New Jersey’s ABC Test Could Impact ACA Compliance and Reporting
3 minute read:
The state of New Jersey has introduced SB 4204 which would change the way employers classify their workforce.
SB 4204 will require employers to administer the ABC Test across their workforce in order to determine if a worker is classified as either an employee or an independent contractor potentially causing significant changes to the way they are treated.
Under SB 4204, the ABC Test states that a worker is considered an employee unless the employer can prove the following:
- The individual has been and will continue to be free from control or direction over the performance of the service, both under the individual’s contract of service and in fact;
- The individual’s service is outside the usual course of the business for which that service is performed;
- The individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the work performed.
The ABC Test makes it more difficult for employers to classify a worker as an independent contractor. If an employer can’t show that the individual in question works outside its normal course of business, the worker would need to be classified as an employee.
New Jersey’s SB 4204 is similar to that of California’s AB5, which also implements the ABC Test in order to determine whether or not an individual will be classified as an employee.
In late 2019, the state of California passed Bill AB5, which expanded the definition of the word employee to be “…a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.” The law went into effect on January 1, 2020.
Similar to the impact already being felt in California, New Jersey’s ABC Test could alter the way employers offer employee benefits, such as those required by the ACA’s Employer Mandate. With many contract workers receiving employee status under the new law, employers will need to account for tracking hours of services, wages, and other employee level details for ACA compliance and reporting purposes.
Should New Jersey pass SB 4204, employers will need to incorporate these newly classified employees into their ACA compliance process and extend offers of health insurance coverage to newly classified employees.
The volume of forms to be processed will increase, along with the costs associated with distributing 1095-C forms to employees and submitting required ACA information to the IRS annually.
This will only create more complexity with ACA reporting, as required by the Employer Shared Responsibility Provisions, also known as the Employer Mandate.
As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), the ACA’s Employer Mandate, Applicable Large Employers (ALEs) (organizations with 50 or more full-time employees and full-time equivalent employees) are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is Affordable for the employee or be subject to Internal Revenue Code (IRC) Section 4980H penalties.
Based on this potential change and the fact that the state is also requiring employers to report their ACA information on a state-level, employers with operations in New Jersey should consider outsourcing for ACA compliance.
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