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Presented by: Lorie Maring Phone: (404) 240-4225 Email: [email protected]

Please remember, employment and benefits law compliance depends on multiple factors – particularly those unique to each employer’s circumstances. Numerous laws, regulations, interpretations, administrative rulings, court decisions, and other authorities must be specifically evaluated in applying the topics covered by this webinar. The webinar is intended for general-information purposes only. It is not a comprehensive or all-inclusive explanation of the topics or concepts covered by the webinar. fisherphillips.com When Employers Offer Health Benefits to Non-Employees: The Consequences & Risks

Presented by: Lorie Maring Phone: (404) 240-4225 Email: [email protected]

fisherphillips.com AGENDA

• Eligibility ― Who may participate in ERISA Plans? Cafeteria Plans? ― Specific issues for PEOs, staffing companies, & leasing firms ― Misclassification concerns • Consequences of Coverage: ― MEWA Issues ― Carrier Risks • Impact on Other Federal Laws ― COBRA, Medicare Secondary Payer, Form 5500 filings, etc. fisherphillips.com ELIGIBILITY

fisherphillips.com ERISA ELIGIBILITY

• ERISA covers pension and • ERISA defines “employee” as welfare benefit plans “any individual employed by an • Discretion of Plan Sponsor employer” (not helpful) o The Supreme Court has directed • ERISA Protects “Participants” lower courts to use the “Common- and “Beneficiaries” Law Employee” test when • Participants = current or former determining whether an individual is employees and “working an employee (Nationwide Mutual owners” Ins. v. Darden, 503 U.S. 318 (1992)). • Plan Assets only used for Participants and Beneficiaries of Plan Sponsor (Exclusive Benefit Rule)

fisherphillips.com ERISA ELIGIBILITY OTHER CONSIDERATION

• Tax Issues: Coverage • ACA Age 26 Mandate for non-tax dependents – imputed income to • COBRA employee • CBAs • Nondiscrimination • State Insurance Law issues under IRC: Requirements • ACA Coverage

fisherphillips.com ERISA ELIGIBILITY

• Who is a “Common-Law • Who is not a Common-Law Employee” under Darden? “Employee”? o Focuses generally on the hiring party’s right to Partners in a Partnership* control the manner and means by which the work o product is accomplished o Sole Proprietors* . Who furnishes work equipment Independent Contractors . Hired party’s discretion over work hours o . Method of payment o Self-employed individuals* . Provision of employee benefits o 2% Shareholder in S-Corp.* . Tax treatment of hired party Outside Directors . Skill required o . Location of work o LLC Members* . Duration of relationship *could be “working owners” . Right to assign additional project . Hired party’s role in paying assistants . Etc.

fisherphillips.com CAFETERIA PLAN (§ 125 PLAN) ELIGIBILITY • A cafeteria plan provides • Who is eligible? participants an opportunity o Common-Law Employees to receive certain benefits o Includes employees of members on a pretax basis in same “Controlled Group” o May include former employees, but cannot exist primarily for them o No partners, independent contractors, sole proprietors, etc. o “Leased Employees” under IRC 414(n) o Full-time Life Insurance Salespersons (statutory employees under IRC)

fisherphillips.com IRC COMMON LAW EMPLOYEES

• Old 20 Factor Test (Rev. Rul. 87-41 • New IRS Guidelines – • Behavioral Control - Does the company control or have the right to control what the worker does and how the worker does his or her job? • Financial Control - Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) • Relationship of the Parties - Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

fisherphillips.com “EMPLOYEE” MISCLASSIFICATION

• Employee misclassification may be identified by the DOL or the IRS o The two agencies share info, and an investigation by one may result in an inquiry by the other • Remember that there are different tests under different federal and state laws – can result in conflicting results

fisherphillips.com “EMPLOYEE” MISCLASSIFICATION

• Not always clear how to classify • IRS Form SS-8 • Can request a formal ruling • Only applies for IRS purposes – could raise issues under other federal and state laws • Section 530 Relief – employment tax relief if historically misclassified • Reasonable basis • Reporting consistency

fisherphillips.com CONSEQUENCES OF COVERING NON-EMPLOYEES

fisherphillips.com Reclassification Risks

• Worker Lawsuits (Microsoft) • IRS and DOL may audit plans and companies may be liable for penalties and monetary corrections if workers misclassified • “Anti-Microsoft” clauses should be added to plan documents to prevent retroactive coverage of misclassified employees if reclassified later by a court or federal/state agency • “Microsoft” Provision will not correct nondiscrimination testing failures relating to inclusion or exclusion of misclassified workers, qualification issues, etc. • May fail to provide ACA coverage to FT Employees • Underestimate penalty exposure in calculating 95% threshold • Reporting Penalties under IRC Sections 6055/6056

fisherphillips.com Other Risks and Considerations When Including Non-Employees • Plan documents must specify which employees are eligible • Some employers cover non-employees without changing terms of plan document (e.g. non-working owner and family members (occasionally extended to dating relationships, outside directors, independent contractors (though coverage weighs in favor of employee status)), • Carriers may deny claims for non-employees and individuals not meeting definition of dependent • Coverage taxable to non-common law employees (IRS def) – penalties for failing to properly report and withhold as applicable • Exposure for claims of fiduciary breach and prohibited transactions if plan assets used to pay benefits for non-employees (remember exception for working owners under ERISA) • Creation of a MEWA

fisherphillips.com WHAT IS A MEWA?

• A multiple Employer Welfare Arrangement (“MEWA”) is defined as an employee welfare benefit plan or other arrangement that is established or maintained for the purpose of offering or providing medical or other welfare benefits to employees of two or more unrelated employers.

fisherphillips.com INADVERTANT CREATION OF A MEWA • A MEWA exists if the elements of the definition are satisfied – the intent to create a MEWA is not required • An employer can create a MEWA if it allows other employers (outside of its controlled group) to participate in its welfare plans • (affiliated service group rules do not apply under ERISA in determining related employers – different results IRC and ERISA) • Thus, an employer may create a MEWA by extending coverage to an individual who is not a common-law employee For example, a leasing/staffing organization can o create a MEWA if it is not the “common-law employer” and it allows individuals who work for several recipient employers to participate in its health/welfare plan

fisherphillips.com INADVERTANT CREATION OF A MEWA: THE RISKS • MEWAs have additional IRS reporting requirements o Form M-1 filing o Exception: if no more that 1% of employees/former employees covered are non-employees, then no Form M- 1 filing requirement will arise from coverage of those non-employees • Self-insured MEWAs are prohibited under many states’ laws • Form 5500 Violations

fisherphillips.com INADVERTANT CREATION OF A MEWA: THE RISKS • MEWAs have additional IRS reporting requirements o Form M-1 filing Exception: if no more that 1% of o employees/former employees covered are non- employees, then no Form M-1 filing requirement will arise from coverage of those non-employees • Self-insured MEWAs are prohibited under many states’ laws • Other state requirements applicable to insured and self-insured MEWAs may include a limit on who can sponsor (e.g. association) and require advance notification or other certification requirements to state DOI • Form 5500 Violations

fisherphillips.com FORM 5500 MEWA FILING RISKS

• Each “plan” is required to file • The revised Form includes a unless exempt new section specifically • Types of MEWAs addressing Form M-1 • Plan level (single employer plan sponsored by a compliance and requires a bona fide group or association of employers plan to include proof of the • Non-Plan level (each employer sponsoring its own ERISA Plan) Form M-1 filing as part of the • Non-Plan MEWA – each “employer” Form 5500. must file a Form 5500 • Many employers fail to file • Mitigate using a DFE (“direct Form M-1 filing entity) and GIA • Penalty of Perjury • No small plan exception for MEWAs beginning 2013 if subject to M-1 requirement

fisherphillips.com Special Issues for PEOs/Staffing/Leased Employees

fisherphillips.com PEOS, STAFFING COMPANIES, & LEASING FIRMS

• Who is the “employer”? Whoever is deemed to be the “common-law” o employer under the fact-specific, multi-factor test (i.e., who has the right to control and direct the work performed). Often the recipient employer Thus, if coverage is offered to worksite o employees, the plan may be covering non- employees • The problem: both the organization and the recipient employer will likely satisfy some of the common-law test factors Neither the IRC nor ERISA recognize the concept o of dual employment Some IRS guidance supports the idea of co- o employment for tax purposes in limited circumstances, but co-employment has not been extended to the eligibility and coverage context

fisherphillips.com PEOS, STAFFING COMPANIES, & LEASING FIRMS

• Consequences of covering common-law employees of the recipient employer: o Plan may be disqualified . Providing benefits to non- employees violates the “Exclusive Benefit Rule” . Substantial and pervasive negative tax consequences

fisherphillips.com PEOS, STAFFING COMPANIES, & LEASING FIRMS

• IRS Relief for Defined Contribution Retirement Plans sponsored by PEOs Revenue Procedure 2002-21 allows PEOs to cover o non-common law employees without risk of disqualification for violating exclusive benefit rule o Gives no opinion on how PEO employees should be classified o No similar relief for other plans or under ERISA Must terminate PEO plan or operate as a “MEP” o (multiple employer plan) Statutory rules for MEPs – provides some certainty on o treatment. Non-PEO situations can result in MEP where employer includes non-common law employees in retirement plan DOL views MEP as a series of separate plans with o separate 5500 and audit requirements (based on MEWA analysis) unless establish commonality of interest and control over plan by participating employers PEOs often rely on level of control over worksite o employees as resulting in common law employee status

fisherphillips.com STATUTORY LEASED EMPLOYEE DEFINITION

• ERISA § 414(n)(2) - Leased • Not counted for ACA purposes Employees are NOT common law employee, but must be taken into • Bottom Line here? account as employees for Careful drafting required! If incorporating o exclusion of 414(n)(2) leased employees, nondiscrimination testing if: ensure Microsoft language applies to o the services are provided pursuant to 414(n)(2) reclassification as common law or an agreement with the leasing duplicate benefits from staffing agency and organization; recipient organization could result. the person has performed services Include in testing to ensure proper results o for the recipient on a substantially full- o time basis for at least 1 year; and the services are performed under o primary direction or control by the recipient.” Some exceptions apply and not o appear to apply to 105(h) testing (does apply to 125 and 401(a))

fisherphillips.com PEOS, STAFFING COMPANIES, & LEASING FIRMS • Common-law Employer has ACA responsibility • If the worker receives an offer of coverage under the staffing firm’s health plan, that offer will be treated as an offer of health coverage by the recipient company so long as the staffing contract provides that the fee the recipient company pays to the staffing firm for employees enrolled in the health coverage is higher than the fee the recipient company would pay for the same employee if he or she did not enroll in the health coverage • Contract should address who is responsible for ACA reporting

fisherphillips.com Impact on Other Federal Laws

fisherphillips.com ACA REPORTING

• Only Common Law Employees are counted • Do not include leased employees (as defined in section 414(n)(2)), a sole proprietor, a partner in a partnership, a 2-percent S corporation shareholder, or a worker described in section 3508 (qualified real estate agent or direct sellers) • Could have reporting obligation if self-insured and provide to non- employees

fisherphillips.com MEDICARE SECONDARY PAYER

• The Medicare Secondary • If a MEWA is inadvertently Payer (MSP) rules prohibit created, employers with < 20 employers with > 20 employees may be required to employees from incentivizing comply with MSP rules if employees age 65 or older to another member of the MEWA elect Medicare instead of the has 20 or more employees group health plan • Certification process with CMS to opt out • Employers must also count “leased employees” in determining total number if they would be counted as employees under § 414(n)

fisherphillips.com COBRA

• If ERISA does not apply at the MEWA level, each employer providing benefits will be maintaining a separate ERISA health plan and COBRA will apply based on whether the employer had 20 or more employees in the preceding year • Only common-law employees are counted for COBRA purposes, and they are counted even if they waive participation in the health plan (so do not include independent contractors or directors who are not common law employees) • If ERISA applies on the MEWA level, the plan administrator is responsible for COBRA compliance

fisherphillips.com Special Considerations for Outside Directors

fisherphillips.com BOARD COMPENSATION ISSUES

• Public companies that offer health coverage and other compensation to non-employee directors should seek legal counsel • Recent litigation involving derivative actions on behalf of shareholders have claimed that directors breached their fiduciary duties by awarding too much compensation to non- employee directors • Also, such companies will likely face reporting requirements such as detailing of director compensation in their annual proxy statement

fisherphillips.com Continuing Education Credit

HRCI – TBD SHRM – TBD

fisherphillips.com Final Questions Email: [email protected]

HRCI – TBD

SHRM – TBD

Presented by: Lorie Maring Phone: (404) 240-4225 Email: [email protected]

fisherphillips.com Thank You

Presented by: Lorie Maring Phone: (404) 240-4225 Email: [email protected]

fisherphillips.com