the misclassificatin f $46,000 per year 7 fr failing t ffer cverage t its full-time emplyees and additinal penalties fr failing t file the required infrmatin returns. EXAMPLE 2: Emplyer Y is an ALE that prvides affrdable, minimum value cverage t 190 f its 200 full-time emplyees. Emplyer Y als utilizes a grup f 20 independent cntractrs that the IRS later reclassifies as emplyees. In additin t ther taxes and penalties, Emplyer Y culd be subject t penalties f $380,000 per year 8 due t misclassifying these few wrkers. EXAMPLE 3: Emplyer Z is an ALE that prvides affrdable, minimum value cverage t all 200 f its full-time emplyees. Emplyer Z als utilizes a grup f 10 independent cntractrs that the IRS later reclassifies as emplyees. Fur f the misclassified wrkers btained subsidized cverage thrugh the federal healthcare exchange. In additin t ther taxes and penalties, Emplyer Z culd be subject t ACA penalties f $12,000 per 7 Assumes the IRC Sectin 4980H(a) penalty applies because n cverage has been ffered. The IRC Sectin 4980H(a) penalty is calculated as the ttal number f full-time emplyees (53) less 30, multiplied by $2,000. That is, $2,000 x (53-30) = $46, Assumes the IRC Sectin 4980H(a) penalty applies because cverage has been ffered t less than 95 percent f full-time emplyees (190/220 = 86%). The IRC Sectin 4980H(a) penalty is calculated as the ttal number f fulltime emplyees (220) less 30, multiplied by $2,000. That is, $2,000 x (220-30) = $380,

14 year 9 because it failed t ffer these wrkers the pprtunity t enrll in its health plan. As yu can see, the ACA penalty regime significantly increases the ptential misclassificatin liability fr larger emplyers. Financial risks are cmpunded by the fact that reclassificatin may be retractive. Because the ACA lks t whether a wrker is a cmmn law emplyee, a brief review f the cmmn law emplyee rules is wrthwhile. 3. The Evlving Cmmn Law Definitin f Emplyee. Under federal cmmn law rules, an emplyment relatinship generally exists when the persn fr whm the services are perfrmed has the right t cntrl and direct the individual perfrming the services, nt nly as t the result t be accmplished, but als as t the details and means by which that result is accmplished. It is nt necessary fr the emplyer t actually direct r cntrl the manner f perfrmance. If an individual is subject t the cntrl r directin f anther persn merely as t the result t be accmplished and nt as t the means and methds, then the individual is likely an independent cntractr. Designatin f the relatinship by the parties as independent cntractr status is nt cntrlling if an emplyment relatinship actually exists. The IRS issued Revenue Ruling in This ruling was intended t prvide guidance as t the factrs used t determine whether an emplyment relatinship exists. It identified 20 cmmn law factrs used by the IRS and curts up t that time and became the standard by which subsequent determinatins were made. Since issuing Revenue Ruling 87-41, the IRS has mdified and updated its apprach t wrker classificatin. In an attempt t ensure the fcus is n the right t cntrl, the IRS nw encurages its agents t lk beynd the 20 factrs in Revenue Ruling and t fcus n three categries f factrs Behaviral Cntrl Factrs, Ecnmic Cntrl Factrs, and Relatinship Factrs. IRS Publicatin 1779 utlines the varius factrs, including: a. Behaviral Cntrl Factrs. Factr 1: Instructins. A wrker wh is required t cmply with anther persn s instructins as t when, where, and hw the wrk is t be perfrmed is rdinarily an emplyee. Factr 2: Training. Training a wrker as t the methd and manner f perfrming services indicates cntrl and the existence f an emplyment relatinship. 9 Assumes that: (a) the IRC Sectin 4980H(a) penalty des nt apply because the 10 misclassified wrkers d nt cause the emplyer t have failed t ffer cverage t at least 95% f its full-time emplyees; and (b) the IRC Sectin 4980H(b) penalty applies with respect t the 4 emplyees receiving subsidized cverage. The IRC Sectin 4980H(b) penalty is calculated as the ttal number f full-time emplyees receiving subsidized cverage thrugh a health care exchange multiplied by $3,000. That is, $3,000 x 4 = $12,

15 Factr 3: Hiring, Supervising, and Paying Assistants. If the persn fr whm the services are perfrmed hires, supervises, and pays all assistants, then an emplyment relatinship is generally indicated. Factr 4: Setting Hurs f Wrk. The establishment f set hurs f wrk by the persn requesting the services is a factr indicating cntrl and the existence f an emplyment relatinship. Factr 5: Full Time Requirement. If the wrker must devte substantially full time t the business f the persn requesting the services, the wrker is impliedly cntrlled and restricted frm perfrming ther gainful wrk, which indicates the existence f an emplyment relatinship. Factr 6: Wrk n Taxpayer s Premises. Wrk perfrmed n the premises f the persn requesting the services indicates the latter persn has cntrl ver the manner f perfrmance, especially if such wrk culd be perfrmed elsewhere. Factr 7: Wrk Order r Sequence. If anther persn can require a wrker t perfrm services in a certain rder r sequence (r fllw established rutines r schedules), then the wrker is subject t cntrl, which indicates an emplyment relatinship exists Factr 8: Requiring Reprts. If a wrker is required t submit regular r written reprts t the persn fr whm services are perfrmed, then the latter persn has sme degree f cntrl ver delivery f the services, which may indicate an emplyment relatinship exists. b. Ecnmic Cntrl Factrs. Factr 9: Tls and Materials. An emplyment relatinship is indicated if the persn fr whm services are perfrmed furnishes significant tls, materials, and ther equipment t the persn perfrming the services. Factr 10: Significant Investment by Wrker. If a wrker invests in facilities r equipment used t perfrm services and which are nt typically maintained by emplyees, independent cntractr status is indicated. Factr 11: Payment f Expenses. If the persn fr whm services are perfrmed pays the wrker s business r travel expenses, the wrker is rdinarily an emplyee. Factr 12. Payment by the Hur, Week, r Mnth. Payment by the hur, week, r mnth generally indicates an emplyment relatinship; prvided, hwever, that this methd f payment is nt merely a cnvenient way f paying an agreed-upn lump sum fr the particular jb. Payment f straight cmmissin r payment by the jb r task generally indicates the wrker is an independent cntractr. Factr 13: Ecnmic Risk f Prfit r Lss. A wrker wh can realize a prfit r lss frm the perfrmance f services ver and abve the prfit r lss rdinarily realized by an emplyee is 12

16 generally an independent cntractr. The wrker wh cannt realize such prfit r lss is generally an emplyee. Factrs 14 and 15: Making Services Available t the General Public; Wrking fr Multiple Persns. These factrs are interrelated. Independent cntractr status is indicated when wrkers make their services available t the general public n a regular and cnsistent basis. A wrker perfrming services fr multiple unrelated parties at the same time is likely an independent cntractr, while a wrker perfrming services fr ne persn r perfrming services fr several persns as part f the same service arrangement is likely an emplyee f such persn(s). c. Relatinship Factrs. Factr 16: Integratin. The degree t which a wrker s services are integrated int the business peratins f the purprted emplyer generally shws the extent t which the wrker is subject t directin and cntrl. Mre extensive integratin indicates the existence f an emplyment relatinship. Factr 17: Persnal Rendering f Services. When services must be rendered persnally, the persn requesting the services is presumably interested in bth the result and the methds used t accmplish the result, which indicates the existence f an emplyment relatinship. Factr 18: Cntinuing Relatinship. A cntinuing relatinship between the wrker and the persn requesting the services, including perfrmance at frequently-recurring but irregular intervals, indicates the existence f an emplyment relatinship. Factrs 19 and 20: Right t Discharge; Right t Terminate. These factrs are als related. The right t discharge a wrker indicates an emplyment relatinship. An independent cntractr typically cannt be discharged s lng as he r she prduces a result that meets the parties cntracted specificatins. Similarly, if a wrker has the right t terminate the relatinship at any time withut liability, an emplyment relatinship is indicated. d. Additinal Cnsideratins. In additin t the twenty factrs f Revenue Ruling 87-41, curts have als lked t factrs such as: Industry practice r custm; The intent f the parties; The existence f written, signed independent cntractr agreements; The prvisin f emplyee benefits; and Whether the wrk requires special skills. 13

17 4. Cnclusin. Prper wrker classificatin and cntrlled grup/affiliated service grup analysis is imperative. Emplyers wh fail t prperly address these threshld issues run the risk f significant adverse cnsequences, including the ACA s shared respnsibility penalties under Cde Sectin 4980H. Emplyers shuld cnsider undertaking an internal audit f their wrkfrces t ensure wrkers are prperly classified and seek legal advice when necessary. The risks f misclassificatin are great. C. Interactin f COBRA and the ACA; Cverage Affrdability Issues. 10 There are a number f interrelated issues arising ut f COBRA and the ACA. 1. Terminatin f Emplyment. Terminatin f emplyment is generally a COBRA-qualifying event, s the emplyee generally shuld be ffered COBRA cverage. Since the individual is n lnger an active emplyee, the ACA s shared respnsibility penalties under IRC Sectin 4980H n lnger apply with respect t the terminated emplyee. 2. Reductin in Hurs/Leave f Absence, but N Terminatin f Emplyment. If an emplyee has a change in status (i.e., full time t part time), a reductin in hurs, r leave f absence, but is still cnsidered an emplyee, a COBRA-qualifying event will generally ccur if the status change, reductin in hurs, r leave results in a lss f cverage under the emplyer s grup health plan. In these situatins: If the individual was a full-time emplyee during the mst recent measurement perid, the ACA requires the emplyer t still ffer qualifying cverage t the emplyee thrughut the remainder f the current stability perid r be subject t shared respnsibility penalties fr failing t d s. 11 An ffer f COBRA cverage qualifies as an ffer f cverage fr ACA purpses. Thus, an ffer f COBRA cverage satisfies the ACA requirement and prtects an ALE frm penalties under IRC Sectin 4980H(a). 12 An ALE may still ptentially be subject t penalties under IRC Sectin 4980H(b) 13 if the COBRA cverage is unaffrdable and the emplyee declines COBRA 10 These scenaris assume that the emplyer is ffering qualifying minimum essential cverage that prvides minimum value (i.e., cvering 60% r mre f ttal health care csts). 11 This assumes that the emplyer uses the ACA s lk back methd fr determining full-time and part-time status under the IRC Sectin 4980H regulatins. 12 The IRC Sectin 4980H(a) penalty applies if an ALE fails t ffer cverage t at least 95% f its full-time emplyees. 13 The IRC Sectin 4980H(b) penalty can apply if an emplyer ffers minimum essential cverage t enugh full-time emplyees t avid the IRC Sectin 4980H(a) penalty, but that cverage is either unaffrdable r des nt prvide minimum value s that ne r mre emplyees still qualifies fr, and actually purchases, subsidized Marketplace cverage. 14

18 cverage and instead purchases subsidized Marketplace cverage. (See belw fr discussin f affrdability.) If an emplyee enrlls in COBRA cverage but then lses cverage because the emplyee fails t pay the required COBRA premium, n ACA penalties shuld apply t the emplyer. 3. Affrdability Issues. Cverage is deemed unaffrdable fr purpses f the ACA s emplyer shared respnsibility penalties if it exceeds a specified percentage f the emplyee s husehld incme (9.56% in 2015; 9.66% in 2016). Affrdability is evaluated based slely n the emplyee s required cntributin fr emplyee-nly cverage. Thus, if emplyee-nly cverage is affrdable because the emplyer pays enugh f the premium s that the emplyee-nly cst is nt greater than the specified percentage (9.66% in 2015) f husehld incme, there is n penalty under IRC Sectin 4980H(b). This is true even if the emplyee actually purchases full family cverage and the emplyee s share f that cst exceeds the specified (9.66%) incme threshld, which culd happen if the emplyer pays little r nthing f the cst t add a spuse and dependents. T avid a pssible penalty under IRC Sectin 4980H(b), an ALE culd decide t subsidize the emplyee-nly COBRA premium t make it affrdable. D. Hurs f Service; Breaks in Service; Special Unpaid Leave; On Call Hurs. There are a number f issues arising ut f the ACA s rules fr cunting and crediting hurs f service fr purpses f determining whether an emplyee is part time r full time. 1. Hur f Service. An hur f service is any hur fr which an emplyee is paid r entitled t payment frm the emplyer (including perids in which n duties are perfrmed due t vacatin hliday, illness, incapacity disability, layff, military duty, r leave f absence). This includes: (a) paid leaves f absence; and (b) payments by insurers n the emplyer s behalf, such as lng term disability insurance. Thus, paid leaves (including disability leave) need t be taken int accunt, accrdingly. 2. Breaks in Service. An emplyee wh returns t wrk fllwing a perid f unpaid absence (including a terminatin) may be cnsidered either a new emplyee r a cntinuing emplyee after the break. This distinctin is imprtant. If the emplyee is cnsidered a cntinuing emplyee and returns t wrk within a stability perid during which the emplyer was therwise required t ffer cverage, then the emplyer must ffer them cverage as f the first day the emplyee returns t wrk, r as sn thereafter as administratively practicable. 15

19 If, hwever, the emplyee is cnsidered a new emplyee, the emplyer must nly ffer cverage after the waiting perid required fr newly hired emplyees. The IRC Sectin 4980H regulatins prvide the fllwing tw methds f determining when an emplyee returning t wrk after an unpaid absence is cnsidered a cntinuing emplyee: a. Break f 13 r Mre Cnsecutive Weeks. If the emplyee resumes emplyment after a perid f at least 13 cnsecutive weeks in which the emplyee was nt credited with an hur f service, the emplyer can treat them as a new emplyee. b. Rule f Parity. An emplyer can als elect t treat an emplyee as a new emplyee if the perid (measured in weeks) during which the emplyee was nt credited with any hurs f service is: at least 4 weeks lng (but nt lnger than 13 weeks); and exceeds the number f weeks f emplyment immediately preceding the perid in which n services are perfrmed. (Fr example, an emplyee is emplyed fr 5 weeks and then has an unpaid break in service f 6 cnsecutive weeks.) 3. Special Unpaid Leave. There is als a rule intended prevent an emplyee frm being cnsidered part time due t taking certain qualifying types f unpaid leave. Special unpaid leave is defined as unpaid leave under the FMLA, USERRA r jury duty. The regulatins prevent the special unpaid leave frm effectively reducing an emplyee s average hurs f service during a measurement perid, thus preventing the emplyee frm being cnsidered part time slely due t the special unpaid leave. Under these rules, an emplyer can either: calculate the emplyee s average hurs f service during the measurement perid by excluding any perids f special unpaid leave during the measurement perid; r impute hurs f service during the perids f special unpaid leave at a rate equal t the average weekly hurs f service fr weeks that are nt part f any perid f special unpaid leave. Example: An emplyee has 4 weeks f special unpaid leave during a 12-mnth measurement perid. Under the first apprach, the emplyer wuld calculate the emplyee s average hurs f service during the measurement perid by excluding the 4-week perid f special unpaid leave frm bth the numeratr and the denminatr f the calculatin (i.e., the emplyee s ttal average 16

20 weekly hurs f service = ttal hurs f service during the measurement perid 48 weeks (rather than 52)). 4. On Call Hurs. One aspect f the ACA frequently faced by emplyers that are health care prviders is hw t address n call hurs fr purpses f determining whether an emplyee is full time r part time. The applicable IRS regulatins under IRC 4980H d nt specifically address n call hurs, and the IRS has acknwledged the need t prvide frmal guidance n this issue. In the interim, the IRS has stated that until further guidance is issued, emplyers are required t use a reasnable methd t track n call hurs. The preamble t the IRS regulatins 14 cntains examples f methds that the IRS wuld cnsider reasnable (r unreasnable) nting that ther methds culd als be reasnable depending n the facts and circumstances. It als states that a methd f crediting hurs is nt reasnable if it takes int accunt nly a prtin f an emplyee's hurs f service with the effect f characterizing an emplyee in a psitin that traditinally invlves at least 30 hurs f service per week as part-time emplyee. Specifically with respect t n call emplyees, the preamble states: It is nt reasnable fr an emplyer t fail t credit an emplyee with an hur f service fr any n-call hur: fr which payment is made r due by the emplyer; fr which the emplyee is required t remain n-call n the emplyer's premises; r fr which the emplyee's activities while remaining n-call are subject t substantial restrictins that prevent the emplyee frm using the time effectively fr the emplyee's wn purpses. Prviding partial-hur credit fr each n-call hur is als nt reasnable. In infrmal cmments, IRS fficials have indicated that if an emplyee is paid any amunt fr ncall hurs r is severely cnstrained in persnal activities while n-call, then the emplyer must credit thse hurs. Emplyers with n call emplyees shuld review their practices t determine if they are prperly crediting n call emplyees with hurs f service. It is pssible sme emplyees wh were previusly cnsidered part time because they were nt receiving credit fr n call hurs may actually be full time emplyees if n call hurs are prperly credited. 14 T.D (Feb. 13, 2014). 17

21 E. Recrdkeeping Issues. Emplyers are respnsible t maintain all recrds necessary t dcument cmpliance with r exemptin frm the varius ACA requirements. Fr example, an emplyer that is audited may be required t shw that all applicable ntices were prvided and all applicable fees were paid n a timely basis and that all applicable reprting requirements were timely met. Emplyers that cannt prve cmpliance may be subject t penalties. The shared respnsibility penalty rules under IRC 4980H are a certain audit target nce the IRS begins auditing emplyers fr ACA cmpliance. Emplyers wh are ALEs shuld be prepared t rebut an IRS claim that additinal shared respnsibility penalties are due. Emplyers that are nt ALEs shuld maintain dcumentatin f their nn-ale status. Fr example, an emplyer with a wrkfrce that cnsists f a significant number f temprary r part-time emplyees r that utilizes a significant number f independent cntractrs shuld be prepared t shw that it prperly classified all wrkers (as emplyees r independent cntractrs) and prperly cunted full-time emplyees and full-time emplyee equivalents. Mistakes can be cstly. Fr these reasns, emplyers shuld maintain recrds dcumenting: Ntices. That all applicable ACA ntices were prvided n a timely basis. Fr example, emplyers maintaining a grandfathered plan shuld keep recrds necessary t prve the plan maintained grandfathered status and that they prvided ntice f grandfathered status in all plan materials describing benefits. Reprting. Cmpliance with all applicable reprting rules n a timely basis. Fr example, ALEs subject t the shared respnsibility rules and IRS Frm 1094/1095 reprting requirements shuld keep recrds f: The cunting rules used t determine ALE status and what related entities are aggregated fr purpses f the ALE emplyer determinatin; The categrizatin f emplyees (full-time, part-time, seasnal, variable hur) and wrkers cnsidered independent cntractrs; The applicable measurement perids, stability perids and administrative perids used t determine the emplyees (and their dependents) that the emplyer must ffer cverage t; The hurs f service fr each emplyee; and All ther items required t be reprted IRS Frm 1094/1095. As additinal guidance is issued n varius ACA requirements, emplyers shuld determine whether they need t maintain additinal recrds t dcument cmpliance with r exemptin frm such requirements. 18

22 IV. CONCLUSION. The ACA is a cmplex web. Careful planning and can help emplyers avid the pitfalls. Emplyers shuld invlve their attrneys, accuntants and benefits cnsultants in the planning prcess. By utilizing their team f advisrs, emplyers will be able t mre fully understand their bligatins, analyze their ptins and determine the best curse f actin. GSB: