Yes! Generally, it is not advisable for an employer to offer group health coverage to independent contractors.
However, before addressing the details of why health coverage should not be offered to independent contractors, it is important for an employer to ensure they have properly classified their workers as employees or independent contractors.
Employers who utilize independent contractors should work closely with their employment counsel to ensure proper worker classification. At a high level, the determination of employee versus independent contractor classification involves a facts and circumstances-based analysis of the nature of the individual’s employment and who directs or controls the individual’s work, taking into account numerous factors.
As noted above, workers properly classified as independent contractors (sometimes referred to as 1099 workers) generally should not receive an offer of coverage. Below, we will discuss some of the compliance issues if an employer offers coverage to independent contractors.
Section 125 Cafeteria Plan Eligibility
If the health benefits are offered through a Section 125 cafeteria plan, there are specific limitations as to which individuals can participate. One such requirement is that participants are employees. So, generally, a cafeteria plan may extend participation only to current and former employees of the employer who are considered common-law employees. Accordingly, offering benefits to an ineligible class such as independent contractors could present tax qualification issues for the plan.
ERISA Plan Eligibility
From an ERISA standpoint, it is generally not advisable to extend benefit plan coverage to independent contractors or other workers who are not the employer’s current or former common-law employees. Allowing independent contractors to participate in an ERISA group health plan contrary to the plan document terms would likely be a fiduciary violation. Additionally, the employer could end up funding all the benefits if the insurer or stop-loss carrier, as applicable, learned ineligible individuals were enrolled in the coverage. So, even if the carrier or TPA tells an employer they can cover independent contractors, it does not mean that the employer necessarily should do so. Furthermore, offering coverage to an independent contractor could be an additional factor that blurs the line between employee and independent contractor.
Inadvertent Creation of a MEWA
The other issue is that if the employer covers both employees and independent contractors, it would create a multiple employer welfare arrangement (MEWA). Independent contractors are considered self-employed so their participation in the group health plan would mean that employees of more than one employer are participating. MEWAs are subject to additional compliance obligations under both federal and state laws. If the plan is self-insured, that complicates things further since some states impose licensing, funding, reporting, and/or other obligations to operate while others actually prohibit self-insured MEWAs altogether.
ACA Employer Mandate
The ACA employer mandate (which applies to employers with 50+ employees) requires the employer to offer coverage to and report full-time employees. If the employer offers coverage to an independent contractor or reports them as a full-time employee, they are adding weight to the argument that they have misclassified the worker as an independent contractor and that the independent contractor should have been classified as an employee. On the other hand, if the individual is classified as an independent contractor, not offered coverage, and the DOL later determines them to be a common-law employee, this could result in the employer being subject to employer mandate penalties if the person goes to the exchange and receives a premium tax credit.
Summary
When extending offers of group health coverage, employers should carefully consider the factors discussed above and whether their workers are properly classified as independent contractors or employees, consulting with employment counsel as necessary. If the workers are independent contractors, then offering them coverage may give rise to compliance and legal issues, so it is not recommended unless directed by their own legal counsel.