Q&A: Can Independent Contractors Enroll in Our Health Plan?

Question:

We have several salespeople who are classified as independent contractors and paid on a 1099 basis. One of our highest earners has asked if she can enroll in our health plan. Can we allow this, with or without extending the same offer to all of our contract salespeople?

Answer:

The vast majority of group health plans don’t include independent contractors in their definition of eligible employees. I’m going to assume your plan is the same.

I definitely do not recommend offering coverage to only one contracted salesperson. Instead, you might consider redefining your eligible classes to include all contracted salespeople or even all independent contractors, if you have more than one kind. If your plan is fully insured, you would need to run this past the carrier first. They may or may not have an issue with it.

Self-insured plans have a little more flexibility in defining eligible classes, but you still need to make sure your stop-loss carrier is aware of the change and approves. Otherwise, you could have non-employees on the plan incurring claims for which the carrier will subsequently deny coverage. In that scenario, your company would be responsible for any claims incurred by the independent contractors (and any covered family members) who enroll.

However, even if you can redefine your eligibility to include independent contractors, that doesn’t necessarily mean you should. Some concerns you would need to consider before making such a change include:

• The potential impact on the plan’s compliance with the nondiscrimination requirements for self-insured health plans. (Those are too complicated to explain in an article of this length.)
• If you offer benefits to individuals who are not employees, the premiums paid by both the employer and non-employees would likely be considered taxable income.
• Offering benefits to independent contractors could create a strong argument in favor of them being reclassified as employees. Most employers with independent contractors would prefer to avoid that.

In short, I wouldn’t recommend offering benefits to independent contractors unless you intend to reclassify them as employees for all purposes. If you want to explore all the issues and whether there is a way to accomplish your goals with minimum risk, I suggest discussing this with your attorney.