Can You Offer Health Insurance To Independent Contractors?

There are many benefits to working with independent contractors and freelancers as you build your business.

You can access experienced professionals you may otherwise not be able to afford. You can tap into the expertise of a professional to accomplish a short-term goal without worrying about adding them to the payroll for the long term. And you don't have to worry about the taxes and benefit requirements of hiring an employee.

But what if your favorite freelancer starts negotiating for health insurance coverage?

Can You Offer Health Insurance To Independent Contractors?

While you may want to offer health coverage for the independent contractor helping move your business forward, most benefit experts say this could be risky for your business. Here's why you should think twice before adding independent contractors, freelancers, and other 1099 non-employees to your business health insurance plan.

Misclassification Misunderstandings

The Internal Revenue Service (IRS), the Department of Labor, and state governments have regulations and aggressive policies to crack down on worker misclassification and enforce workers' rights.

Federal, state, and local labor laws provide protections for employees in the form of minimum wage, overtime pay, unemployment insurance benefits, workers' compensation coverage, and employer contributions toward Social Security and Medicare.

However, some employers, whether acting out of ignorance or willful disregard for labor laws, will misclassify employees as independent contractors to avoid paying minimum wage, overtime, or providing benefits for workers.

One of the guiding principles for determining if a worker is an employee vs. an independent contractor is the delineation between the worker and your business.

For example, twenty states, including California, have adopted the ABC test to determine a worker's status. The test states an independent contractor must be able to prove they:

A. Complete work without the direction and control of the employer

B. Perform work outside the usual course of the employer's business

C. Have their own independent business or trade performing said work

When you provide health benefits for an independent contractor, you start to blur the line between employee and freelancer. It makes it more difficult to prove that your contractor is working independently and could open the door for possible misclassification misunderstandings.

Former Freelancers Might Cry "Foul"

If you should provide health benefits to one independent contractor or freelancer, what happens when other freelancers find out? Providing group health benefits for one non-employee could put you at risk from former contractors who now feel they were denied benefits from your company. You could find yourself facing a lawsuit for not offering the same benefits to all of your contractors (current and former). When feelings of unfairness arise, a lawsuit could follow.

Tax Issues Get Messy

Adding a non-employee to your health plan can add a level of tax implications. Your contractor may need to declare any employer contributions as taxable income, for example. Non-employees also cannot participate in a group health plan on a pre-tax basis the way employees can. You and your independent contractor should have a good understanding of the considerations involved with adding a non-employee to your group plan.

You Just Accidentally Created a MEWA

If you cover non-employees on your company's health plan, you may inadvertently create a multiple employer welfare arrangement (MEWA), which comes complete with an IRS reporting requirement. MEWAs are plans that cover multiple unrelated employees and are subject to increased regulation and enforcement.

A business can accidentally and unintentionally create an MEWA by allowing employees of other employers or nonemployees to participate in its plan. 

Once considered a MEWA — whether intentional or not — you can face fines and penalties of up to $1,500/ day for not filing the correct form with the Department of Labor (Form M-1).

California Employers Have No Obligation to Cover Contractors

As much as you might want to offer health benefits to your favorite independent contractors and the freelancers who help you succeed, you have no legal obligation to do so. Offering health benefits to your contractors could backfire, leaving you at risk for lawsuits or fines and penalties.

How do you take care of your contractors if you decide not to cover them?

  • Increase your contract rates: your independent contractor will certainly not complain if you offer to pay them more for their services. If you want to show your favorite freelancer how much you value their work, increase the amount you're willing to pay for their services to help them afford private health coverage. 
  • Introduce your contractor to your insurance broker: independent contractors needing to find coverage can benefit from an experienced insurance broker who can help them find the right coverage at the right price. 
  • Refer their services: referrals are a great way to show your appreciation for someone's work and talent. Keep your favorite contractors front of mind and make introductions and referrals to other business owners who could benefit from their services.
  • Offer to bring them in-house: if you enjoy the working relationship with your independent contractor and constantly have work for them to do, it might benefit you both to bring them in-house. Have a conversation about what it would take to make them a permanent part of your team and the benefits you could provide if they wanted to make the move from contractor to full-time employee.

Got Employee Health Benefits Questions? Aegis Has Answers

Understanding the ins and outs of employee health coverage can be difficult. Aegis Insurance Markets can help you find the answers to your most pressing insurance questions, from commercial insurance to employee health benefits coverage. Our insurance brokerage is headquartered in Truckee, California, where we specialize in helping business owners understand and mitigate risks and protect their businesses.

Contact our Truckee office for a FREE strategy analysis call, or request a no-obligation business health insurance quote for your business today.




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