For many employers as well as many brokers, the last quarter of the year is focused on renewals. As such, a lot of “dirt” gets overlooked or swept under the carpet. Unfortunately, in the benefit arena, such “dirt” can result in compliance problems and regulatory fines.
This issue of Legislative Review explores corners where “dirt” can accumulate. Spring is a great time to clean it up!
Applicable Large Employers (ALEs) subject to the Affordable Care Act reporting requirements should have already issued 1095 forms to employees. These were due March 4th after the IRS granted an exemption from the original due date of January 31st.
Employers who file paper reports of their information to the IRS have already exceeded the deadline of February 28th. Electronic filers still have until April 1st to be in compliance.
Exempt and Nonexempt
The federal Fair Labor Standards Act (FLSA) establishes the rules for determining whether an employee is exempt from overtime rules – or, subject to them.
Exempt employees who are typically paid a salary are not entitled to overtime.
This issue is further complicated by nonexempt employees who may also be paid a salary but overtime rules apply. Many employers make the mistake of assuming that the fact that they pay a salary means that overtime doesn’t apply.
Defining an employee’s class as exempt or nonexempt is further complicated by an employee’s duties and earnings. Calling an employee a manager when their duties don’t match the title is one example of employee misclassification. Similarly, an employee may be a manager but if their salary is less than $455.00 per week they aren’t considered exempt.
As if all of this wasn’t confusing enough, rules to raise the salary requirements were due to go into effect in 2016. These rules were blocked. New rules are expected to be published soon that are expected to offer a raise in salary requirements.
Misclassifying employees can be a very expensive compliance faux pas. Both state and federal governments can levy fines. And, if employees are reclassified as nonexempt, overtime back pay may also be required.
Another common example of misclassification involves independent contractors. Criminal penalties and prison can be the result of misclassifying employees as independent contractors. Just calling an individual an independent contractor or having them sign a contract that identifies them as an independent contractor is insufficient.
Independent contractor status can be difficult to determine. The “right-to-control” test is one factor that comes into play. Other factors could include whether the individual’s duties are critical to the business or whether the individual works for multiple entities.
A worker who is a true independent contractor is responsible for paying their own taxes. They are also not covered by the contracting firm’s unemployment, workers’ compensation plans and employee benefits.
More information on independent contractor status can be found on the IRS website. An employer should consult with a labor law attorney to determine independent contractor status.
Correct classification of employees – whether it’s exempt or nonexempt or independent contractor status– is a cornerstone of determining a number of benefit and tax concerns. Employers often face questions from the IRS or Department of Labor when a worker who has been classified as an independent contractor applies for unemployment or workers’ compensation.
Eligibility for employee benefits such as retirement plans, health plans, and life insurance is generally limited to employees who meet the definition of “eligible employee.” If the employee or individual is improperly classified, they may not be enrolled in coverage.
Incorrectly classifying employees can lead to errors in counting employees to determine compliance requirements with various employer laws. For example, applicable large employer (ALE) status depends on the average size of an employer’s workforce during the prior year. An employer counts full-time employees and full-time equivalent employees to determine ALE status. If individuals are misclassified as independent contractors rather than employees, an employer may be subject to the ALE requirements including employer reporting.
Counting employees is critical to determine ALE status. Employer shared responsibility provisions and employer reporting apply to ALEs.
With 2018 in the rearview mirror, employers need to determine ALE status for 2019. The IRS provides the following guidance:
If an employer has at least 50 full-time employees, including full-time equivalent employees, on average during the prior year, the employer is an ALE for the current calendar year. There are some nuances to determining ALE status. The IRS website has considerable detail in this regard.
Employers who have been remiss in assessing ALE status should review several years of employee counts. Employers who realize that they were ALEs should take immediate steps to come into compliance.
Spring is a good time to review plan documents and other paperwork. Summary Plan Descriptions (SPDs) may need to be revised to reflect changes that have
been made to a plan. A Summary of MaterialModification (SMM) must be distributed within 210 days after the end of the plan year in which the material modification has been made.
Privacy and security of financial and personal information is no longer an academic abstraction. Breaches of such data are announced with stunning frequency. Covered entities and Business Associates (BAs) have legal requirements to safeguard and protect PHI (protected health information). Employers may be considered subject to HIPAA depending on their access to PHI.
The administrative safeguards of HIPAA require a risk assessment to identify the use of PHI and means to reduce the risk of a breach of PHI. The risk assessment should be repeated and reviewed at regular intervals. Making this review part of “spring cleaning” is one way to ensure that the review is conducted.
Another facet of HIPAA compliance is training employees. Training is not a “one and done” exercise. Training schedules for new and existing employees should be a part of the risk assessment and review.
Employers often make decisions to get through the renewal without regard to whether the decisions support their employee retention and recruitment strategies. A review of how plans are meeting goals well in advance of the next renewal can help an employer make more informed decisions in the coming year. Such a review can also find gaps in the strategy that can lead to additional sales such as ancillary or voluntary plans.