Why is it important to know who counts as an “employee” for health care reform?

Starting in 2014, employers with 50 or fewer full-time equivalent employees are considered small employers and will be eligible to purchase health insurance through the Marketplace SHOP. Group health plans (sold in or outside the Marketplace) for small employers will be subject to the small group market reforms, such as age-based rates and metal tier classifications.

Starting in 2015, employers with 50 or more full-time equivalent employees are considered large employers and must offer affordable, minimum value, medical coverage to full-time employees to avoid penalties under the Employer Shared Responsibility requirement.

FTE includes both full-time (working 30 hours or more per week) and part-time (working less than 30 hours per week) employees. For example, if a part-time employee works 15 hours per week, the individual is counted as .5 compared to a full-time worker. To determine if a small or large employer in the current year, an employer averages the number of FTEs for each month in the prior calendar year.

Who is counted as an “employee”?

For health care reform, “employee” is defined using the common-law standard found in 26 CFR § 31-3401(C)-1(b). Under the common-law standard, an individual is an employee if a legal employer and employee relationship exists. Generally, that relationship exists when the company “has the right to control and direct the individual” regarding “the details and means by which” the individual’s work is performed for the company. There are several factors that are considered under the common-law standard, including the right to discharge, the furnishing of workspace or tools, the source of the individual’s employment wages, etc. The determination depends on the particular facts and circumstances of the relationship. No single factor is determinative.

All employees should be included in the employee count, even if they are ineligible for health coverage. Certain owners are excluded from the definition of employee.

Which owners are excluded from the employee definition?

When providing guidance on counting employees to determine employer size, insurance carriers may specifically state to include or exclude some owners as “employees”. If not otherwise stated, follow the guidelines below:

Sole proprietor:

Excluded. The regulations under health care reform specifically exclude sole proprietors as employees. If the owner’s spouse works for the company, additional guidance may be required.

Partner in a partnership:

Excluded. The regulations under health care reform specifically exclude partners as employees. If a partner’s spouse works for the company, additional guidance may be required.

2% S corporation shareholder:

Might be excluded. The definition for small employers does not exclude 2% shareholders. However, the definition of employee for large employers specifically excludes 2% shareholders as employees. Insurance carriers or the Marketplace may exclude 2% shareholders on the applications.

Other owners:

The answer depends on whether the owner and the company have the legal relationship of employee and employer. The definition of employee requires that the individual perform work for the company, and that the company “has the right to control and direct the individual” regarding “the details and means by which” the individual’s work is performed for the company. If the owner does not perform work for the company or performs only minor services, the owner is not considered an employee. Also, if the owner performs work, but is autonomous in the work, then the owner is not an employee. However, if an owner performs work that the company has a right to control and direct the means of, then the owner is a common-law employee. To determine whether the company has the right to control and direct is a matter of the specific facts and circumstances of the relationship.

Are independent contractors counted as employees?

It depends on whether the company where the individual works has the legal relationship of employer to employee. In general, if the contractor is subject to the control of the company only regarding the work result, and not the means and methods of performing the work, the contractor is not an employee. For instance, if the contractor performs services for multiple companies/clients, retains control over the work schedule, location, tools, or technique used, has the right to refuse or accept projects, or is compensated per project or on retainer, the contractor is likely not a common-law employee. However, if the company has the right to control a number of these factors, it is likely the company is the employer and the contractor is an employee.

Are temporary or leased workers hired (and paid) through a staffing or placement agency counted as employees?

It depends on whether the client company, for whom the individual performs the work, has the legal relationship of employer to the employee. Typically, the agency is responsible for the individual’s employment wages, but that alone does not mean that the agency is the common-law employer. When the agency also retains control over the individual’s training, daily performance, workspace or tools, and termination from a job assignment, the agency is more likely to be considered the common-law employer. However, when the individual reports to work at the client’s worksite, uses tools provided by the client, is trained and supervised by the client, and the client has the right to terminate employment, the client is most likely the common-law employer.

For an illustration of the facts and circumstances under which a temporary staffing agency (rather than its client) is the individual’s common-law employer, see Rev. Rul. 70-630.

What if the individual is the company’s common-law employee, but the agency offers medical coverage?

If an individual is the client company’s common-law employee, the individual must be included as an employee when determining the company’s size. If the individual is a full-time employee, the individual must also be included in the employee count for determining what percent of full-time employees are being offered coverage. However, the company might not need to offer medical coverage to an individual whose agency offers coverage that is both minimum value and affordable.

Keep in mind: Applicable large employers must offer coverage to at least 95% of full-time employees (2016+) or be subject to a penalty under §4980H(a) for failure to offer coverage. Even if an applicable large employer offers coverage to at least 95% of full-time employees, the employer may still be subject to a penalty under §4980H(b) for an employee who is not offered coverage or if the offered coverage is not affordable or not minimum value.

There are two ways that the agency’s offer of affordable, minimum value coverage can satisfy the company’s requirement to offer coverage to the individual:

  1. The agency’s offer of coverage may be treated as an offer made by the company if the fee paid by the company to the agency is higher for an employee that enrolls in coverage than if the employee did not enroll. (See (2) on pdf page 56 of Fed. Reg. Vol. 79, No. 29.)
  2. The penalties under §4980H(a) and §4980H(b) will be assessed to the employer only if at least one full-time employee enrolls in Marketplace coverage and receives a premium tax credit. The premium tax credit is not available to an individual who was offered affordable, minimum value coverage. In general, when an individual does not qualify for a premium tax credit, the individual will not trigger a penalty for either the agency or the company, regardless of which business is the common-law employer or which offered the coverage.

However, if the company does not offer coverage to at least 95% of its full-time employees, and the agency’s offer is not treated as an offer made by the company (number 1 above), the §4980H(a) penalty could still be triggered by another employee.

Therefore, it is recommended that:

  • Staffing and placement agencies establish benefit programs to offer affordable, minimum value coverage to their temporary or leased workers;
  • Companies only hire temporary or leased workers from agencies that agree to offer affordable, minimum value coverage to placed workers; and
  • Contracts for temporary or leased workers include a surcharge fee to the company for each worker who enrolls in the agency’s coverage.

For more information to determine if an individual is a common-law employee, independent contractor, or non-employee owner:
Please visit the IRS website for more information and to locate the form that can be submitted to the IRS for an official determination.