NATIONAL ASSOCIATION OF HEALTH UNDERWRITERS

Transcription

1 NATIONAL ASSOCIATION OF HEALTH UNDERWRITERS COMPLIANCE CORNER WEBINAR June 6, 2013 Controlled Groups and Common Law Employees: Basic Concepts for Pay or Play Compliance William H. Nichols, Esq. Laner Muchin, Ltd. 515 N. State Street, Suite 2800 Chicago, Illinois (312)

2 I. Overview Why are these concepts important? A. Pay or Play requires Large Employers (having 50 or more FTE employees) to offer group health coverage to substantially all their Full-Time Employees or face the risk of penalties, beginning with the 2014 plan year. B. Controlled Groups 1. Who is a Large Employer that is subject to Pay or Play? 2. Which Full-Time Employees must be offered health coverage? C. Common Law Employees 1. How many employees does the Employer/Controlled Group have? 2. Which individuals qualify as Full-Time Employees who must be offered health coverage? 2

3 D. Which Employers must give an Exchange Notice in October? 1. Employers subject to the Fair Labor Standards Act (FLSA). 2. Whether or not a Large Employer. 3. Must give employees written notice of State Exchange coverage options and rights for

4 II. Controlled Groups A. What are they? Employers that are sufficiently related by common ownership will be treated as a single employer. B. Four Types 1. Parent-subsidiary 2. Brother-sister 3. Combined 4. Affiliated service group C. Parent-Subsidiary Controlled Groups 1. 80% vertical chain of ownership. 2. Can include multiple subsidiaries on each tier of the chain. 4

5 D. Brother-Sister Controlled Groups 1. Horizontal group of commonly-owned employers. 2. Controlling Interest Test: 5 or fewer individuals, trusts or estates must collectively own at least 80% of each employer. 3. Effective Control Test: When the smallest ownership percentages of each of those common owners in any one of the employers are added, they must total more than 50%. 5

6 E. Examples 1. Parent-Subsidiary Controlled Group Parent 100% 80% 75% Sub A Sub B Sub C 80% Sub A1 100% 75% Sub B1 Sub B2 The controlled group includes: Parent, Sub A, Sub B, Sub A1, and Sub B1. Sub C and Sub B2 are excluded. 6

7 2. Brother-Sister Controlled Group Individual Owners Corp A Corp B Corp C Andy 40% 60% 15% Bob 30% 30% 30% Cheryl 15% 10% 30% Others 15% 0% 25% 7

8 a. Controlling Interest Test: at least 80% aggregate ownership. i. Andy, Bob and Cheryl collectively own 85% of Corp. A, 100% of Corp. B, and 75% of Corp. C. ii. Therefore, only Corp. A and Corp. B pass and Corp. C is excluded. 8

9 b. Effective Control Test: Andy s smallest ownership % in A or B is 40% Bob s smallest ownership % in A or B is 30% Cheryl s smallest ownership % in A or B is 10% Their aggregate smallest percentages exceed 50%, so both Corp. A and Corp B pass. By passing both tests, Corps. A and B form a brother-sister controlled group. 9

10 F. Combined Controlled Groups 1. If the top-tier Parent of a Parent-Subsidiary controlled group is also a member of a Brother-Sister controlled group, then both groups together form a Combined controlled group. G. Many Complex Rules for Attributing and Ignoring Ownership Interests, for example: 1. Inter-organization ownership interests are generally ignored so, for example, if one subsidiary in a Parent- Subsidiary controlled group owns part of another subsidiary in the same tier of that group, that stock ownership is ignored, thereby increasing the percentage owned by the parent in the tier above. 10

11 2. Treasury stock and non-voting preferred stock are generally ignored, but stock options count as stock owned. 3. Stock of a subsidiary that is owned by a 5% or more owner of the parent is generally ignored. 4. Special family ownership rules may attribute the ownership interests of a spouse or child to the other spouse or parent. 5. Special ownership attribution rules may treat the beneficiary of an estate or trust as the owner of stock held by that estate or trust. 6. Stock owned by a corporation is considered owned pro rata by any 5% owner of that corporation. 11

12 H. Controlled Group Rules also Apply for Many Other Purposes 1. Nondiscrimination testing of tax-qualified retirement plans. 2. Nondiscrimination testing of group health and cafeteria plans. 3. Determining whether an employer has 20 employees to become subject to COBRA. 4. Liability for underfunding of a terminated pension plan. 5. Liability for multiemployer pension plan withdrawal liability. 12

13 I. Separate Lines of Business (SLOBs) can be segregated from Controlled Groups 1. Must apply to IRS for approval to designate separate and distinct operations within a Controlled Group as its own employer for benefits purposes. 2. The approval process is costly and challenging. J. Affiliated Service Groups are treated like Controlled Groups 1. Where one affiliated business services another. 2. Where multiple affiliated businesses appear to the public to be one, or to be working together to offer a product or service. 13

14 K. Controlled Group Rules for Tax-Exempt Employers 1. Keys are Identity of Management and Right to Select Management. 2. Common Control between two tax-exempt entities exists if at least 80% of the Directors or Trustees of one entity are either: a. Representatives of the other entity, or b. Controlled by the other entity. 3. Representatives include directors, trustees, employees and agents. 14

15 4. Control involves the power to remove and replace the director or trustee. 5. These rules apply in addition to the regular controlled group rules, so tax-exempt entities may be part of controlled groups that include taxable entities. 6. Permissive aggregation and disaggregation rules add complexity. 15

16 L. Remember: 1. Whether an employer has 50 FTE employees to be subject to Pay or Play is based on all the employees in that employer s controlled group, if any. 2. Controlled groups mostly involve horizontal or vertical chains of common ownership, primarily at 80% or more. 3. Complex rules apply for measuring ownership, so pay attention to details. (Prudent to seek legal counsel.) 4. Affiliated businesses that work together or service one another also may be treated as a controlled group. 16

17 5. The full-time employees of the entire controlled group are the ones who must be offered health coverage starting in 2014 to comply with Pay or Play. 6. Pay or Play penalties might be calculated based on the number of full-time employees in the entire controlled group, depending on the circumstances. 17

18 III. Common Law Employees A. The IRS standard focuses on who controls the work being done 1. IRS standard: An employment relationship exists when an employer has the right to control and direct the worker, not only as to the result of the work but also as to the details and means by which that result is accomplished. 2. Requires a facts and circumstances analysis which depends largely on whether the employer can control the when, where, and how of the work being performed. 3. Employers beware! This standard may cover a variety of temporary, leased or independent contractor workers, depending on the facts and circumstances. 18

19 B. Indicia of Control under the IRS standard 1. Behavioral elements a. Type of instructions given b. Degree of instruction c. Evaluation systems 2. Financial elements a. Significance of employer s investment in the worker b. Reimbursement of expenses c. Opportunity for profit or loss d. Services available to the market e. Method of payment 3. Type of relationship a. Written contracts b. Employee benefits c. Permanency of relationship d. Whether the services provided further a key activity of the business 19

20 C. Tax Code Leased Employee Rules 1. Individuals who are not common law employees. 2. Provide services to a recipient business per an agreement between that business and any other person. 3. The worker provides services to the recipient business on a substantially full-time basis for at least one year 4. The recipient business has primary direction and control over performance of the work. 5. When those 4 conditions are met, the worker shall be treated as an employee of the recipient for various benefit plan purposes, including COBRA and certain other aspects of health plan compliance. Apparently not applicable to Pay or Play. 20

21 D. Impact of these Rules 1. For purposes of Pay or Play, true leased employees will not be treated like common law employees even after 1 year of substantially full-time service. 2. Workers whose services are controlled by the recipient employer shall be considered common law employees of the recipient from start of service. 3. Employers will need to count temp, leased and independent contract workers from date of hire if those workers meet the IRS common law standard. a. So those workers could count towards 50 FTE large employer status. b. So those workers may need to be offered health coverage starting in IRS guidance is expected for Pay or Play purposes regarding staffing agencies acting as employers. 21

22 4. Even true leased employees may need to be counted by the recipient employer for the same purposes after one year of substantially fulltime service. 5. IRS guidance is expected for Pay or Play purposes regarding staffing agencies acting as employers. 22

23 IV. Employers Required to give the Exchange Notice A. Employers must give employees written notice of the health Exchange alternative. 1. Timing. a. For current employees October, b. For new hires upon date of hire. 2. Contents. a. Existence of an Exchange. b. Description of Exchange services available. c. How to contact the Exchange. d. Tax credit and cost reduction available under certain circumstances for Exchange coverage. e. Impact of enrolling in the Exchange on health coverage through the employer. 23

24 B. All Employers subject to the Fair Labor Standards Act ( FLSA ) are obligated to give the notice. 1. Is the Employer an Enterprise under FLSA? a. Has at least 2 employees, and b. Has at least $500,000 of annual revenue; or c. Hospitals, businesses providing medical or nursing care for residents, schools, preschools, and government agencies. 2. Alternatively, does the Employer have any Employees whose work regularly involves them in interstate commerce, for example: a. Producing goods that may be sent out of state. b. Making out of state phone calls. c. Handling records of interstate shipping or sales. d. Traveling out of state. e. Doing maintenance work in buildings where goods are produced or stored for interstate delivery. f. Even domestic workers! 24

25 C. Consider 1. Who will prepare the notice (use of or customizing a model notice)? 2. Understand the required contents. 3. Identify a contact person to handle questions. 4. How will the notice be distributed? 5. Identify employees to receive the notice. 6. Document how, when and to whom the notice is given 25

26 Thank you! Any Questions? 26