Many commercial staffing firms say that they will resolve the “pay or play” decision mandated by the Affordable Care Act by “playing” — beginning to offer comprehensive (“minimum value”) health insurance to their full-time assigned employees. The “play” strategy may work for some companies. However, the other option – continuing the long industry tradition of not offering coverage to assigned employees (“pay” instead of “play”) – also deserves careful consideration, and that choice may not actually require “paying” anything.
A staffing firm’s “pay” strategy involves:
- Not offering conventional (non-indemnity) health insurance to assigned employees (I discuss coverage just for staff later.)
- Aggressively managing the schedules and tenure of assigned employees so that few or none become “full-time employees” under ACA, using the 12-month lookback rule for part-time employees and other techniques, thus avoiding most or all penalties for assigned employees
- By exception, allowing assigned employees to achieve full-time ACA status only if customers agree to pay the additional cost of penalties attributable to them
- Paying the “A” penalty for not offering minimum essential coverage to substantially all full-time employees, after 30 or 80 employees are excluded from the calculation – which, depending on firm size and other variables, may be zero
The full-time status regulations fill hundreds of pages, but, with careful planning, staffing firms can keep assigned employees working for most of each year without long gaps in service, so that the annual idle time for each employee is between 0 days and 90 days.
Here are some advantages of a “no-plan” strategy:
No additional health insurance cost. The employer mandate tracks whether employers offer health coverage to full-timers. It doesn’t force employers to pay for any coverage that they do offer. However, in practice, maintaining an employer plan for commercial assigned employees will require employers to subsidize their premiums heavily.
No percentage participation issue. Insurance carriers will impose percentage participation requirements on group plan sales or refuse to renew plans when actual employee participation rates are too low. Assigned employees are notoriously unwilling to pay for insurance. To keep participation high and insurers engaged, staffing firms must generously subsidize any health insurance they offer to assigned employees and may also need to spend money to promote employee participation.
No blizzard of health insurance administration. Operating health plans requires lots of administration – disclosures, enrollments, premium collection, claims disputes, and terminations. Assigned employees will generate many more administrative transactions than your permanent workforce. Administration costs money and creates legal risks for doing it wrong.
No “B” penalties. Offering a plan makes you vulnerable to ACA’s “B” penalty, a nondeductible $3,000 for each full-time employee who obtains a state exchange subsidy because your coverage is below minimum value or charges the employee too much premium. No plan, no “B” penalties.
No new hire coverage decisions. If you offer a plan, you must categorize each new hire as a full-time, variable-hour, seasonal, or part-time employee. That decision determines whether that person must be offered coverage effective within 90 days of hire or can be put through a 12-month lookback period before being offered coverage. The rules for this are murky, yet the consequences of getting it wrong can be serious. If there is no plan, coverage timing is not an issue.
No heightened COBRA administration expense or adverse selection. The COBRA law requires plan sponsors to offer continuation of their employees’ group health insurance for at least 18 months after employment termination, at the employees’ expense. It requires lots of administration and allows the sickest employees to adversely “select” against the plan. In non-staffing firms, departing employees are a mere trickle, but if high-turnover staffing firms offer coverage to assigned employees, they may end up with more COBRA participants than active participants. This would raise the risk level and cost of the plan.
No annual ordeal of insurance rate negotiations and market shopping. Renewing health plans is often a frustrating annual experience. No plan, no negotiations or sticker shock.
No additional costs to charge to customers. Since your assigned employees won’t be generating incremental insurance costs or penalties, you won’t have to try passing them on to customers, unless they agree to absorb them to keep particular workers.
No ERISA §510 benefit deprivation risk. With no plan, you are free to limit the schedules and tenure of your assigned employees. If you offer a plan, you may be accused of terminating or limiting the employment of assigned employees to prevent them from qualifying for your plan — arguably a violation of the federal ERISA benefits law. You may be sued for this even if you had rational business reasons to limit or terminate employment. Giving up your right to manage workforce tenure increases your costs and puts you at a competitive disadvantage against “no plan” firms.
Less government paperwork. Many of the new reporting requirements are about the details of offered plans. If you don’t offer a plan, this burden will be much lighter for you.
No risk of “skinny” plan disqualification. The low-cost, low benefit, so-called “skinny” plans currently appear to be a legal way to avoid the “A” penalty, but they still expose sponsoring firms to the “B” penalty, and the final regulations made the “B” penalty apply to skinny plans even during the employees’ initial 90-day or 12-month waiting periods. If a skinny plan later fails to qualify as “minimum essential coverage,” the large “A” penalty would come back into effect.
Simpler service tracking. Offering a plan greatly complicates tracking employee service and creates risks for doing it wrong. Without a plan, some tracking is required, but it just focuses on annual hours totals and breaks in service.
Extra ACA cost is a customer choice, not a clandestine “spreading” exercise. Insurance costs and penalties will be generated only by some assigned employees but not by the others. Some firms plan to spread these costs over the rates for all assigned employees. Under the simple “no-plan” strategy outlined above, absorbing those costs is a customer option instead of a hidden cost on all customers that makes your prices for most assigned workers less competitive.
No IRS “common law” issue. Some customers worry about IRS threats to use a common law test to count assigned employees in the customers’ workforces. But if assigned employees are prevented from achieving full-time status, large customers won’t care whose common law employees they might be, since only full-time employees qualify for insurance or generate penalties.
No skyrocketing insurance costs. ACA made changes to the US insurance market that are increasing risks and rates drastically. Without an increasingly-expensive plan, your future costs will be more predictable, and the staffing prices you quote will be more sustainable.
No plan termination complications. If you offer a plan, at some future date, you or your insurance company may have to terminate it. That would be a difficult employee relations challenge. But if you have also agreed to customer demands that you maintain minimum value coverage, terminating your plan may put you in breach of contracts with those customers.
No payroll deduction problems. Unless you pay 100% of the premium of a plan, collecting the employees’ share of premiums presents difficult payroll administration problems when employees work and are paid irregularly.
No risk of discrimination charges by exchange-subsidized applicants. ACA prohibits discrimination (like failure to hire) against people who receive subsidies from government exchanges. If you offer a “skinny” plan or a minimum value plan that charges employees more than 9.5% of pay, you will have a motive to avoid hiring subsidy-eligible people who could generate “B” penalties for you. Without a plan, you will have no motive for that kind of discrimination and should be immune from such discrimination charges.
These reasons and factors, if they apply in your firm, add up to competitive advantage for you in the staffing marketplace.
You may be able to continue covering your in-house staff for a while. Staff coverage involves some of the same costs and disadvantages of assigned employee coverage, but not to the same degree. The ACA prohibits discrimination in favor of highly-paid employees, and your in-house staff will probably be considered highly-paid. Enforcement of the non-discrimination rules has been postponed until regulations are published, but when they are published, they will present difficult choices.
Most of the above points also apply to offering “skinny” plans, but, for some firms, if the assumptions work out as hoped, skinny plans might cost less than the “no plan” strategy. Also, staffing firms may offer indemnity plans for positive business reasons, but those plans do not figure in the “pay or play” decision or financial dynamics.
We would all like for all employees to be offered comprehensive coverage. For the entire history of the commercial staffing business, staffing firms could have attempted that, yet almost none of them did. Why, when customers are finally moving away from the employer-sponsored-coverage model, should the staffing industry now move toward it? And why, after decades of meekly allowing customers to require rotation of assigned employees at arbitrary milestones (like 9 months), should the staffing industry be reluctant to manage hours and tenure, now that there are compelling reasons to do that?
For some firms, offering minimum value coverage to assigned workers may be the best and most economical path. But that choice should not be made without objectively evaluating the “no plan” alternative.