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California employers may have another level of complexity coming their way in regards to compliance with the Affordable Care Act.
The California state legislature has passed a law that will reclassify many contract workers in the state as employees. When California Assembly Bill 5 (AB5) goes into effect in January 2020, the law will require employers to treat contract workers like employees unless they meet certain requirements. The most significant impacts are expected to be felt by companies that are considered part of the gig economy, such as Uber and Lyft.
This is because the bill effectively expands the definition of the word employee: “…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.”
One of the biggest impacts employers will see as a result of the bill will be meeting the requirements for offering employee benefits to these new employees, including the requirements of providing healthcare coverage under the ACA. With many contract workers receiving employee status under the new law, employers will now need to account for tracking hours of services, wages, and other employee level details for ACA compliance and reporting purposes.
Under the ACA Employer Mandate, 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. The healthcare law defines full-time employees as workers who average 30 hours of work a week or 130 hours a month.
Employers will need to incorporate these newly classified employees into their ACA compliance process. Employers will need to extend offers of health insurance coverage to more employees, and reporting requirements will grow in complexity. 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.
Employers will need to get this right if they want to avoid ACA penalty assessments from the IRS. Currently the tax agency is issuing Letters 226J to employers identified as having failed to comply with the ACA’s Employer Mandate for the 2017 tax year. The agency is also issuing penalties to employers that failed to file forms 1094-C and 1095-C and furnish forms 1095-C by the required deadlines.
Employers should seek out expert ACA compliance consultants to prepare for increased ACA compliance as more independent contractors become full-time employees under the ACA.
