Navigating the ACA’s common employer rule

As staffing firms and their clients work to comply with the Affordable Care Act’s (ACA) employer shared responsibility rules, one particular feature of the final regulations seems to be causing a good deal of confusion: the special rule governing offers of coverage on behalf of other entities. Under this special rule, an offer of coverage made by a staffing firm is treated as having been made by the client in instances in which the worksite employee is deemed to be the common law employee of the client organization and not the staffing firm.

There generally should be no need to apply this special rule in the case of traditional temporary staffing arrangements because long-standing industry practice, as well as past and current legal precedent, support the conclusion that, in the great majority of cases, temporary staffing firms are (or should be) treated as the common law employer under the multifactor control test. In contrast, the regulators generally take the view that professional employer organizations (PEOs) are not common law employers — and they may take a similar view with respect to staffing firms that provide payrolling arrangements.

To understand why the special rule is needed, consider the following example:

Employer A has 300 employees, all of whom are full-time. Of these, 200 are on A’s payroll and 100 are retained through Staffing Firm B. For all months during calendar year 2017, Employer A determines that the 200 employees on its payroll are its common law employees. Employer A makes an offer of minimum essential coverage under its group health plan to all of these employees. Staffing Firm B also makes an offer of coverage to all of its full-time contract and temporary employees, including the 100 workers placed with Employer A. On audit, it is determined that the 100 workers placed with Employer A through Staffing Firm B are the common law employees of Employer A and not Staffing Firm B.

Absent the special rule, Employer A would be deemed to make an offer of coverage during 2017 not to 100% of its full-time employees as it anticipated, but rather to only 66%. Therefore, if at least one of Employer A’s employees qualified for a premium tax credit from a public insurance exchange, Employer A would incur a non-deductible excise tax for 2017 of over one-half of a million dollars.

Under the special rule, Employer A in this instance would be able to claim credit for the offers of coverage made by Staffing Firm B provided the staffing firm charges Employer A an additional fee for each worker that it places with Employer A and who accepts B’s offer of coverage. Specifically the special rule requires 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.”

When this rule is applied in the above example, Employer A is treated as offering coverage to all of its full-time (common law) employees rather than only 66%.

While the special rule is welcome, it has raised at least three practical concerns:

  • Why is common law employer status important?
  • What contractual terms are necessary to take advantage of the rule?
  • How does a staffing firm document compliance (e.g., is a separate line item identifying the number of workers who accepted the staffing firm’s offer required, or can the staffing firm simply add an across-the-board incremental hourly charge)?

Why It’s Important

For purposes of the federal tax code and ERISA, employers have historically been required to distinguish between workers who are their common law employees and workers who are not. This distinction is important, for example, when complying with payroll tax and withholding at the source provisions. It also affects the design and maintenance of tax qualified retirement plans and welfare plans. Common law status is based on a multi-factor test that seeks to identify the locus of control.

Staffing firms operating under the traditional temporary staffing model should generally qualify as common law employers for ACA purposes because they typically satisfy more than enough of the salient factors under the multifactor test. These include recruiting, screening, and hiring the workers; assuming responsibility as the employer of record for payment of wages and benefits and for withholding and paying employment taxes; establishing employment policies governing employee job performance and conduct; and exercising the right to discipline, terminate, or reassign the employees.

Necessary Terms

Where they seek protection under the special rule, clients generally ask that language complying with the rule be included in the staffing contract or even in statement-of-work contracts. In many instances, they also require the staffing firm to offer minimum essential coverage to its contract and temporary workers that is both affordable and provides minimum value, and to indemnify the client if it is assessed tax penalties as a consequence of the staffing firm’s failure to do so. Lastly, many clients are asking for complete transparency with respect to the additional costs of ACA compliance.

Document Compliance

Some staffing firms believe they can comply with the requirements of the special rule by charging either a flat fee-per-hour (e.g. $0.75) or a fixed percentage of the bill rate for all employees. But the final employer regulations make clear that, to comply with the rule, the staffing firm must charge the client a separate fee for each staffing firm employee that enrolls in the staffing firm’s plan. Hence, an across-the-board increase will not suffice.

A separate issue is whether the number of employees enrolled in the staffing firm’s plan and the additional fee charged for each employee must be explicitly set forth as a separate line item on a client invoice. The government has adopted this view in informal public comments, but there is no clear support for it in the final regulations. There would appear to be no compelling policy reason why the fee must be reflected on a client invoice as opposed to the staffing firm maintaining some method of internal recordkeeping that could be produced on request in the event of audit or investigation. Until formal guidance is issued, however, the prudent course would be for the staffing firm to show the higher fee on a client invoice. Because the rules don’t prescribe how frequently the client must be invoiced, a staffing firm arguably has flexibility in how often to bill the client for this charge.

For a thorough discussion of the issues described above, please visit read this document.