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Paragraph in ACA final rules raises questions

February 25 2014

A paragraph in the final employer mandate regulations of the Affordable Care Act released earlier this month raised questions by some over whether staffing firms are common law employers under the ACA. The paragraph also indicates staffing buyers would have to pay more for temporary workers if they are to be considered covered employees under the ACA for the staffing buyers’ own calculations.

Here’s the paragraph:

"Under this same reasoning, if certain conditions are met, an offer of coverage to an employee performing services for an employer that is a client of a professional employer organization or other staffing firm (in the typical case in which the professional employer organization or staffing firm is not the common law employer of the individual) (referred to in this section IX.B of the preamble as a 'staffing firm') made by the staffing firm on behalf of the client employer under a plan established or maintained by the staffing firm, is treated as an offer of coverage made by the client employer for purposes of section 4980H. For this purpose, an offer of coverage is treated as made on behalf of a client employer only if the fee the client employer would pay to the staffing firm for an employee enrolled in health coverage under the plan is 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."

Staffing Industry Analysts’ Research Analyst Andrew Braswell noted the paragraph during a review of the 200-page recently released guidance. “First, the phrase ‘the typical case in which the … staffing firm is not the common law employer of the individual’ gives pause, implying that IRS does not view the staffing firm as common law employer in most scenarios, and the staffing firm therefore would not be subject to the employer mandate,” said Braswell. “However, that interpretation would seemingly belie the considerable devotion of space elsewhere in the guidance to the specific application of the play-or-pay rules to staffing firms.”

“Secondarily, the excerpt states the client must pay a higher fee for temporary workers that are enrolled in a plan maintained by a staffing firm in order for that offer of coverage to satisfy the client’s obligation under the employer mandate," according to Braswell. “This would ostensibly determine which party will ultimately cover the cost of providing coverage under ACA, though it does not specify how much higher that fee should be or what proportion of the cost must pass through. It would also appear to preclude a staffing firm from offsetting the cost of providing coverage by raising bill rates uniformly across all of its temporary workers.”

George Reardon, special counsel at law firm Littler Mendelson, also looked at the regulations.

Here are Reardon’s comments:

"The final IRS regulations on the employer mandate apply a common law test — based on control of the details of the work — to determine whether, for ACA purposes, contingent employees are to be counted as the employees of their staffing firms or as employees of the customers to which they are assigned. It is not clear how vigorously IRS intends to apply this test. Very similar tests exist for other purposes (such as FICA administration, FUTA administration, and income tax withholding), but in those areas, staffing firms have long performed those roles directly without objection from IRS.

"The regulations discuss when staffing customers can take credit for offering coverage to contingent employees eligible for staffing firms’ health plans. A parenthetical remark refers to “the typical case in which the professional employer organization or staffing firm is not the common law employer of the individual.” One wonders whether IRS is saying 1.) that it is typical overall for staffing customers and not staffing firms to be the common law employers and therefore usually OK for customers to take credit for offered coverage, or 2.) that, in typical manifestations of the few cases where staffing customers are the common law employers, customers may take credit for the offered coverage. An aggressive application of the test could be extremely disruptive to the staffing industry.

"The regulation goes on to say that customers who are the common law employers of contingent workers can take credit for the staffing firm’s coverage only if they pay the staffing firms more for covered employees than for non-covered employees. The reason for this rule is not stated or otherwise obvious. However, if the common law test is vigorously applied, this additional rule would also seem to discourage the practice of “spreading” the additional insurance costs generated by full-time assigned employees over the rates for all assigned employees."

Ed Lenz, senior counsel at the American Staffing Association, said he did not believe the paragraph would adversely impact temporary staffing firms. Lenz believes the wording appears aimed at professional employer organizations and staffing firms that look like PEOs that do not typically operate as common law employers.

This is a complicated area, Lenz said, but the rules in the paragraph appear not apply to temporary staffing firms. They would apply to situations where the staffing firm is not the common law employer, such as with PEOs and similar firms.

And when the paragraph discusses the need for an extra fee, Lenz points out that temporary staffing firms typically send a client a bill that incorporates all costs. Usually, it’s a PEO that would charge clients a separately negotiated fee on top of the wages and statutory benefits for workers. This provides further indication that the drafters of the rules were referring to PEOs and PEO-like entities.

Staffing Industry Analysts’ Braswell reports that notwithstanding the use of the descriptor “final” in the title of this regulatory release, it is expected that there will be continued refinement or revision of the rules through the implementation of the employer mandate on Jan. 1 and beyond.

To go to the final rule, click here.

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