The stakes just got higher for employers that misclassify their workers.
The U.S. Department of Labor (DOL) issued its new Independent Contractor Rule, which takes effect on March 11, 2024, and has clear implications for employers in regard to ACA compliance
The Importance of Proper Employee Classification
Organizations that misclassify workers as independent contractors risk incurring hefty Affordable Care Act penalties.
Under the ACA, employers with 50 or more full-time employees (or the equivalent in part-time employees) must provide health insurance to at least 95% of their full-time staff. These companies are referred to as ALEs (Applicable Large Employers).
Failure to provide employee benefits under ACA may result in significant employer mandate 4980(H) penalties, highlighted below:
- 4980H(a) Penalty: applies to employers failing to offer minimum essential coverage to at least 95% of their full-time employees and dependants.
- 4980H(b) Penalty: affects employers that offer unaffordable coverage that doesn’t meet minimum value.
In the calendar year 2023, Affordable Care Act Penalties stand at $2,880 (Penalty A) and $4,320 (Penalty B).
For calendar year 2024 the IRS has announced an increase to $2,970 and $4,460 respectively.
But compliance isn’t just about avoiding financial sanctions. It’s about doing the right thing.
The Affordable Care Act has led to major strides forward in advancing health equity in the U.S., enabling millions more Americans to gain health coverage and access to essential health benefits. But while the number of people with healthcare coverage is falling, people of color are still disproportionately affected. They account for an astonishing 58.3% of the uninsured population.
People of color are among the most likely to be in jobs where misclassification is common, which excludes them from employee benefits under ACA.
Independent Contractor vs. Employee: The Economic Reality Test
Misclassification of employees is one of the most critical ACA compliance mistakes employers make. Worker classifications have a direct effect on an individual’s eligibility for employee benefits under the Affordable Care Act, and your organization’s compliance.
DOL guidance provides six economic factors to assist companies in determining employee classification under the Fair Labor Standards Act (FLSA). These are:
- Opportunity for profit or loss based on managerial skill.
- Investments by the worker and the potential employer.
- Degree of permanence of the relationship.
- Nature and degree of control.
- Extent to which the work performed is an integral part of the potential employer’s business.
- Skill and initiative.
Each factor should be considered equally to determine worker status. It’s by no means an exhaustive list, as the DOL makes clear in its guidance:
“Additional factors that answer the question of whether a worker is economically dependent on an employer may be relevant.”
While DOL regulations on independent contractors fall under the FLSA, misclassification carries high risks under the ACA. Employers must also consider employee classification for Affordable Care Act compliance.
IRS Guidelines for Employee Classification
Effectively navigating ACA compliance for employers is a tricky task. In addition to the economic reality test, IRS guidelines for employee classification have to be considered. These include three critical questions, covering behavioral control, financial control, and the relationship between an employer and its workers.
That’s not all. States and local jurisdictions may also apply their own criteria to determine independent contractor vs. employee status. For instance, ABC tests are required by numerous states including California. ABC tests also require three specific questions to be answered for a worker to be classified as an independent contractor.
Navigating the Maze of ACA Compliance for Employers
Research from the Center for American Progress highlights how easy it is for employers to get misclassification wrong. DOL regulations on independent contractors are designed to eliminate confusion and reduce that risk. But it requires an honest assessment of the work independent contractors perform as part of your business operations.
Reclassification should be considered if there’s any uncertainty around the six economic factors highlighted above, and the impact on employee benefits under ACA recalculated.
Software solutions like Trusaic ACA Complete® can assist employers in managing who qualifies for ACA coverage and successfully complying with federal and multiple state law filings. Ongoing monthly monitoring helps you to know exactly when offers of healthcare coverage are required.
They can also help to avoid substantial financial penalties by ensuring you meet ACA coverage requirements for employees. Compliance with regulations is also the surest way to avoid costly Affordable Care Act penalties.
Ensure you are in compliance when the DOL’s independent contractor rule goes into effect March 11 by speaking to one of our ACA compliance experts.
