Patient Protection and Affordable Care Act Compliance Checklist for Employers

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1 October, 2014 Patient Protection and Affordable Care Act Compliance Checklist for Employers Under the Employer Mandate in the Affordable Care Act, effective January 1, 2015, employers with 50 or more full-time employees (including full-time equivalents) will be required to (1) offer minimum essential coverage that is affordable to at least 95% of its full-time employees (70% in 2015); or (2) pay a penalty. Employers with plan years that do not start on January 1 may begin compliance at the start of their plan years in 2015, rather than on January 1, This raises a number of complicated questions that we will discuss below: - How do you determine if you have 50 or more full-time employees (including full-time equivalents)? - How do you determine if a variable hour employee is entitled to coverage? - What is affordable coverage? - Does your coverage provide minimum essential coverage? - What penalties could your company face? - Does your company qualify for the small business health care tax benefit? - What are the reporting and notification requirements? This Affordable Care Compliance Checklist for Employers is intended to provide a broad overview of the Act s requirements to aid employers in identifying areas of compliance or potential non-compliance. This checklist reflects the law as of the date of publication. You should consult with an attorney before relying on any information contained herein, as the law may have changed, and outcomes may vary depending on individual circumstances. How to Determine if You re an Applicable Large Employer Employer obligations under the Act vary depending on the number of full-time employees and whether an employer qualifies as an applicable large employer. Therefore, the first step in reviewing compliance starts with calculating the number of full-time employees as defined by the Act.

2 A company is a large employer (and therefore subject to the mandate) if it has a total of 50 or more full-time employees, including the number of full-time equivalent employees. For 2015 only, an employer with 50 to 99 full-time employees or equivalents does not need to comply with the employer mandate as long as it does not reduce the size of its workforce or overall hours of service in order to fit into this category of employers. To qualify for this transition relief, employers also may not eliminate or materially reduce any health coverage offered as of February 9, Step 1: Calculate the number of full-time employees a. Under the ACA, an employee is considered a full-time employee if the employee works an average of 30 hours or more per week. b. Generally, employers must calculate full-time employees for the entire preceding calendar year. Under a transition rule, to determine large employer status for 2015, employers may select any period of at least six consecutive calendar months in c. How to determine number of hours worked: i. Hourly employees 1. Calculate actual hours of service from records of hours worked and hours for which payment is made or due. The regulations treat 130 hours in a calendar month as the equivalent of 30 hours per week. ii. Non-hourly (salaried) employees 1. Three methods a. Use actual hours of service from records of hours worked and hours for which payment is made or due; or b. Credit the employee with eight hours of service for each day for which the employee would have to be credited with at least one hour of service; or c. Credit the employee with 40 hours of service for each week for which the employee would have to be credited with at least one hour of service. 2. Step 2: Calculate the number of full-time equivalent employees a. Determining the number of full-time equivalent employees is based on the number of hours worked by a company s part-time employees. i. Note: Seasonal employees who work less than 120 days in a year are excluded from this calculation

3 b. Calculate the number of full-time equivalent employees by aggregating the number of hours worked by all part-time employees and dividing by 120. c. Equation: (total number of part-time hours worked per month) / 120 = Full-Time Equivalents i. The product of this calculation is rounded to the nearest hundredth to determine the number of full-time equivalents (therefore, fulltime equivalents would be rounded to 30.54). 3. Step 3: Add the number of full-time employees and full-time equivalents 4. Example: Company A has (a) 40 hourly employees who worked an average of 30 or more hours per week during the 12-month period; (b) 8 salaried employees who work on a full-time basis; and (c) 7 part-time employees, each of whom worked a total of 98 hours per month. The total number of part-time hours worked by the 7 part-time employees per month was 686. a. Step 1: Full-Time Employees i. Hourly Employees 1. Company A has 40 hourly employees who qualify as full-time employees. ii. Non-Hourly Employees 1. Company A has 8 salaried employees who qualify as full-time employees. iii. Company A has 48 full-time employees b. Step 2: Full-Time Equivalents i. (total number of part-time hours worked per month) / 120 = Full-Time Equivalents (total hours) / 120 = Round to the nearest hundredth. ii. Full-Time Equivalents = 5.72 c. Step 3: Company A is a large employer subject to the employer mandate because the total of the number of full-time employees including the full-time equivalents is Additional Issues to Consider

4 a. Keep in mind that under the controlled group rules, employers under common ownership are combined together for purposes of determining large employer status. b. Moreover, an employer includes a predecessor employer. Specific rules for identifying a predecessor employer have not yet been released. c. Employers not in existence throughout the prior calendar year will make a determination based on the average number of employees it is reasonably expected to employ in its first year of existence. How to Determine Whether Employees Are Entitled to Coverage If you have 50 or more full-time employees or equivalents, you are an applicable large employer. Under the employer mandate, you must offer coverage to at least all but five percent or, if greater, five of your full-time employees and their dependents (defined as children who have not reached the age of 26). For 2015 only, applicable large employers only need to offer coverage to 70 percent of full-time employees and do not need to offer coverage to dependents. When hiring an employee who you know will be working an average of 30 hours or more per week, the determination is simple the employee should be offered coverage upon employment (subject to any administrative period). However, when an employee is hired on an hourly basis with variable hours, the determination gets more complicated. Under PPACA, a full-time employee, with respect to any month, is an employee who provides an average of 30 hours of service per week. However, enrolling and disenrolling employees on a monthly basis would raise significant administrative issues for employers and regulators. To address these issues, employers are permitted to use a look-back measurement method to determine an employee s full-time status under the law. The look-back measurement method allows the employer to select a measurement period of time to measure whether the employee worked an average of 30 hours per week. If the employee worked an average of 30 hours per week during the look-back period, the employer must consider the employee a full-time employee during the subsequent stability period, regardless of the number of hours the employee works during the stability period. 1. What is the measurement period? a. Ongoing employees. i. The measurement period can be a period of 3 to 12 consecutive months. ii. The employer is given discretion to choose the length of the measurement period. iii. A uniform and consistent measurement period must be used for all employees in the same category.

5 b. New variable hour employees and seasonal employees. i. A new employee is a variable hour employee if, based on the circumstances at the employee s start date, it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week. ii. A seasonal employee is one in a position for which the customary annual employment is six months or less. iii. For new variable hour and seasonal employees, an employer may use a measurement period of 3 to 12 consecutive months that begins on any date between the employee s start date and the first day of the first month following the start date. 2. What is the stability period? a. The stability period begins immediately after the measurement period and any administrative period. b. If an employer determines that an employee worked full-time during the measurement period, then the employee must be provided benefits for the duration of the stability period (regardless of the hours actually worked during the stability period). c. The duration of the stability period must be at least the greater of 6 months or the duration of the measurement period. i. Example: If an employer uses a 3-month measurement period, the stability period must be at least 6 months. ii. Example: If an employer uses a 9-month measurement period, the stability period must be at least 9 months. 3. What is the administrative period? a. Employers may impose an administrative period that begins immediately after the end of the measurement period and ends immediately before the stability period. b. The purpose of this administrative period, which may last up to 90 days, is to give employers time to determine employee eligibility for coverage, notify them of their eligibility, and enroll them in the plan. c. The measurement period and stability period combined may not extend past the last day of the first calendar month beginning on or after the one-year anniversary of the employee s start date.

6 d. Example: Company A uses a 9-month measurement period and has a 90-day administrative period. Employee 1 is a new variable hour employee so that Company imposes a 9-month measurement period from the date of hire. After the 9-month measurement period, it is determined that Employee 1 is entitled to coverage. Employee 1 s coverage begins at the end of the 90-day administrative period, which begins at the end of the measurement period. Employee 1 is entitled to coverage for a stability period of at least 9-months following the full 90-day administrative period. e. Example: Company B uses a 12-month measurement period and has a 90-day administrative period. Employee 2 is a new variable hour employee so that Company imposes a 12-month measurement period from the date of hire. At the end of the measurement period, it is determined that Employee 2 is entitled to coverage. Company B cannot impose the full 90-day administrative period because that would delay the start of coverage past the first day of the calendar month following Employee 2 s one-year anniversary. In this case, Company B would have to shorten its administrative period. Employee 2 is entitled to coverage for a stability period of at least 12 months. Is your Coverage Affordable 1. Coverage is affordable if the employee s required contribution for self-only coverage does not exceed 9.5% of the employee s household income for the taxable year. 2. If an employer offers multiple coverage options, the affordability test applies to its lowest-cost option that also meets the minimum value requirement (discussed below). 3. Employers generally will not know their employees household incomes. Therefore, there are three affordability safe harbors available: a. The Form W-2 safe harbor, which allows plans to base affordability on the wages reported in Box 1 of an employee s Form W-2; b. The rate of pay safe harbor, which allows employers to take the hourly rate of pay for each eligible employee and multiply the rate by 130 hours per month (for salaried employees, monthly salary is used instead of hourly salary multiplied by 130); and c. The federal poverty line safe harbor, under which employer-provided coverage is affordable if the employee s cost for self-only coverage under the plan does not exceed 9.5 percent of the federal poverty line for a single individual. 4. Affordability is determined by assuming that each employee fails to satisfy the requirements of a wellness program (except tobacco cessation programs). Does your Coverage Provide Minimum Value

7 A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan. 1. Four methods to calculate minimum value a. Minimum value calculator b. Any safe harbor established by the Department of Health and Human Services and the Internal Revenue Service c. Certification by an actuary (but only if the plan contains non-standard features that are not suitable for the minimum value calculator or other safe harbor) d. Any plan in the small group market that meets any of the metal levels of coverage based on the actuarial value calculator 2. Minimum value is determined without regard to reduced cost-sharing available under a wellness program (except tobacco cessation programs). 3. You should make sure to obtain documentation that you have offered coverage. Employer Penalties If you (1) do not offer coverage or you offer coverage and the coverage is either unaffordable or does not provide minimum value, and (2) an employee receives a premium tax credit or costsharing subsidy, you will be subject to a penalty. 1. Premium tax credits are generally available for employees who a. Are between 100% and 400% of the federal poverty level and enroll in coverage through an Exchange, b. Are not eligible for coverage through a government-sponsored program like Medicaid or the Children s Health Insurance Program, and c. Are not eligible for coverage offered by an employer or are eligible only for employer coverage that is unaffordable or does not provide minimum value. 2. Penalty for not offering coverage a. If an employer fails to offer coverage, or does not offer coverage to at least 95% of its full-time employees and dependents (or 70% of full-time employees in 2015), they have to pay a penalty. The penalty equals $2,000 per full-time employee minus the first 30 employees. i. [(number of full-time employees) 30] x $2,000 =???? b. Example: Company A has 100 full-time employees and does not offer coverage to at least 95 of the full-time employees.

8 i. [100 30] x $2,000 = $140,000 penalty c. Note: For 2016 and any calendar months of 2016 that fall within the employer s 2015 plan year, if an employer with 100 or more full-time employees is subject to a penalty for failing to offer coverage, then the penalty calculations will be made after subtracting 80 employees (or its allocable share of 80 employees if in a controlled group) instead of Penalty for failing to provide affordable coverage that provides minimum value a. If an employer offers coverage but one or more of its full-time employees receives a premium tax credit on the basis of the coverage not being affordable or providing minimum value, the employer will be subject to a penalty. b. This penalty is calculated monthly based on a maximum penalty of $3,000 per year per employee i. (Number of full-time employees who received a premium tax credit for that month) x 1/12 of $3,000 = $$$$ c. Example: Company A offers coverage to its full-time employees but 3 receive a tax credit because the coverage is not deemed affordable based on their household incomes. Each of the 3 employees received the tax credit for 6 months. i. 3 x (6/12 of $3,000) = 3 x ($1,500) = $4,500 d. The penalty is capped at the penalty the employer would have paid had it not offered coverage. Small Business Health Care Tax Credit 1. If you have fewer than 25 full-time employees or equivalents, you may be eligible for a small business health care tax credit. 2. Requirements for eligibility: a. You must have fewer than 25 full-time employees or equivalents; b. You must cover at least 50 percent of the cost of single health care coverage for each employee; and c. Employees must have average wages of less than $50,000 a year (adjusted for inflation beginning in 2014). 3. For more information about the small business health care tax credit, visit the IRS web page. Reporting and Notifications

9 1. W-2 reporting: a. Employers that filed at least 250 W-2 forms in the previous calendar year must, for the current calendar year, report the cost of coverage on an employee s Form W-2. b. A chart is available online that describes in more detail the employers and types of coverage that are subject to this reporting requirement. 2. Annual federal reporting: a. Entities that provide minimum essential coverage (such as employers that sponsor self-funded plans) must file annual returns reporting information for each individual who receives minimum essential coverage. The first required returns are due in i. Information that must be reported include: 1. The name, address, and employer identification number of the employer and whether the coverage was enrolled in through the Small Business Health Options Program; 2. The name, address, and taxpayer identification number (or date of birth if a taxpayer identification number is not available) of the responsible individual (reporting of taxpayer identification numbers for responsible individuals who are not enrolled in the coverage is not required); 3. The name and taxpayer identification number (or date of birth if a taxpayer identification number is not available) of each covered individual (regardless of whether covered individuals are employees); 4. For each covered individual, the months for which the individual was enrolled in coverage; and 5. Other information specified in forms, instructions, or published guidance. ii. In addition to reporting information to the IRS, employers that provide minimum essential coverage must furnish statements to responsible individuals (generally the employees). b. Additionally, large employers that are subject to the employer mandate must file annual reports with the Internal Revenue Service on the terms and conditions of their health care coverage for full-time employees. The first required returns are due in 2016.

10 i. Information that must be reported include: 1. The employer s name, address, and employer identification number; 2. The name and phone number of the employer s contact person (which can be a third party); 3. The calendar year for which the information is reported; 4. A certification as to whether the employer offered to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an employer-sponsored plan, by calendar month; 5. The months in which minimum essential coverage under the plan was available; 6. Each full-time employee s share of the lowest cost monthly premium (self-only) for coverage providing minimum value by calendar month; 7. The number of full-time employees by calendar month; 8. The name, address, and taxpayer identification number of each full-time employee (but not dependents or others covered through the employee) and the months, if any, during which the employee was covered under the plan; and 9. Any other information required by the IRS. ii. The following information will be reported through the use of indicator codes: 1. Whether coverage provides minimum value and whether employees had an opportunity to enroll spouses in coverage; 2. The total number of employees, by calendar month; 3. Whether an employee s effective data of coverage was affected by a waiting period, by calendar month; 4. Whether the employer had no employees during any particular month; 5. Whether the employer is part of an aggregated group, and the name and employer identification numbers of all other members;

11 6. If the employer contributes to a multiemployer plan, whether the employer is not subject to an employer mandate penalty because of its contribution to the plan; and 7. If a third party is reporting, the name, address, and identification number of the third party. iii. Additionally, the following information will be reported for each full-time employee for each calendar month using a code (as opposed to providing specific or detailed information): 1. Whether minimum essential coverage was offered to the employee only, the employee and children only, the employee and spouse only, or the employee, spouse, and children; 2. Reasons why coverage was not offered to an employee; 3. Whether coverage was offered to an employee although he or she was not full-time; 4. Whether the employee was covered under the plan; and 5. Whether the employer met one of the employer mandate s affordability safe harbors with respect to the employee. iv. Generally, the information described above must also be furnished to each full-time employee. c. Employers subject to both requirements may report on a single, combined form. 3. Employee Exchange notifications: a. By October 1, 2013, certain employers were supposed to have notified employees of the availability of Exchanges. i. This requirement applies to any employer that is subject to the Fair Labor Standards Act. A tool is available online to determine whether the law applies to your business. b. These notices must notify each employee of three things: i. Information on the existence of Exchanges; ii. An employee s eligibility for a premium tax credit if the employee purchases a qualified health plan through the Exchange; and iii. If the employee purchases a qualified health plan through the Exchange, the employee may lose the employer contribution to any health benefits

12 plan offered by the employer and all or a portion of such contribution may be excluded from income for federal income tax purposes. c. There is a model notice for employers that offer a health plan and one for those that do not. 4. Summary of benefits and coverage and uniform glossary: a. Group health plans and plan issuers must provide a summary of benefits and coverage and uniform glossary to participants and beneficiaries. b. This summary of benefits and coverage is an easy-to-understand summary about a health plan s benefits and coverage. c. The uniform glossary defines terms commonly used in health insurance coverage. d. Samples and templates are available online. Automatic Enrollment 1. At some point, employers that are subject to the Fair Labor Standards Act (see here to determine if you are subject) and that have more than 200 full-time employees must automatically enroll new full-time employees in one of the employer s health benefits plans. 2. The Department of Labor has stated that it intends to complete rulemaking on automatic enrollment this year. Until then, employers are not required to comply with this provision.

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