Temporary staffing firms and PPACA are at odds. Recent employer mandate regulations published by the IRS on February 10, 2014, reveal the tension: the IRS worries that if staffing firms get any breaks, businesses will be incentivized to use staffing firms to minimize their PPACA obligations, while staffing firms worry that the added costs of PPACA will potentially cripple their business.

The staffing industry asked three main questions of the IRS and received answers which will greatly affect how much cost they must pass on to their clients.

First, the staffing industry asked the IRS if their employees could be presumed to be variable hour employees. This would be desirable because employers of variable hour employees can avoid IRC § 4980H liability while not offering coverage during the first year of employment. The IRS rejected a general presumption and instead directed staffing agencies to follow a multi-factor analysis in order to determine whether each employee is or is not a variable hour employee.

Second, PPACA states specific rehire rules; a previously terminated employee is not considered a new employee unless there was a break between employment (typically 24 weeks). Because staffing agencies typically have employees who return for many jobs, they requested a shorter break of 4 weeks before an employee is considered a new employee. The IRS rejected this rule.

Finally, temporary staffing firms asked for guidance on when they can count an employee who is not working on assignments as having separated from service with the firm. This determination is significant in certain non-PPACA contexts such as eligibility to receive a distribution from a qualified plan (see, for example, section IRC § 401(k)(2)(B)(i)(l)) and the requirement to provide a notice of continuation coverage under COBRA (see IRC § 4980B). Essentially, to the extent it is easier to count an employee as separated from service, it would likely lower the cost of PPACA compliance to the staffing firms under PPACA rehire rules. The IRS gave no guidance, instructing staffing firms to use reasonable methods consistent with general practices for other purposes.

In sum, temporary staffing firms, by their nature, are among the most vulnerable to PPACA’s added cost to employers. Because of the tension between the services they offer and the stance of the IRS, careful planning will be required in order to achieve a cost-effective solution.