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Will temporary employees be covered under the Affordable Care Act?

October 5, 2012

Article courtesy of SBAM Approved Partner ASE

By Anthony Kaylin  

The fast answer is “likely.”  Beginning in 2014, large employers—i.e., those with at least 50 full-time employees working at least 30 hours weekly or 130 hours monthly, on average—who want to offer group health insurance must extend that coverage to these employees or pay a penalty.

Under the Affordable Care Act (ACA), “full-time employees” are those working 30 or more hours per week. There is an exception for employers whose population of seasonal workers put them over the 50-employee mark. Seasonal workers are either agricultural workers who work seasonally or retail workers employed exclusively during holiday seasons.

That exception aside, to calculate its population under the ACA, an employer has to add the number of its full-time employees for a month to the number of full-time equivalents (or FTEs) for the month.  If the total comes out to 50 or more, the employer is “large” under the ACA.

According to the law, calculating FTEs means dividing the aggregate number of hours of service of non-full-time employees  (i.e., those who averaged less than 30 hours per week) for the month by 120.  For example, if six part-time employees each work 25 hours per week, they would be the equivalent of five full-time employees ([6x25x4]/120) = [600/120] = 5). Thus, these six part-time employees would be counted as five FTEs toward determining whether or not the employer has 50 full-time employees and is required to offer health insurance. If the total comes out to 50 or more, all six contingent employees will have to be offered healthcare insurance.  

Employers not sure whether they have part-time or full-time employees may be able to get relief from the government that will get them through 2014, under Notice 2012-58, I.R.B. 2012-41 from the U.S. Department of Treasury.

According to Treasury attorney Kevin Knopf, certain variable-hour employees may not need to be treated as full time based on the uncertainty of their hours and their expected tenure in the job. Further, certain types of employees such as on-call employees or leased employees are not addressed yet in any guidance. Nevertheless, says Knopf, the department hopes to issue proposed and final regulations by January 1, 2014, the effective date of this part of the law.

However, until any guidance is provided, most employers who use contingent employees—including variable, paid interns, paid co-ops, and other as-needed workers—will likely have to count their hours in the calculation of their FTE total.

The implications of these requirements could be far-reaching. For example, employers on the cusp of 50 FTEs may end up reconsidering whether, how or how much to use temporary employees or paid interns or paid coops. Or, they may choose to run all their contingent employees through a third-party payroll provider (ASE is one) to payroll these types of employees.

There is an additional implication that affects 1099 contractor/employees. The U.S. Department of Labor and the IRS have made it their mission to determine appropriate classifications of contract employees.  If a 1099 worker is found to be misclassified and should be an employee, the ramifications will be more intense than just payroll and normal benefit issues.  Healthcare eligibility will definitely be involved.

The real kicker is that employers are going to have to make hard financial decisions when looking at healthcare insurance, and determine whether to offer it or not quite apart from the attraction/retention benefits it may hold for them. They will have to decide if the penalty cost for sending employees out to the public exchange, even though there is no tax benefit, will make better financial sense than offering health insurance internally. To make this decision they may have to do some complex financial modeling and headcount management to ensure they meet the legal requirements to avoid the penalties of sending people to the public exchanges.

According to Pamela Villarreal and Peter Swanson of the National Center for Policy Analysis, if wages and salaries remain fairly constant but the cost of retirement and healthcare benefits grows, employers will more likely use temporary workers from a staffing agency. The agency would then be responsible for the healthcare requirements under the ACA.

Mercer conducted a study on cost savings on compensation and benefits and found that companies that switched workers from full-time to part-time status in order to save money did save $5 million in compensation and benefits but ultimately lost $30 million in productivity, possibly due to turnover and lower motivation.

If the ACA plays out as above, it will hasten the arrival of the so-called “on-demand” workforce. In the world of the on-demand workforce, employers will add heads only when projects require them and drop them immediately after, all the time looking to further reduce their number of what we used to think of as “permanent” employees, whether full-time or part-time. HR practitioners will have to bring a whole new set of skills to the talent management process, specifically financial modeling using predictive statistical analytics.

It is not the old HR anymore.

Questions on the ACA?  Visit SBAM’s Health Care Reform member center or use our Ask An Expert hotline.

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