Even if a large employer offers coverage to at least 70% of its full-time employees (95% starting in 2016), it can still incur penalties if the coverage offered does not meet defined standards of affordability and value.

The employer mandate rules will be of particular concern to companies that utilize the services of individuals who are contractors (as opposed to actual employees) on a long-term basis - what are sometimes referred to as embedded or nested contractors. Embedded or nested contractor personnel are individuals whom a company treats as independent contractors (as opposed to employees) utilized under long term contracts or arrangements with staffing companies, other types of contractors, or perhaps, the individuals themselves. These personnel are typically onsite at a company's facility on a daily basis and working under the direction of the company.

Even before the ACA, the status of such individuals as independent contractors was often challenged by the IRS. Applying a 20-factor common law test of employee status, the IRS was often able to sustain a claim that the individuals were employees and that the company should, therefore, have been withholding employment taxes and paying the company's share of FICA tax. 

The issue of employee vs. independent contractor status is even more important under the ACA, because "large" employers, those employers with 100 or more employees (50 or more employees in 2016 and thereafter), are subject to steep penalties if they do not offer health care coverage to their full-time employees and dependents. The employee vs. independent contractor issue can be particularly tough to deal with in applying the ACA's employer mandate.  First, an employer that otherwise would not be a large employer because it has fewer than 100 or 50 actual employees might find itself reclassified as a large employer if individuals it has been treating as independent contractors are deemed to be employees under the IRS 20-factor test.  Second, if the employer has not been offering health care coverage to these new-found deemed employees, it can be subject to steep penalties.

The penalty is $2,000 per full-time employee ("employee" meaning all actual employees and deemed employees applying the IRS 20-factor test) if the employer is not offering coverage to at least 95% of its full-time employees (including these embedded contractors who are deemed employees under the ACA).  To clarify, the $2,000 per employee penalty applies to the total number of full-time actual and deemed employees working for the employer, not just those who are not offered health care coverage.  Thus, the penalties prescribed by the statute are potentially very punitive even if an employer misses the required coverage threshold by one or a small number of uncovered employees.  

The final employer mandate regulations provide a safe harbor rule that may be of particular interest to employers with embedded contractors.  The safe harbor rule allows an employer to contract with a staffing agency or other contractor providing long-term on-site personnel to offer the required medical plan coverage.  If certain standards are met, the staffing agency's offer of coverage will count as an offer of coverage from the employer.

If your company frequently uses workers who are classified as contract or temporary employees, or if you have company contractors that have personnel onsite at your facilities on a long-term basis, we suggest you contact your attorney to make certain you are in compliance with the new rules.