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Page 1: KaufCAN.com ACA Update Focused on the Employer Mandate Final Regulations Shenandoah University Business Symposium March 25, 2014 John M. Peterson Kaufman

kaufCAN.com

ACA Update Focused on the Employer Mandate Final Regulations

Shenandoah University Business Symposium

March 25, 2014

John M. PetersonKaufman & Canoles, P.C.

[email protected](757) 624-3003

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DisclosuresThe following disclosure is required pursuant to IRS Circular 230 and applicable state and local tax provisions, the regulations that govern the practice of tax advisors. Any advice concerning Federal, state and local tax issues contained in this written communication (and any attachments) has not been written nor is it intended by the author or Kaufman & Canoles, PC to be used, and cannot be used, for the purpose of (i) avoiding federal, state or local tax penalties that may be imposed by the Internal Revenue Service or applicable state or local tax provisions, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. If a formal covered opinion intended to provide such protection is desired, please contact us to discuss the issues and costs involved in preparation of such a covered opinion.

Kaufman & Canoles is providing general education and not specific legal advice at this presentation.

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Topics

PPACA Overview & Timeline

Health Insurance Reforms

Individual Mandate

Health Insurance Marketplace & Subsidies

Large Employer Mandate

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PPACA Overview & Timeline

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The 4 Patient Protection &Affordable Care Act Principles

1. Health insurance reform (no medical rating)

2. Begets requirement that everyone have coverage or purchase insurance (individual mandate)

3. But health insurance is expensive so provide Federal financial assistance towards the cost (Marketplace subsidies)

4. But to control government subsidies have to require that large employers continue to subsidize their employees health insurance (employer mandate)

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ACA Key Events- Past

• March 23, 2010- PPACA enacted

• June 28, 2012- Supreme Court validates

• November 6, 2012- election, no change

• December 28, 2012- employer mandate proposed Regs

• January 1, 2013- .9% & 3.8% “pay for” taxes began

• March 2013- “Exchange” became “Marketplace”

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ACA Key Events- Past

• July 1, 2013- original deadline to start tracking employee hours (large vs. small, look-back measurement period)

• July 9, 2013- employer mandate delayed until 2015

• October 1, 2013- distribution of Marketplace notice, first Marketplace open enrollment period began (HealthCare.gov website rough opening)

Page 8: KaufCAN.com ACA Update Focused on the Employer Mandate Final Regulations Shenandoah University Business Symposium March 25, 2014 John M. Peterson Kaufman

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ACA Key Events- Past

• January 1, 2014

– Health insurance reforms began (or at 2014 insurance renewal)

– Health insurance Marketplace coverage and subsidies began (if purchased by 12/23/13)

– Individual mandate & penalties began (subject to exceptions, exemptions)

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ACA Key Events- Recent/Soon

• February 10, 2014- IRS issued final regulations on the employer mandate (4980H)– New 1 year delay for 50-99 employees– Other transitional relief & clarifications

• March 6, 2014- IRS issued final regulations on the large employer information reporting requirements and processes associated with determining liability for the employer mandate

• March 31, 2014- Initial Marketplace open enrollment period ends (applications made by this date avoid individual mandate penalty for 2014)

Page 10: KaufCAN.com ACA Update Focused on the Employer Mandate Final Regulations Shenandoah University Business Symposium March 25, 2014 John M. Peterson Kaufman

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ACA Key Events- Future

• July 1, 2014- new deadline to start tracking employee hours (large vs. small, look-back measurement period)

• November 15, 2014 - February 15, 2015- Marketplace open enrollment period for 2015 coverage

• Maybe in 2014? – IRS issues Regulations preventing discrimination in how employer provided group health insurance is offered/utilized

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ACA Key Events- Future

• January 1, 2015 (or first day of 2015 health plan year)- large (>99) employer mandate & penalties begin

• January 1, 2016 (or first day of 2016 health plan year)- large (50-99) employer mandate & penalties begin

• January 31, 2016- Large (>49) employers file 2015 forms (1094-C full time count and 1095-C offer of minimum essential coverage by employee/month)

• ?? Regulations on auto-enrollment >200 employees

• 2018- 40% “Cadillac” coverage excise tax begins

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Health Insurance Reforms

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4 Health Insurance Markets

• Individual (on and off exchange/Marketplace)

• Small Group (<50 in 2014 and 2015, <100 in 2016, possibly larger in 2017 and future)

• Large Group

• Self-funded/self-insured

(Grandfathered plans enjoy some exceptions)

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Major Insurance Reforms

• No health based ratings/underwriting (community rating)

• Guaranteed issue & renewability• No annual dollar limits on essential health

benefits• No lifetime dollar limits on essential health

benefits

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Major Reforms/Mandates

• No-cost preventive care (no co-pays or deductibles)– Includes contraception for women

• Cover dependent children through month turn 26 (includes step and foster children)

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Major Reforms/Mandates

• Maximum 90 day waiting period from date of eligibility– Eligibility based on lapse of time = 90 days from

hire– Eligibility based on orientation period not > 1

month + 90 days– Eligibility based on average hours per period can

measure for 1 year then offer within 1 month– Eligibility based on cumulative hours (1,200 max)

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Major Reforms/Mandates

• Deliver new Summary of Benefits and Coverage (SBC)

• Expanded claims and appeals procedures

• No rescission of coverage (except fraud or misrepresentation)

• Non-discrimination requirements (when guidance issued)

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Individual and Small Group Reforms

• Premiums established by geographic rating area (not health of individual or group)

• Premium age banding at maximum 3 to 1 disparity (age 64 vs. age 21)

• No sex based ratings

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Age Banding

0-20 0.635

21 1.000

25 1.004

30 1.135

35 1.222

40 1.278

45 1.444

46 1.500

48 1.635

50 1.786

53 2.040

55 2.230

60 2.714

65 3.000

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Individual and Small Groups Must Cover 10 Essential Health Benefits

• Ambulatory patient services

• Emergency services• Hospitalization• Maternity and newborn

care• Mental health &

substance abuse• Prescription drugs

• Rehabilitative & habilitative services

• Laboratory services• Preventive & wellness

services & chronic disease management

• Pediatric care, including dental & vision

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Comments on EHB• Notable medical services not EHB:

– Cosmetic surgery– Adult dental and eye exams– Acupuncture– Routine foot care– Infertility– Weight loss programs & surgery– Long term care– Private nursing

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Comments on EHB

• Level of EHB benefits set by “benchmark” plan (example types of prescriptions)

• Virginia benchmark plan requires coverage for:– Adult eye exams– Routine foot care– Infertility

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Reform ApplicabilityReform Individual Small Group Large Group Self-Insured

Community rating & 3:1 age band

Yes Yes No No

Cover 10 EHBs Yes Yes No No

No pre-existing excl Yes Yes Yes Yes

90 day wait No Yes Yes Yes

No annual or lifetime limits

Yes Yes Yes Yes

Kids to 26 Yes Yes Yes Yes

No cost preventive Yes Yes Yes Yes

Non-discrimination N/A Coming Coming Already exists

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No Individual Policy Delay in Virginia

• Responding to angst over cancellation of non-ACA compliant individual policies a 1 year (now 3 year) grandfathering is allowed if authorized at state level and carriers agree

• Virginia Board of Insurance has rejected and insurance carriers are not willing to extend non-compliant policies- no delay in Virginia

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Health Reforms Enforcement- The Forgotten $100/day Penalty

• Section 4980D excise/penalty tax– $100/day per affected employee ($36,500/year)– Applies to all size employers– Not delayed, already in effect in 2014– Self report on IRS form 8928

• Self-correct within 30 days = no penalty• “Reasonable cause” cap at 10% of health

costs

Page 26: KaufCAN.com ACA Update Focused on the Employer Mandate Final Regulations Shenandoah University Business Symposium March 25, 2014 John M. Peterson Kaufman

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Health Reforms Enforcement- The Forgotten $100/day Penalty

• Most reforms baked into health insurance contract, little employer concern

• Employer concerns:– Failure to distribute SBC– Exceeding maximum 90 day wait– Deny free contraception (litigation)

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Individual Mandate

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Individual Mandate 2014• Beginning with the month of January, 2014,

everyone must have “minimum essential coverage” (MEC) or be penalized for each full month without coverage (unless exception/exemption applies)

• Includes you, your spouse (if filing jointly) and your dependents (all individuals included on the tax return)

• Coverage can be purchased from your or your spouse’s employer (if offered), on the individual market, from the Marketplace or provided by Medicare, Medicaid, Tricare, CHIP or other government programs

Page 29: KaufCAN.com ACA Update Focused on the Employer Mandate Final Regulations Shenandoah University Business Symposium March 25, 2014 John M. Peterson Kaufman

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Individual Mandate

• Penalty = greater of flat dollar amount per person or specified percentage of household income in excess of income tax filing threshold:– 2014 $95 or 1% of excess– 2015 $325 or 2% of excess– 2016 $695 or 2.5% of excess

• Household income is Adjusted Gross Income (AGI) with the following add backs:– Foreign income excluded from AGI– Tax exempt or excluded interest– Any Social Security benefits not already included in AGI

Page 30: KaufCAN.com ACA Update Focused on the Employer Mandate Final Regulations Shenandoah University Business Symposium March 25, 2014 John M. Peterson Kaufman

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Individual Mandate • Income tax filing thresholds (2013)

– Single $10,000– Married filing joint $20,000

• Dependent income included if dependent required to file an income tax return (parent can elect to include)

• Dollar penalty for dependents under 18 is 50% of regular amount

• Maximum dollar penalty for any household is 3 times the dollar amount

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Individual Mandate

• 2014 Example: – 5 person household (2 parents, adult child >17 and 2

children <18), none insured– Household income $50,000, assume filing threshold

$20,000– Dollar penalty before limitation = $380 (3 adults and 2

children @ 50% = 4 x $95)– Capped dollar penalty $285 ($95 x 3)– % penalty $300 ($50,000 - $20,000 x 1%)– Pro-rate $300 penalty for # of months without coverage

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Individual Mandate

• 2016 Example (same facts):– 5 person household (2 parents, adult child >17 and 2

children <18), none insured– Household income $50,000, assume filing threshold still

$20,000– Dollar penalty before limitation = $2,780 (3 adults and 2

children @ 50% = 4 x $695)– Capped dollar penalty $2,085 ($695 x 3)– % penalty $750 ($50,000 - $20,000 x 2.5%)– Pro-rate $2,085 penalty for # of months without

coverage

Page 33: KaufCAN.com ACA Update Focused on the Employer Mandate Final Regulations Shenandoah University Business Symposium March 25, 2014 John M. Peterson Kaufman

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Individual Mandate

• Exceptions/exemptions from individual penalty:– Income below the tax filing threshold– Premiums for lowest cost plan available from

employer or marketplace (Bronze) exceeds 8% of household adjusted gross income (net of marketplace subsidies)

– Gap in coverage for less than 3 calendar months– Low income individuals in states not expanding

Medicaid– Apply by 3/31/14 even if coverage not effective until

5/1/14 (4 month transition)

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Individual Mandate • Hardship exemptions (apply through HHS/Marketplace)

– Eviction & homelessness– Death of close family member– Casualty to residence– Bankruptcy– Recent unpaid medical expenses

• Estimated 24 million excepted/exempt

• IRS can charge interest on unpaid penalty tax but prevented from collecting via tax liens and levies– Essentially can only collect from refunds

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Health Insurance Marketplace

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Health Insurance Marketplace

• What it is: a government operated online “storefront” in each state for residents to shop for and purchase individual health insurance

• Had been called the “exchange” until spring 2013

• Marketplace offers private insurer Qualified Health Plans (QHP), no government insurance involved

• 14 states operating their own, 36 states operated my federal government (Federally Facilitated Marketplace)

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Health Insurance Marketplace

• All individuals lawfully present in the US and not incarcerated can shop for and purchase health insurance through the new health insurance Marketplace– Healthcare.gov– Everyone can “comparison shop”

• Only factors determining Marketplace rates are geographic location (“rating area”), age and smoker status– Virginia divided into 12 rating areas (see next slide)– 3 to 1 maximum age banding between ages 21 and 64– No rate difference due to sex or medical condition– Smokers (4 or more per week) = up to 50% rate hike

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Health Insurance Marketplace

• All policies graded based on “actuarial value”– Measure of relative generosity– What % of standard medical costs will policy cover

• 4 “metal” tier insurance options– Bronze 60% actuarial value (AV)– Silver 70% AV– Gold 80% AV– Platinum 90% AV

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Catastrophic Plan

• In addition to the 4 metallic tiers the Marketplace will offer a high deductible catastrophic plan to certain individuals– Younger than age 30; or– No other coverage “affordable”; or– Obtained “hardship” exemption

• Meets individual mandate but not eligible for subsidies

• Covers 3 primary care visits and no-cost preventive care

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12 Virginia Rating Areas

1. Blacksburg

2. Charlottesville

3. Danville

4. Harrisonburg

5. Bristol

6. Lynchburg

7. Richmond

8. Roanoke

9. Virginia Beach-Norfolk

10. Arlington/Alexandria

11. Winchester

12. All other non-MSA

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Lowest Monthly Virginia RatesBronze Coverage, Area 9

Age 21

Catastrophic $128.00

Bronze $166.20

Silver $211.00

2nd Lowest Silver $212.48

Gold $258.00

Platinum N/A

Note exact 3 to 1 ratio

Age 64+

$384.00

$498.60

$633.00

$637.44

$774.00

N/A

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Marketplace Enrollment Periods

• 2014 open enrollment 10/1/2013 – 3/31/2014

• 2015 open enrollment 11/15/2014 – 2/15/2015

• Special enrollment opportunities:– Marriage– Birth or adoption of a child– Permanent move to different rating area– Losing coverage other than by voluntary quit or

failure to pay premium

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SHOP Marketplace

• For small employers to purchase group coverage

• Small means < 50 (< 100 in 2016)• Must use SHOP to claim Small Business

Health Care Tax Credit• Direct enrollment via broker in 2014• Online enrollment promised for 2015

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Marketplace Subsidies

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2 Marketplace Subsidies

• APTC- Individuals and families with household income between 100% and 400% of Federal Poverty Level who purchase through the Marketplace will be potentially eligible for “advance premium tax credits” paid directly by the Marketplace to their selected insurer

• CSR- Those between 100% and 250% of FPL will receive “cost-sharing reductions” (reduced deductibles and co-pays) if they purchase at least “Silver” coverage (70% actuarial value)

• Collectively = Marketplace “subsidies”

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Advance Premium Tax Credit (APTC)

• Individuals and households 100% to 400% FPL– Available to 47% of US households– 20% are below 100%– 33% are above 400%

• Marketplace (HHS) pays APTC directly to selected insurer “in advance” based on representations of households estimated 2014 income

• Individual/household pays a % of INCOME, government pays the balance

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Advance Premium Tax Credits

• APTC operates by capping the individual/household share of the premium for 2nd lowest cost Silver plan at between 2% and 9.5% of household income

• NOTE: APTC caps individual/household share of premium at a % of household income, not a % of the actual premium• Actual premium irrelevant to the individual/household

•100%-133% FPL pays 2% of household income for 2nd lowest cost Silver plan, government pays the balance

•300%-400% FPL pays 9.5% of household income for 2nd lowest cost Silver plan, government pays the balance

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Sample 2014 Federal PovertyLevels/Lines (FPL)

• One person household– 100% FPL $11,670– 400% FPL $46,680

• Two person household– 100% FPL $15,730– 400% FPL $62,920

• Three person household– 100% FPL $19,790– 400% FPL $79,160

• Four person household– 100% FPL $23.850– 400% FPL $95,400

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APTC Table

• Percentage of household income contribution towards 2nd lowest cost Silver (70%) coverage in Marketplace:– 100% to 133% FPL 2%– From 133% to 150% 3% to 4%– From 150% to 200% 4% to 6.3%– From 200% to 250% 6.3 % to 8.05%– From 250% to 300% 8.05% to 9.5%– From 300% to 400% 9.5%

• Between bands use inverse linear sliding scale– 225% FPL is half way between 200%-250% band– Household income contribution half way between 6.3% and 8.05%

= 7.04%

• See K&C detailed APTC chart

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K&C APTC Chart

• Example: $30,000 family of 4 falls at 125% FPL, pays 2% of income ($50/month) towards 2nd lowest cost Silver

• Below 100% FPL no subsidy (Medicaid non- expansion gap)

• Above 400% FPL no subsidy

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OOPS- APTC Pay Back

• APTC provided “in advance” based on estimate of 2014 income and reconciled on individual tax return

• Rarely exactly right- rates only smooth between• 100%-133% FPL (2%) and • 300%-400% FPL (9.5%)

• If too little, claim additional refundable credit• If too much, repay to IRS, subject to maximum

repayment limits

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Limits on APTC Repayments

• 100% to 200% FPL – Single $300– Married Filing Joint

$600

• 200%-300% FPL – Single $750– Married Filing Joint

$1,500

• 300%-400% FPL – Single $1,250– Married Filing Joint

$2,500

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APTC Pay Back Example 1• 4 person household estimates 2014 income

@ $31,000 (130% FPL)• Assume 2nd lowest Silver premium = $10,000• Family share 2.0% x $31,000 = $620• APTC = $9,380• Wage earner gets $1,000 bonus, actual

income goes to 135% FPL• Revised share of premiums 3.12% = $998• Owes $378 difference with tax return

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APTC Pay Back Example 2

• 4 person household estimates 2014 income @ $95,000 (barely under 400% FPL)

• 2nd lowest Silver premium $12,000• Family share 9.5% x $94,000 = $8,930• APTC = $3,070• Wage earner gets $1,000 bonus, goes above

400% FPL• Loses entire $3,070 APTC (300% tax rate!)

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Cost Sharing Reductions (CSR)(Reduced Deductibles & Co-Pays)

Never Subject to Repayment

100%-150% FPL

150%-200% FPL

200%-250% FPL

70% Silver increase to 94%

70% Silver increase to 87%

70% Silver increase to 73%

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Employer vs. Marketplace Subsidy?• To be eligible for Marketplace subsidies employee cannot be

offered “adequate” and “affordable” coverage from employer

• “Adequate” means at least Bronze (60% actuarial value) coverage- virtually all current offerings meet this standard

• “Affordable” means the employee’s share of the self-only coverage premium cannot be more than 9.5% of his income

• If employer offers coverage for spouse and/or dependents (even if entire premium paid by employee) then spouse and dependents are also ineligible for Marketplace subsidies

• Employer may be inadvertently “harming” certain lower income employees by offering coverage

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Subsidy Analysis Required

• Analyze workforce to determine value of Marketplace subsidies

• Requires knowledge of employee’s household size and household income

• Household size: taxpayer, spouse if filing joint, dependents

• Household income: taxpayer, spouse if employed, dependents if required to file a tax return

• Compare cost of coverage in Marketplace (net of subsidies) to cost of employer group coverage

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Illustrating the Subsidies

• Joe Employee age 35 earns $30,000/year ($15/hour) and supports a family of 4 (unemployed spouse age 35 and 2 children under age 20), falls at 126% Federal poverty level

• Joe lives in Virginia Beach (Virginia Rating Area 9)

• 2nd lowest cost silver plan (70% actuarial value)• Total annual premium for all 4 = $9,470• Family share of premium 2% of income = $50/month

= $600/year• APTC $9,470 - $600 = $8,870• Cost sharing reductions increase to 94% AV

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Illustrating the Subsidies

• Buy down to Bronze (60% actuarial value) family coverage

• Total annual premium $7,407• APTC of $8,870 covers entire cost• Family share of premium $-0-• But no cost sharing reductions since didn’t buy

Silver • $50 month upgrades from 60% Bronze to 94%

better than Platinum

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ACA Savings for Employee• Employer of “Joe Employee” currently offers

Bronze (60%) coverage at a cost to Joe of $200/month for the self-only premium with an option to add the family for $700/month (employer subsidy $200/month)

• Offering is “adequate” (Bronze) and affordable (self-only premium <9.5% of wages) so Joe cannot receive any Marketplace subsidies

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ACA Savings for Employee

• Employer decides it’s $200/month contribution can’t come close to the Marketplace subsidies

• Employer eliminates Joe from employer plan and raises his pay by $200/month effective 1/1/2014 so Joe can take advantage of $9,000+ of Marketplace subsidies

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ACA Savings for Employer

• Small law firm currently pays the $7,000 insurance cost for the 3 person family of a valued employee making $35,000/year

• Firm learns that 3 person $35,000 household falls at 177% FPL and household contribution is 5.24% of income ($1,834/year)

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ACA Savings for Employer• Firm drops employee & family from coverage

and raises employee’s salary by $2,500 effective 1/1/2014

• Firm assists employee in purchasing Silver coverage (enhanced to 87% AV) through the Marketplace (better value than employer offering)

• Firm realizes $4,500 savings on 1 employee

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Small Employer Strategies

• Don’t offer “affordable” coverage to any “lower income” employees who can benefit from Marketplace subsidies after January 1, 2014

• Help steer employees to Marketplace opportunity

• Strategies to eliminate employer “offer” or make “unaffordable”• Only offer coverage to 40 hour full-time employees and

reduce lower income to 39 hours• Offer only high priced coverage to ensure self-only premium is

“unaffordable” for lower income• Employees pay 100% of premium via cafeteria plan• Enroll through SHOP

• But only avoid minimum participation and contribution requirements during 30 day window

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Small Employer Strategies

• In comparing “value” of employer subsidy to the Marketplace subsidy remember that the employer subsidy is more valuable

• Employer subsidy is tax free to the employee• Employee’s share of Marketplace premium is after tax (non-

deductible)

• Can still offer “higher income” employees insurance in 2014• Nondiscrimination regulations not yet issued• IRS says regulations not effective until 2015 at the earliest• We’ll likely be discussing non-discrimination rules next year-

stay tuned

• Possible long term result: small employers may stop offering group insurance and push all employees to the Marketplace?

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Large Employer Strategies

• Don’t offer “affordable” coverage to “lower income” part-time employees after January 1, 2014

• Part-time = less than 30 hours/week in prior “measurement period”

• Enables those employees to enjoy Marketplace subsidies and will never expose employer to penalties

• Consider not offering “lower income” full-time employees adequate and affordable self-only coverage 1/1/14

• Allows lower income employees to receive Marketplace subsidies until 2015 renewal

• But employer not likely to continue this practice when employer mandate starts in 2015

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Large Employer Strategies

• Consider dropping spouse coverage• No ACA requirement to ever offer spouse coverage • Enables lower income employee’s spouse to obtain

subsidized Marketplace coverage• UPS and UVA notable examples

• Must offer dependent coverage to avoid penalty• Can delay until 2016 if “taking steps” towards

expanding coverage in 2015

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Employer Mandate

February 10, 2014 Final Regulations

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Employer Mandate Large employers

will be subject to nondeductiblepenalty taxes

unless theyoffer

adequate and affordablegroup health benefits to their

full-time*employees (and children to age 26)

*Full-time employee defined as 30 hours/week or 130 hours/month*

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Key Concepts• No employer is required to offer health

insurance (just strongly encouraged)

• Small employers (96% of all employers) are never subject to the mandate or penalties– But if they choose to voluntarily offer group health

they must comply with all the insurance reforms

• Large employers never have to offer coverage to (or can be penalized with respect to) part-time employees (<130 hours/month)

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Mandate Effective Date

• Large employer penalties calculated monthly, essential to know your start month

• Original effective month January 2014

• IRS Notice 2013-45 delayed mandate to January 2015

• Final regs delay mandate for “some” 50-99 employers to January 2016 (see below)

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Fiscal Year Delay to Renewal

• Some large employers will qualify for an additional delay until their 2015/2016 health insurance renewal date– Must have had a fiscal year plan as of 12/27/12– Must not have changed fiscal year– As of renewal prior to 2/9/14:

• Offered to 33% or covered 25% of all employees• Offered to 50% or covered 33% of full-time

employees– Must actually offer adequate and affordable coverage

to all full-time on 2015/2016 renewal date

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Who is the Employer?

• “Employer”- treat related entities as 1 employer for purposes of determining employer size (‘applicable large employer”)

• Apply controlled group and affiliated service group rules of IRC section 414(b), (c), (m) and (o)

• But treat each related company separately for purposes of determining and assessing penalties

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Who is an Employee?

• “Employee” determined under the common law test– Under who’s direction and control?– Are independent contractors properly classified?– Workers hired through staffing companies or PEO?– Good news- employer can take credit for health

insurance provided by staffing company or PEO so long as employer is charged a higher fee for those EEs

– Significant danger if worker is misclassified

• Excluded from “employee” definition– Sole proprietors, partners in partnerships and >2% S

corporation shareholders– New: bona fide volunteers

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Counting Hours of Service• “Hours” include:

– Hours worked– Hours paid while not working (paid holiday,

vacation, jury duty, etc.)– Special unpaid leave of absence (FMLA.

USERRA, unpaid jury duty)• Either credit hours or ignore these periods in

calculations– Educational organizations- employment break of 4

or more consecutive weeks• Either credit hours or ignore break

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Counting Hours of Service

• Employees paid hourly must count actual hours

• Employees not paid hourly must choose from 3 options– Try to track actual hours– Credit 8 hours/day or 40 hours/week if work on

that day or week– Other reasonable basis

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Determining “Small” Exemption

• 50 or more full-time employees + “full time equivalents” in prior calendar year = large employer for next calendar year – 49 or less = exempt “small” for next year

• Full-time employee = 30 or more hours per week or 130 or more hours per month– 52 weeks x 30 hours divided by 12 = 130/month

• Only for small vs. large determination part-time employee hours are converted to “full-time equivalents” (FTEs)

• Calculation made for each month in prior year then averaged to determine status for the following calendar year

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New 50-99 1 Year Delay

• In performing the small employer test in 2014 qualifying employers can substitute 100 for the normal 50 threshold to be considered a large employer in 2015

• Qualification requirements:– Has not reduced employees or hours in 2014– Has not reduced coverage offered 2/9/14– Signs “certification” of compliance

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Small Employer Calculation

Template for determining full-time employees and FTEs for a month:

1. List all employees for the month and their hours2. Sort by hours (high to low)3. Number of employees at 130 or more hours = “actual” full-

time employees4. Total the hours for all other employees (but don’t count more

than 120 hours for any one employee) = total “part-time” hours5. Divide total part-time hours by 120 = number of “full-time

equivalents” (FTEs) (carry to second decimal point)6. Number of “actual” full-time employees + number of FTEs =

testing “number” for that month

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Small Employer Calculation

Average number for prior calendar year determines status for following calendar year

1. Add the calendar year monthly totals, divide by 12 and round down to the next lowest whole number

2. If the resulting number is 49 or less (99 in 2014) the employer is “small” and exempt from the mandate for the following calendar year

3. If the resulting number is 50 or higher (100 in 2014) the employer is “large” and subject to the mandate for the following year (unless the seasonal employer exception applies)

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Monthly Calculation ExampleFor the month of January 2014 employer had 72 employees:

12 salaried and hourly employees who worked 130 or more hours (“actual” full time employees)

10 hourly employees who worked between 121 and 129 hours (limit to 120 hours each = 1,200 total part-time hours for these 10)

50 hourly employees who each worked <121 hours and collectively worked 4,000 hours

Total “part-time” hours = 1,200 + 4,000 = 5,200Divide 5,200 hours by 120 = 43.33 FTEs12 “actual” full time + 43.33 FTEs = 55.33 “number” for January 2015

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Special 2014 6 Month Rule

• Special transition rule for 2014 calculations:– Don’t have to include all 12 months of 2014 in test– Use any 6 or more consecutive month period– 28 possible testing periods (6 or more consecutive months)– Recommendation: test all 28 iterations until you find one <100– Make permanent record of test results and underlying data to

support 2015 exemption if IRS proposes a penalty

• Any employment changes (hours reductions) need to be in place by 7/1/14 to capture the requisite 6 month minimum period

• Note: future years will test using all 12 calendar months– For first calendar year fall into “large” category given until April

1st to offer coverage and avoid penalty for January-March

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Seasonal Worker Exception• If employer fails the <50 general test may still be exempt if:

– Workforce exceeded 50 for no more than 120 days or 4 months

– 100% of the employees in excess of 50 for those 120 days or 4 months were seasonal workers

– Can’t combine with special 6 month 2014 transition

• Employer can chose any 120 days or 4 months, not required to be consecutive– Suggestion: test as many combinations as needed to

demonstrate exemption

• “Seasonal workers” include those in agriculture, retail during holidays and “other” reasonably determined seasonal businesses (summer help in resort areas)

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Exempt Small Employer- Stop Here

• 99 or less in 2014 = exempt small employer for 2015: stop here (future years needs to be 49 or less)

• Determine whether to offer health insurance, to whom and at what cost without regard to the employer mandate/penalty

• But health insurance reforms will apply to any coverage offered

• Be mindful that offering affordable coverage to lower income employees will make them ineligible for Marketplace subsidies

• Be mindful that non-discrimination requirements must be considered once IRS issues regulations

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Large Employer Planning• To plan for and mitigate the impact of the

penalties starting in 2015 (2016 for 55-99) large employers need a strategy to identify and track (“measure”) all employees based on their potential classification as “full-time employees” who can expose the employer to penalties

• Since penalties are calculated monthly, identification/measuring must be monthly

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Large Employer Employee Categories

• Full-time: 130+ hours/month• Part-time: always work <130/month• Variable hour: cannot reasonably determine

whether employee will work 130/month• Seasonal: will work >130/month but for less

than 6 months/year

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Full-Time Employees• This is the only class that can cause penalties• Assume every employee falls into this class

until you can demonstrate otherwise• Salaried employees will almost always fall in

this class• New employees: apply “reasonable

expectation” test– But can’t consider likelihood employment be of

short duration

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Part-Time Employees

• Employees who will never work 130 or more hours per month

• Some employers ensuring this result by limiting total work hours to <130 per month (or <1,560 over measurement year)

• If calendar month hour tracking difficult, final regs allow 120 hours for 4 week months and 150 hours for 5 week months

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Variable Hour Employees

• At time of hire employer can’t reasonably determine whether employee will work 130 or more hours per month

• Employer can “measure” hours for up to a year before treating as full-time

• IRS concerned about abuse

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Variable Hour Employees

• Factors employer must consider:– Is employee replacing a FT or PT employee?– Do other employees in similar positions usually

qualify as FT or PT?– How was position advertised or represented?

• Factor that cannot be considered: knowledge or expectation that employment will be short duration

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Seasonal Employees

• Employee is hired into a position that lasts for less than 6 months per year (based on historical data)

• Do not have to treat as full-time despite working 130+ hours/month during the “in” season

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Measuring Part-time and Variable Hour Employees

• Full-time and seasonal employees will be relatively easy to identify

• Part-time and variable hour employees will be more problematic

• Two options:– Determine status on a current month basis

(“monthly measurement periods”); or– Determine status on a look-back basis (“look-back

measurement periods”)

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Monthly Measurement Period• Determine each employee’s status based on

how many hours they worked in the current calendar month

• For weekly tracking systems use 120/hours 4 week months, 150/hours 5 week months

• Once employee crosses threshold have 3 months to offer coverage to avoid penalty

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Look-Back Measurement Periods

• Determine full-time status based on look-back to prior period hours

• Provides measure of certainty with respect to employees who’s hours may vary from month to month (part-time or variable hour)

• Prevents a temporary spike in hours causing reclassification as full-time

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Look Back Measurement Process

• Test the employee’s hours during a prior measurement period (max 12 months)

• Analyze the data, make the status determination and notify and enroll “full-time” employees during an optional administrative period (max 90 days)

• Based on hours of employment during the measurement period treat employees as full-time or part-time during a future stability period (max 12 months)

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Choosing Periods

• Generally advisable to choose 12 month stability period that coincides with insurance year

• Generally advisable to include an administrative period

• Assuming a 2 month administrative period, then back into the measurement period

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Sample “Look Back” Methodology

• Optimum 12 month measurement and stability periods for a calendar year health plan:– Measurement period 11/1/2013 to 10/31/2014 (12 months)– Administrative period 11/1/2014 to 12/31/2014 (2 months)– Stability period calendar year 2015 (12 months)

• Example:– Employee F works an average 32 hours/week and employee P

works an average 28 hours/week during measurement period– During the following “stability period” employee F “deemed” to be

a full-time employee and P “deemed” to be a part-time employee irrespective of the actual number of hours worked during that stability period

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Special 6 Month Rule for 2014

• Measurement and stability periods must generally be the same length (ideally 12 months each)

• Transition rule: employers may use a “short” 2014 measurement period and still use a 12 month 2015 stability period if the measurement period:– Is at least 6 consecutive months long– Ends <90 days before 2015 renewal date– Begins no later than July 1, 2014

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Sample 2014 Look Back Periods• Calendar year plan:

– Measurement period 5/1/2014 to 10/31/2014 (6 months)– Administrative period 11/1/2014 to 12/31/2014 (2 months)– Stability period calendar year 2015 (12 months)

• April 1st renewal date– Measurement period 7/1/2014 to 1/31/2015 (7 months)– Administrative period 2/1/2015 to 3/31/2015 (2 months)– Stability period 4/1/2015 to 3/31/2016 (12 months)

• July 1st renewal date– Measurement period 7/1/2014 to 4/30/2015 (10 months)– Administrative period 5/1/2015 to 6/30/2015 (2 months)– Stability period 7/1/2015 to 6/30/2016 (12 months)

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Final Status Records

• After selecting the periods and running the analysis prepare a final report (with supporting payroll data)

• Keep report as proof of which 2014 employees are “deemed” to be full-time (and can subject the employer to penalties) in 2015

• Have report available to counter IRS penalty assertion in late 2016

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Note on Waiting & Measurement Periods

Large employers are exempt from penalties during the initial 90 day waiting period for new full-time employees or during the look-back measurement period for variable hour employees ONLY if minimum value coverage is offered at the end of those periods

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What About New Employees?

• If classified as full-time (“reasonably expect” employee to work 130 or more hours/month) offer coverage within 90 days of hire or risk penalty

• If classified as part-time or variable hour measure actual employment over a maximum 12 month special “initial measurement period” and if actual hours >1,560 (130 x 12) offer coverage within one month (13 month rule) or risk penalty

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What About Rehired Employees?

• If employee gone for 13 weeks can be treated as new employee upon rehire– 26 weeks required for educational employees

• Rule of parity: employer can treat former employee as a new employee if length of period gone is at least 4 weeks and is less than the prior period of employment– Example: employee works 6 weeks, is gone 8 weeks,

can treat as new employee– Example: employee works 2 weeks, is gone 3 weeks,

can’t be treated as new employee (not gone 4 weeks)

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Large Employer “a” Penalty

• 4980H(a) penalty (a/k/a the $2,000, no coverage or sledgehammer penalty)

• If large employer fails to offer qualifying coverage to all of it’s full-time employees for a particular month and 1 or more full-time employees receive a Marketplace subsidy for such month then penalty is $167.67 per full-time employee in excess of 30 for such month • $167.67/month = $2,000/year• Punitive penalty: applies to all full-time employees

including those purchasing employer coverage, those covered by spouse, Medicare, Medicaid, Tricare, CHIP and those going without coverage

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Large Employer “a” Penalty

• Modifications to “all” requirement by IRS regulations• Otherwise missing 1 of 10,000 could = $20M penalty

• Proposed regulations permit 5% margin of error• Could miss <500 of 10,000 and avoid the “a” penalty

• Final regulations permit 30% margin of error for 2015 only• Then revert to 5% rule for 2016 and future

• Final regulations also increase 30 employee exemption to 80 employees for 2015 only (IRS theory is 30 was 20 less than 50, 80 is 20 less than 100)

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Large Employer “b” Penalty• 4980H(b) penalty (the $3,000, inadequate/unaffordable

coverage or tack-hammer penalty)

• If large employer fails to offer adequate and/or affordable coverage to a full-time employee for a month in which the employee receives a Marketplace subsidy penalty = $250 • $250/month = $3,000/year• Penalty more understandable than the “a” penalty since

employer is only penalized for employees receiving government subsidies

• “b” penalty cannot exceed what the “a” penalty would have been had it applied (can’t pay more by offering something than by offering nothing)

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Penalty COLA Adjustments

• Penalties will increase at the rate of health care costs

• HHS projects 6% increase for 2015:– $2,000 will become $2,120 ($176.66/month)– $3,000 will become $3,180 ($265/month)

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$3,180 “(b)” Penalty Example

• In 2015 employer offers all 100 full-time employees adequate but unaffordable coverage

• 30 employees obtain coverage from spouse, Tricare, Medicare or Medicaid

• 30 employees >400 FPL buy coverage from employer • 30 employees refuse to purchase any coverage (may be

subject to the individual mandate penalty)• 10 employees under 400% FPL purchase subsidized

coverage in the Marketplace• Inadequate/Unaffordable Penalty:

$3,180 x 10 employees receiving subsidies = $31,800

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$2,120 “a” Penalty Example

• Same facts as above except employer does not offer any coverage

• Since at least 1 employee received a subsidy penalty = $2,120 x 20 (100 full-time employees - 80) = $42,400– Under normal 30 exemption penalty in 2016 would be

$148,400 ($2,120 x 70)

• Strategy: large employers will generally want to offer minimum essential coverage that is unaffordable or fails minimum value rather than offering nothing (tack hammer hurts less than sledgehammer)

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Avoiding Employer Penalties

Requirements to avoid employer penalties:

Offer coverage toAll full-time employees that

Provides minimum essential coverageMeets minimum value

Is affordable

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The Coverage Offer• Offer coverage to all full-time employees

• Offer coverage to dependent children until end of month attain age 26– Includes adopted children but not step or foster children– Dependent coverage not required for 2015 so long as “steps

being taken” to offer coverage in 2016”

• No requirement to ever offer spouse coverage– UPS and UVA notable employers already dropping spouses

• Offering must be communicated to full-time employees so they have an effective opportunity to participate– Recommendation: keep signed election forms or other

acknowledgement from all full-time employees

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Minimum Essential Coverage

• Large employers must offer minimum essential coverage (MEC)– Means offering a group health plan that provides

medical care – Relatively easy to qualify as MEC

• Large employer insurance offering not required to cover the 10 Essential Health Benefits (discussed earlier)

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Minimum Value • Employer’s offering must provide at least a 60%

minimum actuarial value

• Actuarial value (AV) is a relative measure of a plan’s “generosity”– A plan providing 60% AV would be expected to cover 60% of the

cost of medical/health needs of a standard population– Employee would cover cost of remaining 40% through co-pays

and deductibles– HHS and IRS provide AV calculators and safe harbors

• For comparison shopping 4 levels of AV:– Bronze 60% (the base level for employer mandate)– Silver 70% (the base level for Marketplace subsidies) – Gold 80%– Platinum 90%

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Affordability• Statute: coverage is affordable if the employee’s

premium for self-only coverage is no more than 9.5% of the employee’s household income

• IRS allowing use of employee’s W-2 Box 1 (gross wages subject to income tax) as a substitute for household income

• Box 1 is AFTER pre-tax 401(k) and cafeteria plan deductions

• Affordability is measured on cost of employee-only coverage under the lowest cost 60% minimum value (Bronze) plan offered by the employer

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Affordability Safe Harbors• 3 IRS safe harbors on affordability of employee share of

premium for employee-only coverage:– 9.5% of Box 1 wages– 9.5% of lowest hourly wage x 130 hours per month – 9.5% of Federal Poverty Level (FPL)

• Examples– Employee earns $5,000/month (Box 1), employee-only

coverage affordable at $475 or less per month – Employee paid $9.00 per hour, coverage affordable at

$111.15 or less per month ($9.00 x 130 x 9.5%) – Under current FPL of $11,670, coverage affordable at

$92.38 or less per month ($11,670/12 x 9.5%)• Use this option as a design based safe harbor• OK even for months where employee’s wages fall below FPL

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Penalty Avoidance Strategies

• Large employer complies with intent of statute– Offers “adequate” and “affordable” coverage to all full-time

employees and their dependents– Can exclude spouses

• Employer has <30 full-time employees (<80 in 2015) but is “large” due to large part time workforce– No penalty since the “no coverage penalty” only applies to

full-time employees in excess of 30 (80 for 2015)– But if 50-99 have to start reporting requirements for 2015

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Penalty Avoidance Strategies

• Employer limits all hourly paid employees to <130 hours/month in 2014 “look back” measurement period– 1,560 total hours if using 12 month measurement

• Employer limits all employees < 400% FPL to <130 hours/month in 2014 (no full-time employee can qualify for subsidized coverage in 2015)

• Employer only employees workers making >400% FPL or are covered by spouse, Tricare, Medicare, Medicaid (no employee can receive a Marketplace subsidy - risky strategy)

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Compliance Issues & Planning• Determination of related employers, common law

employees and hours of service

• Exploration of opportunities to “break” a single employer or related entities apart to qualify for the small employer exemption (no later than July 1, 2014)

• Exploration of changes in employment practices (limit certain employees to <130 hours/month) to minimize “full-time” population in 2015 (no later than July 1, 2014)

• Must consider employment law concerns with respect to any strategies under consideration

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Caution in Penalty Strategizing

• ERISA Section 510- employers may not …”discharge, fine, suspend, expel or discriminate against a participant or beneficiary…for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan…”

• ACA Section 1558- “No employer shall discharge or in any manner discriminate against any employee with respect to…compensation, terms, conditions or other privileges of employment because the employee…” has received a premium tax credit (subsidy) or is a whistleblower

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3 Reporting Requirements Associated with the Mandate

1. Section 6051- Report cost of employer-sponsored health care on Form W-2

2. Section 6055- Insurer or self-funded plan report type and period of minimum essential coverage (MEC) (ties to individual mandate)

3. Section 6056- Large employer reports “offer” of MEC to full-time employees (ties to large employer mandate)

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Section 6051 W-2 Reporting• Employers must report cost of employer-

sponsored health benefits on Form W-2 (started in 2010)

• Allows IRS to accumulate data in anticipation of implementation of 40% excise tax on “Cadillac” coverage in 2018

• Currently limited to employers who filed more than 250 W-2s in prior year (but will expand downstream)

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Section 6055 MEC Reporting

• Starting for calendar year 2015 IRS must know which taxpayers received “minimum essential coverage” (MEC) for each month of the year

• Required to determine taxpayer liability for the “individual mandate” penalty

• All MEC providers must file new reports (details by taxpayer by month)

• Insurance company responsible for insured plans• Employer responsible for self-insured plans

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Section 6056 “Offer” Reporting

• Starting for calendar year 2015 IRS must know which employees of large employers were offered “minimum essential coverage” (MEC) for each month of the year

• Required to determine employer liability for the “employer mandate” penalty

• All large employers will have to file reports (including the 50-99 group exempt from 2015 penalties)

• Reports will cover all 12 calendar months of 2015, including months prior to 2015 renewal/effective date

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Assessment and Collection Procedures

• HHS will notify employer (section 1411 certification) when employee applies for subsidized marketplace coverage– employer will have opportunity to “contest” subsidy

• Effective for 2015 large employers will file new annual reports with IRS (with copies to employees)– Insurers and self-funded plans will report similar

information on coverage to IRS

• Employees report premium subsidies on their individual tax returns (beginning with 2015 returns due by 10/15/2016)

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Assessment and Collection Procedures

• IRS will match 2015 data from HHS/Marketplace, employer, insurers and employees (probably late 2016) and send a proposed penalty assessment for 2015 to employer

• Employer will have an opportunity to dispute/clarify the facts that led to the proposed assessment

• Ultimately IRS will bill the employer for the penalties (separate from other tax returns)

• First nastygrams expected late 2016

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Transition Relief Summary

• Extended/continued from proposed regs– Effective date delayed to 2015 renewal date– 6 month calculation of “small” for 2015– Possible 6-11 month “short” 2014 measurement

period (depending on renewal month)– Dependent coverage required until 2016– Multiemployer (union) coverage sufficient

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Transition Relief Summary• New relief in final regs

– No 2015 penalty for 50-99 “medium” employers (with conditions, must still do 2015 reporting)

– No 2015 “a” penalty if offer to 70% (vs. 95%) – No 2015 “a” penalty on first 80 FT employees (vs.

30)

• Relief not extended – Special 1 time change to fiscal year cafeteria plan

election for year that overlaps 1/1/2014

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Latest Delay Overview

Employer 4980H 6056

Size Mandate Reporting

<50 (96%) Never Never

50-99 (2%) 2016 2015

100+ (2%) 2015 2015

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Employer Mandate by the Numbers

• 5%- margin of error permitted in offering coverage to all full-time employees (30% in 2015)

• 9.5%- maximum % of income self-only premium for coverage to be “affordable”

• 30- threshold hours per week to be full-time employee

• 30- threshold number of full-time employees before any penalty tax applies (80 for 2015 only)

• 50- threshold average number of full-time employees and “full-time equivalents” in prior calendar year to be treated as large employer subject to mandate in following year (100 for 2014 only)

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Employer Mandate by the Numbers

• 60%- Bronze level of coverage (employer mandate)• 70%- Silver level of coverage (Marketplace subsidy)• 80%- Gold level of coverage• 90%- Platinum level of coverage• 90- maximum days in waiting period before new

employee must be offered coverage• 120- divisor into total part-time hours in a month to

determine “full-time equivalents” • 130- threshold hours per month to be treated as full-time

employee (functional counterpart to 30 hours/week)• $176.66- monthly “no coverage” penalty (2015)• $265- monthly “unaffordable coverage” penalty (2015)

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Employer Mandate Checklist

• Determine “employer”• Determine “employees”• Count hours• IF MIGHT QUALIFY AS SMALL/EXEMPT-

– Make FT and FTE calcs (100 threshold)– Use 6 or more months in 2014– Special rules for seasonal– If “small” for 2015 stop here

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Employer Mandate Checklist

• Divide employees into categories– Full time– Part time– Variable hour– Seasonal

• Determine measurement method and periods• Calculate “full-time” employees• Determine effective date of mandate

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Employer Mandate Checklist

• Determine cost of compliant coverage• Decide whether to “pay or play” with respect

to full-time employees• Extend offer of coverage by effective date• Gear up for complying with recordkeeping

and reporting requirements • Maintain audit trail of employee classification

and hours history

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Checklist of Major ACA Requirements by Employer

Size

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All Size Employers Whether or Not Offering Health Insurance

Provide Marketplace notice on October 1, 2013 and all future employees at point of hire

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Only Large Employers

Prepare for and deal with the Employer Mandate & penalty exposure

Collect data and file new informational returns tied to enforcement of the Individual and Employer Mandates

W-2 reporting of value of health benefits (>250)

> 200 - auto enrollment of all eligible employees in health plan (coming when?)

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ACA Requirements Applicable to All Employers Offering Coverage

No pre-existing condition exclusions

Cover children to age 26

No annual or lifetime limits on EHB

No cost preventive care

No rescission except fraud or misrepresentation

Equitably share MLR rebates with employees

Distribute SBC in prescribed format

Limit medical FSA to $2,500/year

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ACA $100/day Penalty Exposure All Employers Offering Coverage

Notice of choice of physician

Notice of expanded claims & appeal procedures

SBC distribution (penalty delayed until 2015)

Notice of material modification of coverage

Notice of grandfather status

Notice of 1 year delay in offering no cost contraception (if applicable)

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ACA Taxes and Fees Impacting Cost of Coverage (All Size Employers)

Patient Centered Outcomes Research Institute fee (PCORI)

Transitional Reinsurance Fee (2014-2016)

2018- 40% excise tax on “Cadillac” coverage

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Questions?

John M. Peterson 757.624.3003

[email protected]

150 West Main Street Suite 2100Norfolk, VA 23510