Under ACA, could you be responsible for agency temps and PEO employees?

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

Assume the following scenario: ABC Company has 200 full-time employees and 50 temporary employees supplied through a staffing company. Based on the calculations for employee coverage for 2016, ABC Company determines that the 200 full-time employees are its “common law” employees. Therefore it provides coverage under its group health plan to all of them. The staffing firm also provides coverage to all of its full-time employees, including the 50 temporary workers placed with ABC Company (whom the staffing firm has determined are full-time for IRS Code 4980H purposes).

Who is really responsible for those 50 temporary employees’ healthcare under the Affordable Care Act? As it turns out, both.

The common law definition of “employee,” which historically has been used for both ERISA and tax code purposes, should come in to play.  This definition has been used to determine, for example, which employer is responsible for payroll taxes and withholding and retirement plans.

Now there is another compelling reason for looking at the common law definition of “employee”: the ACA’s Employer Shared Responsibility rules. If at least one of ABC Company’s full-time employees qualifies for a premium tax credit from a public insurance exchange ABC Company may have liability under the Act’s Employer Shared Responsibility requirements if it fails to make an offer of group health plan coverage to at least 95 percent (or 70 percent in 2015 under a transition rule) of its full-time (common law) employees.  ABC Company believes it has done that. But what about the temporary employees? What if they make the population of ABC Company 250 instead of 200 for ACA purposes?

Under the Shared Responsibilities final regulations, an “offer of coverage” includes an offer of coverage made on behalf of an employer by an unrelated entity.   In other words, ABC Company may be responsible for the staffing company’s temporary employees working at ABC Company.  The requirement under 4980H provides that  “the fee the client employer would pay to the staffing firm for an employee enrolled in health coverage under the plan [must be] 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.” Therefore, ABC Company must pay the staffing firm something extra for each of the 50 temps who may or may not enroll in the staffing firm’s group plan.

How much is the fee?  The rule says nothing about that.  A nominal amount would appear to be sufficient.  The real question in this scenario is whether the fee shows up in the bill rate on a temp employee basis or as an aggregate fee for all workers.  Maybe, logically, the fee ought to only be imposed on day 91, when an employee would first be eligible for healthcare assuming all requirements are met. Therefore, an employer using a staffing agency would be likely to see mark-ups on its bill rate, but will not have to include the temporary employee on its health plan.

This scenario should also include “temp to hire” situations as well.

The other area of concern is PEOs (Professional Employer Organizations).  ASE has a PEO (as well as a staffing organization for temporary employees) that services a number of organizations. A PEO is not the same as a staffing company.  Yet the regulations appear to treat PEOs and staffing companies the same. In 2002, as a result of guidance provided by the IRS on the rules of retirement plans for PEOs, it has been presumed that a PEO is not a common law employer.  But by contrast, contract and temporary workers placed by staffing firms have been treated as common law employees of the staffing firm and not the client organization.  Assuming new Shared Responsibility regulations are overturning past interpretations of PEOs under the law, a small fee must also either be assessed by the PEO on each PEO employee or in the aggregate billing (with all appropriate documentation maintained) as staffing companies are required to do.

Finally, “payrolling employees,” meaning employees who are simply put on another’s payroll so the headcount does not count on the employer’s payroll, should be counted as employees of the payrolling company (e.g., the staffing firm in the example given above).  The same rules should apply for payrolling as they do for temporary staffing in terms of insurance coverage and nominal fee requirements.

Eventually the courts will likely rule on the appropriateness of each type of arrangement described above.  In the meantime, the IRS agents who will be enforcing the rules will have to make judgment calls, and then see what sticks and doesn’t stick.

But the long and short of it is that staffing firms and PEOs will most likely operate as usual, but will increase their fees to employers to be in compliance with the Shared Responsibility regulations.