preparing for the aca

Preparing for theAffordable Care Act

Ted Ginsburg, CPA, JD

June 17, 2015

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• The status of the ACA today

• What employers need to be thinking about

What is the ACA penalty?

Should I offer insurance at all?

Strategies to avoid the penalty

• IRS reporting issues

• Other issues relating to welfare plans

• The real due date

TODAY’S DISCUSSION

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• The Affordable Care Act (“ACA”) is currently effective for employers who had 100 or more full time equivalent employees (FTEs) in 2014. Employers who have 50 or more FTEs in 2015 will be subject to the ACA on January 1, 2016

• Several bills are currently before Congress to repeal or change certain portions of the ACA; it is doubtful that it will be entered into law during the Obama administration

• The ACA has withstood numerous court challenges, although more cases are pending, including one at the Supreme Court

• IRS/DOL continually make changes

STATUS OF THE ACA TODAY

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If an employer has a certain number of FTEs based on the prior calendar year, and:

• Doesn’t offer minimum value insurance to a certain percentage of full time employees, or

• Offers insurance but it isn’t affordable and/or it isn’t adequate and

• In either case, one employee purchases insurance through an exchange and receives a subsidy, then

An excise tax may result

EXCISE TAX BASICS

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Based on the prior calendar year, comprised of two parts:• Full time employees—works an average of 30 hours

week/130 hours a month; and • Part time or seasonal employees— Add total hours of

work by these people on a monthly basis and divide by 120

• Employees subject to a CBA count in total• Calculation is made monthly, average FTE level is used

FTE–WHAT IS IT?

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Part one: Do I offer health coverage to at least 70% (95% for 2016) of my full-time employees?

Part two: If I do offer health coverage to my full time employees:• Is that coverage affordable, and• Does that coverage provide minimum coverage to the full-

time employees and their dependents?

Two different, non-deductible, excise taxes exist depending on which part is not satisfied:

• If both parts are not satisfied, employer pays only the greater of the two excise taxes

THE TWO-PART TESTIf an employer is subject to ACA, potential liability for the greater of the following two tests

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What happens if I fail to comply with Part One of the two-part test?• If an employer:

Fails to offer 95% (70% for 2015) of its full-time employees (or dependents) coverage and

One employee receives a subsidy (either a tax credit or cost-sharing reduction) through the exchange/marketplace for purchasing health insurance then

The employer might be liable for a non-deductible $2,000 penalty per year for the total number of full-time employees (reduced by 80 in 2015, 30 in 2016)

WHAT HAPPENS?

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A full-time employee for this purpose is an employee who is employed an average of at least 30 hours of work per week or 130 hours of work per month:• Full-time equivalent, also known as FTEs,

employees (discussed in the large employer test) are not relevant to this discussion

• Look at this monthly to determine classification and when coverage should begin

• Can use current year expectations or prior year results

• Special rules apply to educational institutions, breaks in employment, new hires and employees who work variable schedules

IMPORTANTCOMPLIANCE DEFINITIONS

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A subsidy occurs when an employee acquires insurance through the exchange/marketplace and qualifies for a reduction in his/her cost for insurance coverage because of his/her financial situation. • Subsidies are of two types:

An employee is eligible for a cost reduction subsidy if the employee’s household income is less than 250% of the federal poverty line (2014 maximum income of $29,125 for a single individual and $59,625 for a family of four).

An employee is eligible for a premium tax credit subsidy if the employee’s household income ranges between 100% and 400% of the federal poverty line (2013 maximum income of $46,680 for single individuals, $95,400 for a family of four); an employee who is eligible for Medicaid can not receive the subsidy.


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What happens if I fail to comply with Part Two of the two-part test?

• If an employer offers 95% (70% for 2015) of its full-time employees coverage but the coverage is unaffordable or does not provide minimum coverage

• The employer will be liable for a non-deductible penalty of $3,000 per year, times the number of full-time employees who obtain insurance through the exchange/marketplace and receive a subsidy

WHAT HAPPENS?

The employer is only liable for the greater of the Part One or Part Two excise tax.

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How do we determine if the coverage is ‘affordable” for full-time employees? Three part “safe harbor” test—allows employer to choose how affordability is determined.

Form W-2: An employee’s monthly contribution for self-only coverage is affordable if it does not exceed 9.5% of their W-2 wages for that calendar year

Rate of pay: An employee’s monthly contribution for self-only coverage is affordable if it is no more than 9.5% of their monthly wages (hourly rate of pay × 130 hours, or, for salaried employees, their monthly salary figure)

Federal Poverty Line (FPL): An employee’s monthly contribution for self-only coverage is affordable if it does not exceed 9.5% of the FPL for a single individual (approximately $93 per month)


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Minimum coverage means the insurance plan must cover 60% of the essential health benefits:• The essential health benefits include

emergency services, ambulatory services, hospitalization, lab services, prescription drug coverage and maternity and newborn care, among others

• Among the items not included are vision, dental, disability, and long-term care

DEFINITION OFMINIMUM COVERAGE

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The Cadillac Tax• If a plan provides benefits that exceed a certain level, a

40% excise tax is imposed on the value of those benefits• Benefits under many current CBA programs would be

subject to the tax• Applies to 2018• Paid by employers (self-insured plans) or the insurers

(who pass the cost through to employers)

ANOTHER TAX

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A multi-step process• If an employee acquires coverage through an exchange,

the exchange informs the IRS• An employee claims a tax credit for health coverage on

the employee’s 1040• Employers inform the IRS of what employees were

covered through IRS Forms 1094/1095• IRS assesses the excise tax, sending the employer a bill• Employer has a limited amount of time (2 months) to

contest the assessment

HOW IS THE EXCISETAX ASSESSED?

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Managing workforce levels to avoid ACA

If you keep your total FTEs under 50, you are not subject to the ACA:

Working current employees longer hours Use of subcontractors Timing jobs to avoid spikes in employment Turning down jobs that might cause FTE count to exceed 50

WHAT SHOULD EMPLOYERSTHINK ABOUT?

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If you are subject to ACA, you want to limit the number of full time employees• Keep current employees under 30 hours a week if you

can do it without disrupting your operations• Use part time employees—no coverage needed for

employees under 30 hours a week• Use seasonal employees• Use subcontractors


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Can I merely give my employees some money and let them buy their own insurance?

• The government doesn’t like this approach at all• A pay raise will work, but is inefficient• If you stay under 50 employees, you can reimburse

employees on a pre-tax basis• Formalized employee reimbursement program (IRC 105)

might work for employers with over 50 employees, but it is not clear that it will


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Determine if you should “play or pay”• Compare the potential cost of “play” vs. “pay”

Play: cost of offering more expensive benefits and/or charging employees less than currently imposed

‒ Redesigning plan terms to minimize cost—human resource issues‒ Do you reduce pay to make up for increased employer cost of

insurance? Pay: face potential excise tax liability

THINK ABOUT?WHAT SHOULD EMPLOYERS

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Minimizing potential ACA excise taxes if we “play” Offering coverage that isn’t affordable or adequate

may be preferable to not offering coverage Use of the 5% rule Convincing employees who might

be eligible for a subsidy not to go to the exchange/marketplace


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IRS reporting is due for all employers who have 50 or more FTEs in 2015 • Impacts employers who aren’t currently subject to ACA• Employers who provide fully insured benefits are still

subject to the reporting requirements• Additional information/filings needed for self-insured

plans• Reporting follows the same timeframe as W-2s

Employees receive statements by February 1, 2016 Employer return due February 28 (March 31 if electronically

filed)

REPORTING ISSUES

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For all plans (insured and self insured) Parts I and II of IRS Form 1095-C have to be completed, and employee specific forms need to be distributed.

Among employee specific data needed:• Employee identification data (name, address, SSN)• For each calendar month

What coverage was offered to the employee? What was the cost of the lowest cost plan offered to the

employee? What ‘safe harbors’ were used?

REPORTING ISSUES

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For all plans (insured and self-insured), other information will be needed for Form 1094-C, including:• What types of coverage were offered to what

percentage of full time employees?• Number of full time and total employees?• Controlled group status for benefit plan purposes?

REPORTING ISSUES

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FORM 1095 - C

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For self-insured plans, additional employee specific data is needed:• Participant identification data (name, address,

SSN/DOB for spouses and children)• Which calendar months during the year was each

participant covered?

REPORTING ISSUES

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BUILDING YOUR FILESystems needed to collect and monitor data

Large employer status is an annual determination, which must be monitored monthly

Which employees are eligible and the amount that you charge for insurance is an annual determination?

• Building your file How can you quickly prove to the IRS that you are meeting the two

tests? How can you quickly prove to the IRS that you offered benefits to a

sufficient number of employees? IRS Form 1094/5 compliance

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DOL increases scrutiny of welfare plan compliance• DOL is increasing audit activity in the welfare plan area

DOL investigate staff has significantly increased in size over the last two years

Over 70% of audits result in the plan sponsor paying some type of penalty

• This will only be heightened as ACA becomes effective

OTHER ISSUES

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Program documentation• Many employers have no or inadequate plan

documents relating to their welfare plans Insurance policies do not satisfy ERISA requirements as

summary plan descriptions Additional notices will be needed due to ACA Potential legal (participant) and regulatory (IRS, DOL)

exposure

• Use of “wrap plans” can reduce the number of annual IRS Form 5500 filings that are required

OTHER ISSUES

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For IRS compliance, which is due February 1, 2016, gathering the data should begin as soon as possible

2016 planning should be completed at least one month before open enrollment • Usually occurs in the early fall, contains the following

decisions: Which employees should be eligible for insurance? How much should employees be charged for single coverage? What programs should be offered?

WHEN IS THE REALDUE DATE?

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If you have any questions, or need additional information, please contact:

Ted Ginsburg, CPA, JD(440) 449-6800

[email protected]

QUESTIONS?

preparing for the aca

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