Confusion lingers about PEOs and ACA compliance
Apart from political controversies, the introduction of the Affordable Care Act has opened up questions about liability. Specifically, small and medium-size employers who find it less expensive to use services like Professional Employer Organizations to administer their employee benefits may still be liable for infractions under the act.
Although the government has made some recent provisions in terms of who can or should be administering the ACA’s requirements, questions about liability remain.
Specifically, under the ACA, responsibility for compliance falls to the common law employer. But when contracting with a PEO, there are still questions about who the common-law employer is, and therefore who is responsible for providing benefits and reporting them accurately.
“After the ACA,” notes Rita Patel, an attorney with law firm DLA Piper and an expert in executive compensation and employer tax issues, “employers questioned their contractual obligations and who is responsible for what.”
In particular, she says, “PEOs wondered how they would provide benefits, if they weren’t the common-law employer.”
She replies that, if the employer is controlling the employee, they are the common-law employer and, under the ACA, the IRS will go after the common-law employer for liability. “But the government does not want to destroy the PEO business, so what they came up with is the construct of the PEO as a third-party to providing benefits.”
Per ACA reg. 4980H-4b, this means that in a contract between an employer and a PEO, the PEO may add a surcharge or fee, which—if the employer pays it—transfers liability from the employer to the PEO.
“If the employer pays a negotiated fee on top of the wages,” Patel states, “that in fact satisfies what the government was trying to accomplish.”
A different take
Paul Foery, manager for insurance services with PEO Insperity, has a somewhat different take. He says smaller and mid-size business need not worry about additional ACA reporting, if they join an organization like his. “When it comes to ACA reporting,” Foery says, “if they are a 20-man business, they stay a 20-man business in the eyes of the ACA. Therefore, they don’t have any additional ACA reporting just because they’ve joined a PEO.”
When it comes to meeting the ACA’s reporting requirements, Foery says PEOs have the benefit of knowing things like employee start dates and contribution levels, and can provide that data to employers.
"We have seen an increase in our business as small to medium sized employers look for help with rising health insurance costs as well as ACA reporting requirements," he says.