Effective Jan. 1, 2014, the Affordable Care Act (ACA) imposes a penalty on large employers that do not offer minimum essential coverage to “substantially all” full-time employees and dependents. Large employers that do offer coverage may still be liable for a penalty if the coverage is unaffordable or does not provide minimum value.
These rules can be particularly challenging when a temporary staffing agency or professional employer organization (PEO) is involved. The Internal Revenue Service (IRS) has provided some guidance on issues for these entities in regulations issued in early 2013. However, additional guidance would be welcome.
On Jan. 2, 2013, the IRS released long-awaited proposed regulations on the ACA’s employer penalty provisions. These regulations include a definition of “employee” and a look-back measurement method for identifying full-time employees for penalty purposes. Although the proposed regulations are not final, employers may rely on them until further guidance is issued.
The proposed regulations recognize that temporary staffing agencies may find it difficult to apply the look-back measurement period for determining full-time employee status to their employees because of the distinctive nature of their employees’ work schedules. The IRS is accepting comments on whether to develop special rules for temporary staffing agencies with respect to the variable hour classification, including whether a special safe harbor or presumption should be created. However, unless and until the IRS provides more guidance specific to temporary staffing agencies, the general rules on determining full-time employee status apply to these employers.
who is an employee?
A common law standard applies to define the terms “employee” and “employer.” Under this standard, an employment relationship exists when the person for whom the services are performed has the right to control and direct the individual who performs the services with respect to the result to be accomplished, along with the details and means by which it is done. This is a factual determination and is not necessarily dependent on the label the employer has placed on the relationship in the past.
In general, leased employees are not considered employees of the service recipient for purposes of ACA’s pay or play provisions.
who is a full-time employee?
A full-time employee is an employee who was employed on average at least 30 hours of service per week. The proposed regulations treat 130 hours of service in a calendar month as the monthly equivalent of 30 hours per service per week. To determine an employee’s hours of service, an employer must count:
- Each hour for which the employee is paid, or entitled to payment, for the performance of duties for the employer; and
- Each hour for which an employee is paid, or entitled to payment by the employer, on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military leave or leave of absence.
Under the proposed regulations, all periods of paid leave must be taken into account; there is no limit on the hours of service that must be credited.
optional safe harbor method
ACA suggests that the determination of full-time employee status, and application of the pay or play penalty, involves a month-to-month analysis. However, the IRS recognizes that applying these rules on a monthly basis could cause practical difficulties for employers, particularly with respect to employees with varying hours or employment schedules, and could result in employees moving in and out of employer coverage on a monthly basis.
To address these concerns, and to give employers flexible and workable options and greater predictability, the IRS proposed an optional look-back measurement method as an alternative to the month-to-month method for determining full-time employee status.
This safe harbor method involves a measurement period for counting hours of service, a stability period when coverage may need to be provided depending on an employee’s full-time status and an administrative period that allows time for enrollment and disenrollment. An employer has discretion in deciding how long these periods will last, subject to specified IRS parameters.
The details of the safe harbor vary based on whether the employees are ongoing or new, and whether new employees are expected to work full time or are variable or seasonal employees.
Employers can use this optional safe harbor method for new variable hour employees, seasonal employees and ongoing employees. As long as the employer complies with the safe harbor requirements, it will not be subject to penalties for these employees. However, if an employee is expected to work full-time, the employer must offer coverage to that employee by the end of the first three calendar months of employment.
Temporary Staffing Agencies
It is anticipated that many new employees of temporary staffing agencies will be variable hour employees under the proposed regulations because their periods of employment at 30 or more hours per week are reasonably expected to be of limited duration with the potential for significant gaps between assignments. In addition, there is often considerable uncertainty as to the likelihood and duration of assignments and as to whether an individual will accept any given assignment and will continue in it.
The IRS is accepting comments on whether to develop special rules for temporary staffing agencies with respect to the variable hour classification, including whether a special safe harbor or presumption should be created. However, unless and until the IRS provides more guidance specific to temporary staffing agencies, the general rules on determining full-time employee status apply to these employers.
The IRS also expects to include an anti-abuse rule in the final regulations to prevent employers from using temporary staffing agencies to avoid the pay or play rules. Under the anticipated anti-abuse rule, if an individual performs services as an employee of an employer, and also performs the same or similar services for that employer in the individual’s purported employment at a temporary staffing agency, then all the hours of service are attributed to the employer for purposes of the pay or play rules.
Similarly, to the extent an individual performs the same or similar services for the same client of two or more temporary staffing agencies, it is anticipated that:
- All hours of service for that client are attributed to the client, if the client is the common law employer; or
- All hours of service are attributed to one of the temporary staffing agencies that purports to employ the individual with respect to services performed for that client, if the client is not the common law employer.
Professional Employer Organizations
Because of its unique employment structure, a professional employer organization (PEO) may find it difficult to determine who the employer is with respect to each employee for purposes of the pay or play rules. A PEO is an entity that takes on certain employee management tasks for a client company (such as employee benefits, payroll, recruiting and training) by hiring the employees of that company. Through this practice, known as co-employment, the PEO becomes the employer of record for tax purposes, while the client company maintains control over the employees’ day-to-day activities.
The proposed regulations do not address how the pay or play provisions apply to PEOs. Although the general rule is that leased employees are not considered employees of the service recipient for purposes of ACA’s pay or play provisions, it is still unclear as to how this applies to PEOs. There is some indication that the pay or play provisions will attach at the client level, thus making the client company the “employer” for this purpose. However, until guidance is issued on the pay or play rules with respect to PEOs, these organizations should use the common law standard to determine whether an employment relationship exists.
Source: Internal Revenue Service