As we gather to gawk at the impending King v. Burwell piñata whacking, here’s a reminder to curb your enthusiasm. Even if your employer mandate dies this month, even if it is not resurrected by legislation or executive action, and even if you provide compliant coverage, most of you will have to report your 2015 coverage offers in early 2016 or face audit and significant penalties. He’s a short summary of the reporting requirements, arranged by simplicity.

Who’s Exempt?

Small employers with no group health plans and small employers with fully-insured group health plans are exempt from the coverage offer reporting requirements, because they apply to insurers (including self-insuring employers, under Code § 6055) and to “Applicable Large Employers” (Code § 6056, borrowing the § 4980H ALE definition).

As with the employer mandate, exemption of government employers is a well-busted myth.

Are you eligible for the 50 to 100 “bubble employer,” transitional relief from the 2015 employer mandate? Great, but that only adds to your coverage offer reporting, requiring your certification of eligibility on Form 1094-C.  Relief is not automatic.  You must report and request it.

Fully-Insured ALEs Use Forms 1094-C and 1095-C.

Do you have an EIN? Good, you’ll need one to file with the IRS a Form 1095-C for each person who was your full-time employee in any month of 2015, along with a Form 1094-C cover sheet for the whole set of Forms 1095-C. Your insurer will file Forms 1094-B and 1095-B. To the extent of overlap, they should agree. Expect the IRS to check your submissions against each other and against your W-2 filings.

Self-Insured Small Employers Use Forms 1094-B and 1095-B.

You’re not subject to 2015 plan year ALE reporting if you are small (based on 2014 employment) and not a member of an aggregated ALE group. But if you’re self-insured, you’re subject to insurer reporting.

Self-Insured Large Employers

Here’s where complexity starts. Code sections 6055 and 6056 apply fully to you. The § 6055 rules, § 6056 rules and instructions for the “C” Forms and for the ‘B” Forms offer less than complete relief from duplicative demands. Get help.


Yes, subject to current guidance and with retention of ultimate liability, an employer may report through an agent. A Governmental Unit may trust its reporting to a Designated Governmental Unit (“DGE”). But the IRS must receive a single “authoritative transmittal” for each ALE member, regardless of who files it. That Form must identify all other ALE members of the same aggregated group. If you expect another to carry your load, verify now that they are prepared to carry your load without dropping it.

Leased Employees and Multi-Employer Plans

Do you rely on employees leased in full-time status for less than one year? They may be your ACA responsibility for employer mandate and for coverage offer reporting purposes. Do you contribute to a multi-employer plan administered by someone else? In either case, get help.

Get Help.

Few employers who prepare in advance should need extreme lawyering. Most, however, will need months of help from plan administration consultants, the best of whom are in high demand right now, because they have bought, rented or developed IT tools to handle full-time employee tracking and coverage offer reporting. If you show up late and need to cut in line, expect to pay for that privilege.

This is a compliance blog; we don’t do politics. But we can’t explain compliance consequences of the Supreme Court’s King v. Burwell opinion without acknowledging the political context.

Here’s the June calendar of the Supreme Court of the United States.









Opinions are posted online on Monday or Tuesday, typically. As early as tomorrow, or as late as June 30, we will read whether the IRS and HHS had authority to grant subsidies to people who bought health insurance through   We expect the government to prevail, 5-4. If we’re right, nothing changes, legally, but much changes practically. That’s because so many employers have tried to wait-out the ACA, hoping for political or judicial relief from its burdens. With a few exceptions (e.g., the Cadillac Plan tax), this appeal is their last hope. If they guessed wrong, there will be a mad scramble for hurried advice and assistance, some of which will be reliable.

If the government loses, there will be no employer mandate for employers with employees only in states served by That’s because subsidy certification triggers the employer mandate taxes assessed under 26 U.S.C. § 4980H. No subsidy, no tax. Of course, Congress could change the law but prospects for agreement seem dim. Senate Democrats are likely to filibuster any change except deletion from Code § 36B(b)(2) of the phrase, “established by the State under 1311 of the Patient Protection and Affordable Care Act.” Republicans have not yet revealed an alternative that is likely to have overwhelming popular support. Stalemate seems to be the most likely outcome.

Stalled legislation could tempt the White House to try another “executive action” detour around Congress, but the hostile judicial reception to the President’s executive action on immigration might cool that ardor. And, with a Presidential election looming, Democrats might prefer to blame Republicans for millions of people losing their subsidized health insurance.

We’ll share our more particular thoughts within hours of reading the Supreme Court opinion.

Update:  People rooting for the plaintiffs here should be encouraged by Justice Roberts’ joinder of this part of the opinion in Baker Botts L.L.P. v. ASARCO LLC, 576 U.S. ___ (June 15, 2015):

More importantly, we would lack the authority to re­write the statute even if we believed that uncompensated fee litigation would fall particularly hard on the bank­ruptcy bar. “Our unwillingness to soften the import of Con­gress’ chosen words even if we believe the words lead to a harsh outcome is longstanding,” and that is no less true in bankruptcy than it is elsewhere. Lamie v. United States Trustee, 540 U. S. 526, 538 (2004). Whether or not the Government’s theory is desirable as a matter of policy, Congress has not granted us “roving authority . . . to allow counsel fees . . . whenever [we] might deem them warranted.” Alyeska Pipeline, supra, at 260. Our job is to follow the text even if doing so will supposedly “undercut a basic objective of the statute,” post, at 3. Section 330(a)(1) itself does not authorize the award of fees for defending a fee application, and that is the end of the matter.

Update:  “The Supreme Court has added non-argument sessions for the announcement of opinions on Thursday, June 25, 2015, and Friday, June 26, 2015, at 10 a.m.”  See




Because the IRS needs data to verify subsidy eligibility and to enforce the individual and employer mandates, the ACA added § § 6055 and 6056 to the Internal Revenue Code, requiring insurers and large employers to report that data to the IRS and to beneficiaries. The IRS published final rules in March 2014 and released early draft Forms in August. The final Forms for (voluntary) 2014 reporting were published February 9, 2015. Mandated reporting begins in early 2016, for 2015 coverage months.

The preamble to the Code § 6055 rules explains more clearly than the regulations, Forms or Instructions the relationship between insurer reporting (Forms 1094-B, 1095-B) under Code § 6055 and large employer (Forms 1094-C, 1095-C) reporting under Code § 6056:

An applicable large employer member that sponsors a self-insured plan will report on Form 1095–C, completing both sections to report the information required under sections 6055 and 6056. An applicable large employer member that provides insured coverage also will report on Form 1095–C, but will complete only the section of Form 1095–C that reports the information required under section 6056. Section 6055 reporting entities that are not applicable large employer members or are not reporting as employers, such as health insurance issuers, sponsors of multiemployer plans, and providers of government-sponsored coverage, will report under section 6055 on Form 1095–B.

 79 Fed. Reg. 13,225 (March 10, 2014) (preamble to 26 CFR § § 1.6055-1, 1.6055-2).   An accompanying e-flyer, IRS Pub. 5196, provides a helpful overview, especially the bullet-point lists of the data needed to complete each “C” form.   Note: Employers, regardless of size, offering self-insured group health coverage will have basically the same obligations under Code § 6055 that large employers have under § 6056. The only employers getting a complete pass are small employers with fully-insured group health plans or no group health plans.

Form 1094-C, 1095-C and their instructions are complex. Form 1094-B, Form 1095-B and the Instructions for Forms 1094-B and 1095-B are relatively simple. For that reason, and because the “B” Forms have changed little, we highlight below just a few “C” Form and Instruction changes since August 28, 2014.

Forms 1094-C and 1095-C

The Forms appear to be approved for use.  The first “early release drafts” came with sheets headed, “Caution: DRAFT – NOT FOR FILING,” and bore watermarks reading, “DRAFT AS OF August 28, 2014 DO NOT FILE.”  The new releases lack watermarks.  They are titled, “Form 1094-C (2014),” and “Form 1095-C (2014).”  Form 1094-C is otherwise substantially unchanged.

Form 1095-C Part I (employee and employer identification data), takes up slightly less vertical space and Part II, “Employee Offer and Coverage,” has the same data cells but they too are shorter.  Part III, where large self-insurers identify each covered individual, gets the vertical space that Parts I and II surrendered.  Maybe IRS anticipates that many self-insurers will complete the Form manually. We hope that our readers have selected software solutions.

The Instructions for Recipient on the back of Form 1095-C add only two pieces of new information that employees might use. The opening sentence now tells the employee that his or her employer had to deliver the Form because it is an Applicable Large Employer subject to the ACA’s employer mandate.   The paragraph closes by explaining that an employee of more than one large employer should expect to a Form 1095-C from each of them.

Instructions for Forms 1094-C and 1095-C

Here we see the same indicators that the Forms are no longer in preliminary draft status, and we see many more substantive modifications and additions.  About 15% of the February 9 text seems to be new or modified, compared to the August 28 text.  These fourteen, two-column, single-spaces pages are where the action is.  We lacking room and you lacking tolerance for a page-by page analysis, we’ll briefly and too simply flag just four change areas – Designated Government Entity (DGE) reporting (pages 2-3, 9), self-insurer reporting (pages 2, 4, 10), Minimum Value definition (page 11) and multiemployer plan reporting (pages 5, 7-8, 10-11).

DGE Reporting:  DGE’s were referenced in the first draft instructions but their coverage bulked-up in the final release. A DGE is, “a person or persons that are part of or related to the Governmental Unit that is the ALE Member and that is appropriately designated for purposes of these reporting requirements.”  Nevertheless, “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.”  Here’s the given example:

County is an ALE 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 all full-time employees of the School District.

Self-Insurer Reporting:  The instructions direct self-insured employers to review and use Forms 1094-B and 1095-B and specify when Form 1095-C is a permitted or required alternative.  For example, small, self-insured employers use the “B” Forms, because the “C” Forms are for “Applicable Large Employers.”  Large employers with fully-insured plans need not complete, file and deliver a Form 1095-C for an employee who was, in the relevant year, only employed in a “limited non-assessment” status (even though the employee is included in the census reported on Form 1094-C), but employees enrolled in a large employer’s self-insured plan despite that status must have a Form 1095-C (listing all covered individuals in Part III). Although it’s not clear on first reading, it appears to us that large employers offering self-insured coverage to non-employees (for example, corporate directors) may report “covered individuals” data on Form 1095-C Part III, but must report their self-insurer status on Form 1095-B.

Minimum Value Definition:  The instructions add these italicized words to the Minimum Value definition – “A plan provides minimum value if the plan pays at least 60 percent of the costs of benefits for a standard population.”  Reading “for a standard population,” in light of IRS Notice 2014-69 and the January 15, 2015 HHS release of the 2016 Minimum Value Calculator, we interpret this as reiterated hostility toward Minimum Essential Coverage (MEC) plans lacking hospitalization coverage.

Multiemployer Plan Reporting:  We have worried aloud that the IRS and DOL might treat leased employee coverage arrangements as multiemployer plans, perhaps even applying punitive MEWA rules not written for that purpose.  The reason for severe MEWA penalties is put simply on the DOL/EBSA web site:

Through MEWAs, unrelated employers, typically small businesses, seek to provide health care and other benefits to their workers at what is represented to be a lower cost than other traditional forms of coverage.

The promoters, marketers and operators of MEWAs often have taken advantage of gaps in the law to avoid state insurance regulations, such as a requirement to maintain sufficient funding and adequate reserves to pay the health care claims of workers and their families. In the worst situations, operators of MEWAs have drained their assets through excessive administrative fees or outright embezzlement, resulting in harm to participants and their families. In some cases, individuals incur significant medical bills before they learn that claims are not being paid – and that they are liable and need to pay their medical bills themselves. The Affordable Care Act includes provisions designed to remedy these gaps.

This is a real problem justifying regulatory reaction. Worrying about over-reaction, we scoured these instruction changes for clues that leased employer coverage might be treated as a MEWA.

Under the employer mandate rules, 26 CFR § 54.4980H-4, employers of certain leased employees, under certain circumstances, may claim credit for qualifying coverage offers made to those workers by their staffing company employer.  This accommodating language survived from the original draft of these instructions:

An employer offers health coverage to an employee if it, or another employer in the Aggregated ALE Group, or a third party such as a multiemployer or single employer Taft-Hartley plan, a multiple employer welfare arrangement (MEWA), or, in certain cases, a staffing firm, offers health coverage on behalf of the employer.

The “employee” definition properly was changed to match the § 54.4980H-1 employee definition, which excludes, “a leased employee within the meaning of section 414(n) of the Code . . ….”  Code § 414(n) describes people leased in full-time status for a year or more.  Discussing how an employer reports on Form 1095-C an offer of credit made by another, the instructions say –

The information related to whether the full-time employee was offered coverage (generally meaning the employee was eligible for coverage under the plan) must be accurate to facilitate administration of the premium tax credit, including in the case of coverage offered by a plan such as a multiemployer plan or a plan sponsored by a staffing firm or similar entity for which the client employer pays an additional amount for enrolled employees. The alternative reporting methods may be applied to the offer of coverage to the extent the employer is otherwise eligible to use these methods. For example, if a multiemployer plan represents to a contributing employer that the full-time employee on behalf of whom the employer contributed was eligible for coverage that is a Qualifying Offer for all 12 months, the contributing employer may use the alternative reporting method related to such a Qualifying Offer. See the sections of these instructions related to the Qualifying Offer Method, including the 2015 Qualifying Offer Method Transition Relief.

Emphasis ours.  The closest “relief” code is Code 2E, “multiemployer interim rule relief.”  Other sorts of relief get detailed treatment on page 13 of the instructions, but “multiemployer arrangements” guidance consists of a reference back to the definition of “offer of health coverage.” There (page 11, right column), we read this:

An employer offers health coverage to an employee if it, or another employer in the Aggregated ALE Group, or a third party such as a multiemployer or single employer Taft-Hartley plan, a multiple employer welfare arrangement (MEWA), or, in certain cases, a staffing firm, offers health coverage on behalf of the employer.

Emphasis ours.   IRS seems to be saying that staffing firm offers are one type of arrangement entitled to “multiemployer interim rule relief.”  Consistently, the preamble to the employer mandate final rules describes staffing firm offers as a “similar arrangement” to a MEWA or other multiemployer plan.  79 Fed. Reg. 8,566 (Feb. 12, 2014).  Though staffing company plans are omitted from the preamble’s “Interim Guidance With Respect to Multiemployer Arrangements,” 79 Fed. Reg. 8,576, the rule text, 26 C.F.R. § 54.4980H-4(b)(2), discusses them in abutting sentences, adding that –

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.

Subsection (b) is headed, “Offer of coverage.”  We hope that IRS is not saying that claiming credit for a staffing company’s coverage offer exposes an employer to MEWA rules, but it’s a bit close for comfort. Because DOL has MEWA enforcement authority, it could provide sub-regulatory assurance that claiming Form 1095-C, Code 2E, multiemployer interim rule relief, based on coverage offers made to leased workers by staffing firms, will not expose those plans and employers to ERISA regulation of Multiple Employer Welfare Arrangements.  Let’s hope DOL reads this and responds helpfully.


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.

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.

As we have discussed in prior posts, many employers are looking at ways to restructure their workforces due to the ACA.  In addition to ACA issues, a worker who has been misclassified can have negative consequences on the employer’s employee benefits.  The following are just a few of the consequences in a retirement plan:

  • If misclassified, the worker may be entitled to participate in the company retirement plan going back to the date he or she would have been eligible.
    • If the plan is a 401(k) plan, the employer must contribute matching and non-elective employer contributions, just as paid to other plan participants, 50% of the average deferral percentage amount for the employee’s group, and investment earnings on incorrectly omitted plan assets.  The government essentially wants the employer to put the worker in the position he or she would have been if properly classified.
    • If the plan is a defined benefit pension, the employer must make plan contributions sufficient to fund the participant’s accrued benefit in accordance with the plan’s terms.
  • In addition to the cost involved, the plan may be deemed to have violated the minimum participation standards under ERISA.
  • Employers who mistakenly include those employees who are not eligible because they are independent contractors risk the plan’s disqualification for violation of the “exclusive benefit rule” under the IRC.

As with retirement plans, the failure to include a worker qualified to participate in a welfare benefit plan due to misclassification may expose the employer to liability for damages for benefits wrongfully denied and breach of fiduciary duty under ERISA.  Again, this could lead to the welfare plan being disqualified.  Disqualification of a welfare benefit plan under the IRC typically results in the need for employer contributions and, in some circumstances, plan benefits being includible in all participating employees’ income.

On the other hand, inclusion of a worker who is not eligible may result in a company having to reimburse its insurance or reinsurance carrier for benefits paid by the carrier from its general funds.

In addition to the problems in retirement and welfare plans, employee misclassification in a company’s cafeteria plan can cause substantial problems.  The inclusion of just one employee who is not a bona fide employee may disqualify the entire cafeteria plan.  That would result in any and all benefits received by participants from the cafeteria plan becoming includible in income in the plan year in which they are paid.



“Applicable Large Employers” are exposed, beginning January 1, 2015, to significant new taxes if they fail to offer “minimum essential coverage” to at least 70% of their full-time employees and their dependents.  Employers also must permit full-time employee coverage to become effective within a “90-day” maximum waiting period.  Unlawfully delaying coverage exposes the employer both to the new taxes and to fines of up to $100 per day per affected individual.  Puzzlingly, the enforcement agencies’ (DOL, HHS, IRS) rules on each subject fail to address their potential disruption of temp-to-perm staffing arrangements.  When callers ask for specific guidance, our contact information is taken.  We are reminded of Lewis Grizzard’s joke that the 1988 Atlanta Braves and Michael Jackson had one thing in common: they both wore one glove, for no apparent purpose.

Many employers obtain all new hourly workers from a leasing company that is their W-2 employer for, say, 90 days, at which time the customer moves some to its own payroll.  Is the employee’s first day on the new payroll Day 1 of the maximum waiting period under the customer’s group health plan, or must that plan count the employee’s 90 days with the leasing company?

The rules tell us little more than that an employer’s ACA obligations extend to every person who is its “common law employee.”  The IRS uses a 20-factor “right to control” test to determine whether a common law employment relationship exists.  No one factor determines the result, but if an employer can tell a worker what to do, when to do it and how to do it, then, generally speaking, the worker is that employer’s common law employee.  And an employee may have multiple, joint, common law employers.  If high penalties and lack of clear guidance compel leasing firms and their customers to adopt the most risk-averse rule interpretations, they might shorten the lease term to coincide with the one month “orientation period” of the maximum waiting period rules.  Some leasing firms might not be able to survive in that environment.   Some employers might not find truncated lease terms worthwhile.

If such disruption is to be minimized, leasing firms, their customers and their lawyers need clearer enforcement guidance, and we need it soon.  We’re asking our Congressional representatives to help us get the guidance that we need.  If this matters to you, please consider doing the same.

On the road a lot recently, speaking to large and small rooms of employers, we have seen what we expected to see about now.  As much as their questions, it’s been the look in the eyes of the audience, their body language, indicating that Affordable Care Act compliance worries are back on the front burner.  Maybe busy executives were wise to focus elsewhere since July 2013; certainly, the rules then are not the rules now.  But too many employers know too very little about their ACA obligations, and they have precious little time left to learn.  So, we’re going back to basics for a few weeks, before we resume our hunt for dangers lurking in the weeds.  To our many sophisticated readers, we apologize for the do-over.  If something new and urgent arises, we’ll interrupt this series to cover it. 

Here are several high-altitude, headline concepts that deserve prompt attention.

You’re Being Measured Now

Your status, or not, as an “Applicable Large Employer” under 26 U.S.C. § 4980H, subject to taxation for failing to offer affordable, qualifying coverage to substantially all your full-time employees and their dependents, is being measured in 2014.  If your plan has been to get small by January 2015, so as to avoid coverage, you need a new plan.  Prior, related articles are here, here and here.

The Common Law Employer Pays

Employee leasing can be an effective management tool, and the IRS wrote its employer mandate final rules to help preserve that option.  But do not expect the government to excuse you from ACA obligations to leased employees except as precisely promised in the written rules.  Otherwise, the IRS is likely to look to the “common law employer” of the leased employees.  Related, prior articles are here, here, and here.

Similarly, your common law employee is likely to be your ACA responsibility, even if you call him or her an independent contractor, even if you have a written contract that calls him or her an independent contractor, even if he or she is pleased with the relationship.  The ACA gives the IRS new, effective tools for discovering such misclassifications.

Some Assembly Required

You probably can’t avoid being an Applicable Large Employer by cutting-up your business into nominally separate legal entities, each of which has fewer than 50 full-time employees (including the full-time equivalent hours of part-time employees).  That’s because the ACA uses the broad IRS “controlled group” test.  Relatively few professionals are qualified to analyze controlled group status.  Too many are giving that advice.

Hours of Service,” Not “Hours Worked

Full-time employee tracking depends on which measurement method you are using, but all lawful methods require all employers to count hours in addition to FLSA “hours worked.”  If you are looking only at hours worked, you may undercount your “full-time” employee workforce.

Known Unknowns Are Few

Some advisors still are telling employers that reliable advice cannot be given because so few rules actually have been written.  That advice was excusable as recently as early 2013; not any more.  We’re awaiting major rules on plan discrimination in favor of highly-compensated employees and on automatic enrollment by certain large employers.  We need to see the actual process for Exchange notices to employers of subsidy certifications of people claiming to be their employees, and we need to see the employer appeal process.  We’re hoping for better sub-regulatory guidance on a number of subjects, especially fears about inadvertent MEWA’s due to employee leasing.  We will not be surprised if  some existing “transitional relief” is amended or extended.  Nevertheless, if you can’t get most specific questions answered specifically (not the same as “simply”), you need a different advisor.  Our ACA Advisor Pop Quiz is here.

Note:  When you read a prior article, please keep in mind that it was written based on the rules published at the time, to offer a simple, educational introduction to an important subject.  Do not substitute anything you read on this site for the current, competent, fact-specific ACA advice that you need.

We applauded the IRS decision to credit customer employers, for employer mandate purposes, with leasing company offers of affordable, qualifying coverage to leased employees, as long as the customer employer is surcharged for each employee who takes the coverage offered.  But since then, we have seen no evidence that parties to employee leasing arrangements are accepting that invitation.  Some potential explanations are obvious; perhaps the most obvious is that people making the agreements have not read the employer mandate final rules.  But here’s an even more obscure rule that may explain what we’re not seeing.

Ever heard of a MEWA?  Sounds like it could be a Godzilla movie character, but MEWA stands for “multiple employer welfare arrangement.”  It’s the most uber-regulated, non-retirement ERISA benefit plan, subjected both to federal rules (some added by the ACA) and to state insurance department oversight. If you form an association with other employers to co-sponsor a group health plan, you’re likely making a MEWA.  But what if you supervise employees leased from a company that offers them its own group health plan?

DOL Opinion Letter 2007-05A saw that as a MEWA, even though a state law made the leasing company the relevant employer for employee benefit plan purposes.  Conceding that the state could define a MEWA its own way for purposes of its own rules, DOL gave the state law no weight for ERISA enforcement purposes.

So, if you’re a large employer that needs to rely on leased employees after 2014, what other changes to your lease agreement might avoid employer mandate taxes?  The market may require leasing companies to indemnify customers for leasing company ACA violations, but read the agreement.  Exactly how does it define each party’s obligation to offer health care coverage to leased employees?  If it obligates the leasing company specifically and solely, you might have the MEWA problem described above. If it does not, the indemnity may be illusory, because, if the leasing customer is the common law employer, the IRS probably will see it as having the employer mandate tax exposure.  A compliance indemnity offered by the opposite party is no good if you are the one with the compliance obligation.

Due to this dilemma, some leasing companies – known as Professional Employer Organizations (“PEOs”) – are offering to employ everyone presently on the customer’s payroll.  If the agreement is well-drafted, and if leased employees are supervised solely by their fellow leased employees, the MEWA problem might be dodged, and if all full-time employees are offered affordable, qualifying coverage, that might negate any employer mandate tax exposure.  There’s also time for employer and leasing industry lobbyists to try to persuade DOL to remove the MEWA cloud hanging over partial workforce leasing arrangements.

Here’s the key:  don’t wait much longer to analyze your options and make your decisions.

Recently, we have received requests to re-post prior articles on the 90-day waiting period, the employer mandate final rules (supplemented here, here, here and here), and our pop quiz for ACA consultants.  As we approach our 100th article, some readers apparently find the scroll-down browsing process tedious.  So do we.  Here are two other ways to find the articles that most interest you.

You may search by “Tags” or by search terms.  We have attached all our present “Tags” to this article, appearing just under the author’s name, so that you may see your options.  Click any Tag and the server will show you a list of all articles similarly tagged.  Or, enter your search term(s) in the “Search” box, in the green bar above and to the right of the article, just above “ABOUT THIS BLOG.”  The server then will show you a list of articles that contain your search term(s).

We genuinely seek to help employers, providers, insurers and brokers understand ACA compliance issues, but please remember that the articles posted on this site are not legal advice and should not be substituted for legal advice.  They are offered as educational introductions to the subjects addressed.  ACA legal advice should be obtained confidentially from a lawyer who knows the ACA and who knows all your relevant facts.