New ACA Issue for Staffing Companies and their Clients: Who s the Employer? Kaufman & Canoles Webinar. April 9, 2014

Transcription

1 New ACA Issue for Staffing Companies and their Clients: Who s the Employer? Kaufman & Canoles Webinar April 9, 2014 John M. Peterson Kaufman & Canoles, P.C. jmpeterson@kaufcan.com (757) Disclosures The following disclosure is required pursuant to IRS Circular 230 and applicable state and local tax provisions, the regulations that govern the practice of tax advisors. Any advice concerning Federal, state and local tax issues contained in this written communication (and any attachments) has not been written nor is it intended by the author or Kaufman & Canoles, PC to be used, and cannot be used, for the purpose of (i) avoiding federal, state or local tax penalties that may be imposed by the Internal Revenue Service or applicable state or local tax provisions, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. If a formal covered opinion intended to provide such protection is desired, please contact us to discuss the issues and costs involved in preparation of such a covered opinion. Kaufman & Canoles is providing general education and not specific legal advice at this presentation. 2 1

2 Topics Introduction to the Issue Historical focus on Independent Contractors Final Regs: Common Law Employee Work Around & Fee Disparity Common Law Employee Defined & Examples Our Recommendations Sidebar: Variable Hour Issue Sidebar: Per Diem Audits 3 Introduction to the Issue The ACA introduces a significant new issue for staffing companies and their clients: who s the common law employer? Final regulations under the employer mandate (4980H) issued 2/10/2014 make clear that for ACA purposes the IRS will consider the worker the employee of the common law employer without regard to who issues the W-2 4 2

3 Why the Issue is Important Consider a large employer who in 2016 has 900 full-time employees on it s payroll and offers all of them adequate and affordable health insurance to avoid ACA penalties But the employer also employs 100 full-time workers through a staffing company that the IRS determines on audit are the employer s common law employees 5 Why the Issue is Important Since the employer did not offer qualifying coverage to the requisite 95% of it s full-time employees they will be subject to the 4980H(a) no offer of coverage penalty After COLA adjustments the (a) penalty for 2016 will likely be about $2,250 per full-time employee in excess of 30 or about $2,182,500 (970 x $2,250) 6 3

4 Historical Focus on IC IRS has been attacking the payment of workers as independent contractors (IC) for decades IRS would prefer that all workers have payroll taxes withheld and paid on all payments for services Although never an easy determination the IC issue has resulted in a large body of law around the issue of what factors make a worker a common law employee 7 Sidebar on IC Issue Any employers currently paying any workers as ICs (on 1099-MISC) would be well advised to revisit that situation and the terms of their IC agreements with their counsel Certain employers enjoying IC protection under section 530 or other special relief provisions specifically do NOT enjoy that relief with respect to their ACA determination of employees 8 4

5 Why the Issue is New in the Staffing Company Context With their primary concern being payroll tax withholding and payment at the source the IRS has not previously been concerned with Who s the employer? in the staffing company/client context Issue has sometime arisen in the qualified retirement plan area but has been addressed under the leased employee rules found in IRC section 414(n) and the multiple-employer plan solution for PEOs found in Revenue Procedure Final Regs- Employee Defined Final regulations under IRC 4980H define employee as follows: The term employee means an individual who is an employee under the commonlaw standard. See (c)-1(b). IRS specifically rejected relief from penalties that will result from retroactive reclassification of workers 10 5

6 Final Regs- Troubling Statement IRS made a very troubling statement in the context of whether a client could take credit for coverage provided by the staffing firm as follows:..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 [PEO] or staffing firm is not the common law employer of the individual) 11 Typical case?? Is IRS insinuating that in most cases workers provided by staffing companies are the common law employee of the client? Hopefully not! Or did they mean to limit their statement to the typical PEO situation and included an unfortunate reference to staffing companies in general? 12 6

7 Final Regs- Work Around IRS provided in the final regulations a very helpful work around on the Who s the employer issue A client company who is later determined to be the common law employer can take credit for any health coverage provided the worker by the staffing firm In such case the IRS considers the staffing firm the agent of the client company 13 Final Regs- Fee Disparity However the work around comes with a confusing condition: 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. 14 7

8 Fee Disparity Questions Does the worker have to actually be enrolled in the staffing firm s plan in order for the client to take credit, or is just an offer of coverage enough? Does the client have to pay a higher fee only for workers actually enrolled or for all those offered coverage? Does the extra fee have to bear any relationship to the actual cost of providing the coverage? 15 Common Law Employee Defined An individual is a common law employee if the company has the right to: control and direct the individual who performs the work, not only as to the result to be accomplished by the work but also as to the details and means by which the result is to be accomplished. 16 8

9 Common Law Employee Original infamous IRS 20 factor test first reduced to 13 factors and now reduced to 3 broad standards: Behavioral control Financial control Legal control (relationship of the parties) No bright line tests, still a very difficult issue 17 Behavioral Control Who has authority over Where work is done What tools & equipment is used What types of work are performed What routines are to be used What order or sequence is to be followed What level of instruction is provided and consequences of non-compliance 18 9

10 Financial Control Does the worker: Make a significant financial investment Incur significant unreimbursed expenses Make services available to others Have an opportunity for profit/loss (IRS emphasis) 19 Legal Control What does the legal relationship of the parties indicate with respect to: Intent as to control of work Written contract Extent/duration of the relationship (specific project or indefinite) 20 10

11 Regs- Home Care Example The final regulations provide insight into factors the IRS considers relevant in the home care context In finding the home care service recipient (and not the staffing firm) the common law employer the IRS cited: Recipient s right to direct and control how services are performed Ability to choose (hire) the particular provider Ability to select the specific services Ability to set the hours Since the service recipient is a small employer not subject to the mandate this is great news! 21 Example- Clearly Staffing Company Employee Staffing company provides short term, relatively low-skilled workers from a stable of on-demand employees Client does not interview or have any say in selecting the temporary worker and only has the power to request a substitute 22 11

12 Example- Clearly Client Company Employee Employer provides services on a project or contract basis (government or private) Rather than employing workers directly employer contacts staffing company and requests a number of candidates of a certain skill level for a project lasting a certain length of time Client employer interviews and hires workers for the project Employer is clearly the common law employer 23 Example- Clearly Client Company Employee Employer with 80 full-time employees decides to try to avoid ACA mandate by off-loading 40 employees to a staffing company This is the proto-typical fire and lease back situation that will not be recognized as changing the common law status of the off-loaded workers 24 12

13 Recommendations for Staffing Companies Review your business model and historical practices (with assistance of counsel)- is there any possibility that any of your placements could be considered common law employees of your client company? If NO, then address your ACA employer mandate issues assuming everyone on your payroll is your employee 25 Recommendations for Staffing Companies If YES then prepare to address the issue: Determine cost of ACA compliant coverage for all of those workers Determine cost sharing as between you and the employee (remembering that it needs to be affordable ) Advise client companies of your willingness to provide them with mandate protection and the incremental cost Revise service contracts to incorporate the fee disparity provisions 26 13

14 Recommendations for Client Companies Review your historical practices (with assistance of counsel)- is there any possibility that any of your workers through staffing companies could be considered your common law employees? If NO, then address your ACA employer mandate issues solely with respect to the employees on your direct payroll 27 Recommendations for Client Companies If YES then prepare to address the issue: Not likely that you can or want to extend your existing health coverage to the contracted workers Confer with staffing company to confirm they will address the issue by providing ACA compliant coverage to all such workers placed with you and additional cost Revise service contracts to incorporate the fee disparity provisions and obtain representations and warranties that the staffing company will assume the ACA mandate responsibilities 28 14

15 Separate Contracts Likely Probable outcome of this issue is all staffing companies and their clients will operate under 2 separate service contracts depending on the circumstances One for workers clearly the employees of the staffing company Separate (and different) contract for all other workers who don t clearly fall into the first category 29 Sidebar- Staffing Company Variable Hour Employees Once a staffing company has identified it s common law employees it must then address it s employer mandate penalty exposure Given the somewhat intermittent employment opportunities for many staffing company employees it would have been very helpful if IRS had allowed all new staffing employees to be considered variable hour employees 30 15

16 Sidebar- Staffing Company Variable Hour Employees Variable hour employees do not have to be offered compliant coverage within 90 days of hire but instead can be measured over the first 12 months of employment to determine whether they work over 1,560 hours in that first year Fearing abuse the IRS declined to adopt such a position and instead provided specific factors staffing companies must consider 31 Sidebar- Staffing Company Variable Hour Employees Provisions of the final regulations specific to Temporary Staffing Firms : No presumption that new employees can be classified as variable hour No special rehire rule for staffing firms (subject to standard 13 week absence rule to consider rehire as new) Special factors that have to be considered in classification of new employee 32 16

17 Sidebar- Staffing Company Variable Hour Employees Special factors for new employees intended to be placed on temporary assignments at client organizations : Typical experience of employees in that position Does new employee have right to reject temporary placements Does the position generally have periods with no work Are the placements generally less than 13 weeks No single factor determinative Fall back to reasonable expectation test 33 Sidebar- Staffing Company Per Diem Issue Staffing companies are being audited by IRS for abuse in the payment of tax free per diem expense reimbursements Example: staffing company pays a local worker $20/hour ($160/day) but pays an out-of-town employee $10/hour plus $80/day tax free per diem (same total $160/day) IRS is re-characterizing per diem as wages 34 17

18 Thank You for Attending John M. Peterson West Main Street Suite 2100 Norfolk, VA