healthcare reform – the state of the union

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Health Care Reform: Focus on Employer

“Shared Responsibility” Penalty

Wednesday, January 30, 2013

Presented By:

Lisa M. deFilippis Senior Benefits Counsel, Cleveland Office

Simplifying business. Benefiting people.

Disclaimer

2012 Jackson Lewis LLP

• This presentation provides general information regarding its subject and explicitly may not be construed as providing any individualized advice concerning particular circumstances. Persons needing advice concerning particular circumstances must consult counsel concerning those circumstances.

• IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)

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Context – How Key Parts Fit Together

Market Reforms and

Mandates

Shared Responsibility

Insurance Exchanges

Medicaid Expansion

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Individual Mandate

• U.S. Supreme Court upheld constitutionality in 2012

• Individual must have minimum essential coverage (employer-sponsored, Medicare, Medicaid, exchange, etc.) or pay tax penalty for periods without coverage that’s greater of –

– 1% AGI or $95 for 2014

– 2% AGI or $325 for 2015

– 2.5% AGI or $695 for 2016

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2014 Employer Penalty

Internal Revenue Code § 4980H Employer Shared Responsibility Penalties

• a/k/a “Pay or Play” penalty

• Nondeductible penalty applies to employers with 50 or more fulltime employees

• “Assessable penalty” - generally are assessed and collected in the same manner as taxes

• Guidance so far: Notice 2011-36, Notice 2012-58, Proposed Regulations

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Employers Subject to Penalties

“Applicable Large Employer”

• “Large” means the employer had an average of 50 or more fulltime employees on business days in prior calendar year

• Employer status is determined on controlled group basis (aggregation, like for retirement plan); different EIN ≠ different employer

• Special rules for predecessor employers and new employers

• Common-law employment principles apply when determining employment relationship

• Anti-abuse rules

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Employers Subject to Penalties Controlled Group Rules

• Parent-subsidiary group – an entity has an 80% or more controlling interest in another entity

• Brother-sister group – same 5 or fewer people (or trusts/estates) together own at least 80% of each entity and the same owners hold more than 50% of each entity

• Affiliated service group – service organizations (e.g., medical practice, architectural firm) where one performs services for the other or management function group

• Attribution rules apply, too

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Employers Subject to Penalties New Employer Example

• NewCo is incorporated on January 1, 2015 and on that day NewCo has just three employees. However, prior to incorporation, NewCo's owners bought a factory they intended to open within two months of incorporation and they intended to employ 100 employees. By March 15, 2015, NewCo has over 75 fulltime employees

• Because NewCo can reasonably be expected to employ on average at least 50 fulltime employees on business days during 2015, and actually does, NewCo is an applicable large employer

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Employers Subject to Penalties Who’s an Employee?

• Employee/Employer relationship determined based on common law principles

– Subject to the company’s will and control not only as to what but also how

– Facts and circumstances, not necessarily contract language

• Independent contractors are not employees (but be certain they’re independent contractors!)

• Non-employee directors, sole proprietors, partners, 2-percent or more shareholders in an S corporations and leased employees (if they’re not your common law employees) are not treated as employees.

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Employers Subject to Penalties What Fulltime Means

• Fulltime = employed on average for 30 hours of service per week (130 hours per month)

– Hourly – count actual hours

– Non-hourly – count actual hours or use equivalency rules (8hrs=1day, 40hrs=1week)

• Okay to use different methods for different groups

• Use reasonable method for commission-only

• Service includes hours paid for performance of duties, vacation, sick, jury duty, layoff, military service, holiday, incapacity (e.g., disability)

• Service does not include work performed outside the US

• For 2014, may use any 6-month period in 2013 (instead of all of 2013) to determine average

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Will Your Company be a Large Employer for 2014?

1. Count your fulltime employees (including seasonal) for each month in 2013

2. Count your fulltime equivalents (including seasonal) for each month in 2013

a. Add total hrs for non-fulltime employees but count no more than 120/mo for any one non-fulltime employee

b. Divide # obtained in sub-step a) by 120; the result is the number of fulltime-equivalents for that month

3. Add the two #s obtained in steps 1) and 2) above for each month

4. Add the twelve sums obtained in step 3) and divide the total by 12; the result is the average number of fulltime employees/equivalents

5. If the # in step 4) is at least 50, determine whether seasonal employee exception applies

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Will Your Company be a Large Employer for 2014?

Seasonal employee exception After determining that your company had at least 50 fulltime employees/equivalents on average for 2013, determine whether –

– the number exceeded 50 for only 120 days/4 months (or fewer) and

– the number in excess of 50 were seasonal employees

Seasonal = seasonal retail, agricultural and others included under good faith reasonable interpretation

If the number of fulltime employees exceeded 50 for no more than 120 days/4 months and the excess employees were seasonal, your company is not a large employer for 2014

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Large Employer Determination Seasonal Worker Exception Example

• Elves Inc has 40 fulltime non-seasonal employees for the full 2015 calendar year, Elves also has 80 seasonal fulltime workers who pack and ship toys from September through December. Elves has no part-time employees

• Before applying the exception, Elves Inc has 40 fulltime employees for 8 months of 2015 and 120 fulltime employees for 4 months of 2015, resulting in an average of 66 employees for the year

• But, since Elves’ workforce equaled or exceeded 50 fulltime employees for no more than 4 months and the number of fulltime employees would be less than 50 in those months if seasonal elves were disregarded, it’s not an applicable large employer for 2016

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– Play or Pay (4980H(a)): If minimum essential coverage is not offered to “all” fulltime employees and dependents and one or more fulltimer obtains subsidized Exchange coverage, employer must pay (annualized) penalty of $2,000 x (#fulltimers - 30)

– Play and Pay (4980H(b)): If minimum essential coverage is offered but one or more fulltimer obtains subsidized Exchange coverage, employer must pay (annualized) penalty equal to lesser of –

• $3,000 x #fulltimers who decline employer coverage and receive subsidized Exchange coverage or

• $2,000 x (#fulltimers - 30)

Understand the § 4980H Penalty

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Understand the § 4980H Penalty Pay or Play Example

ER with 100 FT EEs does not offer minimum essential coverage to FT EEs and dependents and at least one FT EE obtains subsidized exchange coverage

$2,000 x (100 – 30) = $140,000

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Understand the § 4980H Penalty Pay and Play Example

ER with 100 FT EEs offers minimum essential coverage to all FT EEs and dependents but at least one FT EE obtains subsidized exchange coverage

Lesser of –

• $2,000 x (100 – 30) = $140,000

• $3,000 x (# FT EEs who obtain subsidized exchange coverage) = ??

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Understand the Penalty Meaning of Fulltime Employee

• Control group and common law employer concepts apply

• Works at least 30 hours per week with respect to a given month (non-fulltime employees do not trigger penalty)

• Since monthly determination is administratively burdensome, IRS offers safe harbor “measurement/stability” method

– Count hours during a look-back measurement period of 3-12 months to determine fulltime/non-fulltime status;

– Treat as fulltime/non-fulltime for stability period, depending on status determined under measurement period

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Understand the Penalty Safe Harbor to Determine Fulltime Status

For ongoing employees (i.e., employed for at least as long as the measurement period you use) count actual hours for a look-back measurement period

– If employee averages 30 hrs/wk in measurement period, treat as fulltime for a stability period of at least 6 months and no shorter than measurement period, regardless of actual hours worked during that stability period

– If the employee averages less than 30 hrs/wk in measurement period, he or she is treated as non-fulltime for a stability period no longer than the measurement period

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safe harbor – ongoing employees – 3 to 12-mo measurement period

– Different measurement and stability periods may be used for categories of employees: union/nonunion, different bargaining agreements, salaried/hourly, different states

– May change length of periods each year but not with respect to an employee who’s measurement period has begun **

– May use “administrative period” of up to 90 days between measurement and stability periods but it cannot reduce or lengthen the measurement or stability period

– Optional for 2014 only: use 6-mo look-back with 12-mo stability

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Safe Harbor Method Ongoing Employees Example

• Your company is an applicable large employer that offers coverage only to fulltime employees and chooses to use:

– a 12-mo stability period that begins January 1

– a 12-mo standard measurement period that begins October 15; and

– an administrative period between the end of the standard measurement period (October 14) and the beginning of the stability period (January 1) to determine which employees were employed on average 30 hours per week during the measurement period

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Safe Harbor Method Ongoing Employees Example - continued

• Al was employed on average 30 hours per week during the standard measurement period 10/15/2015 – 10/14/2016 and for the prior measurement period

– Because Al was employed for the entire standard measurement period, Al is an ongoing employee with respect to the stability period 1/1/2017 – 12/31/2017

– Because Al was employed on average 30 hours per week during that standard measurement period, Al is offered coverage for the entire 2017 stability period (including the administrative period 10/15/2017 – 12/31/2017)

– Because Al was employed on average 30 hours per week during the prior standard measurement period, he’s offered coverage for the entire 2016 stability period and, if enrolled, coverage would continue during the administrative period 10/15/2016 – 12/31/2016

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Safe Harbor Method Ongoing Employees Example - continued

• Bob also was employed on average 30 hours per week for all prior standard measurement periods, but is not a fulltime employee during the standard measurement period 10/15/2015 - 10/14/2016

– Because Bob was employed for the entire standard measurement period 10/15/2015 – 10/14/2016, Bob is an ongoing employee with respect to the stability period in 2017

– Because Bob did not work full-time during this standard measurement period, you don’t offer Bob coverage for the stability period in 2017 (including the administrative period from 10/15/2017 – 12/31/2017)

– However, because Bob was employed on average 30 hours per week during the prior standard measurement period, Bob was offered coverage through the end of the 2016 stability period and, if enrolled, would continue such coverage during the administrative period from 10/15/2016 through 12/31/2016

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Safe Harbor to Determine Fulltime Status for a New Employee

For new employees (i.e., employed for less than one measurement period), determine if –

– Fulltime: reasonably expected to be employed on average at least 30 hours per week, non-seasonal; or

– Variable-hour/Seasonal: unable to determine at start date whether he or she will be fulltime

• For 2014 only, employer may take into account an anticipated termination date (after 2014, employers must assume that an employee will be employed for the entire measurement period)

• Apply look-back measurement/stability safe harbor method and there’s no penalty with respect to a new employee during measurement

– If status changes during measurement period (reasonably expected to be fulltime), treat as fulltime starting on first day of 4th month after status change or, if earlier, first day of month after measurement period

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Safe Harbor General Rules

• Rehired employees (and employees returning from unpaid leave) are treated as new hires if the period of no service was at least 26 consecutive weeks – As alternative can use parity rule for shorter periods of pre-break

employment – If treated as new, restart measurement period – If not treated as new, the rehired/resuming employee is treated

as “continuing” for purposes of measurement/stability period • If using safe harbor, careful recordkeeping is essential (not just hours

– measurement/stability periods, start dates, termination dates, leave dates, job category, coverage eligibility, coverage offers, enrollments, etc.)

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Understand the Penalty Meaning of Dependent

• An employee’s child under age 26

– Child for federal tax purposes (§ 152(f)(1)) – son, daughter, stepchild, adopted child, child placed for adoption, foster child

– May rely on employee’s representation

• An employee’s spouse is not a dependent

• For 2014 only, an employer not currently offering dependent coverage will not be liable for a penalty solely for failure to offer dependent coverage as long as it takes steps in 2014 to begin offering dependent coverage

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Understand the Penalty What’s “Subsidized Exchange Coverage”

• Remember, a fulltime employee must obtain subsidized Exchange coverage (§ 36B) to trigger a penalty

• No subsidy unless –

– Household income between 100% and 400% federal poverty line (currently, $11,170 for a single person)

– Not offered: minimum essential coverage

– Buys Exchange coverage

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Understand the Penalty What it Means to “Offer” Coverage?

• Employee must have effective opportunity to accept coverage at least once per year

• If coverage is not affordable or does not meet minimum value, employee must also have had effective opportunity to decline coverage (i.e., mandatory or automatic coverage that’s not affordable or of minimum value will not prevent employee from obtaining subsidized Exchange coverage and triggering penalty)

• Offer is effective for a given month only if coverage is effective for full month if employee accepts offer

• Offer not negated by employer dropping employee’s coverage for nonpayment of premium

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Understand the Penalty Meaning of Minimum Essential Coverage

• Coverage under a grandfathered plan, an eligible employer sponsored plan, an individual plan, Medicare, Medicaid, CHIP, TRICARE etc.

• Special rule: for employer-sponsored coverage to be minimum essential coverage, it must meet –

– Affordability test

– Minimum value test

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Understand the Penalty Meaning of Affordable Coverage

• Employer coverage meets affordability test if the employee is required to pay no more than 9.5% of household income for self-only coverage

Affordability Safe Harbors:

– Employee’s W-2 reported wages

– Based on monthly rate of pay (cost does not exceed 9.5% of monthly pay)

– Coverage does not exceed 9.5% of Federal poverty level for single individual

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Understand the Penalty What is Minimum Value?

To avoid penalties, employer plan must provide minimum value*:

• The plan’s share of the total allowed costs of benefits provided under the plan must be at least 60% of the Actuarial Value of those costs

• “Actuarial Value” is a general summary measure of health plan generosity

*plans in the small group market must also provide

minimum value

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Understand the Penalty Dependent Coverage

What if ER offers coverage for all full-time employees but does not offer any coverage for their dependents? Is this the same as ER not offering coverage? (i.e., to avoid play or pay penalty, must offer dependent coverage)

No penalty possible if ER offers coverage to all full-time employees and their children, pays full cost of employee coverage but does not subsidize dependent coverage at all

*Note, that proposed regulations define “dependent” as child, not spouse

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Understand the Penalty Some Special Rules

Multiemployer plans

• Through 2014, an employer that makes contributions to a multiemployer plan will be treated as having satisfied 4980H if (i) it contributes to the plan pursuant to a collective bargaining agreement, (ii) the coverage is offered to fulltime employees and dependents, and (iii) the coverage is affordable and provides minimum value

Non-calendar year plans

• Delayed effective date – first day of 2014 plan year if non-calendar year plan was in effect as of 12/27/2012 and offers affordable minimum value coverage no later than first day of 2014 plan year

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Pay or Play Strategies

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Drop Coverage & Pay Penalties

Play by PPACA Rules

Play Using Private Exchanges

Play But Vary By Location Play But Reduce

Coverage

Pay Penalties & Increase Salaries

Play & Pay Unaffordability

Penalty

2014 Pay or Play

Options


How to Avoid the Penalty

• Shrink/Don’t grow your business and remain below “large” employer threshold– really?!

• Don’t let employees who’re ineligible for health coverage work more than 30 hours per week?

• Provide health coverage (with at least 60% value) for all employees working at least 30 hours per week and their children under age 26 and don’t make any of those employees pay more than 9.5% of compensation for single coverage?

– Don’t have to subsidize dependent coverage

– Can use alternate safe harbor to meet affordability test

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Deciding Whether to Pay or Avoid the Penalty

• How important is health coverage to recruitment and retention of employees?

– What’s common in industry/geographic area?

– What does your company currently offer?

• How important is health coverage to other business considerations (e.g., union avoidance, public relations)?

• If unionized, what does the collective bargaining agreement say?

• If status quo, how much would it cost to avoid estimated penalties compared with the cost of paying estimated penalties?

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One More Thing: PPACA Fees

• Transitional Reinsurance Fee (2014)

$63 Per Covered Life (4% Increase for Fully Insured Plans) ALL Plans (Self Funded and Fully-Insured) To Fund High Claimant Costs on Exchanges From 2014-2016

• Comparative Effectiveness Research Fee (Plan Years On/After October 2012)

$1 Per Covered Life (Year 1) $2 (Year 2); Indexed to Medical Inflation Patient-Centered Outcomes Research Institute (PCORI) Funding until 2019

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Staying up-to-date

• Jackson Lewis Health Care Reform Resource Center http://www.jacksonlewis.com/healthcare/index.php

• Jackson Lewis Benefits Law Advisor Blog http://www.benefitslawadvisor.com/

• Jackson Lewis e-mail updates

http://jlmarketing.jacksonlewis.com/reaction/RSGenPage.asp?RSID=k5_c7IHYHsVmAKIhyttfRpWKlZt0NCGFtjTqbXpTSKk

IRS website: http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions

Kaiser Family Foundation Compliance Timeline: http://healthreform.kff.org/timeline.aspx

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http://www.jacksonlewis.com/healthcare/index.php

http://www.benefitslawadvisor.com/



http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions









http://healthreform.kff.org/timeline.aspx

QUESTIONS

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Simplifying business. Benefiting people. 39

Lisa M. deFilippis Senior Benefits Counsel, Cleveland Office

contact

Email:[email protected]

Phone: (216) 750-0404

Fax: (216) 750-0826

Web:www.jacksonlewis.com


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