Affordable Care Act – How Staffing Companies May Prosper With Payroll Funding
Steve Capper CEO/Managing Member. Flexible Funding - July 17, 2017
As we all know, the Affordable Care Act ACA will affect the entire temporary staffing marketplace–and your staffing company– directly or indirectly. Seminars, conferences, and consulting companies are springing up everywhere to assist with all of the ACA confusion. Some are wondering if and to what extent the ACA can be legally sidestepped (discussion to follow). Payroll
funding companies and invoice factoring organizations are also well aware of the coming changes and are wise to advise their customers to plan ahead. Consider the following:
- When there is an increase in dollar sales as a result of the ACA cost add ons, then more will need to be funded or financed….until the customer remits payment.
- If there is a need for more payroll funding then the overall maximum credit line for the staffing agency may need to be increased.
- If billing to an individual client increases, then the individual credit limit (if any) for that client may need to be reviewed and/or modified.
- When there is an increase in total dollars financed as a result of healthcare cost add-ons, then new volume discounts may apply…resulting in lower payroll funding cost. And if there is a loss of business as a result of ACA then one may lose volume payroll funding discounts, or may even fail to meet minimum volume/minimum fee amounts in the factoring or accounts receivable financing agreement.
- Enforcement interference by the IRS for not legally complying with all aspects of ACA, such as costly penalties, could also have a limiting effect on continued funding.
Can ACA be Legally Sidestepped for Growth?
There has been discussion around the staffing industry as to whether there is any staffing business model that would legally minimize the risk of liability-responsibility for the ACA Affordable Care Act and/or shift that risk to another party. At this time, it appears that careful structuring of the MSP Managed Service Provider/VMS Vendor Manager model can be utilized to shift ACA risk to another, subject to caveats. It must be emphasized that this is a new and developing area of law, with the IRS constantly issuing new regulatory and sub regulatory guidance regarding staffing agency arrangements.
If a competing staffing agency has to get cost increases from a customer or a prospect because it must provide healthcare benefits, and you do not, one has a competitive price advantage “strategy”. The first step toward this possible price advantage would be to obtain a contract to become an MSP Managed Service Provider-VMS with your customer/prospect–and sign with them as their MSP/VMS. This contract would be modified to address and clarify ACA responsibility. You would then execute an MSP/VMS contract–also a contract modified to address ACA responsibility– with separate labor supplier entities or associated entities that legally remain under the thresholds requiring provision of mandated benefits (ie. each entity staying under one hundred employees in 2015). There are a number of other thresholds and variables that one must account for. First, the parties to the agreements must determine whether they would be treated as affiliated under the IRS controlled group rules for determining who is a large employer that must provide healthcare benefits. Then, the parties must determine who is the common law employer of the contingent workers. Next, the parties must determine whether any of the contingent workers are full time employees. Finally, the parties must determine which entity (if any) will offer those employees qualifying coverage.
At the time of this writing, Flexible Funding is the only payroll funding company–we are aware of– that may provide it’s staffing agency customers with infrastructure to become an MSP/VMS to garner this price advantage. And of course, when there is an increase in billings due to a legal and carefully executed ACA “business strategy” (not as a result of health insurance add-ons), then many of the previously discussed payroll funding considerations may apply.
Applicable Large Employer Determination
Many already know the basics of ACA. The ACA employer mandate requires that “applicable large employers” –those with 100 or more full-time equivalent employees in 2015– either offer affordable minimum value health coverage to their full-time, common law employees, or pay a penalty. Beyond 2015, a large employer includes those with 50 or more full-time equivalent employees.
For purposes of determining whether an employer is an “applicable large employer”, the IRS has established rules examining company ownership interests. The determination of who is an applicable large employer isn’t made within the four walls of an employer’s building. For example:
- Are two or more companies affiliated by ownership or control?
- Is one company the parent or subsidiary of another company?
- Do certain individuals own a certain percentage of stock, voting power or a controlling interest in two or more companies?
- Are additional companies/entities/divisions being set up that break affiliated service group rules–such as services/consulting arrangements specifically set up to avoid ACA responsibility?
If it is determined that the ownership/control is affiliated, the employee count for those affiliated employers will be aggregated for counting/testing purposes in determining responsibility for ACA. In other certain circumstances, the IRS may determine that employees be aggregated for counting purposes in determining ACA liability: this includes circumstances such as options to purchase, spouses, parent-child relationship and estates/trusts. Employers could also be considered “related” for benefit plan purposes under affiliated service group rules when joint service activities, such as consulting, are rendered back and forth between two or more entities. One or more of them must be a “service organization” where capital is not a material income-producing factor for the organization or if it is engaged in a specified service field. A few examples of service fields include, health, law, engineering, architecture, accounting, consulting and insurance.
ACA Special Rules for Staffing Common Law Employees
The ACA requires that staffing agencies must only offer healthcare coverage to their “common law” employees. Certain commenters to proposed ACA regulations became concerned that this would incentivize employers to simply move to a contingent workforce to artificially reduce their employee headcount. As a result, the IRS came up with a series of rules intended to limit this strategy:
There is no bright-line test to determine whether an individual is an employer’s common law employee. The IRS has established a 20-factor, facts and circumstances test for this purpose. See IRS.gov for circumstances test. Ultimately, the determination hinges on what employer (if any) controls the employee’s actions.
Prior to issuance of regulations, the IRS became aware that employers were developing strategies to avoid common law employer status. Certain staffing agencies were considering “sharing” employees with client employers, with each individual only working part time for each employer (and full-time for no employer). As such the IRS established an anti-abuse standard, meaning that if the IRS determines that such a situation exists, it will “impute” the employee’s hours worked for the staffing agency to the client employer, for the client employer to the staffing agency, or both. Employers, whether staffing agencies or client employers, should be aware of the risk that the IRS could find such a co-employment relationship exists, which would mean that each employer could face liability for failure to offer coverage.
Variable/Temp Employees vs. Full Time Employees
In the debate over how ACA should function, staffing agencies argued that staffing agency employees are inherently “variable hour”, or temporary employees. The IRS addressed this argument in the final regulations, noting that staffing agencies may not automatically assume all employees are variable hour. Instead the staffing agency must consider a variety of factors in making this determination including, but not limited to, whether other employees within the staffing agency:
- Retain the right to reject temporary placements that the temporary staffing agency offers the employee
- Typically have periods during which no offer of temporary placement is made
- Typically are offered placements for differing periods of time
- Typically are offered temporary placements that do not extend beyond 13 weeks.
Depending on the outcome of this determination, a staffing agency may be required to categorize a new hire as “full time” and offer that individual coverage within three months.
Offer of Coverage by Another Employer
If a company is determined to be a common law employer and the workers are full time, requiring healthcare coverage, then the employer may satisfy its ACA obligation for coverage by having another entity–a temporary staffing firm for example– purchase the healthcare coverage. But there are guidelines on how much the client employer must pay to the staffing agency for the coverage, in order to be in compliance with ACA. The employer will only be considered to have offered coverage if the fee the client employer would pay to the staffing agency for an employee enrolled in health coverage is higher than the fee the client employer would pay to the staffing agency for the same employee if the employee did not enroll in health coverage. This leaves a number of unanswered questions, including whether the fee increase for an individual enrolled in health coverage must reflect the staffing agency’s actual cost for providing that individual coverage.
There are a number of key variables that must be ironed out in determining whether the VMS/MSP model would appropriately mitigate risk under the Affordable Care Act. Who is an applicable large employer? Who is the common law employer? Are the contingent workers full time? Which entity (if any) would offer those employees qualifying coverage? Once these questions have been answered the parties appropriately allocate risk to ensure there are no unintended consequences in the arrangement. Even though an entity cannot contractually agree to shift common law employer status, it can shift associated liabilities and and coverage obligations. Assuming this is properly captured in the service contract, the MSP/VMS model could minimize ACA risks/liabilities.