Caution if Offering Health Coverage to Non-Employees

A frequent Compliance Corner question asks whether employers can include independent contractors in their health plans or other benefits. The answer to this question is more complicated than one might think.

Most benefit experts advise against including independent contractors or other non-employees such as 1099 employees, non-employee directors or leased employees on employer’s benefit plans.

Here are three (3) reasons why this may be inadvisable:

  1. Treating an independent contractor like an employee may undermine an employer’s assertion that the individual is not an employee. The DOL and the IRS, as well as their state counterparts, have aggressive programs to uncover worker misclassification. By offering a non-employee employee benefits, an employer’s assertion to these regulators challenging whether an individual is really an employee is weakened. Moreover, if some non-employees gain benefits while others do not, an independent contractor excluded from a plan may sue for benefits exposing an employer to potential penalties.
  2. Covering individuals who are not employees on the health plan may result in creation of a multiple employer welfare arrangement or MEWA. The intent to create a MEWA is irrelevant. MEWAs have IRS reporting requirements such as a Form M-1. If the plan is self-funded there may be further complications with state laws that prohibit self-insured MEWAs
  3. Tax issues also come into play. For example, an independent contractor is not eligible for a Section 125 plan. Employer contributions to coverage may also be taxable.

Complicating this decision is that some insurance carriers will allow independent contractors to be included in an employer’s health plan. But, compliance is the employer’s responsibility, not the insurance carrier’s.

The best answer to whether non-employees can be offered coverage is that employers who wish to evaluate or pursue covering non-employees should consult their legal and benefit advisors.