Determining your Common Law Employees to Comply with the ACA

Compliance with the Affordable Care Act just got a little more demanding for employers – determining which of your employees are full-time and which are not is now a major portion of the final Affordable Care Act regulations published February 2014 in the Federal Register.

In order to determine whether an employee is a full-time employee, you first need to determine who employs the full-time employee. To identify the proper employer, the final regulations use the common law employer/employee standard. In two-party employment arrangements (where the employer hires the employee directly without an intermediary) identifying the common law employer and the common law employee is a simple matter.

According to an article by Alden J. Bianchi on the Employee Benefit Advisor web site, this  determination gets exponentially more complicated when the employee is instead hired through a staffing firm or professional employer organization.

In that case, it’s a good question: Who is the common law employer/employee? For federal tax code purposes and ERISA, employers have historically been required to differentiate between workers who are their common law employees and workers who are not. This is important when complying with payroll tax and withholding at the source provisions. It also affects the choices you make regarding tax-qualified retirement plans and welfare plans.

ACA employer shared responsibility rules – codified at Internal Revenue Code 4980H – add a powerful reason to properly determine a worker’s status as a common law employee: according to Bianchi’s article, if at least one of an employer’s full-time (common law) employees qualifies for a premium tax credit from a public insurance exchange, then the employer may have liability under the ACA’s employer shared responsibility requirements.


  •  Employer A has 300 full-time employees. Of these, 250 are direct hires, and 50 are hired through a staffing firm. During the calendar year, Employer A determines that the 250 direct hires are its common law employees and makes an offer of coverage under its group health plan to all of these employees. The staffing firm also makes an offer of coverage to all of its full-time employees, including the 50 workers placed with Employer A.
  • On audit, it is determined that the 50 workers placed through the staffing firm are Employer A’s  common law employees – not the staffing firm. Employer A is deemed to have made an offer of coverage during the year, not to 100% of its full-time (common law) employees as it anticipated, but instead to only 83%. Therefore, if at least one of Employer A’s employees qualified for a premium tax credit from a public insurance exchange, Employer A would incur a non-deductible excise tax for the year of over $500,000.

Already, comments submitted in response to the proposed Code § 4980H regulations have urged the Treasury Department and the IRS to consider adoption of a special rule under which an offer of coverage would be counted for Code § 4980H purposes if made by another, unrelated entity. This could be under the circumstances outlined in the above examples (or in the case of a multiemployer or single employer Taft-Hartley plan). The final regulations clarify that for purposes of Code § 4980H, an offer of coverage includes an offer of coverage made on behalf of an employer by an unrelated entity. However, according to Bianchi’s article, where the employer is a client of a “professional employer organization or other staffing firm,” there is a further requirement:

“The fee the client employer would pay to the staffing firm for an employee enrolled in health coverage under the plan [must be] 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.”

The combined reference to “professional employer organization or other staffing firm” may be problematic. In  informal comments, representatives of the Treasury Department and the IRS, indicate that these terms have no independent significance. A common law employer status does not depend on whether the third-party is a PEO or a staffing firm. But, PEOs and staffing firms are different. At least since 2002 (as a consequence of IRS guidance dealing with 401(k) plans maintained by professional employer organizations) it has been take for granted that a PEO is not a common law employer. Historically, contract and temporary workers placed by staffing firms have been treated as common law employees of the staffing firm and not the client organization.

There’s nothing to prevent a staffing firm from taking advantage of the special rules relating to “offers of coverage on behalf of other entities,” but, according to Bianchi’s article, it will require some modifications to each firm’s administrative systems. Though a nominal amount appears to be sufficient, the rule omits a conclusion about how much higher the fee must be in cases where the worker placed by the staffing firm elects coverage. What’s less clear is whether the increased fee must appear as a higher amount in the bill rate, participant-by-participant, or whether the incremental charge could simply be included in the aggregate bill rate.

According to Bianchi, there is a lingering issue not addressed in the final regulation (since it is outside the jurisdiction of the Treasury Department and the IRS): where a staffing firm that makes an offer of coverage to a worker is determined not to be the common law employer, the plan under which the offer is made is most likely a multiple employer welfare arrangement. Such a plan would be required to file a Form M-1 annually with the Department of Labor. If the plan was self-funded, then it might be treated as an unlicensed insurance company for state insurance law purposes. If the plan is fully-insured, in most states it could not cover small groups (many state insurance codes do not permit combining a number of small group plans to make a large group plan). While many of the PEOs that offer group health plan coverage have claimed and duly report their multiple employer welfare arrangements status, to our knowledge no staffing firm has done so to date.

The provisions of the final regulations governing offers of coverage on behalf of other entities should be welcome. It will take some time, however, for standards and best practices to emerge. After all, the relationship to other federal laws and state insurance codes will have to be sorted out.

The Affordable Care Act is working reasonably well, but there are important distinctions to be made – choices that can make a big difference in your business. For expert advice, turn to the insurance professionals at Van Beurden Insurance. Click or call me today and I’ll be happy to schedule a convenient appointment to go over the details.

Brad Knerr

Sales Associate | Los Osos