Affordable Care Act (ACA)
The Obama Administration’s most recent change to the Affordable Care Act (ACA) may have given some employers the wrong impression. With this modification, employers with 50 to 99 employees now have until 2016 to comply with the “Shared Responsibility” provisions of the law. Some employers — especially those who are close to the threshold of 99 employees — may be surprised to learn they are not really off the hook.
Here’s What You Need to Consider
Two primary factors come into play. First, recall that the employer size thresholds are based on a calculation which includes part-timers. You need to add up their combined monthly hours and divide by 120 to determine the actual number of full-time equivalents (FTEs) you have. This number must then be added to the number of full-timers, to determine your status.
Example: Suppose you have 80 employees putting in at least 30 hours per week (in other words, 80 full-timers) and 40 part-timers. Assume the combined total of the part-timer hours over the course of a month is 2,400 (40 part-timers averaging 60 hours per month). You must then divide the total part-time hours of 2,400 by 120 (as stated in the paragraph above). This gives you 20 FTEs plus your 80 full-timers, for a combined count of 100 full timers and FTEs. That puts you over the 99-employee threshold, and makes you subject to the employer mandate for 2015. However, you would still only be required to cover the 80 full-timers.
Another way you could be in for a nasty surprise is if you use a lot of independent contractors, who the IRS deems to be employees. Use the same example above, of 80 full-timers. Instead of 20 FTEs, you have 20 workers you consider to be independent contractors. However, the IRS has taken a closer look and decided these individuals are really employees. As a result, you now have 100 employees.
Workers who have been classified as independent contractors and then reclassified as employees by the IRS benefit from the change. Others benefit too, like the state unemployment agency, unemployment insurance carriers, state tax authorities, and the IRS. Your company, on the other hand, may face penalties and additional taxes for misclassification (in arrears and going forward). And, depending on where you end up in the total employee count, you may find you are indeed subject to the ACA’s “Shared Responsibility” provision for 2015 after all.
IRS Revving Its Engines
Last year, the Treasury Inspector General for Tax Administration (TIGTA) issued a report highlighting the fact that many employers aren’t paying attention to periodic IRS rulings that establish the independent contractor/employee boundaries. The result, stated TIGTA, is that “millions” of workers are misclassified, resulting in employers failing to pay the payroll taxes they should be paying.
The IRS has a “Determination of Worker Status Program” (also known as the SS-8 Program), which is supposed to make it easy for employers to get a thumbs up or down on a worker’s independent contractor status. The report found that employers often disregard rulings they don’t like. Combined with the fact the IRS, which is supposed to enforce those rulings, is frequently overwhelmed, enforcement has not always been adequate. In response to TIGTA’s findings, the IRS has vowed to make several changes. One of those changes is, they will form a team “to assess potential avenues to improve employer compliance with SS-8 Program determination rulings.”
Proceed with Caution
Note, while this program seems like a way to guarantee your company is in compliance with the IRS, it is not a step to be taken lightly. Filling out an Form SS-8 and letting the IRS handle it may seem easy and straightforward, but by providing the information you may be inadvertently inviting the IRS to rule against you preemptively. This is an area where seeking the guidance of your tax adviser is highly advisable.
Who’s in Control?
You and your tax adviser can evaluate a worker’s status by addressing three basic areas:
Behavioral control. The level of direction and supervision the worker receives. How does the worker receive work assignments? Describe the worker’s daily routine, such as his or her schedule of hours.
Financial control. What expenses are incurred by the worker in the performance of services for the firm? Does the worker establish the level of payment for the services provided or the products sold? If not, who does?
Relationship of the worker and firm. Did the worker perform similar services for others during the time period [covered by the report]? Please identify the benefits available to the worker.
Keep in mind that Form SS-8 can be filled out either by the worker, or you. Workers who believe they have been misclassified can obtain the form and send it to the IRS. In fact, a very high proportion of SS-8 forms submitted to the IRS come from workers who believe they should be treated as employees. Moreover, the TIGTA report found that in one year, nearly three-quarters of SS-8 forms filed resulted in determinations that a worker treated as an independent contractor should have been treated as an employee. This alone should be a compelling reason for you and your tax adviser to examine worker classification and make necessary changes.
Guidelines you can rely on for a determination of who can be classified as an independent contractor are easy to find. A good primer was prepared by Congress’ Joint Committee on Taxation a few years back, but can still be relied upon for the basics.
If you review your situation and conclude you might be vulnerable to a massive re-classification, the IRS has a “voluntary worker classification program.” This program, if you are eligible, offers the promise of a reduction in your liability for payroll taxes you should have paid. Last year, the IRS liberalized the program, to encourage greater employer participation. However, once again, enter this program only after consulting with your tax adviser to avoid unintended consequences.
Back to the ACA
If you do fall below the small employer threshold, and still offer a health plan, remember, while you may not be subject to the play-or-pay rules, your plan still must satisfy other ACA requirements this year. Examples include not denying health coverage due to a pre-existing condition and not having an eligibility waiting period exceeding 90 days.
In addition, if your analysis of your employee plus FTE headcount shows that you will be subject to the employer mandate in 2015, new IRS regulations cut you a little bit of slack. Instead of having to offer coverage to at least 95 percent of your employees, the standard is reduced to 70 percent. That 95 percent standard will still take effect in 2016 — assuming no further regulatory changes occur before then.
With that said, the ACA has proven so far to be a work in progress. Stay tuned as more changes, big or small, continue to roll out.
Disclaimer of Liability
Vision HR provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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Delay in Dependent Coverage Requirement
The original requirement that employee dependents also be covered in 2015 was pushed back to 2016, “as long as the employer is taking steps to arrange for such coverage to begin in 2016,” states the Treasury Department fact sheet.
The final rules clarified whether certain categories or workers will be considered full-time or not. Two examples:
- Seasonal employees: Those in positions for which the customary annual employment is six months or less generally will not be considered full-time employees.
- Volunteers: Hours contributed by bona fide volunteers for a government or tax-exempt entity, such as volunteer firefighters and emergency responders, will not cause them to be considered full-time employees.
The final rules also addressed the treatment of educational employees, student work-study employees and adjunct faculty members.
Independent Contractor Requirements
Additional highlights of the final rules:
- If you pay for the services of independent contractors, the IRS will decide whether it agrees with your classification of those individuals as independent contractors as opposed to employees based on common law alone — not safe harbors applicable to employment tax requirements. The purpose of this scrutiny is to prevent companies from misclassifying individuals as a way to avoid the need to provide health coverage.
- The final regulations feature a new rule applicable to employers that secure workers via staffing agencies. Employers will only be treated as meeting their shared responsibility requirements if the staffing company employee working for the employer is covered by a health plan offered by that agency, and the fee paid to the staffing agency is higher than it would have been had the agency not provided health coverage to the individual.
2. Strike the words “permanent employment” and “permanent employee” from handbooks, applications and job descriptions. Train supervisors to avoid promising or implying permanent employment when they hire workers.
3. Evaluate employment contracts for management personnel. Include provisions which identify causes for discharge. Assert that employment is not for a specific period of time. Provide for third party resolution of disputes. Limit recoverable damages by either party in the event of a breach.
4. Review your evaluation process. Make certain an evaluation includes constructive guidance on how employees can improve work performance. Train supervisors to use objective — not subjective — criticism.
Example: Subjective language: “Jane’s typing needs improvement.” Objective language: “Jane will increase her typing speed to 55 words per minute.”
5. Use progressive disciplinary procedures. These procedures include oral warnings, written warnings, suspension without pay and termination.
When implementing such procedures, tell employees which types of behavior merit discipline.
Examples: First instance of excessive tardiness, oral warning. Physical fights, termination.
Make certain supervisors consistently enforce these procedures. Your case in court is weaker if worker Pete says he was unfairly discharged for drinking on the job when worker Bob only received a written warning for drinking a beer at break time.
6. Implement a problem resolution procedure. When employees can appeal a discharge or poor performance rating at an impartial hearing, they are less likely to seek relief in court.
Some firms employ ombudsmen to handle employee complaints. Other firms arrange for outside arbiters to decide disputes. Still other firms have panels of in-house personnel to hear disputes.
7. Approach all discharges with caution. Never fire an employee in a fit of anger. First suspend the employee, investigate the incident and then decide if the questionable behavior warrants discharge. Take statements from witnesses. Give the employee an opportunity to respond to charges.
Most important, seek counsel from qualified, neutral advisers before discharging problem workers.
Source: BizActions / Thompson Reuters
