By: Andrew Silverio, Esq.

We couldn’t possibly count the number of inquiries we have received over the years about extending coverage to “1099 Employees” under a self-funded ERISA health plan.  So, it seems like a good idea to lay out some important concepts and issues that arise when discussing coverage under an ERISA plan for independent contractors.  First, there is no such thing as a “1099 employee”.  A 1099 worker is an independent contractor, which is by definition not an employee.  This may seem like a distinction which is relatively meaningless and semantic, but the difference has significant practical consequences. 

Whether a worker is properly classified as an independent contractor, who reports his or her income on a form 1099, or a true employee, who receives a W-2, is based on a multi-factor common law test.  Importantly, this common law test and the resulting question of how a worker is properly classified is a legal and factual question – this is not something that can be decided by an employer by simply documenting someone as a contractor as opposed to employee, or negotiated between the parties. These factors include the amount of control the company has over the work, the financial relationship between the parties (beyond regular pay, who covers business expenses, provides necessary equipment, etc.), and the type of relationship.  For example, is there a written contract governing the relationship?  Is the relationship continuous or for a defined period or project?  Does the worker receive benefits like vacation pay, health coverage, retirement benefits?  This last point is important – whether or not a worker is provided benefits like health coverage is actually a factor in the common law test of how they should be classified, so if an employer is looking at providing health coverage to 1099 workers, it must be aware that doing so can actually tip the scales and render them common law employees (triggering all the related legal and tax considerations).

The ERISA plan sponsor wishing to extend coverage to independent contractors also has various hurdles to consider that an employer purchasing a fully-insured group policy does not – namely, how ERISA defines an “employee benefit plan.”  Since independent contractors are not employees, covering them under an employee benefit plan, which exists for the benefit of employees and their dependents, can actually take the plan out of the realm of ERISA and into the realm of state law.  This could occur because the plan, now covering its own employees as well as those of another employer (even if those persons are self-employed) may be considered a multiple employer welfare arrangement (MEWA), which is subject to state law and regulation by the local department of insurance. This would have serious repercussions for an ERISA plan, as one of the main benefits of that status is the broad protections from state law such plans enjoy.

While we always appreciate the desire to be more generous with benefits, in the self-funded world the issue becomes very tricky when it comes to non-employees.  We would urge any plan sponsor to look carefully at all these different issues and consult with a local employment attorney with any questions about the proper classification of its workers.