Worker Misclassification can Affect ACA Compliance

Affordable Care Act


From The ACA Times, Joanna Kim-Brunetti discusses how misclassifying workers as independent contractors can affect

On December 31, 2017, the North Carolina Employee Fair Classification Act (EFCA) took effect. The new law allows for heightened investigations into those employers that are allegedly misclassifying their workers as independent contractors rather than as employees.

The law allows workers to report potential job misclassification cases to a new division within the North Carolina Industrial Commission, known as the Employee Classification Section (ECS). The new division will provide this information to the state’s Department of Labor, Industrial Commission – Compliance and Fraud Investigative Division, Department of Commerce – Division of Employment Security, and Department of Revenue. Each agency will conduct independent investigations to determine whether violations of their operating statutes have occurred, and, if necessary, will ensure the necessary enforcement actions are taken.

So what makes this a story about the Affordable Care Act (ACA)? The issue of worker misclassification can play a significant role in exposing companies to ACA-related tax penalties issued by the IRS. Here are two:

Being Subject to the ACA’s Employer Mandate. As part of their annual filing of healthcare coverage information with the IRS,entities must determine if they are Applicable Large Employers (ALEs) for purposes of the Affordable Care Act (ACA) – that is, whether they have an average of 50 or more full-time or full-time-equivalent employees over the course of a year. ALEs are subject to the ACA’s employer mandate to offer employees minimum essential coverage that provides “minimum value” and is “affordable,” and to report such information annually to the IRS. If workers are misclassified, an organization may believe it does not meet the threshold for being an ALE, and does not need to comply with the ACA requirements. This can trigger a host of tax penalties.

Greater Exposure to Tax Penalties. Even if your organization already knows it is large enough to be considered an ALE, worker misclassification can lead to errors in information submitted to the IRS. This can trigger your organization receiving an IRS tax penalty notice. The agency recently started issuing its Letter 226J tax penalty notices to companies that did not comply with the ACA in IRS filings for the 2015 tax year. Some penalties are in the millions of dollars. More are expected to be issued in 2018, including for 2016 tax year filings.


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