If any of them are, your HR staff will need to add them to calculations of total employees as part of your Affordable Care Act (ACA) compliance. If not, your company will risk incurring a hefty excise tax.
To comply with the ACA, your company must offer health care coverage to 70% of your full-time employees (those working an average of 30 or more hours per week) in 2015 and 95% from 2016 and beyond. The 70% threshold applies only to employers with 100 or more full-time plus full-time equivalent employees. The 95% threshold applies to employers with 50 or more full-time plus full-time equivalent employees.
Your HR staff will need to divide the number of full-time employees who are offered coverage by the total number of full-time employees, including common law employees who work full-time and may currently be classified as leased employees or independent contractors. If your company misses the threshold, it will owe a tax of $2,000 per year times the total number of full-time employees minus the first 80 employees in 2015 and 30 employees thereafter.
The penalty adds up: For example, a company with 250 full-time employees would pay an annual penalty of $340,000 in 2015 and $440,000 after 2015. Even if you miss the 95% threshold by just 1%, your penalty will be the same as if you hadn’t offered any coverage. Clearly, it’s essential to correctly classify workers and add common law employees into your count.
Align with IRS guidelines
HR will need to evaluate how your company’s full-time independent contractors and workers from staffing agencies line up with the IRS’ guidelines. Generally, the IRS considers individuals to be common law employees if your company is authorized to direct and control the way they perform their services. However, it isn’t that simple. The Internal Revenue Manual lists many factors that should be used to identify common law employees and related considerations.
The IRS estimates that employers misclassify millions of workers as independent contractors instead of employees, thus avoiding the payment of employment taxes, according to the Treasury Inspector General for Tax Administration. The agency has long viewed worker classification as a major contributor to the tax gap and as a result has actively audited employment classification—a trend likely to intensify under the ACA. In addition, the U.S. Department of Labor has entered into alliances to promote enforcement and information-sharing about cases of worker misclassification with the IRS.
With enough time and resources, the process is manageable, so HR staff should start their analysis now. They need to know how many employees must be offered coverage during the open enrollment period this year to meet the 70% threshold for 2015. Acting now will also help position your company for 2016 and beyond, when the coverage threshold becomes more stringent.