Independent Contractors

ACA “repeal” proposals at this point seem like zombie extras – walking dead, and none of them purports to repeal employer mandate taxes that accrued in 2015. Collection is coming; only the timing is in question.

ACV 2.0 is the program designed in 2015 to enable the IRS to identify, starting in early 2017, non-compliant Applicable Large Employers.  The April 7, 2017 report of the U.S Treasury Inspector General for Tax Administration (TIGTA) included this summary of its status:

[I]mplementation of the ACV system has been delayed to May 2017. IRS management indicated that the delay is due to incorporating new requirements into ACV system development to address data inconsistencies, i.e., TY 2015 Forms 1094-C and 1095-C containing errors, missing entries, and contradictory form entries. As a result, the IRS is now having to develop an automation tool outside of the ACA system in an attempt to identify the Applicable Large Employers subject to the § 4980H(a) Employer Shared Responsibility Payment. IRS management advised us that as of January 18, 2017, the IRS was testing the automation tool that it developed and planned to deploy it by March 2017.

IRS management also explained that a lack of funding has resulted in the IRS not developing ACV capability to identify Applicable Large Employers not filing Forms 1094-C and 1095-C as required, i.e., nonfilers, or to identify the Applicable Large Employers potentially subject to the Employer Shared Responsibility Payment for offering health insurance coverage in TY 2015 that did not provide minimum value or was not affordable, i.e., § 4980H(b). Management further noted that the complexities associated with developing the programming requirements associated with the § 4980H(b) provision continue to be a challenge. As a result, IRS management indicated that they are also planning to develop an automation tool to identify nonfilers and Applicable Large Employers subject to the § 4980H(b) Employer Shared Responsibility Payment. IRS management advised us that as of January 18, 2017, the IRS is testing the automation tool that it developed and is planning to deploy it by March 2017. As part of our ongoing ACA audit coverage, we will evaluate the effectiveness of the new automation tools and eventual implementation of the ACV system.

ACV 2.0 was designed as a companion to an “ACA Case Management” system that was cancelled in June 2016 after about $7M of sunk development cost.  Cancellation was related to development of an IRS-wide Enterprise Case Management system, about which the TIGTA report said:

The ACA Case Management system functional components are being transferred to the Enterprise Case Management system. On November 4, 2016, IRS management explained that it plans to use an existing document control system to provide the needed case management capabilities, including establishing manual processes for working the Employer Shared Responsibility Payment cases, as an interim alternative until the Enterprise Case Management system can provide case management for ACA-related compliance activities. As part of our ongoing ACA audit coverage, we plan to evaluate the IRS’s efforts to implement processes to ensure Applicable Large Employer compliance with the Employer Shared Responsibility Provision and assessment of the Employer Shared Responsibility Payment.

(Emphasis ours.)  So, is ACV 2.0 ready for roll-out?  And will employer mandate tax enforcers have ECM tools, or will they be using manual processes to generate and follow-up on letters notifying suspected ALEs of suspected employer mandate non-compliance?

Many such letters may be entirely accurate and timely, but neither should be assumed by the recipient.

 

And if you are an ACA “Applicable Large Employer” (ALE), it was.

The American Health Care Act, H.R. 1628, with last minute amendments noted in H. Rep. 115-109, passed the House of Representatives on Thursday afternoon, May 4.  Here is a very brief summary of the 131 pages of combined text, focused on changes for Applicable Large Employers.

The employer mandate tax isn’t repealed, but AHCA § 206 reduces the tax to $0 for 2016 and beyond.  This leaves the IRS free to assess and collect 2015 employer mandate taxes from Applicable Large Employers, so don’t ignore notices you may receive soon.  But if the employer mandate goes away, so do severe complications for collective bargaining and employee leasing arrangements.

AHCA § 207 suspends the Cadillac Plan tax until 2025, by which time we’ll all have Cadillacs, very probably.

Employer coverage reporting requirements and associated penalties are untouched by the AHCA.  If you like filing your Forms 1095-C, you can keep filing your Forms 1095-C … or even if you don’t.

While the ACA’s anti-retaliation provision (29 U.S.C. § 218c) survives, its danger should subside, practically speaking.  Employee subsidies to buy Exchange insurance present the biggest employer retaliation exposure, it seems to us, and AHCA § 203 ends those subsidies after 2019.  AHCA § 205 sets the individual mandate tax to $0 after 2015, which should reduce the pressure on low wage employees to seek Exchange coverage and related subsidies in 2018 and 2019.

Of course, none of this matters unless the Senate goes along.  There must be a parliamentary ruling that the AHCA may be considered under budget reconciliation rules, so that only 51 votes are needed.  Then, with whatever changes are made, it must find at least 50 votes, plus the Vice President.  Senate changes would require House approval thereafter.  We’re still in Act II.  It’s still messy, but it’s moving.

Watching from afar the Scouts attempting to earn their orienteering merit badges, we could see it on the boys’ faces.  They were lost; they were scared.  They should have reached their destination an hour ago.  Soon, these woods would be dark.   The compass holder, the map marker and the step counter resumed their running argument. We wondered whether to intervene.  Then, the class clown smiled . . . and pointed . . . at a rusted, single-wide trailer they had seen before, very near their departure point.  In five hours, they had come full circle.  They had done a lot wrong and were glad just to know how to get back to our campfire. Success could wait.

And so it is with ACA repeal.  A better-planned, better-executed effort may be mounted, but probably not soon.  Between now and then, 2015 employer mandate taxes will be assessed and collected, and perhaps 2016 taxes, too.  OSHA will investigate the retaliation complaints of employees discharged after triggering those tax assessments by seeking ACA Marketplace subsidies.  Form 1094-C / Form 1095-C reporting penalties will be imposed.  Group health plans will be audited for ACA compliance.  Temp staffing and employee leasing arrangements will be disrupted by those developments.  Consequently, we now return you to our regularly scheduled program.  If ACA compliance has been sidelined or forgotten in your organization, now would be a good time to tune-in.

In the ACA realm, change is the only constant, so don’t take this to the bank.  We’re telling you what we see for the first time, on a first reading of the draft 2016 Forms and Instructions that the IRS has released since July 7.  “Applicable Large Employers,” their contractors and consultants will use these Forms in early 2017 to report to the IRS coverage offers (and self-insured coverage) extended during 2016. We apologize for the unusual length of this article, but reading it all yourself would take far longer.  Believe us.

Form 1094-C

As for 2015 coverage reporting, each ALE Member will file this to summarize data about its accompanying Forms 1095-C. There’s only one substantive difference for 2016 coverage reporting – Line 22, Box “B,” “Qualifying Offer Method Transition Relief,” which was available only for 2015 coverage, is gone, and Box “B” is now “Reserved.”

In part III, “Section 4980H” was inserted before “Full-Time Employee Count for ALE Member.”  We infer that many 2015 filers were unaware of the important differences between the § 4980H term “full-time” and the term as defined in their policies and plans.  See also page 9 of the Instructions.

Form 1095-C

Just beneath the Form’s title, the IRS has added this instruction to the recipient employee: “Do not attach to your tax return. Keep for your records.”  Sounds like the IRS was deluged this filing season.

The Line 15 title, “Employee Share of Lowest Cost Monthly Premium, for Self-Only Minimum Value Coverage,” was abbreviated.  It’s now, “Employee Required Contribution (see instructions).” Part III references to “SSN” now say “”SSN or other TIN.”

The Instructions for Recipient note that the 9.5% affordability figure is inflation-adjusted.  See also page 13 – 9.56% for plans beginning in 2015 and 9.66% for plans beginning in 2016.  There are short explanations of three, Form 1095-C, Line 14, Series 1 Code changes.  Code 1I, “Qualifying Offer Transition Relief,” is gone, replaced by “Reserved,” as on Form 1094-C, Line 22.  New Code 1J reports, “Minimum essential coverage providing minimum value offered to you; minimum essential coverage conditionally offered to your spouse; and minimum essential coverage NOT offered to your dependent(s).”  New Code 1K indicates, “Minimum essential coverage providing minimum value offered to you; minimum essential coverage conditionally offered to your spouse; and minimum essential coverage offered to your dependent(s).”

2016 Instructions for Forms 1094-C and 1095-C

Do government forms ever get shorter from year to year?  Seventeen pages of 2015 instructions have expanded to 19, and the font is no bigger.

The revisions recited above appear on page 1, under the heading “What’s New.” Immediately thereafter, the IRS advises close attention to the disappearance in 2016, for calendar year plans, of transitional relief that was offered only for 2015.  And, there’s a link to the IRS page that details technical aspects of filing through the IRS AIR system – https://www.irs.gov/for-tax-pros/software-developers/information-returns/affordable-care-act-information-return-air-program.

On page 1 and throughout, references to filing by “employers” have been changed to speak of filing by “ALE Members.” The “Who Must File” section expanded to emphasize that each EIN within a controlled group must file if the group as a whole is an Applicable Large Employer, based, most commonly, on the prior year’s employment data.  That’s nothing new, but maybe some missed that point in 2015.

The explanation of self-insurer reporting on page 2 is longer than last year, and perhaps clearer, but not substantively new.

Specific Instructions for Form 1094-C

The first substantial re-write begins on page 2, providing much-needed clarification of when and how an ALE Member may file multiple Forms 1094-C.  Here it is.

A Form 1094-C must be filed when an ALE Member files one or more Forms 1095-C. An ALE Member may choose to file multiple Forms 1094-C, each accompanied by Forms 1095-C for a portion of its employees, provided that a Form 1095-C is filed for each employee for whom the ALE Member is required to file. If an ALE Member files more than one Form 1094-C, one (and only one) Form 1094-C filed by the ALE Member must be identified on line 19, Part I as the Authoritative Transmittal, and, on the Authoritative Transmittal, the ALE Member must report certain aggregate data for all full-time employees and all employees, as applicable, of the ALE Member.

Example 1. Employer A, an ALE Member, files a single Form 1094-C, attaching Forms 1095-C for each of its 100 full-time employees. This Form 1094-C should be identified as the Authoritative Transmittal on line 19, and the remainder of the form completed as indicated in the instructions for line 19, later.

Example 2. Employer B, an ALE Member, files two Forms 1094-C, one for each of its two operating divisions, Division X and Division Y. (Division X and Division Y are units of the same ALE Member, and thus both report under the same EIN; they are not members of an Aggregated ALE Group.) Attached to one Form 1094-C are Forms 1095-C for the 200 full-time employees of Division X, and attached to the other Form 1094-C are Forms 1095-C for the 1,000 full-time employees of Division Y. One of these Forms 1094-C should be identified as the Authoritative Transmittal on line 19, and should include aggregate employer-level data for all 1,200 full-time employees of Employer B as well as the total number of employees of Employer B, as applicable, as required in Parts II, III, and IV of Form 1094-C. The other Form 1094-C should not be identified as the Authoritative Transmittal on line 19, should report on line 18 only the number of Forms 1095-C that are attached to that Form 1094-C, and should leave the remaining sections of the form blank as indicated in the instructions for line 19, later.

Note. Each ALE Member must file its own Forms 1094-C and 1095-C under its own separate EIN, even if the ALE Member is part of an Aggregated ALE Group. No Authoritative Transmittal should be filed for an Aggregated ALE Group.

Example 3. Assume that Employer A from Example 1 is a member of the same Aggregated ALE Group as Employer B from Example 2. Accordingly, Employer A and Employer B are separate ALE Members filing under separate EINs. Forms 1094-C should be filed in the same manner indicated in Examples 1 and 2. Employer A should include only information about employees of Employer A in its Authoritative Transmittal, and Employer B should include only information about employees of Employer B in its Authoritative Transmittal. No Authoritative Transmittal should be filed for the Aggregated ALE Group reporting combined data for employees of both Employer A and Employer B.

Similar rules apply for a Governmental Unit that has delegated its reporting responsibilities for some of its employees to another Governmental Unit—see Designated Governmental Entity (DGE) in the Definitions section of these instructions for more information. In the case of a Governmental Unit that has delegated its reporting responsibilities for some of its employees, the Governmental Unit must ensure that among the multiple Forms 1094-C filed by or on behalf of the Governmental Unit transmitting Forms 1095-C for the Governmental Unit’s employees, one of the filed Forms 1094-C is designated as the Authoritative Transmittal and reports aggregate employer-level data for the Governmental Unit, as required in Parts II, III, and IV of Form 1094-C.

Example. County is an Aggregated ALE Group made up of ALE Members School District, Police District, and County General Office. School District designates the state to report on behalf of the teachers and reports for itself for its remaining full-time employees. In this case, either the School District or the state must file an Authoritative Transmittal reporting aggregate employer-level data for the School District.

Page 3 does the same to explain when one employee may be reportable by multiple ALE Members.

[A] full-time employee who works for more than one ALE Member that is a member of the same Aggregated ALE Group must receive a separate Form 1095-C from each ALE Member. For any calendar month in which a full-time employee works for more than one ALE Member of an Aggregated ALE Group, only one ALE Member is treated as the employer of that employee for reporting purposes (generally, the ALE Member for whom the employee worked the greatest number of hours of service), and only that ALE Member reports for that employee for that calendar month. The other ALE Member is not required to report for that employee for that calendar month, unless the other ALE Member is otherwise required to file Form 1095-C for that employee because the individual was a full-time employee of that ALE Member for a different month of the same calendar year. In that case, the individual may be treated as not employed for that calendar month. If under these rules, an ALE Member is not required to report for an employee for any month in the calendar year, the ALE Member is not required to report for that full-time employee for that calendar year. For a description of the rules related to determining which ALE Member in an Aggregated ALE Group is treated as the employer for a month in this situation, see the definition of Employee.

Example. Employer A and Employer B are separate ALE Members that belong to the same Aggregated ALE Group. Both Employer A and Employer B offer coverage through the AB health plan, which is an insured plan. In January and February, Employee has 130 hours of service for Employer A and no hours of service for Employer B. In March, Employee has 100 hours of service for Employer A and 30 hours of service for Employer B. In April through December, Employee has 130 hours of service for Employer B and no hours of service for Employer A. Employer A is the employer of Employee for filing purposes for January, February, and March. Employer A should file Form 1095-C for Employee reporting offers of coverage using the appropriate code on line 14 for January, February, and March, should complete lines 15 and 16 per the instructions, and should include Employee in the count of total employees and full-time employees reported for those months on Form 1094-C. For the months April through December, on Form 1095-C, Employer A should enter code 1H (no offer of coverage) on line 14, leave line 15 blank, and enter code 2A (not an employee) on line 16 (since Employee is treated as an employee of Employer B and not as an employee of Employer A in those months), and should exclude Employee from the count of total employees and full-time employees reported for those months on Form 1094-C.

It’s hard to read, but we’re glad it’s there.  Also on page 3, the IRS notes that the paper filing date will be February 28, 2017 and the e-filing date will be March 31, 2017.  This year, extensions will be available only by request, and page 3 includes instructions about where to get and how to use Form 8809 for that purpose.

Page 4 discusses e-filing rules at greater length than last year and notes the penalty increase from $250 to $260 per Form.  See also page 6.  But it’s not all gloom and doom.

If you are required to file electronically but fail to do so, and you do not have an approved waiver, you may be subject to a penalty of $260 per return for failure to file electronically unless you establish reasonable cause. However, you can file up to 250 returns on paper; those returns will not be subject to a penalty for failure to file electronically. The penalty applies separately to original returns and corrected returns.

The correction “how to” chart on page 5 adds the requirement to correct a Form 1094-C Authoritative Transmittal if the original filing incorrectly reported the other members of the ALE Group.

Page 6 notes that Forms 1095-C are to be delivered to the employee recipients by January 31, not February 1, as last year.

Page 7 clarifies that Code 1A, “Qualifying Offer Method,” properly entered on Line 14 of Form 1095-C relieves the ALE Member from any obligation to fill the related box on Line 15 or on Line 16.

Page 9 clarifies that employers sponsoring non-calendar year plans may have early 2016 months of 2015-only transition relief, because those months were part of the 2015-2016 plan year.  This includes the 50-99 “smaller large employer” relief and the 70% offer transitional relief that applied only for 2015.  Page 9 also notes that an employee who terminates during a 2016 stability period, having been measured full-time in the associated, prior measurement period, must be reported on Form 1094-C as a full-time employee, regardless of his or her average hours of service during 2016.

Specific Instructions for Form 1095-C

Page 10 notes that the ALE Member contact listed on Line 10 need not be the contact listed on Line 8 of Form 1094-C.  Also, filers are admonished never to leave Line 14 blank, even for months before and after employment.

Page 11 is almost entirely new text, explaining in helpful detail how to code on Line 14 COBRA coverage offers and retiree coverage offers.  Here’s the Example provided:

During the applicable open enrollment period for its health plan, Employer makes an offer of minimum essential coverage providing minimum value to Employee and to Employee’s spouse and dependents. Employee elects to enroll in employee-only coverage starting January 1. On June 1, Employee experiences a reduction in hours that results in loss of eligibility for coverage under the plan. As of June 1, Employer terminates Employee’s existing coverage and makes an offer of COBRA continuation coverage to Employee, but does not make an offer to Employee’s spouse and dependents. Employer should enter code 1E (Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse) on line 14 for months January – May, and should enter code 1B (Minimum essential coverage providing minimum value offered to employee only) on line 14 for months June – December.

Page 12 (see also page 17) reiterates that new Line 14 codes 1J and 1K are conditional offer variants of codes 1D and 1E, respectively, and defers Line 15 employee cost guidance to the “Employee Required Contribution” section of the Definitions on page 15.

On page 13, and in the “Tip” on page 17, the IRS continues its Delphic guidance about how Line 16, Code 2E applies when an employer seeks § 4980H credit for coverage offers made to its common law employees by their Form W-2 employer, e.g., a temp staffing firm.  Suppose that an employer seeking such credit sponsors a self-insured plan.  The 2016 Instructions read, “For this [Part III] purpose, employer-sponsored self-insured coverage does not include coverage under a multi-employer plan.”  Our initial guess is that the IRS means to say so only for purposes of reporting covered individuals in Part III.  We remain concerned about the lack of published IRS guidance regarding whether an employer will be assumed to participate in a MEWA if it enters Code 2E on Line 16 in order to claim credit for coverage offers made by a temp staffing firm.

Definitions

Page 14 adds a link to the IRS page on § 4980H employer aggregation rules.

Page 15 adds this definition of “Employee Required Contribution” for Form 1095-C, Line 15 affordability determinations.

Employee Required Contribution. The Employee Required Contribution is the employee’s share of the monthly cost for the lowest-cost self-only minimum essential coverage providing minimum value that is offered to the employee by the ALE Member. The employee share is the portion of the monthly cost that would be paid by the employee for self-only coverage, whether paid through salary reduction or otherwise

For purposes of determining the amount of the employee’s share of the monthly cost, an ALE Member may divide the total cost to the employee for the plan year by the number of months in the plan year. This monthly amount of the employee’s share of the cost would then be reported for any months of that plan year that fall within the 2016 calendar year. For example, if the plan year begins January 1, the ALE Member may determine the amount to report for each month by taking the total annual employee cost for all 12 months and dividing by 12. If the plan year begins April 1, the ALE Member may determine the amount to report for January through March, 2016, by taking the total annual employee cost for the plan year ending March 31, 2016, and dividing by 12 (and reporting that amount for January, February, and March 2016). Then the ALE Member may determine the monthly amount for April through December, 2016 by taking the total annual employee cost for the plan year ending March 31, 2017, and dividing by 12 (and reporting that amount for April through December 2016).

The Employee Required Contribution may not be the amount the employee paid for coverage. For additional rules on determining the amount of the Employee Required Contribution, including for cases in which an ALE Member makes available certain HRA contributions, cafeteria plan contributions, wellness program incentives, and opt-out payments, see Regulations sections1.5000A-3(e)(3)(ii) and 1.36B-2(c)(3)(v)(A). Also see Notice 2015-87.

Also on page 15 begins a longer explanation of what “Full-Time Employee” means, apparently to correct common employer filing errors for 2015.  We noted this part especially:

Under the look-back measurement method, an employee is a full-time employee for each month of the stability period selected by the ALE Member if the employee was employed an average of least 30 hours of service per week with the ALE Member during the measurement period preceding that stability period. (The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability under section 4980H, and not for purposes of determining if the employer is an Applicable Large Employer.)

Pages 18-19 describe in great detail the trailing effects for 2016 reporting of 2015-only transitional relief by employers with non-calendar year plans.

We close with this good news:  As in 2105, the IRS estimates that you will need just four hours to complete and file your Form 1094-C and just twelve minutes to complete and file each Form 1095-C.  If there’s an appropriate emoji here, suggest it, please.

Jed, employed by Drysdale LLC, a janitorial contractor, recently began working nights at the Commerce Bank, supervised by the Bank’s Chief of Security.  Jed’s family had health insurance until his wife lost her job early this year.  Drysdale didn’t offer insurance, so Jed bought a policy through Healthcare.gov.  With the federal subsidy, his premium is less than $50 monthly.

About six weeks ago, Drysdale got a Marketplace notice of the subsidy granted to Jed.  After consulting its lawyer, Drysdale amended its standard contract to negate any indemnity obligation to customers for ACA taxes and penalties imposed on the customer with respect to Drysdale employees.  The Bank noticed the change and inquired.  Drysdale explained, using Jed’s example, that the Bank could have ACA obligations to Jed independent of Drysdale’s obligations to Jed.

On July 5, the Bank asked for a replacement after Jed was found asleep in a computer closet.  Drysdale removed Jed from the Bank and has not reassigned him.

Today, Drysdale and the Bank received OSHA notices that Jed (represented by a labor union) had charged them with retaliation in violation of FLSA § 218c, which reads, in relevant part:

218c. Protections for employees

(a) Prohibition

No employer shall discharge or in any manner discriminate against any employee with respect to his or her compensation, terms, conditions, or other privileges of employment because the employee (or an individual acting at the request of the employee) has—

(1) received a credit under section 36B of title 26 or a subsidy under section 18071 of title 42;

[…]

(b) Complaint procedure

(1) In general

An employee who believes that he or she has been discharged or otherwise discriminated against by any employer in violation of this section may seek relief in accordance with the procedures, notifications, burdens of proof, remedies, and statutes of limitation set forth in section 2087(b) of title 15.

(Emphasis ours.)  When Jed applied for his subsidy, he was given three notices of this retaliation protection.  Much to the employers’ surprise, they have only a few weeks to prove that Jed would have suffered the same fate even if they had been ignorant of his subsidy.  But Jed says that he and the Security Chief had a deal: If Jed finished his work an hour early, he could nap before leaving for his day job.  And OSHA’s rules say that Jed’s proof “burden may be satisfied, for example, if the complaint shows that the adverse action took place shortly after the protected activity, giving rise to the inference that it was a contributing factor in the adverse action.” 29 CFR § 1984(e)(3).  Very probably, OSHA will issue a preliminary order reinstating Jed who, by the way, is now a union organizer.  A damages trial will follow some months later.

Why is this the Bank’s problem?  Because DOL enforces this law, and DOL’s “employee” definition is even broader than the definition used by the IRS.  You may “employ,” for this purpose, a worker whom the IRS would recognize as an independent contractor.  Jed’s supervision by the Bank’s Chief of Security goes a long way toward proving that the Bank was Jed’s joint employer.

Why is this Drysdale’s problem?  Because it opened the Marketplace subsidy notice envelope.  As we explained in several prior articles, there are ways to appeal subsidy errors without acquiring notice of the identities of subsidy recipients who might be among your employees.  If you have not established those procedures yet, now would be a very good time to do so.

 

Nearly three years ago, having spent hundreds of hours immersed in ACA minutiae, we anticipated that clients would not react well to fees for services that consisted principally of telling them that they had asked the wrong question. So we decided, against tradition and much conventional wisdom, to sink lots of unpaid partner time into this education project. A casual reader of this blog should learn basic ACA terms and concepts, so that he or she can converse effectively with advisors. A regular reader should be able to identify, during such a conversation, a purported ACA expert who’s a poseur. Sadly, they abound. A colleague should find this a thought-provoking reference to ACA rules and guidance documents. Those are our goals.

Substitute nothing you read here for legal or other professional advice about any specific situation. ACA rules and sub-regulatory guidance change frequently and whimsically. Occasionally, the three main enforcement agencies (DOL, HHS, IRS) disagree. Sometimes, they publish a new rule unaware of a related, existing rule. Part of our service to you is to alert you to what we see coming. We usually have guessed right, but we often are guessing. And of course, apparently insignificant factual details can turn out to be determinative. If you regard this blog as cheap – i.e., free – legal advice, you’re rolling the dice at your own risk and the risk might be far bigger than you realize.

Finally, we invite constructive comments, including reasoned criticism, but not rants. We delete hissy-fits and block commenters who seem to be unable to comment otherwise. That goes triple for political hyperbole. Sometimes, we must explain political realities in order to explain a regulatory reality, but we try to be objective. You should, too.

It’s the “silly season” on the Hill and a busy season for ACA regulators. This article gives you brief notes about Notice 2015-87, information reporting relief and the § 4980I delay buried in the omnibus spending bill.

IRS Notice 2015-87 first answers questions on the periphery of earlier guidance effectively killing stand-alone HRAs. Most notably, an HRA or employer payment plan may be used to reimburse (or to pay directly) premiums for individual policies that provide only excepted benefits – e.g., stand-alone dental or vision plans.

Notice 2015-87 also clarifies that plan-integrated employer HRA contributions that may be used to pay premiums or employee cost sharing obligations under the group health plan are counted to reduce the employee’s share of the premium for purposes of affordability determinations under Code § § 4980H and 5000A. The same is true of some, but not all, employer cafeteria plan flex contributions. IRS forecasts future regulations on related treatment of “opt-out” payments made to employees who decline group health plan coverage.

Which brings us to a federal contractor conundrum. The Service Contract Act and Davis-Bacon Act require certain federal contractors to pay prevailing wages and benefits. The benefit obligation may be satisfied either by benefits or by cash in lieu of those benefits. Until this Notice, employers paying cash in lieu of benefits were exposed to double burdens. Here’s the temporary relief offered a p. 16 of Notice 2015-87.

Treasury and IRS continue to consider how the requirements of the SCA, the DBRA, and the employer shared responsibility provisions under § 4980H may be coordinated. However, until the applicability date of any further guidance, and in any event for plan years beginning before January 1, 2017, employer fringe benefit payments (including flex credits or flex contributions) under the SCA or DBRA that are available to employees covered by the SCA or DBRA to pay for coverage under an eligible employer-sponsored plan (even if alternatively available to the employee in other benefits or cash) will be treated as reducing the employee’s required contribution for participation in that eligible employer-sponsored plan for purposes of § 4980H(b), but only to the extent the amount of the payment does not exceed the amount required to satisfy the requirement to provide fringe benefit payments under the SCA or DBRA. In addition, for these same periods an employer may treat these employer fringe benefit payments as reducing the employee’s required contribution for purposes of reporting under § 6056 (Form 1095-C), subject to the same limitations that apply for purposes of § 4980H(b). Employers are, however, encouraged to treat these fringe benefit payments as not reducing the employee’s required contribution for purposes of reporting under § 6056. If an employee’s required contribution is reported without reduction for the amount of the fringe benefit payment and the employer is contacted by the IRS concerning a potential assessable payment under § 4980H(b) relating to the employee’s receipt of a premium tax credit, the employer will have an opportunity to respond and show that it is entitled to the relief described in this Q&A-10 to the extent that the employee would not have been eligible for the premium tax credit if the required employee contribution had been reduced by the amount of the fringe benefit payment or to the extent that the employer would have qualified for an affordability safe harbor under § 54.4980H-(4)(e)(2) if the required employee contribution had been reduced by the amount of the fringe benefit payment. See also Q&A-26 for certain relief with respect to employer information reporting under § 6056.

Finally, we get a plain English answer to what had seemed for years a simple question – i.e., whether the employer mandate affordability safe harbor (9.5% of household income) is inflation-adjusted. The answer (p. 18, Q12) is “yes.” Thus, the 2015 number is 9.56% and the 2016 number will be 9.66%. Information reporting rules under Code section 6056 will be revised accordingly.

Similarly, the annual assessable payment amounts under Code sections 4980H are inflation-adjusted (p. 20, Q13), so that the $2,000 amount for 2015 is $2,080 and the $3,000 amount is $3,120. For 2016, those numbers will rise to $2,160 and $3,240.

IRS will revise its 4980H “hours of service” rules to clarify that employers need not count as “hours of service” payments made under workers’ compensation and disability plans to former employees. However, disability benefit payments, if funded in part by employee contributions, may count as hours of service if the employee is still on the payroll.

Staffing companies providing labor to educational organizations will face revised § 4980H rules that require them to observe the special employment break period rules that apply to the educational organization, unless the employee is offered full year employment. (P. 23, Q15.)

Bad news for state and local government agencies (p. 25, Q19): If you are deemed a separate employer under applicable state law and you are an ALE, you must have a separate EIN and must report separately on Form 1094-C. The rules about reporting through another Designated Government Entity do not change this. One DGE may report for ten ALEs, but it must file ten 1094-Cs.

It’s not new, but its repetition is welcome: IRS does not intend to penalize 2015 ALE reporting errors made in good faith by ALEs that tried to report correctly, timely in 2016. (That’s Q&A-26, p. 30.) Which brings us to §  202 of H.R. 2029, the omnibus spending bill, which directs IRS to treat information returns as completely correct if the errors involve small dollar amounts. It’s not perfectly clear whether this applies to Form 1095-C, line 15 affordability reporting. Let’s hope.

And, to gift-wrap this, § 101 of the omnibus spending bill delays Cadillac tax (Code § 4980I) accrual from 2018 to 2020 and directs the IRS to re-examine the applicable inflation adjustment formula. Merry Christmas; happy holidays; may the Schwarz be with you.

On July 15, 2015, DOL’s Wage & Hour Division issued Administrator’s Interpretation No. 2015-01, titled, “ The Application of the Fair Labor Standards Act’s ‘Suffer or Permit’ Standard in the Identification of Employees Who Are Misclassified as Independent Contractors.” Nothing new there, right? All well-counseled employers know that the DOL takes an especially dim view of avoiding overtime by calling workers “independent contractors.” DOL’s “economic realities” test is tougher than the IRS “common law employee” test. Consequently, you may owe overtime to a worker properly excluded from your W-2 payroll. But, with apologies to Tina Turner, what’s the ACA got to do with it? The IRS, not the DOL, enforces the employer mandate of 26 U.S.C. § 4980H and the coverage offer reporting requirements of § § 6055 and 6056.

If you wondered why Congress dropped the ACA’s anti-retaliation section into the Fair Labor Standards Act (as new § 18C), wonder no more. According to OSHA’s interim final rules for the handling of such retaliation complaints, “The definitions of the terms ‘‘employer,’’ ‘‘employee,’’ and ‘‘person’’ from section 3 of the FLSA, 29 U.S.C. 203, apply to these rules and are included here.” See 78 Fed. Reg. 13,224 (February 27, 2013) and 29 CFR § 1984.101. So, to find the limits of your ACA retaliation claim exposure, don’t consult IRS “common law employee” guidance; instead, read the new DOL Administrator’s Interpretation.

Here’s the executive summary:

The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor.

Here are factors that DOL considers critical to this analysis, with associated examples.

A.  Is the Work an Integral Part of the Employer’s Business?

For a construction company that frames residential homes, carpenters are integral to the employer’s business because the company is in business to frame homes, and carpentry is an integral part of providing that service.

In contrast, the same construction company may contract with a software developer to create software that, among other things, assists the company in tracking its bids, scheduling projects and crews, and tracking material orders. The software developer is performing work that is not integral to the construction company’s business, which is indicative of an independent contractor.

B.  Does the Worker’s Managerial Skill Affect the Worker’s Opportunity for Profit or Loss?

A worker provides cleaning services for corporate clients. The worker performs assignments only as determined by a cleaning company; he does not independently schedule assignments, solicit additional work from other clients, advertise his services, or endeavor to reduce costs. The worker regularly agrees to work additional hours at any time in order to earn more. In this scenario, the worker does not exercise managerial skill that affects his profit or loss. Rather, his earnings may fluctuate based on the work available and his willingness to work more. This lack of managerial skill is indicative of an employment relationship between the worker and the cleaning company.

In contrast, a worker provides cleaning services for corporate clients, produces advertising, negotiates contracts, decides which jobs to perform and when to perform them, decides to hire helpers to assist with the work, and recruits new clients. This worker exercises managerial skill that affects his opportunity for profit and loss, which is indicative of an independent contractor.

C.  How Does the Worker’s Relative Investment Compare to the Employer’s Investment?

A worker providing cleaning services for a cleaning company is issued a Form 1099-MISC each year and signs a contract stating that she is an independent contractor. The company provides insurance, a vehicle to use, and all equipment and supplies for the worker. The company invests in advertising and finding clients. The worker occasionally brings her own preferred cleaning supplies to certain jobs. In this scenario, the relative investment of the worker as compared to the employer’s investment is indicative of an employment relationship between the worker and the cleaning company. The worker’s investment in cleaning supplies does little to further a business beyond that particular job.

A worker providing cleaning services receives referrals and sometimes works for a local cleaning company. The worker invests in a vehicle that is not suitable for personal use and uses it to travel to various worksites. The worker rents her own space to store the vehicle and materials. The worker also advertises and markets her services and hires a helper for larger jobs. She regularly (as opposed to on a job-by-job basis) purchases material and equipment to provide cleaning services and brings her own equipment (vacuum, mop, broom, etc.) and cleaning supplies to each worksite. Her level of investments is similar to the investments of the local cleaning company for whom she sometimes works. These types of investments may be indicative of an independent contractor.

D.  Does the Work Performed Require Special Skill and Initiative?

A highly skilled carpenter provides carpentry services for a construction firm; however, such skills are not exercised in an independent manner. For example, the carpenter does not make any independent judgments at the job site beyond the work that he is doing for that job; he does not determine the sequence of work, order additional materials, or think about bidding the next job, but rather is told what work to perform where. In this scenario, the carpenter, although highly-skilled technically, is not demonstrating the skill and initiative of an independent contractor (such as managerial and business skills). He is simply providing his skilled labor.

In contrast, a highly skilled carpenter who provides a specialized service for a variety of area construction companies, for example, custom, handcrafted cabinets that are made-to-order, may be demonstrating the skill and initiative of an independent contractor if the carpenter markets his services, determines when to order materials and the quantity of materials to order, and determines which orders to fill.

E.  Is the Relationship between the Worker and the Employer Permanent or Indefinite?

An editor has worked for an established publishing house for several years. Her edits are completed in accordance with the publishing house’s specifications, using its software. She only edits books provided by the publishing house. This scenario indicates a permanence to the relationship between the editor and the publishing house that is indicative of an employment relationship.

Another editor has worked intermittently with fifteen different publishing houses over the past several years. She markets her services to numerous publishing houses. She negotiates rates for each editing job and turns down work for any reason, including because she is too busy with other editing jobs. This lack of permanence with one publishing house is indicative of an independent contractor relationship.

F.  What is the Nature and Degree of the Employer’s Control?

A registered nurse who provides skilled nursing care in nursing homes is listed with Beta Nurse Registry in order to be matched with clients. The registry interviewed the nurse prior to her joining the registry, and also required the nurse to undergo a multi-day training presented by Beta. Beta sends the nurse a listing each week with potential clients and requires the nurse to fill out a form with Beta prior to contacting any clients. Beta also requires that the nurse adhere to a certain wage range and the nurse cannot provide care during any weekend hours. The nurse must inform Beta if she is hired by a client and must contact Beta if she will miss scheduled work with any client. In this scenario, the degree of control exercised by the registry is indicative of an employment relationship.

Another registered nurse who provides skilled nursing care in nursing homes is listed with Jones Nurse Registry in order to be matched with clients. The registry sends the nurse a listing each week with potential clients. The nurse is free to call as many or as few potential clients as she wishes and to work for as many or as few as she wishes; the nurse also negotiates her own wage rate and schedule with the client. In this scenario, the degree of control exercised by the registry is not indicative of an employment relationship.

Think twice before replacing the “contractor” or “temp” who identified you as his non-offering, full-time “employer” so that he could obtain subsidized insurance through Healthcare.gov.

This morning, the Supreme Court of the United States, by a 6-3 margin, removed the last legal obstacle to employer mandate tax enforcement. Because the HHS had authority under Code § 36B to subsidize insurance plans bought through Healthcare.gov (according to an IRS rule), those subsidies properly will trigger Code § 4980H employer mandate tax assessments by the IRS starting in early 2016.   If you are accruing liabilities, you need to determine how you’ll pay those assessments and how you might minimize them. You’ll probably need outside help to do both.

We predicted this opinion but we’re not celebrating. We’re especially concerned for state agencies, local governments, smaller large employers and employers that rely on employees leased in full-time status for less than one year. Here’s a simplified comparison of potential § 4980H(a) assessments based on the same payroll numbers for 2014 (ALE in 2015, assessed in 2016) and 2015 (ALE in 2016, assessed in 2017).

200 Full-time W-2 Employees, all offered coverage (90.1%)

20 Full-time Leased Employees, none offered coverage (9.9%)

2016 § 4980H(a) assessment:         $0                     (70% offer transitional relief)

2017 § 4980H(a) assessment:         $360,000+     (95% offer required)

Should this employer fail to file and deliver its required 2015 Forms 1094-C and 1095-C in early 2016, a $44,000 penalty could be assessed for that default, even though no employer mandate tax was owed for 2015.

Many more traps have been laid and few are sufficiently wary.  As Justice Roberts understated it in his majority opinion, “[The ACA] does not reflect the type of care and deliberation that one might expect of such significant legislation.”  Boy, howdy.  Get help.

Update (in response to inquiries):  Some had speculated that the Court might delay the effective date of its decision if it invalidated Healthcare.gov subsidies.  This decision in favor of the subsidies, and therefore in favor of the employer mandate, is effective retroactively.  The mandate was effective for most “Applicable Large Employers” (on a controlled group basis) beginning January 1, 2015.

Update: We’re getting questions and comments that reflect fundamental misconceptions about the employer mandate. We’ll correct two here and save others for a separate article.

State and local government employers are covered, and most will be “large” due to aggregation rules. The IRS “controlled group” and “affiliated service group” rules don’t fit government employers exactly, but similar aggregation principles will apply.

It’s too late to “get small” for 2015. You are “large” or not in 2015 based on your 2014 employment levels (assuming that you existed in 2014). Your exposure to 2016 § 4980H assessments is based on your “Applicable Large Employer” status in 2015 (which is based, in turn, on your 2014 employment) but your “assessable payment amounts” will be based on 2015 employment levels.

Beginning in 2016, Code § 6056 requires large employers to complete, file with IRS and deliver to employees a Form 1095-C for each full-time employee offered minimum essential coverage for each 2015 coverage month.  So, who are your Form 1095-C employees?  Might they include people not on your payroll?

Here’s the relevant IRS rule defining “full-time employee” under Code § 6056:

(6) Full-time employee. The term full-time employee has the same meaning as in section 4980H and § 54.4980H–1(a)(21) of this chapter, as applied to the determination and calculation of liability under section 4980H(a) and (b) with respect to any individual employee, and not as applied to the determination of status as an applicable large employer, if different.

26 CFR § 301.6056-1(b)(6).  And here is the cited sub-section 21 of the § 4980H rules:

(21) Full-time employee—(i) In general. The term full-time employee means, with respect to a calendar month, an employee who is employed an average of at least 30 hours of service per week with an employer. For rules on the determination of whether an employee is a full-time employee, including a description of the look-back measurement method and the monthly measurement method, see § 54.4980H–3. The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability under section 4980H and not for the purpose of determining status as an applicable large employer under § 54.4980H–2.

(ii) Monthly equivalency. Except as otherwise provided in paragraph (a)(21)(iii) of this section, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week, and this 130 hours of service monthly equivalency applies for both the look-back measurement method and the monthly measurement method for determining full-time employee status.

(iii) Determination of full-time employee status using weekly rule under the monthly measurement method. Under the optional weekly rule set forth in § 54.4980H–3(c)(3), full-time employee status for certain calendar months is based on hours of service over four weekly periods and for certain other calendar months is based on hours of service over five weekly periods. With respect to a month with four weekly periods, an employee with at least 120 hours of service is a full-time employee, and with respect to a month with five weekly periods, an employee with at least 150 hours of service is a full-time employee. For purposes of this rule, the seven continuous calendar days that constitute a week (for example Sunday through Saturday) must be consistently applied for all calendar months of the calendar year.

26 CFR § 54.4980H-1(a)(21).  But that just tells you which “employees” are full-time.  “Employee” is defined in the preceding sub-section 15:

(15) Employee. The term employee means an individual who is an employee under the common-law standard. See § 31.3401(c)–1(b). For purposes of this paragraph (a)(15), a leased employee (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in section 3508 is not an employee.

26 CFR § 54.4980H-1(a)(15).  The IRS uses a multi-factor test to identify common-law employees who have been errantly omitted from an employer’s payroll.  Most often, the outcome hinges on the employer’s right to control how, where and when the worker works.  The referenced rule sums it up this way:

(b) Generally the relationship of employer and employee exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so. The right to discharge is also an important factor indicating that the person possessing that right is an employer. Other factors characteristic of an employer, but not necessarily present in every case, are the furnishing of tools and the furnishing of a place to work to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is not an employee.

26 CFR § 31.3401-(c)(1)(b).  Sub-section (e) then warns:  “If the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. Thus, if such relationship exists, it is of no consequence that the employee is designated as a partner, coadventurer, agent, independent contractor, or the like.”  Code § 414(n)(2), with our emphasis, reads:

(2) Leased employee

For purposes of paragraph (1), the term “leased employee” means any person who is not an employee of the recipient and who provides services to the recipient if—

(A) such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the “leasing organization”),

(B) such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year, and

(C) such services are performed under primary direction or control by the recipient.

Commonly, workers are leased for less than one year, such as in temp-to-perm staffing arrangements.  Section 3508 relates to real estate agents.

A long slog, we realize, but a necessary one to show you why you may have Form 1095-C reporting obligations with respect to people who are not on your payroll.  But so what? Here’s what.  Code § § 6721 and 6722 state the penalties for failure to file and deliver your Forms 1095-C as required by Code § 6056.  We quote just the main penalty statements from the statute:

(a) Imposition of penalty

(1) In general

In the case of a failure described in paragraph (2) by any person with respect to an information return, such person shall pay a penalty of $100 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $1,500,000.

(2) Failures subject to penalty

For purposes of paragraph (1), the failures described in this paragraph are—

(A) any failure to file an information return with the Secretary on or before the required filing date, and

(B) any failure to include all of the information required to be shown on the return or the inclusion of incorrect information.

26 U.S.C. § 6721(a).

(a) Imposition of penalty

(1) General rule

In the case of each failure described in paragraph (2) by any person with respect to a payee statement, such person shall pay a penalty of $100 for each statement with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $1,500,000.

(2) Failures subject to penalty

For purposes of paragraph (1), the failures described in this paragraph are—

(A) any failure to furnish a payee statement on or before the date prescribed therefor to the person to whom such statement is required to be furnished, and

(B) any failure to include all of the information required to be shown on a payee statement or the inclusion of incorrect information.

26 U.S.C. § 6722(a).  So, missing one common law employee when you generate your Forms 1095-C in early 2016 could cost as little as $200.  Missing 100 could cost $20,000.  You’d need to miss 15,000 to reach the $3,000,000 annual cap.  But any audit of such errors might also identify payroll taxes that should have been withheld from the wages of people misclassified as independent contractors.  There could be collateral damage under wage and hour laws and benefit plan participation rules.

Are you planning to complete, file and deliver your Forms 1095-C manually?  Does your automated process cover all Form 1095-C employees?  These are questions that large employers should answer in 2015.