The factors that affect a firm’s decision to offer insurance or pay fines
On July 2, the Treasury Department announced that the employer mandate portion of the ACA has been delayed until 2015. While this gives staffing firms an extra year to work out whether they will offer their temps insurance or pay fines, they still should be considering their options now. Attorney George Reardon continues to discuss factors that will affect their decision in the conclusion of his two-part feature. The first part appeared in the July 2013 issue of Staffing Industry Review, which was published prior to the administration’s announcement.
Violating ERISA
Many staffing firms are planning to aggressively limit the weekly hours and long-term tenure of temporary employees in order to prevent too many of them from achieving full-time, insurance-eligible status. There is nothing in the Affordable Care Act that forbids such aggressive management of service time.
However, if an employer offers health coverage to all employees who achieve full-time status and then takes employment actions (such as termination or deprivation of assignment opportunities) to prevent them from becoming full-time and enrolling in coverage, it may violate ERISA, the 39-year-old federal benefits law that makes it “… unlawful for any person to discharge, … suspend, expel, … or discriminate against a participant … for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan ….”
Courts have held that this section of ERISA applies to welfare plans (like health insurance) and protects people who have not yet attained participant status under the plan.
To avoid litigation over violating this ERISA section, staffing firms that offer coverage to all full-time employees might be forced to abandon any plans to systematically limit the weekly or annual hours of temporary employees. Even without intentional or systematic hours limitations, staffing firms offering coverage to temporary employees could be vulnerable to charges that the temporary employees were not provided enough work to qualify for coverage. Such litigation would likely be in class action form and would be expensive, even to win.
Losing control over temporary employee hours and tenure could be a very expensive consequence of plan sponsorship.
The ‘Silo’ Approach
Under ACA, only “large employers” are subject to penalties for not offering health insurance. The law treats groups of corporations and other entities under common ownership or control as single employers for purposes of “large employer” status. But once a group is determined to be a “large employer,” the employer mandate for offering coverage and the penalties for not offering it will be applied on an entity-by-entity or “silo” basis.
That means that one subsidiary could avoid penalties by offering affordable coverage to all full-timers, while another subsidiary that does not offer coverage would pay penalties just on its full-timers. The disaggregation savings come from the fact that, if the two subsidiaries had to be aggregated for penalty purposes, the “no offer” penalties would apply to all of the full-timers of both companies, even though insurance is being provided to some of them.
Some staffing firms hope to use this silo approach. There may be ways for staffing firms to silo to advantage. For example, a staffing firm might isolate its professional lines from its commercial lines and offer coverage only to the staff and temporary full-time employees of the professional subsidiary. However, this technique will probably be very limited in scope and value. Two rules will impose these limitations.
One limiting rule is the common law test for determining the employer of employees for ACA purposes. If a staffing firm tried to isolate all of its internal staff employees in one subsidiary while isolating its temporary employees in another, the common law test would probably be used to deem the “staff ” subsidiary the employer of the temporary employees of the other subsidiary, because the work of the temporaries is controlled by the staff. The subsidiaries would then be tested together and be penalized as a single employer for not covering all full-timers.
The other limiting rule would come from the anti-discrimination regulations that are expected to be published soon. The ACA statute requires its anti-discrimination regulations to be similar to long-standing regulations for self-insured medical plans, and those existing regulations include aggregation of controlled entities. It may be possible to maintain separate silos with different coverage plans, but it will probably not be possible for the generosity levels of the two plans to be as sharply different as staffing firms would like them to be.
Customer Outsourcing
ACA provides staffing firms with opportunities to obtain new staffing business with customers driven to them by the same insurance and penalty provisions that staffing firms face. Customers near the 50-employee threshold for ACA penalties or those with employee groups that they do not want to insure may opt to outsource those positions to staffing firms. These positions are likely to be full-time positions. Customers may be willing to pay penalties through staffing firms but would not be willing to pay the higher cost of insuring outsourced positions, because that is the expense they are trying to avoid.
Staffing firms that offer coverage to full-timers will not be able to deliver cost savings to customers that need outsourcing strategies and will effectively cede this market to staffing firms that do not offer coverage to temporaries.
Staff Coverage
If staffing firms do not offer qualifying coverage to their full-time temporaries, it is likely that they will eventually not be able to continue offering such coverage to their staff employees. That is not yet certain, because the regulations for ACA’s anti-discrimination provision have not been published as of press time. However, it is likely that those regulations, when published, will effectively prohibit the staffing industry’s pattern of comprehensive, subsidized coverage for staff and no coverage for temporaries.
The health insurance plans to be offered by the ACA state exchanges or otherwise on the individual market under the new ACA rules may be workable choices for staff employees who do not have access to group or governmental coverage from other sources. Staffing firms may choose to increase the earnings of staff employees to compensate for the loss of their employer subsidies, but, because of taxes, full compensation for the loss would result in a slightly higher cost to the staffing firm than the premium subsidies that are being replaced.
Some insurance carriers have discussed offering favorable terms for employees who have been covered under group plans to convert to individual coverage. A large portion of the group may have to convert in order to obtain such coverage. Staffing firms should ask their insurance companies about this possibility.
Coverage for staff employees is an important issue, but in most staffing firms, it will be secondary to the issues of operational survival and competitiveness that are driven by the larger costs of insurance or penalties for temporary employees.
Administrative Hassles
Staffing firms that offer coverage to temporaries will take on significantly heavier administrative burdens than those that do not offer the coverage. Even though the eligible temporaries are relatively long-term among temporaries, they are still going to turn over faster than a regular permanent workforce. That means a high rate of individual measurement period tracking, inactivity tracking, income verification, coverage offers, enrollments, payroll deduction issues, terminations, COBRA notices and the legal issues that go with those responsibilities.
None of that additional administration contributes to the growth or health of the staffing firm and it may become a major source of management and staff distraction.
Out of Control?
It now appears certain that insurance costs will not go down as promised but will go up sharply. Employer-based health insurance is not inherent in the role of being an employer. American employers got into the tradition of providing insurance only as a way to avoid wartime wage caps.
Staffing firms have avoided most of this tradition by insuring only internal staff. If they now add temporary employees to their insured populations, the risk character of their groups will deteriorate and make the coverage much more expensive, because temporaries are not as long-term and stable as internal employees.
Is now a good time for staffing firms to be getting all the way into the business of offering benefits that will go up in cost drastically and unpredictably, will create new liability exposures, will complicate operations and will preclude marketing opportunities? Maybe for some firms, it is a good time for all of that. But either way, the decision should be given careful consideration.
This article may not reflect all last-minute changes in rules and legislation made, as there is a long lead time stemming from print magazine requirements.
