Employee or independent contractor? The answer has serious implications on your tax and benefit obligations, and you are also liable for significant financial penalties if you misclassify your workers.

Classifying a worker as an independent contractor is often financially advantageous for a company, as the company is not responsible for paying various payroll taxes or providing benefits. However, the risk of misclassifying a worker is significant, so it is important that companies exercise due diligence in ensuring proper worker classification.

Because it can be difficult to differentiate between employee and independent contractor, the IRS created three criteria to help employers make the distinction:

• Behavioral control: If the company trains the employee, specifies the hours of work, tools to be used, specific tasks to be performed, and how the worker goes about the job, the worker is likely an employee.

• Financial control: If the worker is paid a salary and restricted from working for others, he or she is likely an employee.
• Relationship: This may include whether a contract exists between the worker and company, and whether the worker gets benefits and specified time off. A contract typically suggests an independent contractor, while benefits and time off are generally given only to employees.

Beyond employee and independent contractor, there are two more classifications:

• Statutory employee: Workers classified as an employee for certain tax purposes, including certain distribution and delivery drivers, full-time life insurance or annuity agents, individuals who work at home using your materials and specifications, and full-time traveling salespeople.
• Statutory non-employee: Workers treated as self-employed for federal tax purposes, generally including direct sellers and real estate agents.

If employers are unsure about the classification of a worker, they can file a Form SS-8 with the IRS, and the IRS will determine the worker’s status.

In addition, the IRS recently announced a new Voluntary Classification Settlement Program. The program gives employers the opportunity to reclassify workers who may have been misclassified in the past, rather than risk an IRS audit. Employers would be subject to a minimal payment covering past payroll tax obligations, avoiding much higher fees and penalties in the event of an audit. For more information, you can visit the IRS website.

Health care reform continues to bring changes for employers and health plans. Here’s what employers need to know for 2012.

• Determine whether you have a grandfathered plan, and whether your plan will maintain that status in 2012. If you make certain plan changes, the plan is no longer grandfathered. If you have a non-grandfathered plan, it must comply with various health care reform provisions.
• The deadline to provide a Summary of Benefits and Coverage (SBC) was extended until final regulations are issued.

The former proposed deadline was March 23, 2012. It is unknown when final regulations will be issued.

• Once the SBC requirement becomes effective, plans must provide 60 days’ notice of any material modifications to the plan that are not related to renewals of coverage.
• For non-grandfathered plans starting on or after Aug. 1, 2012, certain women’s preventive health services must be covered with no cost sharing.
• Fully insured plans may receive rebates in August 2012 if they qualify for one under the new medical loss ratio rules. The rebates must be used for the benefit of plan members, which may include reducing enrollees’ premium payments.
• Beginning with the 2012 tax year, employers who issue 250 or more W-2 Forms must report the aggregate cost of employer-sponsored group health coverage on employees’ W-2 Forms. The cost must be reported beginning with the 2012 W-2 Forms, which are issued January 2013. The requirement is optional for smaller employers until further guidance is issued.
• If your state previously required you to impute income for covering dependents up to age 26, check for changes to your state’s tax code. All states should now conform to federal tax law, which permits this coverage to be provided tax-free.
• Self-funded plans must pay a $1 per covered life fee for comparative effectiveness research. Fees are effective for the first renewal after Oct. 1, 2012.
• Small employers that qualify for the tax credit provided by health care reform can claim it by filing Form 8941 with their annual tax filings. Employers with fewer than 25 employees and who pay average annual wages of less than $50,000 generally qualify.

Common questions and answers about extension of health insurance coverage

The health care reform legislation makes changes to the U.S. health care system, including an extension of health insurance coverage to young adult children up to age 26.

Who is Eligible?

The extension of dependent coverage applies to plans in existence on the date the health care reform legislation was passed (grandfathered plans) and new plans. Coverage must be made available to qualifying young adults up to age 26 whose parents carry private group or non-group health coverage.

Qualifying young adults include sons, daughters, stepsons, stepdaughters, adopted children (and possibly eligible foster children) of the parent, regardless of the qualifying young adult’s marital status. It does not matter whether the qualifying young adults are tax dependents for federal income tax purposes. Parents may decide whether to add adult children to their plan, but there is no requirement to cover the child of a dependent child.

Tax-Free Coverage

Effective March 30, 2010, health coverage provided for an employee’s child is not subject to federal tax for the employee or dependent during the tax year in which the child turns 26.

Although the coverage requirement ends on the child’s 26th birthday, employers can continue to offer the benefit on a tax-advantaged basis until the end of the taxable year in which the child turns 26.

The Internal Revenue Service announced that these changes

immediately allow employers with cafeteria plans – plans that allow employees to choose from a menu of tax-free benefit options and cash or taxable benefits – to permit employees to begin making pretax contributions to pay for the expanded benefit. This guidance also applies to health FSAs and health reimbursement arrangements (HRAs).

When Does the Dependent Coverage Extension Begin?

The extension of dependent coverage provision takes effect for plan years beginning on or after September 23, 2010. That means that for October plans, the start date would be October 1, 2010. Plans that run on a calendar-year basis must cover an employee’s young adult child up to age 26 starting on January 1, 2011. Plans that begin July 1 must cover dependents up to age 26 starting on July 1, 2011. Some insurers have said that they will begin to extend dependent coverage prior to September 23, 2010, for individuals who would otherwise lose coverage.

For grandfathered plans, before January 1, 2014, the extension of coverage will apply only with respect to dependent children not eligible for coverage under another employer’s health plan. On and after January 1, 2014, the provision applies to all plans regardless of a dependent child’s eligibility for coverage under another employer health plan.

How Much Will it Cost?

The provision does not specify how a parent’s premium costs will be affected by having a qualified young adult remain on their policy. Although, any qualified individual must be offered all

of the benefit packages available to children who did not lose coverage because of loss of dependent status. The qualified young adult cannot be required to pay more for coverage than similarly situated individuals who did not lose coverage due to the loss of dependent status.

What if My State Already Extends Coverage to Young Adults?

More than two-thirds of states already have laws that require insured group health plans to cover dependents past age 18, often into their mid to late 20s and in some cases later. For example, in New Jersey, unmarried children can stay on a parent’s plan until age 31. Such state mandates, including those requiring coverage past age 26, will continue to apply. Also, the favorable federal tax treatment applies only for adult children through the tax year in which they turn 26 and does not vary depending on state requirements. Employees in states that extend coverage past age 18, but not all the way to age 26, will now be able to take advantage of the federal extension.