Healthcare INSIGHTS. The ACA in a Nutshell: A Healthcare Reform Primer. Simplify and Grow with SWBC PEO

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1 Healthcare INSIGHTS The ACA in a Nutshell: A Healthcare Reform Primer Simplify and Grow with SWBC PEO 1

2 The ACA is Here to Stay Not withstanding a Supreme Court challenge to certain aspects of the ACA, it appears the ACA is here to Stay. Republicans appear to have accepted that mandated coverage is a new reality and have turned their efforts to reform, rather than repeal. More than 8 million individuals selected a health plan through a federal or state exchange during the 2014 open enrollment period. The short and long-term impact on the healthcare industry and the future of employer-sponsored healthcare is still very uncertain. Simplify and Grow with SWBC PEO 2

3 Three Fundamentals of the ACA Individual coverage mandate: As of January 1, 2014 virtually all U.S. taxpayers were required to have health coverage or pay a penalty. Pay or Play: Large employers (generally those with 50 or more full-time equivalent employees) must provide minimum value, affordable health coverage to their full-time employees or pay a penalty tax. This was initially required January 1, 2014, but was deferred for most employers until January 1, State exchanges: Health insurance exchanges are open in all 50 states to provide access to individual and small employer group health coverage. Simplify and Grow with SWBC PEO 3

4 All Businesses Are Impacted! Large employers must decide whether to play (comply with the employer mandate) or pay (not provide ACA-compliant coverage, and risk exposure to IRS penalties if an employee purchases individual insurance on an exchange and receives a tax credit). All employers providing major medical healthcare must make sure their plans are ACA-compliant. Tax credits are available for small businesses that provide health coverage, but all employers seeking to claim the credit need to be sponsoring coverage on the SHOP exchanges. Even for the smallest employers, the rules have changes regarding what types of insurance coverage are available for purchase on the open market. Additionally, the ACA has imposed new reporting rules on employers (such as Form W2 reporting of healthcare coverage) and has limited employers ability to pay for employee s healthcare expenses with tax free dollars. Simplify and Grow with SWBC PEO 4

5 Many ACA Requirements Are Already Effective Many of the ACA s provisions took effect as early as March 23, 2010 (or the first plan or policy year beginning thereafter). For example, most employer group health plans (whether insured or self-funded) must no include: Dependent child coverage to age 26. Coverage of pre-existing conditions. Coverage of preventive benefits: without co-pay. No lifetime limitations on coverage of essential health benefits. Rescission limited to fraud or serious misrepresentation by insured. No annual dollar limits on essential health benefits. Summary of Benefits and Coverage (no longer than four doublesided pages) of the major medical coverage offered. Simplify and Grow with SWBC PEO 5

6 Current Requirements, Continued Additional requirements current in Effect Are: Limits on FSA, HRA, HSA, OTC drugs not covered without a prescription; Annual FSA contributions limited to $2,500 W2 reporting of employer health benefits (currently for employers with 250 or more w2s in prior year, but eventually for all employers). MLR (Medical Loss Ratio) rebates from insurers who failed to apply an adequate portion of premium for care or quality improvement. Refunds may be ERISA assets and subject to fiduciary duties. Medicare tax increase to 2.35% for singles earning over $200,000 and couples over $250,000 PCORI (Patient-Centered Outcomes Research Institute) fee. Restrictions on the use of cafeteria plans and the ability of employers to pay for employees healthcare with tax-free dollars. Waiting periods limited to 90 days or fewer. Limitations on annual cost sharing and deductibles Simplify and Grow with SWBC PEO 6

7 Some Specifics: Employer Mandate Most large employers will have to begin complying January 1, Employers with between 50 and 99 full-time equivalent employees may be able to delay compliance until Employers with plans that operate on a non-calendar plan year may be able to delay compliance until the beginning of the 2015 plan year. Employers need to be updating their systems now to ensure compliance. Employers need to be identifying their controlled groups and need to determine how they will identify which employees are full-time. Simplify and Grow with SWBC PEO 7

8 Some Specifics: New Employer Tax Reporting Requirements for 2015 Employers subject to the employer mandate will have to file reports with the IRS in early 2016 detailing their employersponsored coverage (provided in 2015) Employers that self-fund major medical health benefits will have to file reports with the IRS in early 2016 detailing the coverage they provided to employees which satisfies the individual mandate (coverage provided in 2015). Forms and Instructions are still forthcoming from the IRS. Employers need to think about how they will collect and report the data. Simplify and Grow with SWBC PEO 8

9 Some Specifics: Restrictions on Tax-Favored Arrangements Recent IRS guidance effectively prohibits the use of cafeteria plans or other tax-favored employer-sponsored arrangements (HRAs, FSAs, HSAs, and employer premium plans) for the payment of individual insurance premiums. If employees seek to be HSA-eligible, they must be covered by a qualifying high-deductible health plan (HDHP)- and not any disqualifying coverage (such as a general purpose health FSA). For an employer to sponsor a health FSA that is ACA-compliant, its employees who are eligible for the health FSA must also be offered coverage under a non-hipaa-excepted major medical plan. Employer-sponsored HRAs cannot be used to purchase individual health insurance policies and must be integrated with major medical coverage in order to meet the ACA s requirements. Simplify and Grow with SWBC PEO 9

10 Some Specifics: Excepted Benefits Plans that qualify as HIPAA-excepted benefits are exempt from many ACA requirements and will allow employees to be eligible for subsidized benefits on the individual exchanges. IRS has proposed rules that would allow for certain plans to qualify as HIPAA excepted: Employee assistance plans. Stand-alone dental and vision plans (regardless of whether employees contribute towards the cost. Plans that would wrap around individual coverage (if employer s major medical plan is unaffordable.) 10 Simplify and Grow with SWBC PEO

11 Thoughts for Employers Review existing plans and plan documents with qualified experts. Determine whether payroll and recordkeeping systems must be revised to satisfy the new rules. Regularly review new requirements and announcements. Prepare today for tomorrow s requirements. 11 Simplify and Grow with SWBC PEO

12 Thoughts for Employers: Employer Mandate Issues Are you (will you be) an eligible large employer (very generally, 50 or more employees)? Have you identified all controlled group members for purposes of this determination? Have you determined if you have between 50 and 99 full-time employees, which could allow you to delay compliance until 2016? Do you understand the options for your employees? Group versus individual coverage. What will it mean for you? If you are an eligible large employer, will you play (offer healthcare) or pay (the penalty)? 12 Simplify and Grow with SWBC PEO

13 Thoughts for Employers: Mandate Issues, Continued If you provide coverage, will it be affordable and provide minimum value? How will you determine if the plan coverage is affordable? Have you identified all full-time employees? This calculation will require consideration of part-time, seasonal, and variable-hour employees and the rules are complex. Are you providing dependent coverage? Are you taking steps to do so? Have you made all the modifications to payroll and accounting services? At this juncture, there are still many more questions than clear answers, but the time for planning is NOW. 13 Simplify and Grow with SWBC PEO

14 Who must report? Section 6056 Employer Plan & Eligibility Information Requires all applicable large employers (50 or more FTEs) to report plan and eligibility information Employers with FTEs satisfying the transition relief criteria to delay compliance until 2016 must still report for 2015 Employers who do not offer coverage must stull report Purpose IRS enforcement of employer shared responsibility rule and individual eligibility for subsidies when purchasing individual health insurance 14 Simplify and Grow with SWBC PEO

15 Who must report? Section 6055 Coverage Data Requires all employers offering self-funded plans (large and small) to report participant coverage information Insurance companies will report this information to the IRS for fully-insured plans Purpose Tracking coverage for IRS enforcement of the individual mandate 15 Simplify and Grow with SWBC PEO

16 When must employers report Required to report in 2016 for 2015 calendar year Based on previous calendar year regardless of the group s plan year When required time frame same as W-2s Must be filed with IRS by Feb 28 ( March 31 st if filed electronically) If filing 250 or more returns must file electronically Corresponding employee statements must be provided annually to employees by Jan 31 st Since Jan 31, 2016 is a Sunday statements must be provided by Feb. 1, Simplify and Grow with SWBC PEO

17 Forms Form 1094-B or 1094-C Employer Summary and Transmittal Form Purpose report employer summary info to IRS Consider it a summary sheet for all the individual employee statements Form 1095-B or 1095-C Employee Statement Purpose report employee specific info to IRS Remember one is required for Each full-time employee Each covered individual ( including dependents) under a selffunded plan 17 Simplify and Grow with SWBC PEO

18 The Road Ahead: Buckle Up! It s going to be a Bumpy Ride Federal marketplace subsidies Supreme Court agreed to hear King vs. Burwell Expect decision in late June or July Impact on employer shared responsibility rules are unclear Auto-enrollment for employers of 200 or more (currently on hold). Non-discrimination testing (currently on hold). Cadillac Tax on high-cost plans (to be implemented in 2018). 40% excise tax on health coverage cost that exceeds threshold amounts $10,200/yr. for self-only coverage $27,500/yr. for coverage other than self-only The burden on employers is enormous, the law is confusing, and compliance will be complex. 18 Simplify and Grow with SWBC PEO

19 1094-C Form Part II Designate at least one form C as the authoritative transmittal and tally total 1095-Cs being submitted 19 Simplify and Grow with SWBC PEO

20 1094-C Form page 2 20 Simplify and Grow with SWBC PEO

21 1095-C Form 21 Simplify and Grow with SWBC PEO

22 Full time employee hired Feb. 15, 2015 and employer makes a qualifying offer Apr Dec Simplify and Grow with SWBC PEO

23 Full time employee offered minimum value coverage Jan Jul 2015 and employment is terminated Aug 15, 2015 (coverage terminated upon date of employment termination) 23 Simplify and Grow with SWBC PEO

24 Full time employee offered minimum value coverage May Dec 2015 but employer qualifies for non-calendar year transition relief (Jan-Apr 2015) 24 Simplify and Grow with SWBC PEO

25 HEALTHCARE REFORM Dealing with Employer Shared Responsibility a/k/a Play or Pay Rules June 12, 2015

26 These materials are intended to stimulate thought and discussion and to provide the reader with useful ideas and guidance in the areas of healthcare reform and HIPAA. The materials do not constitute, and should not be treated as, legal advice. Although we have made every effort to ensure the accuracy of these materials, neither the authors nor Dykema Cox Smith assumes any responsibility for any individual s reliance on the written information presented during this presentation. Laws and regulations are subject to change at any time. This PowerPoint presentation is an educational tool that is general in nature and for purposes of illustration only. The materials in this presentation are not exhaustive, do not constitute legal advice and should not be considered a substitute for consulting with legal counsel. Dykema Cox Smith has no obligation to update the information contained in this presentation. 26

27 COVERAGE MANDATE: WHAT IS IT? Applicable Large Employers must: Provide eligible employer sponsored coverage to substantially all full-time employees and their children or face draconian sledgehammer penalty Even if employers do provide such coverage, may be subject to smaller tackhammer penalty if coverage is not affordable and/or does not provide minimum value 27

28 COVERAGE MANDATE: WHEN IS THE MANDATE EFFECTIVE Employer Shared Responsibility penalties and reporting requirements delayed until Penalties further delayed for employers with between 50 and 99 FTEs until January 1,

29 COVERAGE MANDATE: WHEN IS THE MANDATE EFFECTIVE For Mid-Sized Employers (50-99 FTEs) to be eligible for delay to 2016: Between 2/9/14 and 12/31/14, may not reduce size of workforce or hours without bona fide business reason May not eliminate or reduce coverage from 2/9/14 to 12/31/15 (or last day of plan year 2015) Certify qualification for transition relief in Code Sec reporting (later slide) NOTE THIS IS NOT DELAYED! Non-calendar year plan relief but cannot change plan year after 2/9/14 to extend relief 29

30 COVERAGE MANDATE: WHAT EMPLOYERS ARE SUBJECT TO PLAY OR PAY? Applicable Large Employer ( ALE ) will be subject to the rule Average of 50 or more Full Time Equivalents ( FTEs ) on business days in prior calendar year Formula: Full-time ( FT ) employees (including seasonal) for each month + FTEs (including seasonal) for each month 12 FT employee = Average of at least 30 hours per week 130 hours of service in a calendar month is equivalent 30

31 COVERAGE MANDATE: WHAT EMPLOYERS ARE SUBJECT TO PLAY OR PAY? Number of FTEs for month = total hours worked by non- FT employees (not more than 120 for any one) 120 If a fraction, round down to next lowest whole number Note that the numbers are different for the two rules Exception for seasonal workers if Count exceeds 50 FT employees for 120 or fewer days (or 4 months) in year and employees in excess of 50 employed in that period were seasonal workers 31

32 COVERAGE MANDATE: WHAT EMPLOYERS ARE SUBJECT TO PLAY OR PAY? Aggregation Rules Related employers (per IRC section 414) are combined for purposes of ALE determination All employees are taken into account when determining whether members of group are ALEs If 50-employee threshold is met by group, then each member is an ALE member No separate line of business exception 32

33 THE EXCHANGE: SUBSIDIES TRIGGER PENALTIES Subsidies are provided to assist eligible lower-income individuals to purchase Qualified Health Plans Key: Employer play or pay penalty is triggered if a FT employee enrolls in such subsidized Exchange coverage Subsidy includes tax credits and cost-sharing reductions Question: Are subsidies available in federally facilitated Exchanges ( FFEs )? IRS Regulations say yes, but some challengers say language of Code 1401(b)(2) provides subsidies only in state-based Exchange. Currently a Circuit split on this question. 33

34 THE EXCHANGE: SUBSIDIES TRIGGER PENALTIES An individual is not eligible if Not a citizen or legal resident Has Household Income greater than 4 times FPL (about $46,000/individual or $94,000/family of 4) Offered enrollment in ER Coverage providing MV and that is affordable to employee Actually enrolled in ER Coverage, regardless of MV or affordability Eligible for other specified coverage, including Medicare Part A, Medicaid, CHIP, TRICARE, etc. 34

35 THE EXCHANGE: SUBSIDIES TRIGGER PENALTIES Based on FPL, individuals contribute specified percentage of income for coverage Tax credit covers remainder of premium Cost-sharing reductions also available to some Note: Many states refusing Medicaid expansion (including Texas) Expansion raises eligible income level from 100% to 133% FPL; makes certain groups eligible who were not before In these states, certain low-income employees who might have been Medicaid-eligible could instead get subsidies Estimated $ million in additional penalties in TEXAS ALONE due to failure to expand Medicaid. 35

36 COVERAGE MANDATE: WHAT IS ELIGIBLE EMPLOYER SPONSORED COVERAGE? Offering Eligible Employer Sponsored Coverage ( EESP ) to substantially all FT employees (and dependents) will preclude large sledgehammer penalty EESP is essentially an employer-sponsored plan (insured or selfinsured) that provides medical care Most or all of premium cost can apparently be shifted to employees without affecting EESP nature of plan 36

37 COVERAGE MANDATE: WHAT IS ELIGIBLE EMPLOYER SPONSORED COVERAGE? EESP is not listed HIPAA-excepted benefits, such as excepted health FSAs, limited-scope dental/vision plans, certain supplemental coverage, on-site medical clinics, etc. How minimal can an EESP be? Per guidance, essential health benefits condition is not imposed Required scope remains unclear, not further elaborated on in final regulations Skinny plan strategy? Not minimum value [later slide] 37

38 COVERAGE MANDATE: THE PENALTIES Penalty is triggered, in general, if FT employee is certified as enrolled for Exchange subsidy for a month Sledgehammer penalty applies if employer Failed to offer substantially all FT employees (and dependents) opportunity to enroll in EESP for a month Monthly Penalty = $2,000 X # of FT employees minus FOR 2015 ONLY: the formula is # of FT employees minus 80 38

39 COVERAGE MANDATE: THE PENALTIES Tackhammer penalty applies if employer Offered substantially all FT employees (and dependents) opportunity to enroll in EESP for a month But coverage is not affordable or fails to provide Minimum Value ( MV ) Monthly Penalty = lesser of $2,000 X # of FT employees minus OR [minus for 2015 only] $3,000 X # of FT employees with subsidy 12 39

40 COVERAGE MANDATE: THE PENALTIES Substantially all defined as 95% of FT employees or, if greater, 5 FT employees Means that failing to offer EESP to as few as 5.001% of FT employees (and their dependents) will cause sledgehammer penalty to apply Clear and definitive rule: Inadvertence is not required 40

41 COVERAGE MANDATE: THE PENALTIES NEW 2015 TRANSITION RULE: substantially all is defined as 70% of FT employees for 2015 only. For employers with 100 or more FTEs No change in plan year after 2/9/14 Defined as all but 30% of FT employees (and dependents) Note this would increase exposure to tackhammer penalty 41

42 COVERAGE MANDATE: THE PENALTIES Must include dependents (i.e., children up to age 26) Code 152(f)(1) definition, but stepchildren and foster children are now excluded per final regulations Also new: child is dependent for the entire month in which he or she attains age 26 Would preclude plan design that cuts of coverage on date turn 26 (but allowed under age 26 mandate) Spouses need not be included (so plans that exclude spouses with other coverage may still do so) 42

43 COVERAGE MANDATE: THE PENALTIES Offer of coverage Must offer effective opportunity to enroll or decline enrollment at least once per year (evergreen elections with opt out permissible) Emphasizes adequacy of enrollment materials and recordkeeping practices Failure to offer for one day treated as failure to offer for month (Except January 2015, can be 1 st pay period) Coverage may be terminated for failure to pay premium But COBRA-like 30-day grace period and insignificant shortfall rules are made applicable to employee premium payments 43

44 COVERAGE MANDATE: EXAMPLES FOR SLEDGEHAMMER PENALTY Cox Co. has 1,000 FT employees and does not offer an EESP to any FT employees 1 FT employee enrolls in subsidized coverage for year Annual Penalty = $2,000 X (1,000 30) = $1,940,000 Note: Result would be same even if Cox Co. offered EESP to 94.99% of FT employees (and children up to age 26) 2015 ONLY: result would be the same if offer to 69.99% of FT employees 44

45 COVERAGE MANDATE: EXAMPLES FOR SLEDGEHAMMER PENALTY Smith Co., with 20 FT and 60 half-time (0.5) FTEs, does not offer an EESP to substantially all FT employees Treated as having 50 FT employees and, thus, subject to rules 1 FT employee enrolls in subsidized coverage for year Annual Penalty = $2,000 X (20 30) = 0 Smith Co. owes no penalty because only true FT employees are counted (FTEs only count for ALE status) Note that Smith Co. would not be liable for any penalty until 2016, anyway, because it is under 100 FTEs 45

46 COVERAGE MANDATE: EXAMPLES FOR SLEDGEHAMMER PENALTY Matthews Co. has 1,000 FT employees, offers affordable plan with minimum value ( A/MV ) to ALL FT employees but NO dependent coverage Question: Whether sledgehammer penalty could apply since it would appear that no FT employee would be eligible for Exchange subsidy (due to A/MV offer) 46

47 COVERAGE MANDATE: EXAMPLES FOR SLEDGEHAMMER PENALTY Same as previous slide except Matthews Co. offers A/MV plan to substantially all FT employees but NO dependent coverage Annual Penalty = $2,000 X (1,000 30) = $1,940,000 Can be triggered by one of the 4.99% of FT employees who goes onto the Exchange and receives a subsidy (or, if using transition guidance, one of the 29.9% not offered note the increased exposure!) Matthews Co. can then be penalized because no offer of coverage to dependents 47

48 COVERAGE MANDATE: EXAMPLES FOR TACKHAMMER PENALTY Sutin Co. has 1,000 FT employees and offers EESP to substantially all (including children up to age 26) If 200 FT employees enroll in subsidized coverage for year Annual Penalty = $600,000 Lesser of $2,000 X (1,000 30) = $1,940,000 (Example #1) OR $3,000 X 200 = $ 600,000 Under transition guidance: $2,000 X (1,000-80) = $1,840,000 (result still the same) 48

49 COVERAGE MANDATE: EXAMPLES FOR TACKHAMMER PENALTY If 647 (or more) enroll in subsidized coverage for year (in 2016 and beyond) Annual Penalty = $1,940,000 (same as Example #1) Lesser of $2,000 X (1,000 30) = $1,940,000 (Example #1) OR $3,000 X 647 = $1,941,000 49

50 COVERAGE MANDATE: EXAMPLES FOR TACKHAMMER PENALTY Smith Co., with 20 FT and 60 half-time (0.5) FTEs, offers EESP to substantially all FT employees In 2016, one FT employee goes onto Exchange and receives a subsidy tackhammer penalty = $3,000 X 1 But can never be more than sledgehammer penalty, which is $2,000 X (20 30) = 0 Penalty is still 0 under lesser of formula Still need to file information returns 50

51 COVERAGE MANDATE: HOW TO COMPLETELY AVOID A PENALTY No penalty possible with offer of an affordable plan that provides MV to all FT employees (and children up to age 26) A/MV plan FT employees offered this kind of plan are not eligible for subsidized Exchange coverage and, therefore, cannot trigger a penalty for the employer When a plan provides MV and when a plan is considered affordable discussed in later slides 51

52 COVERAGE MANDATE: LIMITED NON-ASSESSMENT PERIODS New in the final regulations is the concept of limited non-assessment periods, which are not included in penalty formula 6 Limited Non-Assessment Periods: January to March of employer s first year as ALE (if meet transition rule) Month in which employee has start date other than 1 st of the month Permitted waiting period for new employee (90 day max) 52

53 COVERAGE MANDATE: LIMITED NON-ASSESSMENT PERIODS Last 3 limited non-assessment periods apply when using look-back measurement method Initial 3 calendar months of new full-time employee s employment During the initial measurement period for new variable-hour, seasonal, or part-time employees Permitted period following change to full-time employment during new employee s initial measurement period 53

54 COVERAGE MANDATE: WHAT IS MINIMUM VALUE? MV not satisfied if Plan s share of the total allowed costs of benefits provided under the plan is less than 60% of such costs It is a measure of cost-sharing under the plan (related, but distinct concept from actuarial value for Qualified Health Plans on Exchanges) Does not include premiums in calculation 54

55 COVERAGE MANDATE: NEW GUIDANCE ON MINIMUM VALUE Plans should use the MV Calculator to measure standard plan features Can adjust result based on an actuarial analysis of plan features outside the calculator s parameters Alternatively, satisfy a safe harbor plan design 55

56 COVERAGE MANDATE: WHAT IS THE AFFORDABILITY TEST? Affordable if employee cost for self-only coverage in lowest-cost MV plan 9.5% of household income New IRS guidance for individual mandate indicates the affordability percentage will be 9.56% in 2015 By necessity, affordability determination for purposes of Exchange subsidy cannot be finalized until tax year-end Employee who receives subsidy may have to repay as part of tax return if household income turns out to be too high But remember: Subsidy and employer-penalty determinations are separate 56

57 COVERAGE MANDATE: WHAT IS THE AFFORDABILITY TEST? Since employers cannot know household income, special safe harbors apply for employer penalty purposes Note: HRA and employer HSA contributions do not affect affordability calculation Generally cannot be used by employees to pay premiums Amounts newly available under HRA integrated with EESP may be counted if amounts can be used to pay premiums Wellness incentives and affordability: not taken into account except those regarding tobacco 57

58 COVERAGE MANDATE: AFFORDABILITY SAFE HARBORS 1) Employee Form W-2 earnings safe harbor 2) Employee rate of pay safe harbor slightly revised under final regulations 3) Federal poverty line ( FPL ) safe harbor (based on FPL for single individual in state where employee is employed) 58

59 COVERAGE MANDATE: TRANSITION ISSUES Transition Guidance for Fiscal Year Plans (updated under final regulations) Significant Percentage Transition Guidance (All Employees) Based on whether significant percentage of employees were offered coverage at last open enrollment NEW! Significant Percentage Transition Guidance (Full-time Employees) Same, except based on percentage of FT employees If criteria met, no penalty for any month prior to the first day of the 2015 plan year 59

60 COVERAGE MANDATE: EMPLOYER RESPONSE? ALEs with close to 30 FT (or 80 in 2015 only) employees have much smaller sledgehammer penalty exposure and, thus, might not provide employer coverage But even these employers will likely start to offer EESP (requiring employees to pick up as much of cost as needed) to avoid what will likely be the higher sledgehammer penalty Appears that 100% employee-paid plan can still be EESP But this may make it more likely, as a practical matter, that employees will seek subsidized Exchange coverage 60

61 QUESTIONS? 61

62 Mary M. Potter E. H. Jansen L. Katherine Noll Jillian Gordon Foerster Joshua A. Sutin 112 E. Pecan Street, Suite 1800 San Antonio, Texas (210) tel (210) fax This PowerPoint presentation is an educational tool that is general in nature and for purposes of illustration only. The materials in this presentation are not exhaustive, do not constitute legal advice and should not be considered a substitute for consulting with legal counsel. Dykema Cox Smith has no obligation to update the information contained in this presentation. 62