Here’s another look at the kind of regulatory issue that can separate the elite benefits specialists from the order takers. Federal benefits rules and compliance policies are evolving rapidly, but the professional employer organization (PEO) seem to be reasonably stable, and here’s how the situation looked at press time. Even if the rules change dramatically, whatever comes next may continue to reflect some of the provisions previously in effect
Most professional employer organizations (PEOs) employ internal staff who run the company and recruit the temporary employees and workers to perform temporary work for the PEO firms’ clients (recipients). The latter often consist of lower-wage employees, sometimes with high rates of turnover.
Temporary employees have, at least in the past, shown little interest in obtaining health insurance coverage. Thus, many PEO firms have not provided health benefits to those workers. They are more likely to have arrangements under which the internal employees are provided major medical benefits, and the temporary employees are offered no plan or perhaps a limited benefit plan. The employer mandate rules encourage broad-based offers of major medical health coverage to all full-time employees and dependents. Thus, many PEO firms that do not offer affordable minimum value coverage to at least 95% of their full-time employees will be subject to an annual nondeductible employer mandate penalty of $2,260 multiplied by the number of all full-time employees, including full-time temporary employees, less thirty.
Additionally, nondiscrimination rules, presently delayed, will apply to health insurance plans. Those rules are to be based on Internal Revenue Service regulations, not yet issued, and modeled on the nondiscrimination rules that apply to self-insured plans. There are exclusions in the self-insured nondiscrimination rules that allow exclusion of high-turnover employers or part-time employees.
1. The Employer Mandate and PEO Employees Working for Recipient Employers
For the employer mandate, employee status is determined under the common law standard. A worker is a common law employee if the employer 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. It is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so. It is uncertain whether the PEO can take over the liability for the Affordable Care Act (ACA) employer mandate as provided by Internal Revenue Code (IRC) Section 4980H.
The Small Business Efficiency Act of (SBEA), which was signed into law in 2014, avoids addressing this issue by stating that “nothing in this section shall be construed to affect the determination of who is an employee or employer.”
Historically, many temporary employees assigned by PEO firms to client firms have been treated as common law employees of the PEO firm. There is no reason to believe this will change, at least with respect to traditional temporary PEO services. PEO employees performing services for many clients, such as payroll services, likely will continue to be PEO employees unless the PEO leases back employees performing payroll solely for one recipient employer. However, where the PEO employee is assigned to one recipient employer, it is likely that the worker will be the common law employee of the recipient if the recipient determines the services to be performed and has a right to determine the details and means used by the employee to perform those services.
Additionally, the employer mandate regulations preamble states that if the primary purpose of the PEO arrangement is to avoid the employer mandate provisions of the Act, the client may be the responsible employer.
2. Obtaining Minimum Value Coverage to Satisfy Employer Mandate
The Affordable Care Act insurance market reform provisions require that insurers guarantee the availability and renewability of health insurance products in the individual and group markets with no exclusions for pre-existing health problems.
PEO firms that want to offer coverage should be able to obtain coverage that provides 60% of minimum value, the required minimum threshold for adequate coverage. Before 2014, health insurers have often required employers to meet minimum participation requirements to meet their underwriting requirements and avoid adverse selection. This practice is no longer permitted. In the past, many health plans also imposed annual and lifetime payment limits to contain health care coverage costs. Beginning in 2014, this practice was no longer allowed. The Affordable Care Act also imposes maximum limits on out-of-pocket costs. Large PEO firms may also elect to self-insure their own health plan, administered by an insurance company or a third-party administrator.
The requirement of guaranteed availability means that carriers cannot apply traditional underwriting practices. This could result in adverse selection with greater numbers of people needing health care to elect it, which would increase the cost of health coverage. Final HHS regulations acknowledge that adverse selection may present a significant economic exposure to insurance companies. As a result HHS allows insurance companies to limit open enrollment periods in the individual and small group markets to once a year to reduce the risk that those needing health care would wait to purchase it when they needed the coverage.
However, HHS did not extend that provision to the large group market. Despite measures to limit adverse selection, insurance costs could still increase substantially due to these insurance reform rules, thereby making affordable, minimum value coverage impracticable for many PEOs. However, non-minimum value health plans may provide a solution, as discussed hereafter.
3. PEOs and Other Employers May Offer Non-Minimum Value Group Health Plans
Penalties under the IRC Section 4980H(b) apply where an employer offers health coverage that is not affordable or does not provide minimum essential coverage. The term “minimum essential coverage” refers to the source and not the scope of the coverage. Medicare, Medicaid, and VA health benefits provide minimum essential coverage, as does coverage under an eligible employer-sponsored health plan. An “eligible employer-sponsored plan” means a “group health plan” that provides for medical care other than just a Health Insurance Portability and Accountability Act (HIPAA) excepted benefit (e.g., stand-alone vision and/or dental, fixed indemnity, and single disease plans).
For now, at least, Affordable Care Act Section 5000A, the embattled individual mandate, requires many U.S. citizens and green card holders to maintain minimum essential coverage for themselves and any nonexempt family members or pay a penalty with their federal income tax return. Employer-sponsored minimum essential coverage need not provide for essential health benefits.
Nevertheless, it avoids the employee mandate penalty if it is affordable, in which, in 2018, the cost does not exceed 9.56% of the individual’s household income for self-only bronze coverage or individual and family bronze coverage where the individual has nonexempt family members. Essential health benefits are 10 types of health coverage that must be included in fully-insured products sold in the individual and small group markets as part of an “essential health benefits package.” These rules don’t apply, however, to large group and self-funded plans.
Minimum essential coverage need not offer minimum value, which requires that the coverage pay for 60% or more of expected health costs. As discussed, if an employer plan does not provide minimum value coverage, an employee may apply for subsidized coverage through a public exchange, which could trigger a $3,390 employer penalty per full-time employee per year. If an employer is not concerned with meeting the minimum value standard, it may sponsor a group plan that covers “medical care” and that complies with the act’s insurance market reforms. Thus, a plan that covers only preventative care and clinical trials covers medical care and qualifies as an eligible employer-sponsored plan. Indeed, excepted benefits included dental or vision insurance offered under a separate policy, certificate, or contract of insurance, so theoretically it is possible that a self-insured vision plan could be minimum essential coverage.
Non-minimum value plans will generally be much less expensive and may not require underwriting. Such plans allow the employer to satisfy the coverage option and avoid the $2,260 per full-time employee less thirty no-coverage penalty. Admittedly, the employer can be liable for the Internal Revenue Code Section 4980H(b) penalty. In many cases, however, the plan’s cost plus any penalty will be much lower than the cost of providing affordable coverage that provides minimum value.
Plans that fail to provide minimum value means that low-income employees in firms sponsoring such plans can still obtain subsidized coverage under a plan that provides an essential health benefits package from a public exchange, and the applicable large employer can be subject to the employer mandate penalties. Moreover, for low-income employees, the cost of subsidized coverage will in most cases be less than 9.59% of household income, which is what an “affordable” employer plan would cost. If the employee decides to forgo exchange coverage and buys the employer’s non-minimum value product, he or she will not be subject to the individual tax penalty for failing to have minimum essential coverage, and the employer will not be subject to the employer mandate for such employees.
—Read Watchdogs: IRS Has Problems With Employers' Tax Withholders on ThinkAdvisor.