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PEO Industry Best Practice: Certification of Eligibility for Transitional Relief

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PEO Industry Best Practice: Certification of Eligibility for Transitional Relief

A key issue for the professional employer organization (PEO) industry is how to address healthcare coverage responsibilities that may arise when a PEO co-employs a new client’s staff.  This may pose particularly trying issues if the PEO sponsors a group health plan for its worksite employees. 

Summary of Best Practice

With the caveat that the Affordable Care Act (ACA) is complex and ever-evolving in its regulatory implementation, and prudent PEOs should consult with legal counsel on legal questions that speak to their own varying circumstances, NAPEO is recommending that its members adopt the following best practices for onboarding a new client:

  • Determine whether there is an employer shared responsibility for the health care of the new client’s employees;
  • Request and review all appropriate payroll and benefits documentation to determine the extent of the client employer’s ACA obligations; and
  • Ensure the co-employees of the client are not disadvantaged by the co-employment event.

Best Practice:  The Recommended Process a PEO Should Take When Onboarding a New Client

When a PEO contracts with a new client, what are the recommended steps a PEO should take?  As part of this best practice, NAPEO recommends taking the following steps:

  1. Make a determination whether a health insurance coverage obligation exists: A PEO should first determine whether there is a health insurance coverage obligation for the new client.  This involves asking whether the client being onboarded is an ALE for purposes of employer shared responsibility (pay or play) under the ACA.  This is important, as the federal government is concerned about “Who’s on First?” scenarios being used to avoid responsibility for health coverage.  For example, in its final February 2014 regulation on employer shared responsibility, the Internal Revenue Service (IRS) offers a scenario in the temporary staffing firm context where: “The client employer purports to employ an employee for only part of a week, such as 20 hours, to hire that same individual through a temporary staffing firm for the remainder of the week, and then claim that the individual is not a full-time employee (FTE) of either the client employer or the temporary staffing firm.[1] Clearly, such an arrangement is an artifice, distinguishable from the PEO context. Yet, an FTE is an FTE and must be attributable to some employer – and this is as true in the PEO co-employment context as elsewhere. There are several things to keep in mind when determining whether a coverage obligation runs to the client employer. 
  • No such employer responsibility exists in 2014.  Thanks to transition relief, the penalty, and the mandate, is delayed.
  • However, this responsibility does exist beginning in 2015 for employers with 100 full-time equivalent employees or more.
  • Employers of between 50 and 99 full-time equivalent employees also may be eligible for another temporary reprieve.  However, this latter group of smaller employers isn’t altogether unburdened in 2015.  For example, if an employer of between 50 and 99 full-time employees was already offering health coverage as of February 9 of this year, it cannot eliminate, or materially reduce, such coverage in 2015.
  • Employers cannot drop below the 100-employee size threshold simply as a means of avoiding healthcare responsibility.
  1. Request and review all appropriate payroll and benefits documentation to determine the extent of the client employer’s ACA obligations: It is important for a PEO to obtain these records to correctly establish potential obligations and liabilities for the client employer and fashion a compliance strategy.  

    For example, in assisting a client in determining whether it is an ALE, the PEO needs to calculate the number of full-time employees and equivalents employed by the employer in the preceding calendar year.  This will likely require great reliance on the client employer’s payroll records.  Very generally, this involves adding up the number of full-time employees for each month (using a 120-hour rule) and then dividing the aggregate number of hours worked (capped at 120 per employee) by all other employees for that month. (Notably, for this first year, an employer may perform this calculation using as little as a six consecutive month period in 2014.) Caveat: Remember that the ACA applies common control rules to determine ALE status, so you will have to garner additional information about that.[2]   Additionally, it is important to set appropriate client expectations concerning the accuracy of determinations and the high dependence upon data they provide as this is ultimately their responsibility. 

    When there is a coverage responsibility, the ALE must offer qualifying coverage to at least 70 percent (95 percent after 2015) of its FTEs and their children (up to age 26), or be subject to a penalty, generally equal to $2,000 per full-time employee (less the first 80 full-time employees in 2015 or 30 after 2016).  For those FTEs who are covered, an employee’s share-of-cost  for qualifying employee – only coverage cannot exceed 9.5 percent of the employee’s modified adjusted gross household income (or, easier for the employer to assess, an appropriate safe harbor such as W-2 wages).  It is important to be clear with the client about documentation, expectations, and roles. 
  2. Transition to PEO Plan: Another significant issue for PEOs when onboarding new client employers is how to transition a client employee to one of the PEO’s health plan offerings, to the extent such are available. For example, when an employer is an ALE, how do you credit service with the client prior to crediting service with the PEO?  How do you overlay and count measurement periods?

The best practice is to ensure the employee is not disadvantaged by the co-employment event.  Each employee should retain his or her position with regard to the ACA.  The PEO should take note of the measurement and stability period in effect prior to the CSA being signed.[3] Even when the client employer voluntarily offered a group plan (one it was under no obligation to provide), a cautious group-plan-offering PEO may wish to, upon assuming responsibility for the healthcare coverage of those employees, count toward the statutory limit of a 90-day waiting period (which may be preceded by a bona fide employment-based orientation period of a month) the days any otherwise-eligible new employee had worked for the client employer prior to the PEO entering the picture.  Otherwise, the PEO-sponsored plan could be found to violate the ACA’s rule against using waiting periods that exceed 90 days per term of employment.  This is because federal agencies may not agree that establishing a co-employment relationship permits the PEO to apply a new 90-day waiting period.

If the client employer did not provide healthcare prior to entering into a co-employment relationship, the PEO generally should be able to apply a new 90-day waiting period to its new client employees (this is because these employees generally are newly eligible for participation in any plan sponsored by the employer or the PEO no sooner than the date of the client service agreement).

Finally, within 14 days of transition, PEOs must remember to notify the transitioned employees of the availability of exchange-based coverage (whether through an exchange administered by a state or by the federal government on behalf of a state).[4]

Conclusion

Relying on the Senate floor colloquy during ACA debate as guidance,[5] the best practice for PEOs is to determine whether the client has a health insurance obligation under the ACA.  That involves determining if the client being onboarded is an applicable large employer (ALE) for purposes of employer shared responsibility (pay or play) under the ACA.  Once that determination is made, the PEO can help guide the client on their obligations under the ACA

[1]http://www.irs.gov/irb/2014-9_IRB/ar05.html

[2]See “The ACA: A Guide to the Year Ahead,” PEO Insider,® February 2014 (http://bit.ly/1iebRo0), and “Don’t Pay or Play with Less Than a Full Deck,” PEO Insider, June/July 2013 (http://bit.ly/1fMD6HC).

[3]“If a new . . . employee has on average at least 30 hours of service per week during the initial measurement period, the applicable large employer member must treat the employee as a full-time employee during the stability period that begins after the initial measurement period (and any associated administrative period).  The stability period must be a period of at least six consecutive calendar months that is no shorter in duration than the initial measurement period.  The stability period must begin immediately after the end of the measurement period and any applicable administrative period.”  http://www.irs.gov/irb/2014-9_IRB/ar05.html#ftn.d0e1247

[4]http://napeo.org/members/docs/Exchange%20Notice%20Sept.%209%20Final2.pdf

[5]See Congressional Record, March 24, 2010 (Senate) page S1989 or https://napeo.org/members/secureDocument_step2.cfm?docID=1150.