Our clients include employee leasing firms and their employer customers. Sometimes, both ask us to explain their ACA exposures related to proposed lease revisions, which we cannot do. Professional ethics rules generally forbid lawyers to work both sides of the same deal. Maybe that explains why so many lawyers enter politics. But we can explain things for the public good (Latin, pro bono), so here we go.

Staffing firms are offering different solutions to the problems discussed here.  In our opinion, there is no “right” versus “wrong” way to address these issues.  There are only different sets of risks to take.   Our purpose here is to introduce you to those risks, briefly, so that you might choose wisely, based on your circumstances.

The leased employee exclusion from the “employee” definition in §54.4980H-1(a)(15) only covers those leased in full-time status for at least one year – the definition borrowed from Code § 414(n)(2). So, an employer that uses a leased worker full-time for longer than the maximum waiting period but less than one year  may have § 4980H tax exposure if it is the leased worker’s “common law employer.”  The IRS uses a many-factor test that typically turns on the customer employer’s control of leased workers.  Presciently, the employer mandate final rules offer a solution.

Our text is the .pdf version of IRS Employer Shared Responsibility Cost final rules, starting with this passage from the preamble, at page 8,566, middle column:

[I]f 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.

Here is the corresponding text of the actual rule, 26 C.F.R. § 54.4980H-4(b)(2), at Federal Register page 8,598 (left column)

For an offer of coverage to an employee performing services for an employer that is a client of a staffing firm, in cases in which the staffing firm is not the common law employer of the individual and the staffing firm makes an offer of coverage to the employee on behalf of the client employer under a plan established or maintained by the staffing firm, the offer is treated as made by the client employer for purposes of section 4980H 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 the staffing firm for the same employee if that employee did not enroll in health coverage under the plan.

This presents a minor dilemma. To get credit for affordable, qualifying coverage offers made by the leasing firm, the customer employer must pay more for each employee who enrolls. How much more is not stated; we guess that the IRS wants the surcharge to reflect the actual cost of coverage. But the customer employer might rather not know who enrolled because, if it knows, it might be charged with retaliation when it ends that worker’s assignment.

We deem this a “minor” dilemma because the relevant ACA anti-retaliation rule protects an employee who, “Objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee (or other such person) reasonably believed to be in violation of any provision of title I of the Affordable Care Act (or amendment), or any order, rule, regulation, standard, or ban under title I of the Affordable Care Act (or amendment).” DOL has interpreted this to protect an employee objection, “based on a reasonable, but mistaken, belief that a violation of the relevant law has occurred.” 78 Fed. Reg. 13,226 (Feb. 27, 2013, left column). It’s not clear to us that enrollment in an employer’s group health plan fits this definition. Nevertheless, we expect claimants to test the limits of this ACA section and ERISA’s similar provision, which covers, “exercising any right . . . under the provisions of an employee benefit plan [ERISA] . . . or . . . interfering with the attainment of any right to which such participant may become entitled under the plan, [ERISA] . . . .”

A leasing firm might try to solve the dilemma by what we’ll call a straddle solution – i.e., charging just a bit extra for all who receive offers, regardless of who enrolls. That should reduce any retaliation exposure but does it allow the customer employer to claim § 4980H credit for the offers?

With our emphasis, the rule text seems pretty clear; credit is available “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 the staffing firm for the same employee if that employee did not enroll in health coverage under the plan.” The straddle solution charges the customer the same for all offer recipients. True, the customer’s labor costs might be identical, but the arrangement does not comply strictly with the rule as written. Therefore, the customer with a straddle arrangement may gain § 4980H tax exposure protection in order to reduce retaliation claim exposure.

Better solutions that come to mind are rather more cumbersome. For example, without identifying enrolled employees, the leasing firm could surcharge for each one assigned to the customer employer, submitting its records to confidential audit by a third party. But what if, to get §4980H credit, the customer employer must file and deliver a Form 1095-C for each of the leased workers? Though a subject for another day, we think that’s a reasonable conclusion, practically speaking. How might an employer do that without knowing who enrolled in the coverage offered by the leasing firm?

Responsible people on both sides of employee leasing arrangements need to spend time and attention on these issues.