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Employee Benefit Considerations for Contingent Workers

Employee Benefit Considerations for Contingent Workers. Types of Contingent Workers. Employee or Independent Contractor Employee or Leased Employee Who is the common law employer, especially in three-party arrangements? On-call Employees Temporary Employees Freelancers Contract Employees

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Employee Benefit Considerations for Contingent Workers

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  1. Employee Benefit Considerations for Contingent Workers 1

  2. Types of Contingent Workers • Employee or Independent Contractor • Employee or Leased Employee • Who is the common law employer, especially in three-party arrangements? • On-call Employees • Temporary Employees • Freelancers • Contract Employees • Workers of Staffing Firms • Workers of Professional Employer Organization (PEOs) 2

  3. Scope • Employment of contingent workers is governed under a series of federal laws, but the high profile cases have principally involved two laws: • Internal Revenue Code • Employee Retirement Income Security Act • IRC and ERISA Common Law Test • Other laws may have broader tests • For example, FLSA uses a very broad definition (is the worker economically dependent on the employer?) 3

  4. Employee or Independent Contractor • Mostly focus on abuses involving misclassification of workers as independent contractors • Common law agency test focuses on who has control over the services performed by the worker. • Mostly subjective • The relationship of employer and employee exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. • Avoidance of tax obligations: • FICA • FUTA • Federal Income Tax withholding 4

  5. IRS 20 factor test • Revenue Ruling 87-41 used to determine FUTA, FICA, and income tax withholding: Factors include: • Complying with instructions of others • Extent of training • Integration of services • Hiring, supervising • Continuing relationship • Submission of reports • Payment by hour, week, or month • Right to discharge or terminate • Reduced to three broad standards: • Behavioral control (how the work is performed) • Financial control (economic aspects of relationship • Legal control (relationship of parties) 5

  6. Agreements Important • Important to have a good agreement in place that at the very least describes: • obligations to pay taxes, • responsibilities, • equipment and office space, • fixed fees, and • distance from employee status 6

  7. Employee Benefit Issues • Plan might not cover workers who are not employees • Plan may exclude from participation workers who are employees and who do not fit within the eligible class of employees 7

  8. ERISA Obligations • ERISA is the law designed to protect rights of employees, former employees, and their designated beneficiaries with respect to certain employee benefit plans. • Under ERISA, benefits are generally provided only to persons designated as employees and not independent contractors. • Courts use the common law agency test 8

  9. Tax-Qualified Plan Overview 9

  10. Tax-Qualified Plans Cont. • IRC Section 401(a)(2) requires qualified plans to be maintained “exclusively for the benefit of …… employees” • Plans covering non-employees violates the qualification requirements • Use of EPCRS for reclassified workers 10

  11. Tax-Qualified Plans Cont. • To receive benefits under the plan, a worker needs to show: • He is an employee of the employer (common-law definition of an employee) • Member of the class of employees who are eligible to participate in the Plan • He elects to participate (in some cases) 11

  12. What if the Plan is not Tax-Qualified? • Retroactive reclassification of workers (exposure to risk) • Consequences for including Independent Contractors or excluding Employees: • Operational failures, only corrected through EPCRS • Nondiscrimination testing issues • Financial consequences for plan sponsor, plan participants, trust 12

  13. Welfare and Fringe Benefits • Include group health plans, life, travel, accident, AD&D, long-term disability, short-term disability, severance, long-term care plans, etc. • Think about the terms of insurance policies • Health plans are subject to the Affordable Care Act 13

  14. Affordable Care Act • Certain employers must offer group health plan coverage to their full-time employees or pay an assessment • Applies only to applicable large employers (50 or more FTEs starting in 2016) (100 or more FTEs in 2015) • Full-time common-law employees are those that work at least 30 hours per week 14

  15. 4980H Rules • When applying the rules, employee classification is critically important: • For determining whether employer has at least 50 FTEs, and • Determining penalty based on each full-time employee • Must offer coverage to at least 70% in 2015 or 95% in 2016 and beyond • (a) Penalty of $2000/year for each FTE excluding the first 80 in 2015 or first 30 in 2016 and beyond if at least one employee receives a premium tax credit • (b) Penalty of $3,000 per each FTE who receives a premium tax credit • Improperly classified workers may skew the calculations • Assessment in the nature of a nondeductible excise tax 15

  16. Health and Accident Plans • Tax benefits for employee, not independent contractors: • Section 105 governs the tax treatment of “amounts received by an employee” • Section 106 provides that employer-paid coverage under an accident and health plan is not taxable to the employee • Under a typical plan, 106 insures that premiums paid by an employer on employee’s behalf are excluded from income and 105(b) exempts any benefits paid on the employee’s behalf under the plans. • Employee contributions would be taxable in absence of section 125 16

  17. Health and Accident Plan Cont.Issues • Nondiscrimination issues for self-insured plans, causing taxable reimbursement to highly compensated employees (IRC Sec. 105) • Taxation of excess benefits provided in case of failure of eligibility test or taxation of benefits not provided to all participants in case of failure of contribution test • Nondiscrimination issues under cafeteria plans (IRC Sec. 125) 17

  18. Group-Term Life Insurance • Employers are permitted to provide employees with group-term life coverage on a tax-advantaged basis ($50,000) • Employees include current common law employees, full-time employees, leased employees • Plans that improperly include independent contractors or exclude workers who are common law employees risk violating the nondiscriminatory eligibility requirements, in which case the entire cost must be included in wages of key employees 18

  19. Education Assistance Programs • Section 127 • Provides that gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance, up to a dollar limit and the excess of the dollar limit may be deductible as a working condition fringe benefit • Employee is a common law employee, leased employee, former employee who retired or terminated as result of disability, present employee on leave, self employed individual • Must be for an exclusive benefit of employees 19

  20. Educational Assistance Program Cont. • Violates the requirements that programs be for the exclusive benefit of employees and result in the loss of tax benefits for all participants • If employees are excluded, concern with failure of the applicable nondiscrimination tests 20

  21. Dependent Care Assistance Program • Section 129 • Exclusion from gross income of employee for amounts paid or incurred by the employer for dependent care assistance provided to the employee, up to a certain dollar limit • Employee means current common law employee, 414(n) leased employee • For misclassified workers, income is taxable and subject to employment taxes and income withholding 21

  22. Fringe Benefits • Form of non-cash compensation for performance of services that would normally be treated as taxable • Tax benefits are unavailable to non-common law employees • Misclassifying workers may result in reporting errors, employment tax issues, loss of tax deduction 22

  23. Qualified Transportation Benefits • Tax advantages for two categories of transportation expenses • Only permits inclusion of current common law employees and leased employees 23

  24. Counting 414(n) Leased Employees as “Employees” for Nondiscrimination • Generally employees of staffing firm • Prevention of “fire” and “lease-back” • Qualified retirement plan • IRC Sec. 401(a)(3), (4), (7), (16), (17), (26) • Group life-insurance – IRC Sec. 79 • Accident and health plan – IRC Sec. 106, 125 • Cafeteria plan – IRC Sec. 125 • Educational assistance program – IRC Sec. 127 • Dependent care assistance program – IRC Sec. 129 • COBRA – IRC Sec. 4980B 24

  25. 414(n) Leased EmployeesCounting for nondiscrimination testing • any person who is not an employee of the recipient and who provides services to the recipient if— • (A)such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the “leasing organization”), • (B)such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year, and • (C)such services are performed under primary direction or control by the recipient. 25

  26. 414(n) Leased Employees Cont. • Never required recipient employer to cover leased employees under those plans, but instead, count the leased employees when conducting nondiscrimination testing for various benefits • A worker who otherwise would be treated as a leased employee may not be so treated if the worker participates in a safe-harbor plan maintained by the leasing company. • Primary direction and control prong of the test is applied only after it is determined that the worker is an employee of the leasing organization. 26

  27. 414(n) Leased Employees Cont. • Factors to determine primary control: • Service is performed by a particular person • Subject to supervision of service recipient • Perform services in sequence set by service recipient • Leased employee status only occurs where leasing company involvement is substantial 27

  28. Statutory Leased Employees Cont.Example • Staffing company duties (IRS Rev. Rul.70-630): • Entered into contracts with employers (determining services and fees); • Has right to replace the worker; • Employer has no right to affect contract between staffing company and worker. • Hires the worker, pays wages, provides liability and unemployment insurance • Contractual right to evaluate workers • Hours and nature of duties are set by staffing company based on employer’s request • Need to have control of employees at the worksite 28

  29. Co-Employment (PEOs) • Who is the common law employer? • Two business exert some control over an employee’s work or working conditions • Three-party arrangements • Assume responsibilities for all or most of a client’s existing workforce • Client still has control over day-to-day activities of its workforce • Under the Code: • The business employer is considered the common law employer for benefit and tax purposes. • Accommodations and special rules in the ACA 4980H regulations 29

  30. Professional Employer Organizations • Smaller employers outsourcing their tax and benefits compliances to specialists with expertise in the area (payroll, benefits, hr) • Allow employers to use group purchasing power to purchase employee benefit programs collectively 30

  31. Joint-Employment http://www.napeo.org/peoindustry/coemployers.cfm

  32. Professional Employer Organizations Cont. • The IRS has done little to discourage PEOs, but has not come up with a set of clear principles • For wages, the IRS has issued guidance starting with 2016 that a certified PEO is treated as the only employer but only with respect to remuneration remitted by the PEO to the employee (ABLE Act) • The ABLE Act solves a number of payroll-tax related issues, but not employee benefit issues 32

  33. Professional Employer Organizations Cont.Qualified Plans • If the workers employed through the PEO are common law employees of the recipient only, and if workers are covered by a tax-qualified plan by the PEO, then: • The plan may be disqualified because it is not being offered exclusively to employees; • The plan has to be treated as a multiple employer plan 33

  34. The Affordable Care Act and Staffing • Staffing Models: • Staffing firm is the common law employer • Client of the staffing firm is the common law employer • No distinction between staffing firm and PEO • Ultimate penalty rests on the common law employer • Actual facts and circumstances will govern the status, not the contract • Anti-abuse provisions which address arrangements to evade application of the employer mandate 34

  35. The Affordable Care Act and Staffing Cont. • Recognize that the PEO and not the employer, in some instances, will make the offer of coverage • Regulations permit an offer of coverage by an unrelated employer in cases where the employee to whom coverage is offered by the staffing firm is the common law employee of the client • Can be used intentionally or contractually 35

  36. The Affordable Care Act and Staffing Cont. • If PEO offers coverage for common law employees of the employer, the employer is treated as having offered coverage, but only if the fee paid for the employee enrolled in the health plan is higher than the fee paid for employees not enrolled in the plan. • Do not address issues such as: • MEWA status of the staffing firm’s group health plan; • Loss of tax deduction under Code Sec. 105, 106, and 125 (additional fee may preserve these exclusions) • Determination that the employees being placed with an employer are employees of the employer may have consequences on other benefit programs (such as 401(k))

  37. Post-Employment Consultant • If a worker that is now referred to as a consultant is still a common law employee, then he/she is misclassified • Looking for a fundamental change in the relationship • Employees should not be immediately rehired as an independent contractors • The employer should enter into a contract with the worker, which describes limited services provided • Payment for services should be on a project basis • The agreement should not set a time or place • Issues when W-2 and 1099 received in same year 37

  38. Self Audit • Employers should self-audit their worker classifications and to review benefit issues as part of the analysis: • Review status as common law employer • Eligibility terms and distinctions • Nondiscrimination tests • Proper crediting of service and inclusion of leased employees 38

  39. Baltimore Lockwood Place • 500 East Pratt Street, Suite 900 • Baltimore, MD 21202-3171 • T: 410.332.8600 • F: 410.332.8862 Boston 131 Dartmouth Street, Suite 501 • Boston, MA 02116 • T: 617.723.3300 • F: 617.723.4151 Chesterbrook 1200 Liberty Ridge Drive, Suite 200 • Wayne, PA 19087-5569 • T: 610.251.5050 • F: 610.651.5930 Harrisburg Penn National Insurance Plaza • 2 North Second Street, 7th Floor • Harrisburg, PA 17101-1619 • T: 717.257.7500 • F: 717.238.4622 New York 245 Park Avenue, 24th Floor • New York, NY 10167 • T: 212.672.1995 • F: 212.372.8798 Newark One Riverfront Plaza • Newark, NJ 07102 • T: 973.286.6700 • F: 973.286.6800 Philadelphia Centre Square West • 1500 Market Street, 38th Floor • Philadelphia, PA 19102-2186 • T: 215.972.7777 • F: 215.972.7725 Pittsburgh One PPG Place • 30th Floor • Pittsburgh, PA 15222 • T: 412.209.2500 • F: 412.209.2570 Princeton 650 College Road East, Suite 4000 • Princeton, NJ 08540-6603 • T: 609.452.3100 • F: 609.452.3122 Washington 1919 Pennsylvania Avenue, N.W. Suite 550 • Washington, DC 20006-3434 •T: 202.333.8800 • F: 202.337.6065 Wilmington 222 Delaware Avenue • Suite 1200 P.O. Box 1266 • Wilmington, DE 19899 • T: 302.421.6800 • F: 302.421.6813 39

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