Date: May 01, 2014
Magazine:
May 2014 Irrigation Advances

Dear Jon,

 

We use farm labor contractors (FLCs) to perform all sorts of services on our farm.  I’m concerned about the large employer mandate and whether or not the employees that work for the FLC could somehow subject me to a tax penalty under Obamacare.  Am I concerned for no reason?

 

— Feeling Hoodwinked in Hughson

 

Dear Hoodwinked,

 

Recent IRS guidance does suggest that employers who use staffing services (like farm labor contractors) may be at risk of misclassification issues that could lead to employer mandate penalties.  The guidance warns that because the final employer mandate regulations use a “common law” definition of employee, an IRS examination could find that “common law” employees have been misclassified as independent contractors.  Such a finding could result in significant penalty exposure to an employer.

Under the employer mandate “pay-or-play” rules, a large employer has an obligation to offer substantially all of its full-time employees and dependents the opportunity to enroll in minimum essential coverage that provides minimum value, which is affordable.  If a large employer fails to offer coverage to substantially all of its full-time employees and dependents, it may be subject to the “no offer” penalty which is $2,000 multiplied times each full-time employee (minus the first 80 in 2015, and the first 30 in 2016 and thereafter).

The mandate was set to begin in 2014.  It was then delayed to 2015.  It was further delayed to 2016 for employers with 50-99 full-time employees and relaxed for employers with 100 or more full-time employees.  As it stands now, employers with 100 or more full-time employees must offer 70 percent of their full-time employees (a.k.a. substantially all) the opportunity to enroll in coverage beginning in 2015.  This is a temporary relaxation of the substantially all requirement imposed by earlier regulations, which required 95 percent of full-time employees be offered the opportunity to enroll.  The 95 percent requirement returns in 2016.

Why does this matter?  Employers that utilize a large number of 1099 employees face a serious risk of incurring the “pay-or-play”  “no offer “penalty which is $2,000 per full-time employee.  This threat exists even where an employer believes it is offering coverage to its full-time employees because the 1099 employees may be reclassified as full-time employees who were not offered coverage.  If enough 1099 employees are reclassified, an employer who had been offering 70 percent (or later 95 percent) of its full-time employees coverage, might find itself on the wrong side of a “no offer” penalty.

To rub a little salt in this wound, the IRS clearly stated that an employer also may not avail itself of Section 530 relief for misclassifying common law employees.  Section 530 provides that no penalties or interest will be incurred if a worker is misclassified as long as the employer:

•             treated the individuals in question as independent contractors;

•             complied with the independent contractor Form 1099 tax reporting requirements; and

•             had a reasonable basis for treating the individuals as independent contractors.

The consequences of mischaracterizing workers from staffing firms can result in penalties for multiple years.  For example, if you fail to include workers from staffing firms beginning in 2015 and you get audited in 2018 the IRS may conclude that those workers were your common law employees during that entire audit time frame.  You could face penalties for not just 2018, but past years.  And if the IRS re-characterizes only a small number of workers each year, this could alter your full-time employee count and you could fall short of meeting your requirement to offer 70 percent of your Full-Time Employees coverage in 2015 and 95 percent of Full-Time Employees coverage in 2016 and beyond.

The recent IRS regulations provide a safe harbor that will help minimize risk.  Staffing firms (i.e. farm labor contractors) could provide health plan coverage through a multiple employer welfare arrangement (MEWA), such as WGAT, and this offer of coverage will be deemed to be an offer of coverage on your company’s behalf.  On the other hand, if the staffing firm does not use a MEWA, the staffing firm will be deemed to be offering coverage on your behalf as long as the fee the staffing firm charges your company is higher for an employee enrolled in the staffing firm’s health plan than it is for an employee not enrolled in the plan.

This latest guidance does present cause for concern for those employers using farm labor contractors.  If you are using farm labor contractors it is imperative that you implement a strategy as soon as practicable to avoid penalties in 2015 and beyond.  For more assistance understanding this or other Affordable Care Act issues, contact our health care reform team at healthcarereform@wga.com or (800) 333-4WGA.

 

WG Staff Contact

Jonathan Alexander
Vice President & PCMI Compliance
949-885-2330

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