The health care exchangesPutting employers on notice

Overview of the Health Insurance Marketplace ..................1

Illustration — State operation of the Health Insurance Marketplace ..................1

Why did I receive a Notice? .......................2

What does the Notice mean for employers? .........................................4

What does this Notice mean for my employees? ...................................4

What’s next? ............................................5

1The health care exchanges Putting employers on notice |

The health care exchanges: putting employers on notice

A key objective of the Affordable Care Act (ACA) is to provide qualifying individuals access to affordable health care. To achieve this objective, the ACA authorizes subsidies to certain individuals who are not offered employer-sponsored health care plans meeting certain affordability standards. These subsidies are utilized to enroll in coverage through a state or federal Health Insurance Marketplace (marketplace or exchange) and come in the form of Advance Premium Tax Credits or APTCs which are paid to the insurer to reduce out-of-pocket premiums or refundable premium tax credits claimed by the individuals on their personal income tax returns.

See the heat map of the current Health Insurance Marketplace and how states operate within it below.

The Health Insurance Marketplace State operation overview

• In order for individuals to receive a premium tax credit they must purchase insurance from the marketplace.

• Marketplaces can be state based, federally facilitated or federally supported:

• State based. Established by an individual state. Use state resources.

• Federally facilitated. States use the Federal Marketplace (Health and Human Services/healthcare.gov) for all marketplace-related activities.

• Federally supported. States may have their own storefronts, assisters and websites, but use the federal technology to process applications and enrollments.

WA

OR

ID

NV

CA CO

NM

TX

OKAR

MO

TN

KYVA

MD

PA

NY

NJ

VTNH

MACT RI

ME

AL GA

FL

MS

IL INOH

KS

NE

SD

ND

NC

DE

WV

AZ

UT

MT

WY

MN

WI

IA

LA

MI

SC

AK

HI

State-based marketplace

Federally facilitated marketplace

Federally supported marketplace

The exchanges play a key role in assisting individuals with purchasing health care coverage and facilitating and administering the APTC. Importantly, the exchanges determine in advance who is eligible to receive the APTC so that premiums are reduced. The most familiar exchange is the Federal Marketplace known as healthcare.gov, which supports the vast majority of states. Additionally, 14 states and the District of Columbia have their own exchange websites and have opted to manage exchange functions with grants and oversight from the Federal government.

Due to the tax penalty provisions of the ACA’s employer and individual mandates, the Internal Revenue Service (IRS) and employers also have an interest in the accuracy of the exchange’s APTC eligibility determination of individual applicants. As a result of this interplay between the exchange, individuals, the IRS and employers, the ACA requires exchanges to send a notice (Notice) to the employer whenever an employee is considered eligible for the APTC and enrolls in coverage through the exchange. This Notice process has created some confusion and a great deal of work for all stakeholders.

Here we provide key insights into the Notice and the notification process, and will answer these key questions for employers:

• Why did I receive a Notice?

• What does the Notice mean for employers?

• What does this Notice mean for my employees?

• What’s next?

The exchanges play a key role in assisting individuals with purchasing health care coverage and facilitating and administering the APTC. Importantly, the exchanges determine in advance who is eligible to receive the APTC so that premiums are reduced.

2 | The health care exchanges Putting employers on notice

What triggers the Notice?In June 2016, the federally facilitated marketplaces issued approximately 470,000 Notices to employers. Each Notice informs a particular employer that one of its employees enrolled in coverage through the exchange and received an APTC. To determine eligibility for the APTC, the exchange analyzes the applicant’s income in relation to the cost of health insurance in the individual applicant’s region. The exchange makes a preliminary determination as to whether the applicant is eligible for an APTC based on whether his or her household income is between 100% and 400% of the Federal Poverty Level for his or her respective family size. (IRC §36B(b)). Additionally, the exchange asks the applicant if they were provided an affordable offer of coverage meeting Minimum Essential Coverage (MEC) and Minimum Value (MV) requirements. Receiving an applicable offer from an employer makes an individual ineligible for the APTC. If the individual is considered eligible for the APTC by the Exchange and the individual enrolls in coverage, the exchange is required to send a Notice to the employer.

Keep in mind, when issuing a notice, the Exchange relies almost entirely on information provided by the applicant. If the applicant claims on the APTC application that his or her employer did not provide affordable coverage, the exchange will rely on that statement when determining eligibility for the APTC and will issue the Notice to the employer as appropriate. The IRS defines coverage as affordable if the lowest cost self-only coverage rate offered to an employee that provides Minimum Essential Coverage at a Minimum Value is less than 9.5% of the employee’s annual household income. An employer-sponsored plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan. MEC and MV are both defined terms by the government statue and regulations. Because “affordable” is a technical term defined by IRS regulations, many individual applicants may not understand if the employer-sponsored coverage available to them is actually affordable. What the IRS considers affordable may not be considered affordable to an individual. An employee may not understand this or even know the lowest cost, self-only coverage rate for him or her if the employee is shopping for coverage for dependents as well. Because of this nuanced definition, the amount the employee actually pays for coverage has very little to do with determining whether the coverage is affordable by the IRS.

Based on a sample of Notices received by Ernst & Young LLP’s clients in 2015 and 2016, only 26% have required additional action by the employer or the employer’s representative. The other Notices were either sent erroneously and should not have been sent at all or the employee correctly received the APTC. Causes for erroneous Notices varied and included instances when employees browsed options on the exchange but did not purchase health care or receive an APTC through the exchange.

3The health care exchanges Putting employers on notice |

Receiving Notices from exchanges — what can go wrong?

1. Incorrect or insufficient employee information is provided making it challenging to identify the employee referenced in the Notice.

2. Where there are multiple employer locations, Notices are not forwarded from the local employer address.

3. State exchanges may provide Notices for employees not residing in the state, making it difficult to identify the correct employee.

What information is included in the Notice and why did I receive it?The ACA directed that basic information be included on each Notice; however, the federal and state exchanges have interpreted this guidance differently, and as a result, the Notice may contain different information depending on the source. For example, the Notice must identify the employee considered eligible for the APTC. The federal Notices provide the first and last name, last four digits of the employee’s Social Security Number (SSN), and month and day of birth. Most state Notices only include the first and last name, and the Notice may also spell the name inaccurately. As a result, it can be challenging identifying the correct employee listed in the Notice.

Because the exchange relies on the applicant for accurate information, the address for the employer reported in the Notice may also be incorrect. If an employer has multiple locations/branches (which is often the case) the applicant will sometimes provide the local address as opposed to the address of the corporate headquarters or the legal entity for which he or she works. Alternatively, the individual may have changed employers but is confused as to which is the appropriate employer of reference for the time period in question. Such confusion may also cause the applicant to list the incorrect employer address on the APTC application. Since Notices are issued via paper and envelope, a Notice directed to a local employer address can be significantly delayed in reaching the appropriate person responsible for tracking and addressing the Notice. Oftentimes the Notices are never forwarded beyond the local employer address to be timely and properly addressed. An employer has 90 days to respond to the Notice if an appeal or correction is appropriate. If the Notice isn’t directly sent to the correct employer or to the group assigned to track and respond to notices, 90 days may not be sufficient time to respond. For the reasons mentioned above, Notices may sit on desks (or worse, in a trash can) without reaching the responsible person or persons who have the information needed to appropriately react to the Notice.

In addition, the exchange sending the Notice may not be the employee’s state of residence. This circumstance often occurs when the employee is a college student, is employed by a staffing agency, or lives in a town near or on a state border. As a result, the employer may have to spend additional time identifying the correct employee and responding to the Notice appropriately.

To help prevent potential Employer Shared Responsibility Payments (described on next page), employers should adopt leading practices that include establishing clear communications with employees to direct them to list a central employer address on any exchange application, as well as establishing a process whereby local managers are educated on the appropriate location to send any Notices received by their local office. These practices are critical to helping establish an efficient Notice appeals process, as Notices generally must be appealed within 90 days of issuance by the exchange.

4 | The health care exchanges Putting employers on notice

What does the Notice mean for employers?In addition to the Notice content described previously, the Notice informs the employers that they may have to pay an Employer Shared Responsibility Payment to the IRS pursuant to IRC §4980H because the employee has been determined eligible for the APTC and has enrolled in exchange coverage. Based on the law in place at the time of publication, the Employer Shared Responsibility Payment is triggered in either of two circumstances: 1) if an Applicable Large Employer (ALE) does not offer health care coverage meeting minimum essential coverage requirements to at least 95% of its full-time employees (determined on a legal entity basis) and at least one full-time employee qualifies for an APTC and enrolls in exchange coverage (known as the IRC §4980H(a) penalty) or 2) an employer fails to offer a full-time employee minimum essential coverage that is “affordable” for that employee and provides “minimum value” (known as the §4980H(b) penalty). An ALE is an employer that has had an average of at least 50 full-time employees or full-time equivalents (FTE) during the preceding calendar year. (IRC §4980H). (ACA Employer Shared Responsibility provisions.)

The Notice provides employers with an opportunity to quash potential penalties before the exchange shares its enrollment and APTC determinations with the IRS.

The Notice informs an employer of a potential Employer Shared Responsibility Payment; however, the Notice does not guarantee the employer will have to make this payment, as the IRS makes the ultimate determination of any penalty due from an employer, not the exchange. The Notice does provide the employer with an opportunity to quash any potential improper penalty before the exchange shares its enrollment and APTC eligibility determinations with the IRS. The employer must decide whether any action is required based on the Notice. During the appeals process, the employer may contest the employee’s eligibility for the APTC by certifying that the full-time employee received an affordable offer of coverage meeting MV and MEC requirements. The exchanges will require evidence from the ALE to support the assertion that it made an affordable offer.

What does this Notice mean for my employees?While the IRS may use Form 1095-C to determine whether an individual is eligible for an APTC, the exchanges use income projections, employee-provided information, and the price of health plans available in a particular geographic area to make these determinations. Circumstances can change between the time an employee starts benefiting from an APTC and when the Forms are issued. If the individual received more income than originally projected, or obtained a job that offered affordable minimum essential coverage meeting minimum value requirements, the individual is responsible for updating the exchange and discontinuing APTC payments. Thus, even if Form 1095-C reflects that employees were provided with an offer of coverage that meets minimum essential coverage and minimum value requirements, they could still have received an APTC because they applied for it long before the applicable Form 1095-C was issued. Similarly, an employee may be considered eligible for the APTC prior to his or her hire date with the employer. If the employee does not cancel the APTC subsidized plan when the employee receives the offer of coverage from the new employer, the employee may be required to repay the APTC. Because of these types of scenarios, it is important to the individual that the Notices are tracked and addressed timely. Employers should develop an effective process for timely receiving and responding to Notices. An effective process benefits the employer and the employee.

One leading practice is for employers to inform their employees and new hires that they will not be eligible for the APTC when they are receiving an offer of coverage from the employer that meets the minimum value and minimum essential coverage requirements.

Employees that receive an APTC erroneously may have to reconcile the credit by paying the amount that was received in error when filing their taxes (or upon IRS audit at a later date). (IRC §36B(f)). Employee education can help prevent this scenario and resulting employee frustration. One leading practice is for employers to inform their employees and new hires that they will not be eligible for the APTC when they are receiving an offer of coverage from the employer that meets the minimum value and minimum essential coverage requirements. Such education could also support employees seeking information to meet their individual mandate through alternative means, such as through government-sponsored coverage.

Employees are often confused about the contents and implications of a Form 1095-C. An employee may not be aware that he or she received an offer of coverage from the employer and enrolled in exchange coverage erroneously. These situations can occur if employees do not understand the health coverage options available to them.

The Form 1095-C creates confusion on its own without the need to reconcile an APTC. Many personal income tax preparers have struggled with how to interpret and use this form when addressing individual tax filings. The form is not filed with the personal income tax return.

Employers should confirm their employees have access to comprehensive benefit information and instructions for enrollment to avoid unnecessary stress and confusion.

The health care exchanges Putting employers on notice | 5

What’s next?The exchanges and Notices continue to be one of the more complex aspects of the ACA. While we have observed some improvement, employers, individuals, and the Exchanges continue to work through the complications involved with administering the APTC. Employers that receive these Notices need to be prepared to manage them through a defined process that is well communicated within the organization. This publication outlines the exchange, the anatomy of the Notices and how they are a harbinger of the IRC §4980H consequences.

Understanding the Notices is only the first step in properly addressing them. We will continue our discussion on exchange Notices in future publications by outlining leading practices when dealing with the exchange and the Notice appeal process (including tips for raising a defense).

This publication deals with current law. We do not yet know how or whether the exchanges will play a role in any future legislation.

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SCORE No. 01449-171US CSG No. 1701-2182399 GeneralED None

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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The Affordable Care Act: more than health careFor employers, the Affordable Care Act (ACA) is more than a benefits law. It’s a tax law that has far-reaching impact on US companies of all industries, geographies and sizes.

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For more information contact our Ernst & Young LLP professionals:

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