The Importance of Worker Classification and the Large Employer Mandate
The Importance of Worker Classification and the Large Employer MandateNovember 11, 2015
Catrina Reyes, J.D., M.P.A., Policy Analyst and Compliance Manager
Employers need to know who its employees are for two purposes related to the Affordable Care Act’s Large Employer Mandate. The first is to determine whether it is an Applicable Large Employer (ALE). The second is to know who must be offered Minimum Value and affordable coverage so as to avoid being assessed a penalty.
The Large Employer Mandate requires ALEs to offer Minimum Essential Coverage (MEC), that is Minimum Value (MV) and affordable, to substantially all of its full time (FT) employees and their dependents (does not include spouses) or otherwise be assessed a penalty. Employers must then first determine if it’s an ALE. An ALE is an employer that employed an average of at least 50 FT and full-time equivalent (FTE) employees in the prior calendar year. A critical component of this determination is identifying who are employees. The common law standard is used to define employees. Under the common law standard, an employment “relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished…it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if [the employer] has the right to do so.” 26 CFR § 31.3401(c)-1. There are several factors that are considered when determining if an employment relationship exists. The determination depends on the particular facts and circumstances of the relationship. This is relevant when the employer has independent contractors and workers from staffing firms. Misclassifying workers as not employees would mean an inaccurate calculation of the number of FT and FTE employees and therefore an incorrect determination of whether an employer is an ALE.
An ALE may be assessed a penalty if it fails to offer MEC to at least 95% (70% in 2015) (or to put in another way, fails to offer to more than 5% or 5 whichever is greater) of its FT employees and their dependents for any month in the year; and at least one FT employee enrolls in a Qualified Health Plan (QHP) on the Exchange to which a premium tax credit or cost-sharing reduction is allowed or paid for that month. The monthly penalty is $2,000 times the number of FT employees minus the first 30 (80 in 2015) FT employees divided by 12. Not offering MEC to at least 95% of FT employees, for example only offering to 94% of FT employees, means the employer would be subject to the penalty for all of its FT employees (minus the first 30). Misclassifying workers, even just one, may cause an employer to fail to offer MEC to at least 95% of its FT employees, thereby triggering a penalty based on all of its FT employees, not just the misclassified workers.
Even if MEC is offered to all or to all but 5% (or, if greater, 5) FT employees and their dependents, an ALE may still be subject to a penalty if at least one FT employee enrolls in a QHP on the Exchange where a tax credit or cost-sharing reduction is allowed or paid. This may occur because the employer did not offer coverage to that employee (i.e. part of the 5% not offered coverage); or the coverage was unaffordable to the employee and/or did not provide MV. The penalty is the lesser of $3,000 times the number of FT employees who receive a premium tax credit or cost-sharing reduction divided by 12; or $2,000 x the number of FT employees minus the first 30 (80 in 2015) FT employees divided by 12. If a misclassified worker enrolls in a QHP on the Exchange where a tax credit or cost-sharing reduction is allowed or paid, the employer will be assessed a penalty for that misclassified worker. Finally, employers may also be subject to a penalty for failing to file and furnish the necessary forms to the IRS and misclassified workers under the reporting requirements in Internal Revenue Code Sections 6055 and 6056.
Worker classification can be complex, therefore, it’s best to seek legal counsel. Claremont can assist you with a referral if needed.
Note: After 2014, the penalty amounts are adjusted for inflation.
- The Affordable Care Act and Staffing: One Size Does Not Fit All
– Littler Mendelson
- 10 Facts About the Affordable Care Act and Worker Classification
– Latham and Watkins
- The Affordable Care Act Ups the Ante for Worker Misclassification
– American Bar Association
To learn more about the Large Employer Mandate, download Claremont’s essential ‘Play or Pay’ guides.
Contact your Claremont team at 800.696.4543 or ACA@claremontcompanies.com.