Guest Author, Alan Hahn, Davis & Gilbert LLP
Just about every employer has them in their workforce—employees who are not quite “regular” employees. They can be called one of several names, including the following:
- project-based employees;
- on-call employees;
- seasonal; and (perhaps most common of all)
Historically, employers used these labels to identify employees who were not eligible for benefits and other employment perks. This was oftentimes an acceptable practice as long as benefit plan documents were amended appropriately and certain other steps were taken. Now, however, with the advent of the Affordable Care Act (ACA), additional concerns may apply in respect of temporary employees, specifically where temporary employees may occasionally (or not so occasionally) work a full time schedule. This article provides a quick run-down on why your temporary employees may give you a permanent ACA headache in 2016.*
The ACA employer mandate
As is well known by now, the Affordable Care Act (ACA) requires “large” employers to offer affordable health care coverage to full-time employees or be taxed. A large employer is generally one that has 50 or more full time employees (including full time equivalents). Employers between 50 and 99 full-time employees (including full time equivalents) generally have an extra year to comply with the ACA, although they must comply with the IRS “information reporting” requirements (new IRS Forms 1094 and 1095).
Under the ACA, affected employers will need to identify any employees who are full-time under the ACA (including temps) and report them to the Internal Revenue Service (IRS). Moreover, employees identified as full-time can trigger an ACA tax on the employer if medical benefits are not offered at the right time.
Who is a full-time employee?
Full-time generally means someone who is working at least 30 hours per week (130 hours of service in a month is generally treated as the monthly equivalent of at least 30 hours of service per week). The ACA does not have a “temporary employee” classification. Instead, the treatment of temps depends on how the employer complies with the ACA in respect of the rest of its workforce under one of the following two methods.
There are generally two methods for complying with the ACA:
- Monthly Measurement Method: Under the monthly measurement method, an employer looks at its workforce each month and determines who it must offer benefits to and for whom it must pay an ACA tax for not offering benefits. It’s a clunky method for any employer that has temporary employees that might work full-time in some months but not others, since temporary workers tend to have hours that fluctuate or vary from month to month. Thus, an employer may have an obligation to offer benefits or pay a tax in any month in which a temporary employee works full-time (or offer benefits all the time, after 90 days of employment, if the employer is concerned the temp may be full-time in any month). This method can be useful to some employers, but many employers seem to be using some form of a look-back method, at least so far.
- Look-back Method: This method allows an employer to test its ongoing workforce in a prior period (e.g., 2015) to determine who is eligible for benefits in a subsequent period (e.g., 2016). For new employees who are classified as full-time, benefits must be offered following hire (generally, a three month waiting period can be accommodated). For new employees who can be classified as “variable hour” or “seasonal,” an employer can wait some period of time (generally, up to a year) and then see if the employee worked full-time hours during this “initial measurement period.” Thus, under this method, it is possible that a temporary employee can be classified as variable or seasonal. If they can be so classified, the temp would need to actually work full time over an initial measurement period to then become eligible for benefits thereafter.
Which employees are “variable”?
This question is where the rubber meets the road for many employers and their temps, as the determination is not so straight-forward in many instances. The regulations define variable as, “[b]ased on the facts and circumstances at the employee’s start date, the employer cannot determine whether the employee is reasonably expected to be employed, on average, at least 30 hours of service per week during the initial measurement period because the employee’s hours are variable or otherwise uncertain.” This sounds like many temps, although this is not always the case.
Somewhat helpfully, the regulations provide factors to consider including:
- Is the employee replacing a full-time employee?
- Are employees in the same or comparable positions full-time?
- Was the job advertised, or otherwise communicated to the new hire, or otherwise documented (for example, through a contract or job description), as requiring 30 (or more) hours of service per week?
In addition to dealing with the issue of temps paid on an employer’s payroll, many employers are grappling with their ACA obligations in respect of temps sourced and paid through third party staffing agencies. In that case, it may be unclear as to who is responsible for ACA compliance—the staffing agency or the client/employer. The answer under the regulations is that the entity that is the “common law” employer is responsible for ACA compliance with respect to that worker, even if someone else is paying them. However, it is not always clear who that common-law employer is.
Checklist: evaluating ACA exposure when it comes to temps:
- Identify your non-regular staff, including any staffing firms that pay your temporary workers
- Consider if you should use the ACA monthly measurement method or look-back method
- Examine your use of “variable” and “seasonal” labels
- Consider amendments to employee offer letters to bolster your ACA approach
- Evaluate client service agreements with staffing agencies (get a strong indemnity)
- Review the new information reporting requirements (IRS Forms 1094 and 1095)
- Respond to notices from the Exchange that may be coming in 2016
- Work with legal counsel on an evaluation of your compliance approach in 2016
- Amend plan documents, as appropriate
*The article is necessarily brief; therefore, important information on ACA compliance may be omitted or stated in summary fashion
Alan Hahn is a partner in the Benefits & Compensation Practice Group of Davis & Gilbert. His practice is devoted to advising clients in the design and implementation of creative, unique and tax-effective employee benefit plans and programs. For more information, Mr. Hahn may be reached at 212.468.4832 or firstname.lastname@example.org.
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