The factors that affect a ﬁrm’s decision to offer insurance or pay ﬁnes
By George Reardon
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.
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.
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.
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.
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.
George Reardon is special counsel with law firm Littler Mendelson LLC. He can be reached at email@example.com.
One strategy that has been getting attention recently is the so-called “bare bones” or “skinnymed” plan, based on the ACA’s surprisingly weak definition of the “minimum essential coverage” that employers must offer to avoid the heaviest type of penalty. Employers would offer all full-time employees a self-insured health plan that covers only non-catastrophic risks, such as preventive care and wellness benefits, thereby escaping the heavy “no offer” penalty based on the total number of full-time employees (less 30). But because “bare bones” coverage will fail ACA’s “minimum value” standard, these employers would incur the other type of penalty, assessed for each employee who obtains subsidized coverage from a state exchange. The hope is that, for various reasons, few employees would obtain such subsidies and that the total insurance and penalty costs would be less than the “no offer” penalty, after adjustment for taxes. Although this appears to be a gap or loophole that offends the purpose of ACA and that could be closed by regulations, some commentators believe that it will survive.
On July 2, the Obama Administration informally announced its intention to postpone the Affordable Care Act’s employer pay-or-play mandate and its related reporting features by one year, from Jan. 1, 2014, to Jan. 1, 2015. On July 9, the IRS issued a formal notice of the action, which did not materially add to the main points of the informal announcement. The rest of the law was unchanged by this action.
The employer mandate requires large employers (those with 50 or more full-time employees or equivalents) to either offer affordable, qualifying health insurance coverage or pay penalties to the government. It is expected to increase the operating costs of staffing firms dramatically, and, in recent months, most staffing firms have been wrestling with decisions on how to minimize its looming effects. The postponement means that no play or pay penalties will be payable for 2014. The IRS urges employers to practice reporting on their coverage in 2014 anyway (as soon as rules are published) and to maintain or expand their health coverage.
The government attributes the need for a postponement to shortcomings in the reporting rules. Some commentators have suggested additional reasons for the action, including political factors relating to the 2014 Congressional elections, the IRS’ failure (after more than three years) to finalize regulations on the penalty rules and coverage discrimination, and a desire to jumpstart the state insurance exchanges by driving employees to them who otherwise would have received new employer-sponsored coverage.
One apparent motive was surprising. Mere hours after it announced the postponement, the government urged federal courts to dismiss at least two cases challenging the ACA’s employer mandate, arguing that the postponement deprives the cases of the necessary urgency or “ripeness” (readiness for the court to resolve the issue.) This tactic could backfire, since it may give those federal courts the opportunity to resolve the ripeness issues by ruling that the postponement was beyond the power of the executive branch.
The administration admits that its decision was influenced by business groups, and the House of Representatives plans to investigate those influences. This action is not the first executive waiver of portions of the statute, and others are likely to follow. One risk of a generalized challenge to the executive branch’s unilateral carving on the law could be that other regulatory relaxations of the law — such as the proposed 12-month look-back rule for determining employees’ full-time status — could be declared invalid or be called into question.
But in the meantime, the one-year reprieve will come as welcome news to staffing firms, most of which still have no ready means for offering qualifying and affordable comprehensive insurance to their temporary employee populations and no clear rules on how the penalty alternatives will work. The extra year will give them the time to find coverage or confirm that it will not be available. It will also allow them to explore and install various cost reduction strategies, which can be fruitful whether or not the firms offer a health plan.