As a legal specialist on the Affordable Care Act, Balch & Bingham’s Pepper Crutcher has a lengthy list of advice for Mississippi businesses on the bubble for falling under the healthcare overhaul’s “employer mandate.”
Atop the list: Move beyond the mountain of misconceptions about the mandate.
“Typically, my first conversation is to disabuse them of all the bad information they have in their heads,” says Crutcher, a health care attorney in Balch & Bingham’s Jackson office who in recent months has spent about 1,800 hours pursuing answers to Affordable Care Act questions.
A starting point for employers is often to simply identify who is an employee of the business — an important distinction considering the employer mandate that will go into effect Jan. 1, 2015, applies to businesses with 50 or more full-time employees.
Getting the calculation correct is especially crucial for businesses on the 50-employee bubble. Often, misconceptions about the rules on full-time employee status cause employers to puzzle over why their current payroll tally does not match the government’s tally, according to Crutcher.
Typically, the confusion is rooted in the government having a different view of who an independent contractor is than employers do, he says.
“If they are working for you exclusively and not working for others, the government is very unlikely to agree with you that they are contractors.”
Just monitoring the time they spend completing a task or project can make them an employee, Crutcher notes. “If you are tracking their hours, the government is very likely to call them an employee.”
Equally important, he says, is whether the company tracks the delivery of a result provided by the contractor and how the contractor achieved the result. In a close call, the distinction between contract worker and employee can come down to how the worker must conduct himself in carrying out the work assigned by the company and how he interacts with other employees of the company, Crutcher says.
Whether intentional or not, the ACA’s creation of the individual health insurance exchange, which opens for enrollment on Oct. 1 with policies starting Jan, 1, gave the IRS a very effective way to determine if a company is correctly classifying a worker as a contractor.
“Most employers don’t see this coming,” Crutcher says. “The reason is there is a whole new mechanism to alert the IRS about misclassification – it’s called the exchange. It’s a wonderful way for the IRS to discover an employee withholding problem.”
Crutcher gives a scenario of a worker who files taxes as a 1099 independent contractor but goes to the exchange with a claim he is employed by a company that does not provide health insurance, a key requirement for getting a premium subsidy on the exchange. The exchange may ultimately deem the worker an employee regardless of his tax filings. In these instances, the IRS may force the employer to pay several years of withholding on the worker’s behalf, Crutcher says.
With the IRS eager to narrow the portion of the federal tax gap caused by employers not paying their share of an employees’ withholding taxes, companies should expect aggressive enforcement on the withholding front, he adds, and notes: “The IRS for years has been increasing its enforcement of withholding tax classifications.”
Now it has precisely the tool it has needed, he says.
“I would make sure all those employees you are treating as independent contractors really are independent contractors.”
Just as with the difficulties of getting employee classifications right, coming up with a correct full-time equivalency employee count poses challenges, according to Crutcher.
Some employers are already cutting workers’ hours to below 30 a week to avoid having them classified as full-time employees. But simply doing that may not be sufficient to avoid the 30-hour threshold for a full-time employee classification under the ACA, Crutcher cautions.
“Many employers think all they have to do is count work hours,” but they neglect to figure in the compensation the worker gets when not on the clock, he says, citing sick time, vacation time, personal time, time off for jury duty and time off for military duty and the like.
Employers should be concerned, he says, that they could have “a no-mans’ land between 24 hours and 38 hours.”
“You want to have a big gap so if you miss it some you won’t have people going over the edge” into full-time worker status.
Ensure your workers are “very part time or very full-time with no one in the middle,” he says. “You want to avoid having people you have to track very closely.”
Say you’ve done your homework and concluded, yes, the company meets the 50-employee threshold. Your next move should be a visit with your tax advisors, says Richard Roberson Jr., an attorney in Bradley Arrant Boult Cummings’ Jackson office who focuses on state and federal regulatory compliance.
“Get with your CPA and look at the tax and penalty implications of providing coverage and not providing coverage,” Roberson advises.
Some employers may conclude they will save money by paying the yearly $2,000 penalty and letting uninsured workers go to the individual exchange for coverage. On the surface, many business executives may think it’s an easy call – just pay the penalty, says human resources and benefits consultant Gary Kushner of Portage, Mich.
In a talk last fall at a Mississippi College summit on the Affordable Care Act, Kushner used the example of an Fortune 1,000 manufacturing company CEO who was entirely sure that paying the penalty made more fiscal sense that covering the employer share of premiums certain to rise under the ACA’s employer mandate.
The CEO’s first thought, Kushner said, was that he would save $8,000 a year on each employee. The CEO said it was a “no brainer.”
“I suggested it was not a non-brainer – not with the way they competed for talent… They competed hard to get the best people they could on to the factory floor.”
The talent is going ask for extra compensation because they must go off and buy their own insurance, Kushner warned the CEO.
He put a typical annual premium cost at $15,000 with the company picking up 80 percent at a cost of $12,000. So the CEO’s idea was to give the employee an extra $12,000 to help him buy coverage on the private market.
But here is the rub: The company would be on the hook to the government for a $2,000 penalty and would pay withholdings on the additional $12,000 in compensation; of course, the employee is not going to be happy about paying his share of taxes on the extra $12,000.
“So when all is done what use to cost you $12,000 now costs you $17,600 [with the fed penalty],” Kushner says.
In the end, the CEO conceded he did not have a no-brainer on his hands.
The Vision Factor
Employers whose businesses fall under the health-care insurance mandate face two types of penalties: one is for failing to provide adequate employee coverage and the other is for opting out of providing employee coverage. “The penalties are mutually exclusive, meaning companies will not be hit with both,” advises CPA Marsha Dieckman, a health care tax partner with HORNE CPAs in Ridgeland.
“Both penalties are triggered when an employee obtains a subsidy for coverage in the exchange,” she said in an email reply to several questions on the ACA issue.
Dieckman says none of the business clients she has talked to want to drop coverage and pay the per-employee penalty instead. “But it is being considered,” she notes.
Her advice is for companies to examine the cost-to-benefit and weight any conclusions to “the company’s vision and growth strategy.”
Yes, premium costs are already increasing as a result of the coming mandate, Dieckman says. “But, employee retention and how companies will meet the needs of their clients and customers is critically important in the overall discussion.”
As they decide what course to take, employers ought not lose sight of their overall goals, she advises.
Those businesses not now offering coverage and on the on the bubble are trying to guess at human behavior and determine the worst case scenarios to decide how to proceed, Dieckman says.
“There are definitely some employers that will find paying the penalty is worth eliminating the headache of it all.”
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