Question:
Can an employer offer their healthcare plan to 1099 contractors if they don’t make the deductions pre-tax?
Answer:
Generally speaking, employers may offer these benefits to 1099 workers, but many carriers may not allow it. The value of the coverage will be included in the worker’s taxable income.
In addition, there are several compliance considerations:
Cafeteria Plans (Sec 125) plans have specific limitations as to which individuals can participate – one being that participants are employees. So, generally a cafeteria plan may extend participation only to current and former employees. Offering benefits to an ineligible class could present tax qualification issues for the cafeteria plan.
- The arrangement could inadvertently create a Multiple Employer Welfare Arrangement (“MEWA”). A MEWA is a health plan set up or maintained for the benefit of employees of two or more employers that are not a part of the same control group. The Department of Labor (“DOL”) states that where an employer covers both its employees and independent contractors, the plan would be considered a MEWA because employees from two unrelated employers participate in the plan. Independent contractors are generally considered self-employed (that is, employed by a separate entity). MEWAs have additional compliance filing obligations (i.e. Form M1 filings, as well as state-legal insurance and regulatory filings). There are some state restrictions to MEWAs, and these plans can be subject to significant state insurance law regulations.
- Be aware of proper worker classification. A failure to properly classify a worker could lead to extensive penalty exposure under IRS and DOL rules and regulations.
For more information
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