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1 Today s webinar will begin shortly. We are waiting for attendees to log on. Presented by: Lorie Maring Phone: (404) lmaring@ Please remember, employment and benefits law compliance depends on multiple factors particularly those unique to each employer s circumstances. Numerous laws, regulations, interpretations, administrative rulings, court decisions, and other authorities must be specifically evaluated in applying the topics covered by this webinar. The webinar is intended for general-information purposes only. It is not a comprehensive or all-inclusive explanation of the topics or concepts covered by the webinar.

2 When Employers Offer Health Benefits to Non-Employees: The Consequences & Risks Presented by: Lorie Maring Phone: (404)

3 AGENDA Eligibility Who may participate in ERISA Plans? Cafeteria Plans? Specific issues for PEOs, staffing companies, & leasing firms Misclassification concerns Consequences of Coverage: MEWA Issues Carrier Risks Impact on Other Federal Laws COBRA, Medicare Secondary Payer, Form 5500 filings, etc.

4 ELIGIBILITY

5 ERISA ELIGIBILITY ERISA covers pension and welfare benefit plans Discretion of Plan Sponsor ERISA Protects Participants and Beneficiaries Participants = current or former employees and working owners Plan Assets only used for Participants and Beneficiaries of Plan Sponsor (Exclusive Benefit Rule) ERISA defines employee as any individual employed by an employer (not helpful) o The Supreme Court has directed lower courts to use the Common- Law Employee test when determining whether an individual is an employee (Nationwide Mutual Ins. v. Darden, 503 U.S. 318 (1992)).

6 ERISA ELIGIBILITY OTHER CONSIDERATION Tax Issues: Coverage for non-tax dependents imputed income to employee Nondiscrimination issues under IRC: ACA Coverage ACA Age 26 Mandate COBRA CBAs State Insurance Law Requirements

7 ERISA ELIGIBILITY Who is a Common-Law Employee under Darden? o Focuses generally on the hiring party s right to control the manner and means by which the work product is accomplished Who furnishes work equipment Hired party s discretion over work hours Method of payment Provision of employee benefits Tax treatment of hired party Skill required Location of work Duration of relationship Right to assign additional project Hired party s role in paying assistants Etc. Who is not a Common-Law Employee? o Partners in a Partnership* o Sole Proprietors* o Independent Contractors o Self-employed individuals* o 2% Shareholder in S-Corp.* o Outside Directors o LLC Members* *could be working owners

8 CAFETERIA PLAN ( 125 PLAN) ELIGIBILITY A cafeteria plan provides participants an opportunity to receive certain benefits on a pretax basis Who is eligible? o Common-Law Employees o Includes employees of members in same Controlled Group o May include former employees, but cannot exist primarily for them o No partners, independent contractors, sole proprietors, etc. o Leased Employees under IRC 414(n) o Full-time Life Insurance Salespersons (statutory employees under IRC)

9 IRC COMMON LAW EMPLOYEES Old 20 Factor Test (Rev. Rul New IRS Guidelines Behavioral Control - Does the company control or have the right to control what the worker does and how the worker does his or her job? Financial Control - Are the business aspects of the worker s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Relationship of the Parties - Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

10 EMPLOYEE MISCLASSIFICATION Employee misclassification may be identified by the DOL or the IRS o The two agencies share info, and an investigation by one may result in an inquiry by the other Remember that there are different tests under different federal and state laws can result in conflicting results

11 EMPLOYEE MISCLASSIFICATION Not always clear how to classify IRS Form SS-8 Can request a formal ruling Only applies for IRS purposes could raise issues under other federal and state laws Section 530 Relief employment tax relief if historically misclassified Reasonable basis Reporting consistency

12 CONSEQUENCES OF COVERING NON-EMPLOYEES

13 Reclassification Risks Worker Lawsuits (Microsoft) IRS and DOL may audit plans and companies may be liable for penalties and monetary corrections if workers misclassified Anti-Microsoft clauses should be added to plan documents to prevent retroactive coverage of misclassified employees if reclassified later by a court or federal/state agency Microsoft Provision will not correct nondiscrimination testing failures relating to inclusion or exclusion of misclassified workers, qualification issues, etc. May fail to provide ACA coverage to FT Employees Underestimate penalty exposure in calculating 95% threshold Reporting Penalties under IRC Sections 6055/6056

14 Other Risks and Considerations When Including Non-Employees Plan documents must specify which employees are eligible Some employers cover non-employees without changing terms of plan document (e.g. non-working owner and family members (occasionally extended to dating relationships, outside directors, independent contractors (though coverage weighs in favor of employee status)), Carriers may deny claims for non-employees and individuals not meeting definition of dependent Coverage taxable to non-common law employees (IRS def) penalties for failing to properly report and withhold as applicable Exposure for claims of fiduciary breach and prohibited transactions if plan assets used to pay benefits for non-employees (remember exception for working owners under ERISA) Creation of a MEWA

15 WHAT IS A MEWA? A multiple Employer Welfare Arrangement ( MEWA ) is defined as an employee welfare benefit plan or other arrangement that is established or maintained for the purpose of offering or providing medical or other welfare benefits to employees of two or more unrelated employers.

16 INADVERTANT CREATION OF A MEWA A MEWA exists if the elements of the definition are satisfied the intent to create a MEWA is not required An employer can create a MEWA if it allows other employers (outside of its controlled group) to participate in its welfare plans (affiliated service group rules do not apply under ERISA in determining related employers different results IRC and ERISA) Thus, an employer may create a MEWA by extending coverage to an individual who is not a common-law employee o For example, a leasing/staffing organization can create a MEWA if it is not the common-law employer and it allows individuals who work for several recipient employers to participate in its health/welfare plan

17 INADVERTANT CREATION OF A MEWA: THE RISKS MEWAs have additional IRS reporting requirements o Form M-1 filing o Exception: if no more that 1% of employees/former employees covered are non-employees, then no Form M- 1 filing requirement will arise from coverage of those non-employees Self-insured MEWAs are prohibited under many states laws Form 5500 Violations

18 INADVERTANT CREATION OF A MEWA: THE RISKS MEWAs have additional IRS reporting requirements o Form M-1 filing o Exception: if no more that 1% of employees/former employees covered are nonemployees, then no Form M-1 filing requirement will arise from coverage of those non-employees Self-insured MEWAs are prohibited under many states laws Other state requirements applicable to insured and self-insured MEWAs may include a limit on who can sponsor (e.g. association) and require advance notification or other certification requirements to state DOI Form 5500 Violations

19 FORM 5500 MEWA FILING RISKS Each plan is required to file unless exempt Types of MEWAs Plan level (single employer plan sponsored by a bona fide group or association of employers Non-Plan level (each employer sponsoring its own ERISA Plan) Non-Plan MEWA each employer must file a Form 5500 Mitigate using a DFE ( direct filing entity) and GIA No small plan exception for MEWAs beginning 2013 if subject to M-1 requirement The revised Form includes a new section specifically addressing Form M-1 compliance and requires a plan to include proof of the Form M-1 filing as part of the Form Many employers fail to file Form M-1 Penalty of Perjury

20 Special Issues for PEOs/Staffing/Leased Employees

21 PEOS, STAFFING COMPANIES, & LEASING FIRMS Who is the employer? o Whoever is deemed to be the common-law employer under the fact-specific, multi-factor test (i.e., who has the right to control and direct the work performed). Often the recipient employer o Thus, if coverage is offered to worksite employees, the plan may be covering nonemployees The problem: both the organization and the recipient employer will likely satisfy some of the common-law test factors o Neither the IRC nor ERISA recognize the concept of dual employment o Some IRS guidance supports the idea of coemployment for tax purposes in limited circumstances, but co-employment has not been extended to the eligibility and coverage context

22 PEOS, STAFFING COMPANIES, & LEASING FIRMS Consequences of covering common-law employees of the recipient employer: o Plan may be disqualified Providing benefits to nonemployees violates the Exclusive Benefit Rule Substantial and pervasive negative tax consequences

23 PEOS, STAFFING COMPANIES, & LEASING FIRMS IRS Relief for Defined Contribution Retirement Plans sponsored by PEOs o Revenue Procedure allows PEOs to cover non-common law employees without risk of disqualification for violating exclusive benefit rule o Gives no opinion on how PEO employees should be classified o No similar relief for other plans or under ERISA o Must terminate PEO plan or operate as a MEP (multiple employer plan) o Statutory rules for MEPs provides some certainty on treatment. Non-PEO situations can result in MEP where employer includes non-common law employees in retirement plan o DOL views MEP as a series of separate plans with separate 5500 and audit requirements (based on MEWA analysis) unless establish commonality of interest and control over plan by participating employers o PEOs often rely on level of control over worksite employees as resulting in common law employee status

24 STATUTORY LEASED EMPLOYEE DEFINITION ERISA 414(n)(2) - Leased Employees are NOT common law employee, but must be taken into account as employees for nondiscrimination testing if: o the services are provided pursuant to an agreement with the leasing organization; o the person has performed services for the recipient on a substantially fulltime basis for at least 1 year; and o the services are performed under primary direction or control by the recipient. o Some exceptions apply and not appear to apply to 105(h) testing (does apply to 125 and 401(a)) Not counted for ACA purposes Bottom Line here? o Careful drafting required! If incorporating exclusion of 414(n)(2) leased employees, ensure Microsoft language applies to 414(n)(2) reclassification as common law or duplicate benefits from staffing agency and recipient organization could result. o Include in testing to ensure proper results

25 PEOS, STAFFING COMPANIES, & LEASING FIRMS Common-law Employer has ACA responsibility If the worker receives an offer of coverage under the staffing firm s health plan, that offer will be treated as an offer of health coverage by the recipient company so long as the staffing contract provides that the fee the recipient company pays to the staffing firm for employees enrolled in the health coverage is higher than the fee the recipient company would pay for the same employee if he or she did not enroll in the health coverage Contract should address who is responsible for ACA reporting

26 Impact on Other Federal Laws

27 ACA REPORTING Only Common Law Employees are counted Do not include leased employees (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in section 3508 (qualified real estate agent or direct sellers) Could have reporting obligation if self-insured and provide to nonemployees

28 MEDICARE SECONDARY PAYER The Medicare Secondary Payer (MSP) rules prohibit employers with > 20 employees from incentivizing employees age 65 or older to elect Medicare instead of the group health plan If a MEWA is inadvertently created, employers with < 20 employees may be required to comply with MSP rules if another member of the MEWA has 20 or more employees Certification process with CMS to opt out Employers must also count leased employees in determining total number if they would be counted as employees under 414(n)

29 COBRA If ERISA does not apply at the MEWA level, each employer providing benefits will be maintaining a separate ERISA health plan and COBRA will apply based on whether the employer had 20 or more employees in the preceding year Only common-law employees are counted for COBRA purposes, and they are counted even if they waive participation in the health plan (so do not include independent contractors or directors who are not common law employees) If ERISA applies on the MEWA level, the plan administrator is responsible for COBRA compliance

30 Special Considerations for Outside Directors

31 BOARD COMPENSATION ISSUES Public companies that offer health coverage and other compensation to non-employee directors should seek legal counsel Recent litigation involving derivative actions on behalf of shareholders have claimed that directors breached their fiduciary duties by awarding too much compensation to nonemployee directors Also, such companies will likely face reporting requirements such as detailing of director compensation in their annual proxy statement

32 Continuing Education Credit HRCI TBD SHRM TBD

33 Final Questions HRCI TBD SHRM TBD Presented by: Lorie Maring Phone: (404)

34 Thank You Presented by: Lorie Maring Phone: (404)