Given the current composition of Congress, it is unlikely the obligations the Affordable Care Act impose on employers will be significantly curtailed, either by repeal, amendment or by defunding by January 1, 2014, when many employer mandates go into effect. Employers who do not formulate their action plans and commence executing those plans now not only are missing an excellent chance to determine how they may accomplish efficient ACA compliance, but also may be missing the opportunity for compliance altogether.
Employers should consider doing the following now:
Identify workers who are misclassified as independent contractors. Both the Department of Labor and the Internal Revenue Service have announced that addressing the issue of misclassified workers is a high priority for their audit and enforcement activities. Complying with the ACA’s provisions requiring employers to count their employees and identify which are “full-time,” as a foundational matter, begin with distinguishing employees from independent contractors. The financial stakes for errors in worker classification are high and will only increase once the ACA is fully effective. Non-employee status should be examined and documented. Now is the time to correct the misclassification of workers who are erroneously treated as independent contractors. However, this does not mean that workers who currently are employees should be reclassified as independent contractors to avoid the ACA’s mandates.
Investigate the application of the controlled and affiliated service group rules. The ACA requires employers that are “related entities” to count employees as if they are employed by a single entity. The ACA rules are similar to the rules applicable to qualified employee pension plans in this regard. Two related employers, each with 25 full-time and full-time equivalent employees, for example, are counted as one “applicable large employer” that reaches the 50-employee threshold to be covered under the ACA. Controlled and affiliated service groups of employers are often overlooked in this analysis. Now is a good time for employers to review their corporate structure to determine whether related-entity issues exist and try to resolve them, if possible.
Examine temporary and leased employee agreements. The Treasury Regulations promulgated under the ACA suggest that an applicable large employer may be subject to the ACA penalties for any worker who is a “common law” employee, as determined under the Internal Revenue Code provisions and Regulations governing payroll taxes. Employers that hire workers through temporary and employee leasing agencies may find themselves deemed to be co-employers with the agencies and, thus, jointly and severally liable with the agencies for ACA penalties. Therefore, employers who contract with temporary employment and employee leasing agencies should examine their contracts and take steps to ensure the agencies both shoulder the burden for ACA compliance for these workers and indemnify their client-employers from ACA penalties.
Avoid “messing” with your insurance contract renewal dates. The Treasury Regulations promulgated under the ACA basically “freeze” a group health plan’s year to the 12-month period that was defined as the “plan year” as of December 27, 2012. Thus, it is too late for employers to try to delay the ACA’s effective date by altering their plan year. An insurance contract that may be used to pay for health plan benefits only constitutes the plan’s funding mechanism, it is not, by itself, the “plan.” Therefore, changing the renewal date of the insurance contract that funds a group health plan will not be successful in altering the actual plan year. The only consequence of changing an insurance policy renewal date at this point will be to have a plan that must comply with the ACA by January 1, 2014, and a non-compliant insurance policy that funds the plan into or through 2014. Both large and small employers should avoid doing this.
Take the time to model the impact of the ACA’s mandates and penalties. The removal of the ability of insurance carriers and self-funded plans to limit liability by imposing annual and lifetime benefit limitations compels the recognition that the financial risk of offering group health plan benefits has risen and, therefore, so will the cost of coverage. It is thus imperative for all employers to model the impact of potential rising cost of coverage, the non-deductible expense of ACA penalties, the effect of moving employees from full-time to part-time status, and the affordability of different group health plan designs in order to forecast and plan for the impact of the ACA on the employer’s “bottom line.” Modeling various ACA-driven scenarios allows employers to control the ACA’s impact, rather than being driven by it. The employer that finds an accounting or consulting firm with good ACA-modeling software and takes advantage of it will be better able to respond to the ACA’s mandates.
ACA compliance, like most legal compliance endeavors, will be easier, more cost-efficient and effective if approached proactively. The next two years undoubtedly will provide many ACA-transition challenges. Employers that take advantage of the upcoming months to undertake these six steps will be better prepared to meet the challenges, both financially and operationally.