Worker Misclassification May Result In High ACA Penalties, Consultant Says

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By Sean Forbes  

Dec. 13 --Employers that fail to properly classify their employees face penalties that have “tripled, quadrupled” since the enactment of the Affordable Care Act, so employers need to be careful about classifying individuals as employees or independent contractors, a benefits consultant said at a Dec. 13 conference.

Employers should remain objective when making these determinations, because the Internal Revenue Service is looking at worker misclassification issues, according to Mark S. Ritter, managing director for compensation and benefits consulting in Grant Thornton LLP's Atlanta office. Ritter spoke at a conference sponsored by the American Institute of CPAs.

Under the ACA's employer mandate, employers with 50 or more full-time employees must provide their employees with minimum essential health-care coverage or face penalties.

Despite knowing the penalties, several of Ritter's clients haven't thought about worker classification and still aren't seriously considering the issue, he said.

“OK, we've thought about it, great, whatever,” is the sense that some of the clients have given, Ritter said.

Penalties for failure to provide minimum essential health-care coverage are equal to the number of full-time employees times $166.66 a month for every employee, minus the first 30 employees.

In addition, an employer with 50 or more full-time employees and/or full-time equivalents that doesn't provide an offer of affordable health coverage that provides minimum value to at least 95 percent of employees and dependents is assessed a penalty per employee if at least one full-time employee receives support in the public exchanges, also known as marketplaces.

Full time is defined as working 30 or more hours per week. Failure to meet this requirement results in the lesser of the above payment, or the number of full-time workers and/or full-time equivalents receiving a subsidy multiplied by $250 per month, Ritter said.

The Treasury Department announced July 2 that it will delay until 2015 the ACA's mandatory reporting requirements for employers and health insurers, as well as related employer mandate, or employer shared-responsibility, penalties (31 HRR 707, 7/8/13).

Taxes and Penalties

“The first thing you have to worry about is do you have contractors or employees,” Ritter said.

“The IRS believes it is their mandate--and they're probably right--to be sure that people pay their Social Security taxes, on the employee side and the employer side,” he said.

Employers are motivated to classify some individuals as independent contractors to lessen their payroll tax burden, Ritter said. Employers “look for people and say, 'Oh you're a private contractor, so we're not going to pay our half of the taxes, you will pay self-employment taxes,' ” he said.

Employers would subsequently say, “And, oh by the way, we're also going to leave you out of our benefit plans,” Ritter said.

If the IRS finds that an employer has misclassified its workers, the employer will be hit not only with retroactive Federal Insurance Contributions Act taxes, but also be assessed for any applicable ACA penalties, Ritter said.

What employers need to hear from their advisers “is that the cost of getting caught is way, way up over what it used to be,” Ritter said. “It's a lot more expensive now, because if you didn't count them, and you're below the 95 percent number--bang! The IRS says retroactively they're employees, but you're only covering 80 percent of the employees, so here is your assessment. And that's the back taxes, and maybe the Medicare plan, and definitely the ACA penalties as well.”

Employers may be responsible for not only health-plan premiums associated with misclassified workers, but also the potential medical claims associated with those individuals, according to Deborah Smith, a partner in Grant Thornton's national standards professional group, based in Oakbrook Terrace, Ill.

Worker Classification Evidence

For worker classification, Ritter said, the IRS has adopted three categories of evidence: behavioral control, financial control and relationship of the parties.

The first category addresses the right of direction and control over the work involved, and how the worker performs the tasks assigned. This includes instructions, training, oral or written reports and furnishing of tools and materials, Ritter said.

The second category addresses the business aspects of the workers' activities. This includes the right to direct or control the way the workers conduct their business activities from a financial standpoint, Ritter said.

The third category addresses the facts that illustrate how the parties perceive their relationship. Factors include whether there is a written contract, whether the employer provides benefits and the right of the employer to discharge or terminate the individual, Ritter said.

Employers also need to carefully examine the status of individuals classified as temporary, seasonal, per-diem or commission-only sales workers, Ritter said.


To contact the reporter on this story: Sean Forbes in Washington at

To contact the editor responsible for this story: Phil Kushin in Washington at

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