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Independent Contractors and Employee Benefits

Question: What are the issues with employers offering group health and welfare plan benefits to independent contractors?

Compliance Team Response:

Offering group health and welfare plan coverage to independent contractors in most cases will not be a realistic option because it would create a MEWA.

  • Offering Coverage to Independent Contractors Creates a MEWA

A multiple employer welfare arrangement (MEWA) is an arrangement used to provide employee welfare benefits to the employees of two or more employers that are not part of the same controlled group. 

The DOL has stated that where an employer-sponsored group health plan covers both its employees and independent contractors, the plan would be considered a MEWA.  This is because a MEWA is a health plan established or maintained for the benefit of employees of two or more unrelated employers, and independent contractors are treated as self-employed individuals that are part of unrelated employers.

Including independent contractors in an employer’s group health and welfare plan therefore creates a MEWA.

Carrier Generally Would Not Permit MEWA for Independent Contractors

Insurance carriers for a fully insured plan generally will not permit employers to create a MEWA to cover non-employees outside of arrangements specifically designed for that purpose (e.g., health plans sponsored by a bona fide association).

Employers seeking to offer coverage to independent contractors would first need to receive approval from the insurance carrier.  Failure to receive carrier approval could result in the carrier refusing to pay claims for the independent contractors—requiring the employer to self-insure the benefits.  This is the worst-case scenario.

  • California Prohibits Self-Funded MEWAs

One important consequence of providing benefits through a MEWA is that you lose much of the ERISA preemption of state law.  Outside of a MEWA, a self-insured employer-sponsored group health plan is not subject to state insurance law because of ERISA preemption.  However, state insurance law can regulate a self-insured MEWA.

In California, state insurance law has prohibited the creation of any new self-funded MEWA since 1995.  A handful of other states have taken a similar approach to essentially ban new self-funded MEWAs (primarily because of fraud concerns).

Self-insured health plans therefore cannot be made available to independent contractors in California or other states where it would violate state insurance law.  Note that even if where self-insured MEWAs are permitted by state law, offering coverage to independent contractors would still create stop-loss coverage issues for the plan that would require advance approval from the stop-loss provider.

  • Form M-1 Filing Requirement

MEWAs are required to file a Form M-1 with the DOL.  Plans that fail to file the M-1 may be subject to penalties of up to $1,597 per day (2019).  This is treated as a personal liability of the administrator (i.e., no corporate protection for the liability), and it cannot be paid with MEWA assets.  Furthermore, unlike the Form 5500 DFVCP program, there is no self-correction program available to provide reduced penalties for late Form M-1 filings.

One item to note here is that there is an exception from the M-1 filing requirement for a plan that provides coverage to independent contractors where the number of such non-employees covered is less than 1% of the total number of employees or former employees covered by the MEWA.  Although this exception could prove helpful in potentially avoiding the Form M-1 filing requirement, it confirms that offering coverage to an independent contractor creates a MEWA (otherwise there would be no need for the exception).

  • Section 125 Cafeteria Plan Exclusion

Lastly, even if the employer chose to offer coverage to independent contractors (which, again, is generally not a viable option for all of the reasons stated above), the independent contractors would not be eligible to pay their share of the premium on a pre-tax basis Section 125 cafeteria plan.  They would have to pay the premium on an after-tax because self-employed individuals cannot participate in a cafeteria plan.

The share of the premium paid by the employer would also be taxable income to the independent contractors.  Furthermore, the independent contractors would not be eligible to participate in the health FSA or dependent care FSA.

Alternative Approach: Individual Coverage Reimbursement

There is no issue with an employer paying for independent contractors’ individual health coverage, such as coverage on the Exchange.  This must be done on a taxable basis—with a gross-up if desired.  Note that paying for an employee’s individual coverage is currently not permitted under the ACA, but the prohibition does not apply to properly classified independent contractors who are not employees.


ABA JCEB Q/A (May 18, 2005):

A follow-up question was asked regarding an arrangement offering or providing health benefits maintained by one employer and covering common law employees of the employer and several independent contractors. DoL staff indicated that they would generally read the reference to self-employed individuals in section 3(40) as resulting in such arrangements being MEWAs.

ERISA §514(b)(6)(A):

(6) (A) Notwithstanding any other provision of this section—

(i) in the case of an employee welfare benefit plan which is a multiple employer welfare arrangement and is fully insured (or which is a multiple employer welfare arrangement subject to an exemption under subparagraph (B) ), any law of any State which regulates insurance may apply to such arrangement to the extent that such law provides—

(I) standards, requiring the maintenance of specified levels of reserves and specified levels of contributions, which any such plan, or any trust established under such a plan, must meet in order to be considered under such law able to pay benefits in full when due, and

(II) provisions to enforce such standards, and

(ii) in the case of any other employee welfare benefit plan which is a multiple employer welfare arrangement, in addition to this title, any law of any State which regulates insurance may apply to the extent not inconsistent with the preceding sections of this title.

California Insurance Code §742.24(h):

  • 742.24. Eligibility for certificate of compliance
  • To be eligible for a certificate of compliance, a self-funded or partially self-funded multiple employer welfare arrangement shall meet all of the following requirements:

(h)  File an application with the department for a certificate of compliance no later than November 30, 1995.

29 CFR §2520.101-2(c)(2)(ii)(C):

(ii) Nothing in this paragraph (c) shall be construed to require reporting under this section by the administrator of an entity that would not constitute a MEWA or ECE but for the following circumstances under this paragraph (c)(2)(ii).

(A) The entity provides coverage to the employees of two or more trades or businesses that share a common control interest of at least 25 percent at any time during the plan year, applying principles similar to the principles of section 414(c) of the Internal Revenue Code;

(B) The entity provides coverage to the employees of two or more employers due to a change in control of businesses (such as a merger or acquisition) that occurs for a purpose other than avoiding Form M-1 filing and is temporary in nature. For purposes of this paragraph, “temporary” means the MEWA or ECE does not extend beyond the end of the plan year following the plan year in which the change in control occurs; or

(C) The entity provides coverage to persons (excluding spouses and dependents) who are not employees or former employees of the plan sponsor, such as non-employee members of the board of directors or independent contractors, and the number of such persons who are not employees or former employees does not exceed one percent of the total number of employees or former employees covered under the arrangement, determined as of the last day of the year to be reported or, determined as of the 60th day following the date the MEWA or ECE began operating in a manner such that a filing is required pursuant to paragraph (e)(1)(i), (2), or (3) of this section.

29 CFR §2520.101-2(c)(3), Example 4:

Example  (4)  (i) Facts. Company E maintains a group health plan that provides benefits for medical care for its employees (and their dependents) as well as certain independent contractors who are self-employed individuals. The plan is therefore a MEWA. The administrator of Company E’s group health plan uses calendar year data to report for purposes of the Form M-1. The administrator of Company E’s group health plan determines that the number of independent contractors covered under the group health plan as of the last day of calendar year 2013 is less than one percent of the total number of employees and former employees covered under the plan determined as of the last day of calendar year 2013.

(ii) Conclusion. In this Example 4, the administrator of Company E’s group health plan is not required to report via the Form M-1 for calendar year 2013 (a filing that is otherwise due by March 1, 2014) because it is subject to the exception to the filing requirement provided in paragraph (c)(2)(ii)(C) of this section for entities that cover a very small number of persons who are not employees or former employees of the plan sponsor.

Prop Treas. Reg. §1.125-1(g)(2)(i):

(2) Self-employed individual not an employee.

(i) In general. The term employee does not include a self-employed individual or a 2-percent shareholder of an S corporation, as defined in paragraph (g)(2)(ii) of this subsection. For example, a sole proprietor, a partner in a partnership, or a director solely serving on a corporation’s board of directors (and not otherwise providing services to the corporation as an employee) is not an employee for purposes of section 125, and thus is not permitted to participate in a cafeteria plan. However, a sole proprietor may sponsor a cafeteria plan covering the sole proprietor’s employees (but not the sole proprietor). Similarly, a partnership or S corporation may sponsor a cafeteria plan covering employees (but not a partner or 2-percent shareholder of an S corporation).

Brian Gilmore

About the author

Brian Gilmore

Lead Benefits Counsel

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law. Connect with Brian on LinkedIn.

The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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