CWS 3.0: May 31, 2011 - Vol.3.13

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Feature: How Healthcare Reform Affects Temp Usage

In March 2010, Congress finally passed healthcare reform legislation, which immediately began to transform the rules governing health coverage for employees. While the burden of the reform may appear to fall on suppliers of contingent workers, companies that use contingent labor should none-the-less be familiar with the effects on their suppliers, as any effect on the supplier may be eventually passed on to them.

“Healthcare Reform” refers to the healthcare legislation passed in March 2010, including the Patient Protection and Affordable Care Act (PPACA), the Healthcare and Education Reconciliation Act (Reconciliation Act), and subsequent modifications, regulations and various agencies’ guidance. Healthcare reform remains a controversial work-in-progress.

Several legal challenges to the legislation are proceeding through the federal courts, and different courts have already reached conflicting conclusions about the constitutionality of the legislation. However, the Supreme Court has, to this point, decided to wait to address the issues. Congress has also begun to modify some aspects of the original legislation, such as the much-criticized changes to Form 1099 reporting requirements.

From a compliance perspective, the vast number of rules, regulations and guidance related to healthcare reform present a monitoring challenge for any employer that offers health benefits to its workers. Federal agencies have begun to issue regulations and guidance, and for some provisions, they have delayed enforcement until more detailed interpretations of the healthcare reform legislation are made available. While these enforcement delays provide some welcome relief for employers, they also add to the complexity of the reform process.

In the wake of healthcare reform, employers will need to implement plan changes and satisfy new reporting requirements. Another important question is how the so-called “pay or play” provisions of the legislation will be interpreted and implemented, as these may affect whether employers decide to continue offering health benefits to their employees or perhaps transition to using more contingent workers.

[subhed]Pay or Play

Under the current form of the legislation, beginning in 2014, employers with at least 50 full-time employees will be assessed a penalty of $2,000 annually per full-time employee if it does not offer “minimum essential coverage” under an “eligible employer-sponsored plan.” In addition, if an employer offers “minimum essential coverage” but an employee receives subsidized coverage through an open market option, called an exchange, the employer may also have to pay a penalty. In other words, an employer might need to pay a penalty for providing coverage that is not adequate to satisfy the regulations.

The rules concerning “pay or play” involve specific calculations to determine the applicability and exact amounts of the penalties, which are determined on a monthly basis. While the staffing industry continues to lobby against this provision, companies should be prepared to discuss with their staffing providers which party should provide the required coverage for full-time contingent employees or pay the “pay-or-play” penalty. Alternatively, they can work out coverage ways fee can be avoided, such as through limiting contingents to part-time hours, which is discussed further below.

Key Requirements of Healthcare Reform

Many of the most important changes in healthcare reform will have a broad impact on all employers that have offered health benefits. Some provisions of healthcare reform apply universally, but others do not apply to plans with “grandfathered” status. Grandfathered plans still have to comply with pre-healthcare-reform requirements, but they are exempted from certain provisions of the new legislation.

The staggered implementation of healthcare reform’s requirements means that employers have time to assess compliance strategies, but it also means that employers will have an increased need to monitor new regulations and guidance. Businesses that use contingent talent will have ongoing negotiations with contingent labor suppliers regarding the gradual shifting of costs as the provisions of healthcare reform are implemented. Both contingent talent consumers and staffing firms will also be faced with the need to assess their own compliance costs.

Healthcare reform involves an array of new requirements, but certain mandates or provisions are particularly prominent. Among the most noteworthy are: the adult-child mandate, which requires most plans to extend coverage to dependent children under age 26; the removal of lifetime limits on essential health benefits; the phasing out of annual limits on essential health benefits; required coverage of “preventive services;” and the establishment of specific internal review and external appeals processes.

Plans will also have to meet new administrative and reporting requirements. They will be required to issue a four-page summary of benefits and coverage, and they will be required to report health plans costs on an employee’s Form W-2. Additional reporting requirements will take effect in 2014. The area of employee benefits was already a complicated issue for staffing firms, and healthcare reform will only add to that complexity.

Specific Issues for Staffing Industry

Companies that use contingent workers should also be aware that some provisions of healthcare reform will present greater challenges to the staffing industry than to other economic sectors, from both compliance and business model perspectives. For example, compliance with new enrollment and waiting period requirements will likely present specific challenges for staffing firms that experience rapid worker turnover in some job categories. Contingent labor suppliers will look to their customers to cooperate on engagement terms to deal with these major challenges; and companies that use contingent labor should know that this is coming so that they can respond in a way that is most productive for all parties.

Currently, employers can impose waiting periods before a worker is eligible to participate in a health plan. These waiting periods allow the employer to avoid the administrative burden and expense of dealing with benefits for workers who only have a brief association with the employer. In 2014, however, healthcare reform will generally  impose a 90-days maximum waiting period.

Another major change that could have an impact on the staffing industry is the automatic enrollment provision that will apply to certain larger employers, most likely in 2014. At this point, the exact requirements of this provision are unclear and compliance will not be required until the U.S. Department of Labor issues regulations in this area. The automatic enrollment provision amends the Fair Labor Standards Act (“FLSA”), and it is limited to employers that offer a health benefits plan and have 200 or more “full-time” employees. Once the provision is implemented, affected employers will be required to automatically enroll full-time employees in an employer health benefits plan. It remains unclear what opt-out provisions will be available for employers or for employees.

A key issue regarding the automatic enrollment provision will be the definition of “full-time employee.” If “full-time” is defined as 30 hours per week, some employers may have a strong incentive to limit as much of their workforce as possible to that 30 hour cut-off. Indeed, the requirement may induce some companies to turn to staffing firms for more of their workforce needs in order avoid that hourly threshold..

Before final passage of healthcare reform legislation, some in the staffing industry were concerned that the proposed pay-or-play penalties would apply to part-time workers, and urged legislators to pro-rate penalties for part-time workers. In the final legislation, part-time workers were excluded entirely, which in some ways is better for the staffing industry than proration of penalties. In order to take advantage of the 30 hour threshold, however, companies that use contingents and their staffing suppliers will need to cooperate with one another. One particular challenge will be workers who provide services for two or more staffing company clients at the same time.

Consumers of contingent labor should be aware of these challenges facing their suppliers and should be prepared to engage in these discussions, and should begin strategizing how to best position with their suppliers to minimize costs while staying in compliance with these complex rules.

Conclusion

With the gradual implementation of healthcare reform, each year will bring new compliance and reporting obligations for employers. Healthcare reform may lead greater contingent worker usage as companies seek to limit their healthcare obligations. That same shift could, however, put greater pressure on a staffing firm’s business model if it becomes difficult to recover, or legitimately avoid, the additional costs of providing health coverage to workers. Companies and their staffing firms will need to closely monitor the implementation of healthcare reform’s many provisions and seek advice to ensure compliance with applicable laws and regulations. In addition, they will need to communicate and cooperate closely in order to maximize efficiency.

Eric Rumbaugh and John Barlament are partners and Mark Lotito is an associate with the law firm of Michael Best & Friedrich LLP, headquartered in Milwaukee. They represent employers in labor, employment and employee benefit law matters.

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