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This is the latest in a series of columns by O’Melveny & Myers attorneys, focusing on key legal issues specific to a variety of U.S. industries. With the obligations and penalties of the Patient Protection and Affordable Care Act (aka, Obamacare) set to take effect in 2014, many employers have begun evaluating the use of “contingent” workers as a strategy for containing healthcare costs. Contingent workers—such as independent contractors, leased employees, and part-time employees—typically are not entitled to healthcare coverage, and their expanded use could offer businesses a way around some of the new law’s costlier requirements. But beware: The benefits of a contingent workforce also come with risks, including the potential for monetary penalties that may strike some employers as inordinate. Under the PPACA, individuals will be required to have healthcare coverage as of January 1, 2014 (the so-called “individual mandate”). Individuals without employer-provided coverage will be able to satisfy the individual mandate by purchasing coverage through new health insurance exchanges. Individuals with incomes between 100 percent and 400 percent of the poverty level will be entitled to a “premium assistance” subsidy if they purchase coverage on an exchange. Millions of individuals are expected to do so. Employers are not directly obligated to provide coverage to their employees. But if a “large” employer—one with 50 or more full-time equivalent employees—does not offer healthcare coverage to at least 95 percent of its full-time employees, the employer faces a penalty under Internal Revenue Code Section 4980H(a). An employer that doesn’t cover at least 95 percent of employees would be hit with a penalty if any of its full-time employees without employer-provided coverage purchases coverage from an exchange and receives premium assistance. The annual penalty under Section 4980H(a) can be severe: $2,000, multiplied by every full-time employee, minus the first 30 full-time employees. Note that all full-time employees count toward calculating the penalty, even the employees with employer-provided coverage.

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