Perhaps rhe besr fearure of rhe Affordable

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1 ~ Wolters Kluwer August 12, 201s. Special Report I HIGHLIGHTS Transition Relief for Reimbursement Plans Ends Possible Legislative Fix Stalls SHOP Plan Employers Can Have Up to 100 Full-Time Employees in 2016 Contraceptive Coverage Accommodation Extended to Closely-Held Businesses IRS Considers Who Will Pay High-Cost Plan Tax for Self-Insured Plans Options for Small Business INSIDE Overview... 1 SHOP Exchange Coverage... 2 Small Business Health Care Tax Credit... 2 Market Reforms... 3 Self-Employed Coverage... 4 Burdens on Employer Self-Insured Plans... 4 Health Coverage Options for Small Businesses ACA Small Business Tax and Compliance Overview Perhaps rhe besr fearure of rhe Affordable Care Acr (ACA) for small businesses is whar ir does nor do: require them ro choose berween offering their fullrime employees ACA-complianr coverage or making Employer Shared Responsibiliry paymenrs. Only Applicable Large Employers char average over 50 full-rime employees a year have ro make rhar choice. There are imporcanr posirive benefirs as well for small employers rhar do wish ro offer coverage. Firsr, employers wirh fewer than 50 full-rime equivalenr employees can buy healrh coverage for rheir employees rhrough a srare or federal SHOP Exchange. Insurance purchased rhrough a SHOP Exchange should be cosr-comperirive, rhe employer can decide the amounr ro conrribure rewards coverage, and coverage is guaranreed robe ACA-complianr. Second, small employers rhar employ an average of 25 or fewer full-rime employee equivalenrs and obrain employee coverage through a SHOP Exch ange may qualify for the Small Business Healrh Care Tax Credir if rhey meer cerrain requiremenrs. Third, self-employed individuals may enroll in individual Markerplace Exchange coverage, and may be eligible for a Premiwn Tax Credir depending on rheir ner income and family size. Self-employed people who would normally have difficulry obraining reasonably priced insurance, or any insurance ar all, no longer have ro rely on their spouse's employer coverage or cling ro a job because of the benefirs. Fourth, employers rhar obrain group health coverage rhrough an insurer will nor be responsible for navigaring the rechnical requiremenrs of the Marker Reforms added by ACA (such as coverage that does nor exclude pre-existing conditions}. Ir is the insurer's responsibiliry ro design and provide coverage thar meers rhese addirional standards. Small employers are exempr from penalties attributable ro the insurer's noncompliance. Ir is also up ro rhe insurer ro sarisfy new coverage provider informarion reporring requiremenrs, ro reporr and pay "PCORI fees," and pay any applicable "Cadillac Plan" rax. However, some small employers char offer coverage may face significant burdens under ACA. The biggesr burden falls on employers rhar "self-insure" in rhar rhey pay for their employees' coverage directly rarher rhan rhrough an insurer. These employers are ro a large degree rreared as insurers, and rhey musr sarisfy the technical coverage and adminisrrarive requiremenrs imposed on insurers by the Marker Reforms. They musr also sarisfy rhe coverage provider information reporring requiremen rs, pay PCORI fees, and (perhaps} pay rhe excise rax on high-cosr coverage when ir goes inro effecr in A burden also falls on employers thar have rradirionally used simple reimbursemenr plans. Unforrunarely, premium paymenr or reimbursemenr plans for an employee's individual coverage are no longer permirred excepr in limired circumsrances. In addirion, Health Reimbursemenr Arrangemenrs musr be inregrared inro ACA-complianr employer coverage.

2 '[~ 5 Affordable Care Act Update A chird issue for some employers is rhar che Marker Reforms require employer group healch plans to provide comraceprive coverage. There is an accommodation for religious non-profit employers, and as a result of che Supreme Coun's decision in Hobby LiJbby v. Burwell, rhe IRS has exrended rhar accommodation to "closely held" for-profit religious employers. SHOP Exchange Coverage Q ualified small employers may buy qualified health plans (QHPs)-privare health insurance that has been certified as meeting cerrain standards-through the Small Business Health Options Program (SHOP) Markerplace. The SHOP Marketplace may be a convenient option for many employers, because everything, including employee enrollment, can be handled online. Like orher employer sponsored coverage, rhe employer is still able ro determine the coverage that employees may enroll in, how much the employer premiwn contribution will be, rhe length of open enrollmem and waiting periods. To qualify for a SHOP plan, a business must satisfy the following requirements: 1. Have at least one common-law employee on payroll This criteria does nor include a business owner or the owner's spouse, so individuals who are self-employed wirh no employees cannot ger coverage through the SHOP (though once the business is considered otherwise eligible for SHOP, the business owner and spouse may also sign up for coverage through rhe SHOP). 2. Offer coverage to all fall-time employees. A full-rime employee is any employee working 30 or more hours per week on average. 1he employer does nor have to offer coverage to parr-time employees. 3. Ensure at least 70% of those fall-time emp loyees enroll in the SHOP Marketplace plan. This is referred to as "minimum participation percentage." Certain srares ser their minimum participation percentage level ar a different percentage. 4. Have a principal business address or an employee with a p rimary worksite in the coverage area. See Healthcare.gov ro dererm ine what SHOP Marketplace coverage is offered in each area. The SHOP Marketplace may be a convenient option for many employers, because everything, including employee en rollment, can be handled online. 5. Employ 50 or fewer fall-time eqttivalent employees (FTEs), includingparttime employees. The nwnber goes up ro 100 in Full-time equivalents can be calculated manually, or rhe employer can use rhe Full-Time Equivalent Employee Calcularor, available online ar SHOP Plan levels Sim ilar ro rhe individual m arketplace, SHO P Marketplace plans are available in four categories or "meral levels": Bronze, Silver, Gold, and Platinum. All plans offer similar benefi ts, bu r d iffer in how much rhe employee pays for things like deductibles and copayments and rhe roral amount rhey spend our-of-pocket fo r rhe year. Generally, rhe lower the premium rhe employee pays, rhe higher the our-of pocker cosrs and vice-versa. The four categories are: Bronze: The health plan covers abour 60% of rhe roral cosrs of care. The employee pays about 40%. Silver: The health plan covers about 70% of the roral cosrs of care. The employee pays abour 30%. Gold: The health plan covers about 80% of the coral coses of care. The employee pays about 20%. Platinum: The health plan covers about 90% of the total costs of care. The employee pays about 10%. Employee Choice In all stares, employers can select one plan and o ffer it to all employees. In certain states, employers can choose a plan category (such as Gold o r Silver) and allow employees ro choose any plan from any insurance company in rhar category. T h is is called Employee Choice. Currently, rhe Employee Choice option is available only in these stares in 2015: Arkansas, Flo rida, Georgia, Ind iana, Iowa, M issou ri, Nebraska, Norrh Dako ra, Ohio, Tennessee, Texas, Virginia, W isconsin and Wyoming. Small Business Health Care Tax Credit Q ualified employers wirh less than 25 employees rhar purchase plans chrough the SHOP Marketplace may qualify for a premium subsidy in the fo rm of a Small Business Health Care Tax Credit, worth up ro 50% of employer premium cosrs. To claim rhe credit, rhe employer must meer certain criteria: The employer has fewer than 25 Full Time Equivalent (FTE) employees. FTE employees is nor rhe same as all employees. In some circumstances, an employer with 25 or more employees may qualify for rhe credit if some of irs employees work less than full-rime. The average annual employee salary ar rhe business is less than $50,800 in 2015 (adjusted for inflation every year). All wages paid ro employees (including overtime pay) are taken into account in computing an eligible small employer's average annual wages. The average salary is calculared by adding up rhe roral wages paid by rhe employer during 2015 CCH Incorporated. All Rights Reserved.

3 August 12, 2015 the taxable year ro irs employees, and dividing rhar number by the number of FTEs for rhe year. The resulr is rhen rounded down ro rhe nearesr $1,000. For example, if an employer pays a roral of $224,000 in wages ro employees and has 10 FTEs, the employer's average annual wages are $22,000 ($224,000 I 10 = $22.400, rounded down ro rhe nearesr $1,000); The employer contribution is at leasr 50% of full-rime employees' premiwn cosr; The employer offers coverage ro all fullrime employees. It is not necessary for the employer ro offer coverage ro partrime employees or dependenrs; The coverage is purchased rhrough rhe SHOP Marketplace. The maximum credit rhar can be claimed by an eligible employer is a "uniform percentage" of 50% of the employer's premium payments made on behalf of its employees w1der a plan offered through a SHOP Marketplace (35% fo r tax-exempt employers). Taking the "uniform percenrage" insread of a flar 50% allows for arrangements rhat require employers ro pay a uniform premiwn for each enrolled employee) and offer different tiers of coverage (for example, employee-only, dependent, a11d family coverage) ro be qualifying arrangemenrs even if the employers pay less than 50% of the premiwn cosr for employees nor enrolled in employee-only coverage. In addition, an arrangemenr thar requires employers ro pay a separate premium for each employee based on age or orher facrors can be a qualifying arrangement even ifit requires employers ro pay less than 50% of the premium cost for some employees. The credit phases our for eligible small employers if the number of FTEs exceeds 10, or if the average annual wages for FTEs exceed $25,400 in 2015 (adj us red for inflation). Market Reforms All employers that offer healrh coverage for more than one employee are subjecr to rhe group healrh plan requiremenrs, whether the coverage is provided through an insurer or rhrough direcr employer funding. TI1ese are minimum coverage and participation standards set out for all employers, and enforced by the IRS rhrough a $100 per day, per affected employee excise tax. The group health coverage rules and excise tax predate ACA, but ACA significantly expanded rhese rules. The ACA changes are often referred ro as "Market Reforms" though they are independent of rhe ACA Marketplace Exchanges. Grandfathered plans are exempt from most of the Market Reforms. Grandfathered plans are plans thar rhat were in effect on March 23, 2010, and have not been substantially modified since. Single-employee and stand-alone retiree plans are not subject ro rhe group plan rules, and therefore they are not affected by rhe Marker Reforms. Plans that only provide "excepred benefits" are similarly exempr from rhe Marker Reforms. Excepred benefits include: limited scope dental or vision plans, on-site medical clinics, coverage fo r a specified disease or illness, hospital indemnity, nursing home care, auto medical payment insurance, Medicare supplemenral coverage, workers compensation insurance, and liability insurance. Reimbursement Plans Srarring in 2014, employers may no longer offer premium reimbursement or paymenr plans because rhey are out of compliance with the group health plan rules, as amended by the Market Reforms. The concern is the dollar benefit from a premiwn plan would be limired ro the dollar amount of the annual premiwn, violating the prohibition against lifetime or annual dollar limirs on certain benefits, and that such plans would not address case-sharing for preventive services. In lieu of premium reimbursement or paymenr plans, eligible small employers can use SHOP Exchange coverage or private group insurance and pay just a portion of rhe cost of coverage. Such coverage may even cost employers less than reimbursing individual coverage. Transition Relief TI1e IRS excused employers thar are not Applicable Large Employers from complying with the Market Reforms umil June 30, 2015 (Notice ). Hisrorically, an S corporation could reimburse or pay for rhe premiums for individual coverage of 2-percent shareholderemployees. The amount would be included in the 2-percent shareholder-employee's income, but could be deducted under Code Sec. 162(1) (Notice ). The IRS is considering future guidance on d1ese arrangemenrs. However, unless and until the IRS changes irs position (and in any case, at least through 2015), raxpayers may continue ro use rhese arrangemenrs without incurring an excise rax or filing Form In addition, the tax rreaanenr of these arrangemenrs (included in d1e shareholder's raxable income with a deduction for the shareholder) remains in effect for now (Notice ). This rule applies only for employees who are also 2-percent shareholders under Code Sec. 1372(b)(2). It does nor apply for S corporation employees generally. Funding Through Compensation Early guidance by the IRS in Notice suggested thar after-tax premium reimbursemenr plans might be excepted from the Market Reforms because they are not group healrh plans. This approach would allow existing arrangements for self-employed individuals (including parmers and S corporation 2-percenr shareholders) ro more or less continue unaffecred, and allow employers ro avoid the excise tax by reporting reimbursements as taxable compensarion on their employees' W-2s. The IRS has since clarified that after-tax arrangements are not generally exempt from rhe Market Reforms.

4 '(~ 5 Affordable Care Act Update To avoid the Markee Reforms, an afcer-rax arrangemenr would have ro consist of a raise in compensation coupled wirh no srrings arrached on whar che employee did wirh the money. Conditioning che money on purchasing insurance, or endorsing a particular kind ofinsurance, would conscirure a group plan subjecr ro the Marker Reforms (Norice ). Single-Employee Plans The Marker Reforms do nor apply ro singleemployee plans. 1he IRS has scared in che conrexr of an S corporation, if rhere are only two employees in che plan and they are borh covered under rhe same family coverage, rhe plan qualifies as a single-employer plan. A business cannor ger around chis rule by having multiple single-employee plans because all che plans are aggregated for these purposes (Norice ). Possible Legislative Relief? Bi-partisan legislation has been inrrod uced in both the House (H.R. 2911) and rhe Senate (S. 1697) that would amend the excepted benefirs rules ro rrear small employer reimbursement plans as excepted benefirs. Under che proposed law, small employers would be able ro use Qualified Small Employer Health Reimbursemenr Arrangemenrs (QSEHRAs). Funding would be limired ro employer conrriburions (no salary reduction conrriburions). QSEHRAs would be able ro reimburse borh medical care expenses, and insurance premiums fo r eligible employees and rheir family members. House bill H.R. 2911, and Senare bill S. 1697, were introduced our of committee on June 15, There mighr be concern on rhe pare of rhe adminisrrarion rhar chis legislation would weaken the SHOP Exchanges. Contraceptives Coverage wirhour any cosr sharing muse be provided for a long list of prevenrive healrh services including contracepcives. From rhe beginning religious non-profit employers could use a safe harbor under which conrraceprive coverage would be provided separacely by rhe insurer ar no cosr ro che employee and wirhour participation by rhe employer. In response to rhe Supreme Court's decision in Burwell v. Hobby Lobby Stores, Inc., chis accommodation is available ro closely held for-profir employers. Self-insured plans... bear the full brunt of many ACA changes that are aimed at insurance companies. To qualify, a business muse have more rhan 50 percent of rhe value of irs ownership inreresrs owned direcrly or indirectly by five or fewer individuals, or musr have an ownership structure char is "substantially similar." The value of the ownership inreresrs is calculated based on all ownership interests, regardless of whether rhey have associated voting rights or any ocher privileges. A business trying ro determine if ir qualifies for rhe accommodation can send a letter describing its ownership srrucrure ro HHS ar accommodacion@cms.hhs.gov. If che encity does nor receive a response from HHS ro a properly submitted lerrer describing the entity's current ownership srrucrure within 60 calendar days, ir will be considered ro meet the requirements provided ir rerains rhar srrucrure. Self-Employed Coverage The Premium Tax Credir (PTC) helps eligible raxpayers pay for healrh insurance obtained through rhe Marketplace. The PTC fo r eligible taxpayers is provided on a sliding scale depending on che size of rhe family and household income. A taxpayer wirh household income ar 200% of rhe federal poverty line for the taxpayer's family size gees a larger credit ro help cover the cost of insurance rhan a taxpayer wirh rhe same family size who has household income ar 300% of che federal poverty line. A complicating fearure of che PTC is char all or a porrion of rhe credit amount can be advanced at the taxpayer's eleccion in rhe form of lower insurance premiums throughout the year. T he advance amount is based on a prediction of rhe taxpayer's income and fa mily size. Differences between the advance and che acrual credit amount are reconciled on rhe taxpayer's annual rax rerurn, and additional rax may be owed. The additional ta."< may be limited depending on rhe taxpayer's modified AGL The self-employed health insurance deduction is available for coverage for which the caxpayer qualifies for a Premium Tax Credit, buc there are limits. If a self-employed taxpayer receives advance payment of the premium rax credir from the government during the year, the deduction is limited ro rhe nonsubsidized porrion of the raxpayer's premiums. Burdens on Employer Self Insured Plans Employers, borh large and small, may pay for their employees' medical care expenses direcrly rather than purchasing group health insurance. Employers sponsoring these selfinsured plans must comply wich many changes under ACA that generally affect insurance companies. PCOR/Fees Self-insured employer plans must pay a fee for each plan year ending afrer Seprember 30, The fee equals che product of $2 ($1 for policy years ending in fiscal 2013) mulriplied by rhe average number of lives covered under rhe plan. For plan years ending on or afcer Ocrober l, 2014, rhe $ CCH Incorporated. All Rights Reserved.

5 August 12, 2015 amount is adjusted for increases in healrh care spending. The fee ends afrer September 30, The plan sponsor pays the fee (Code Sec. 4376). This fee supports the "Patienr-Cenrered Ourcomes Research Insrirure" through a rrusr fund, and is generally known as the PCORl fee. The PCORJ fee is also imposed on issuers of health insurance policies. Coverage Provider Reporting Under Code Sec. 6055, every provider of "minimum essential coverage" must report coverage information by filing an information return with the IRS and furnishing a sracemenr co individuals. Generally, providers are insurers, carriers, or governmenr agencies providing coverage, bur rhey can include any employer with a self-insured plan. Health coverage provider reporring is done through two forms: Form 1094-B (a pure transmirral form, used co identify the reporring emity and transmit Forms 1095-B}, and Form 1095-B (statements furnished co individuals wich a copy senr to the IRS). This format is similar co rhar followed by enricies filing Forms W-2 wirh a Form W-3 cransmitral. The information is used by the IRS co administer rhe individual shared responsibility provisions of ACA. "Cadillac Plan" Tax Scarring in 2018, a 40-percenc excise tax is imposed on health coverage providers co the extenr that the aggregate value of employersponsored healrh coverage for an employee exceeds a threshold amounr (Code Sec. 4980I). For insured plans, the insurer pays the rax, bur for self-insured plans the the entity thar "adminisrers the plan benefits" will pay the tax. The tax is equal co 40 percent of rhe excess benefit, which is the sum of rhe monthly excess amounrs. The excess amount for a monrh is equal co the excess of the aggregate cost for the month over an amounr equal co 1112 of the annual amounr, which is $10,200 (for 2018) for self-only coverage and $27,500 (for 2018) for coverage other than self-only coverage, both multiplied by the health care adjusrmenr percenrage, which is meanr co adjust for the change in cost of health care coverage between 2010 and Employerspecific adjustmenrs for age and gender, and adjustmenrs for retirees nor subject co Medicare and rhose in high-risk professions are also made (Code Sec. 4980I(b)). The IRS is just beginning ro release guidance on this rax. (Notice ; Notice ). The government is trying ro decide whether ro place the payment burden on the plan's third party administrator (if there is one), or on the entity rhat has final decision making aurhoricy on administrative matters (Notice ). 1here might be political supporr from both sides co eliminate the cax as its stare date approaches since both business and labor unions are opposed. Health Coverage Options for Small Businesses A number of employers, both large and small, are seeking ways to accommodate and comply wirh ACA while mainraining their currenr plans or offering new health coverage co their employees. Here are a few options for health insurance coverage for employers averaging under 50 full-time employees: 1. No employer coverage for any employee. The owners and employees will have to obtain individual coverage co avoid individual shared responsibility paymenrs. 2. SHOP Exchange coverage. For employers with 25 or fewer FfEs, a small business tax credit is available for SHOP coverage. 3. Group plan coverage with purchased inmra11ce. Compliance, reporting and excise rax burden is mosrly on the insurer. 4. Health Reimbursement Arrangements. An HRA inregrared with employer coverage to pay deductibles and co-pays is permissible as long as it is integrated with ACA-complianr employer coverage. Orherwise, HRAs have to be limited to retirees-only, excepted benefits, or single-employee plans. 5. Selfillmred group plan coverage. The employer has the compliance burden for the Market Reforms, coverage provider reporting, and paying che PCORJ fees. 6. Reimbursement plans. Businesses with a plan chat includes only one employee can cominue to use a reimbursemenr plan co pay for individual coverage. S corporations can continue co use reimbursemenr arrangemenrs for 2-percenr plus shareholder employees, and the existing deduction rules remain rhe same. 7. Individual Marketplace coverage. Selfemployed individuals can use the ACA Marketplace Exchange for individual coverage. They m ight qualify for the premium tax credit, and can deduct the unsubsidized porrion of the premiums. 8. Retiree plans. Stand-alone retiree plans can scill use premium reimbursemenr plans, and such coverage can cowu as minimum essential coverage for the retiree. The employer must report under the coverage provider rules. 9. Excepted benefit plans. Plans that only offer coverage for excepted benefits (such as vision-only, or denral-only plans) are relatively unaffected by ACA Marker reforms. 10. Religious employer exemption. Religious employers (both non-profir and closelyheld for-profir) can claim an accommodation for conrraceptive coverage.

6 CCH~ Federal Tax Perspectives: ACA Large Employer Compliance and Reporting, 2015 CCH~ Federal Tax Perspectives: ACA Small Business Tax and Compliance CCH' FEDERAL TAX PERSPECTIVES Coverage of Employer Shared Responsibility payments under Code Sec. 4980H(a) and (b), determination of Applicable Large Employer status, health insurance requirements and related reporting. CCH' FEDERAL TAX PERSPECTIVES This title fills the gap between individuals and large employers covering the SHOP (Small Business Health Options) Marketplace, the Small Employer credit as well as self-employed and self-insured coverage. Health coverage provider reporting on Forms 1094-B and 1095-B Applicable large employer reporting on Forms 1094-C and 1095-C Includes Look-Back period examples with graphic time-lines, annotated forms, filled in form examples, charts, FAQs, and reporting checklists just $49.95 hlijd h Compliance with ACA market reforms The effects of the ACA on employer self-insured plans including PCORI fees and coverage provider reporting Claiming the Small Employer Tax Credit with filled-in forms example just $ Hiiii[.l\q Also Available: ~,'l'~""' CCHe Federal Tax Perspectives: ACA Individual Mandate and Premium Tax Credit ebook... $ ""'liiltl U.S. Master Tax Guide, 2016* Guidance on today's federal tax law and timely, precise explanations of federal income tax law for individuals, partnerships, corporations, estates and trusts. ArfOAD.dll (AIU o\(i Affordable Care Act - Law, Regulatory Explanation and Analysis, $57.69 """ll lti Updated checklists for income, deductions, medical expenses, credits and information returns Coverage of the latest guidance on individual and employer health insurance mandates Comments highlighting expired and expiring tax provisions and the potential impact of tax legislation Removable Quick Tax Facts card for at-a-glance reference CCHe Federal Tax Perspectives: 2015 Subscription $49.95 Yn:iii!.H just $98.75 l:llhijl M Get additional ACA coverage with our Health Care Reform Library on CcH lntelliconnect. II Visit CCHGroup.com/Seminars for a calendar of upcoming CCH Seminars. Attend CCH Seminars and Earn CPE! Authoritative seminars In the convenience of your office on a variety of tax and accounting topics, Including the latest developments and tax legislation changes. US MasrerTaxCJKie includtsa copy of the TopFeder~IT1xluuesfor Z016CPECounc{gradlng fee add1uonal) V1s1t CCHGroup.com/PrlntCPE for details cbooks andebookcomblnabons can onty be purchased onlln<! docks cannot be returned for credit or put on uanding order. Visit CCHGroup com/t:books to le rn more about ordcrtngebooks on line and to rc..-~w oor end USCf agreement Visit CCHGroup.com/Legislation for the latest updates as they happen. O. Wolters Kluwer When you have to be right