Alabama Enacts Law that Establishes Portable Benefits for Independent Contractors
In April, the Alabama Legislature passed the Portable Benefits Act, to be codified at Ala. Code § 25-1-70. This Act is intended to help independent contractors, including gig workers, who do not have employer-sponsored health insurance or other benefits. With its enactment, Alabama joins Utah as one of the first states to offer portable benefits.
How Do Gig Workers and Independent Contractors Benefit from the New Law?
Under this new law, independent contractors—including so-called “gig workers” such as drivers for DoorDash, Uber, and similar positions—will be able to create portable benefits accounts to pay for various benefit plans. The Act specifically identifies health benefits, income replacement insurance (i.e., disability policies), life insurance, and retirement benefits. These accounts, unlike traditional fringe benefits accounts, will attach to the individual rather than the specific employer.
How are Portable Benefit Accounts Created?
An independent contractor must open a portable benefit account and have that account administered by a “portable benefit account provider,” which is defined as a bank, an investment management firm, or a technology provider or program manager that offers services through a bank or investment management firm.
Who Can Fund the Accounts?
The Act provides that any person may contribute to an account. It further provides that a hiring party, which is defined as “[a] person or entity who hires or enters into a contract for the performance of work with an independent contractor,” may contribute to the portable benefit account from its own funds or as a form of compensation.
This contribution may be separate from compensation paid to the independent contractor, but it also may be a withholding from compensation owed to the contractor.
If the hiring party contributes to the portable benefits account as a form of compensation, the hiring party and independent contractor must agree to the contribution in a signed service agreement. The agreement must be clear, unambiguous, and prominently displayed in the services agreement or separate notice. The independent contractor must voluntarily opt in to the withholding of compensation and must be allowed to opt out of the withholding at any time.
What are the Tax Benefits of Account Contributions?
Under the Act, the independent contractor may deduct 100% of the amount contributed by a hiring party as a form of compensation to a portable benefit account and 100% of the amount contributed by the contractor on the contractor’s Alabama state income tax return for the applicable tax year of the contributions.
If the hiring party contributes its own funds to the portable account, then it may deduct 100% of that amount as a business expense on its annual Alabama state tax return.
These deductions may be made for tax years beginning after December 31.
Are There Protections Under the Act to Preserve the Independent Contractor Relationship?
The Act specifically provides that any contributions made by the hiring party cannot “be used as a criterion for determining a worker’s employment classification.” This means that independent contractors, who otherwise are not covered by workers’ compensation if injured while performing their duties under the independent contractor relationship, cannot use the fact that the hiring party made or withheld contributions to a portable benefits account as a basis to impose workers’ compensation liability.
Businesses who decide to help create or contribute to a portable benefits account should further ensure that their written independent contractor agreement disclaims any formation of an employer-employee relationship based on such a contribution.
Please contact Michael E. Turner, Abigail W. White or any member of the Phelps Labor and Employment team if you have questions or need advice or guidance.
