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ACI’s Executive Compensation

Jennifer Zimmerman

Executive Director

Morgan Stanley

The Affordable Care Act’s Impact

on Executive CompensationBret F. Busacker

Partner

Holland & Hart LLP

November 30 – December 1, 2016

Bret Clark

Senior Counsel,

Compensation & Benefits

LyondellBasell

Brigen L. Winters

Principal

Groom Law Group,

Chartered

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Roadmap

• Nondiscrimination Rules

• Delivering Executive Benefits within the ACA rules

• Delivering Executive Benefits outside of the ACA

• Employment and Termination Agreements

• Tax Considerations

• New Medical Models

• Challenges for International Executives

• Changes We May See From President Trump

• Q&A

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Nondiscrimination RulesPre-ACA Background & History

• Background:• Nondiscrimination rules applied to self-insured group health plans only

• Vague and outdated regulations with uncertain application

• Sporadic regulatory efforts to monitor compliance

• Providing Special Health Benefits for Executives• Insured benefit plan – Executives are not taxed on premiums paid by the employer or

benefits received under the policy (IRC § 105)

• Taxable bonuses – Executive purchases health policy with after-tax dollars and receives benefits under the policy tax-free. Gross-ups could be provided in certain cases (IRC § 104)

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Nondiscrimination RulesACA Overview

• Effective 9/10/2010, nondiscrimination requirements that are similar to IRC §105(h) apply to insured group health plans. (ACA §10101(d), adding PHSA§2716.)

• Notice 2011-1 waives compliance with ACA insured plan rule until after regulations are issued

• IRC § 105(h) rules for self-insured plans

• Eligibility to Participate: Either (i) 70% of all employees must be eligible to participate, OR (ii) 80% of all eligible employees participate, if at least 70% are eligible, OR (iii) eligible employees satisfy a nondiscriminatory classification, as determined by the IRS.

• Benefits: All benefits available to HCEs are also available to NHCEs.

• Highly Compensated Employee (“HCE”): Top 25% of employees, by compensation, AND the 5 highest paid officers, AND any 10% shareholder.

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Nondiscrimination RulesACA Penalties

• Self-Insured Plan: HCEs must include some or all of the value of benefits (including reimbursements) received in income on their personal income tax returns

• Insured Plan: $100/day x number of NHCEs, paid by the plan sponsor.

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Providing Health Benefits to Executives

•Plans Subject to ACA:• Nondiscrimination rules

• Prohibition on annual and lifetime limits

• Preventive care rules

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Providing Health Benefits to Executives

• Avoiding ACA:• Grandfathered Insured Plans

• Insured plan that existed pre-ACA.

• Not subject to nondiscrimination rules.

• Material changes to benefits could result in the plan losing its grandfathered status.

• Excepted Benefits • Types of health coverage that are exempt from group health plan rules

• Examples: Certain limited coverage policies (e.g., cancer-only coverage), accident/injury plans that pay fixed dollar amounts, or limited-scope dental or vision.

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Providing Health Benefits to Executives

• Taxable Bonuses – Same as Pre-ACA • Pay taxable lump sum bonuses to selected executives

• Bonuses allow executives to purchase individual health policies on an after-tax basis (IRC § 104)

• IRS may argue that the arrangement is a group health plan subject to the nondiscrimination rules if there is a pattern or practice of providing these types of bonuses (or if the employer restricts the use of the bonus to medical care).

• Public Company Disclosure Rules • The ability to deliver a medical benefit tax-efficiently does not mean that the benefit

does not need to be disclosed

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Employment and Termination Agreements

• Review Existing Employment Agreements• Determine whether the employer might be obligated to provide post-employment

medical coverage

• Consider whether to make changes now or at contract renewal

• Change Standard Language in Separation Agreements• Consider providing lump sum cash payments from which the executive can (but need

not) pay for COBRA premiums.

• Public Company Disclosure Rules • SEC disclosure rules are applicable to public-company executive compensation,

including termination and change in control agreements.

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Tax Considerations

• Health Care Industry Executives

• Health insurance issuers may not deduct remuneration greater than $500K/year paid to any officer, director, employee or service provider (IRC § 162(m)(6))

• Complex rules apply to determine when deferred compensation will be considered remuneration

• Cadillac Tax

• 40% excise tax on the amount by which the aggregate value of employer-sponsored health coverage for an employee exceeds a threshold amount

• Threshold amount: Beginning at $10,200 for self-only coverage and $27,500 for other than self-only coverage, each multiplied by a health cost adjustment percentage to be determined by the federal government.

• Implementation is uncertain. The Cadillac Tax is scheduled to take effect in 2020, but there is wide speculation about its repeal before the effective date.

• Implications for existing and new employment contracts.

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New Medical ModelsConcierge Benefits Overview

• Medical service arrangement between the patient and provider in which the patient pays an annual retainer fee to the provider.

• Concierge physician services:• Care for fewer patients

• Available for immediate appointments

• On-demand telephone consultations

• Email access at any time of day or night

• In-home visits

• Worldwide access to doctor groups

• Expedited emergency room care at certain facilities

• Concierge models differ across physician groups, as do the benefits included in the retainer.

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New Medical ModelsConcierge Benefits for Executives

•Considerations:

• Taxability of retainer

• Taxability of benefits

• Status under ERISA

• Status under ACA

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Challenges for International Executives

• Employer and individual mandate for US expats

• Expat plans

• Substantially all of enrollees are qualified expats

• Plan is issued or administered by an expatriate health insurance issuer

• Plan provides certain services and reimbursements in local currencies

• Extending US benefits to foreign executives (e.g., providing annual physical in US)

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Changes We May See from President Elect Trump

• President Elect Trump previously indicated that he favors the full repeal of the ACA.

• In more recent discussions, Mr. Trump has indicated that some aspects of the law are popular and may be retained, such as the restriction on pre-existing conditions and child coverage to age 26.

• Mr. Trump and a Republican held Congress could use the budgetary process to repeal or defund some aspects of the law, such as the individual and employer mandate, various taxes and fees, tax credits and cost sharing subsidies.

• Mr. Trump could use executive powers in shutting down or modifying the operation of the exchanges through executive orders, regulations and sub-regulatory guidance issued by HHS and other agencies.

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Changes We May See from President Elect Trump

• There is a high probability that the Cadillac tax will be repealed. It had questionable support prior to the election. But it could be replaced with a capped employer exclusion or other revenue raiser.

• Employer mandate and individual mandate are possible targets to be eliminated.

• Unclear whether expansion of nondiscrimination rules would survive any legislative changes.

• The popular portions of the law (such as no pre-existing conditions) may not be economically sustainable, however, without an individual mandate to force healthier people into the system.

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Questions??

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