The employer penalty for failing to offer insurance is coming in 2014. A business that has fewer than 50 full-time employees is not subject to a penalty for failing to provide affordable health insurance to its employees. In counting employees, a common question we receive is, “Do leased employees count for purposes of the large-employer penalties?”
Regulation §54.4980H-1(a)(15) defines an employee for purposes of the penalty. Naturally, this definition is conflictive and unclear whether a leased employee counts for the penalty. The proposed regulation references IRC §414(n)(2) for the definition of a leased employee. Part of the definition reads “…such person has performed such services for the recipient (or for the recipient and related persons) on a substantially full-time basis for a period of at least 1 year…” Does this mean they do not count as employees or does it mean they must work for a year for the lessee before they do not count towards the penalty?
Notice 2011-36 and the preambles to the regulation clarify what a leased employee is or is not. Section 414(n)(2) does not cross-reference §4980H, the code section governing the penalty. The notice and preambles clarify that a leased employee generally does not meet the common-law definition of an employee; therefore, does not count towards the penalty. An employer could possibly implement this strategy to avoid the penalty. However, do not expect your client to get off easy. Expect that the leasing agencies will pass along the cost of insurance or penalties to the lessee of these services.
Featured in TAXPRO Weekly - June 20, 2013