Employer Coverage & Notification Requirements Under the Affordable Care Act (ACA): Merit s Value Proposition

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1 Employer Coverage & Notification Requirements Under the Affordable Care Act (ACA): Merit s Value Proposition

2 Table of Contents Large Employer Status Controlled Group Rates Determination of Full-Time Employee Status Limitation on Waiting Periods Affordability Standard and Safe Harbor Estimates Minimum Value Standard and Essential Health Benefits Part-Time Employees Employee Communications Employee Application for Premium Tax Credits Additional Employer Reporting Requirements Small Business Tax Credit Other Tax Issues Under the ACA Medical Loss Ratio (MLR) Rebates Conclusion ACA Compliance: Merit s Value Proposition

3 Major Coverage Requirements Under the ACA The ultimate intent of the ACA is to provide minimum, as defined by the Act, universal health insurance coverage for all lawful residents of the United States. Plan Designs. Elimination of lifetime and annual maximum limits, zero cost and specifically defined preventative care, etc. Employer Mandate. Requires employers of 50 or more Full Time Equivalents (FTEs), to provide affordable qualified coverage to their eligible employees or face stiff financial penalties. Individual Mandate. The Act mandates that all Americans, with some exceptions, maintain minimum essential coverage or face a financial penalty. Insurance Marketplaces. The ACA provides for states to create public insurance marketplaces, the absence of which will be provided for the federal government. Individuals and small employers not covered by the mandate will be enabled to purchase coverage through these state and federal marketplaces. If a lawful resident does not have access to an affordable qualified health plan through their employer, Federal premium tax credits will be available to families with household incomes of less than 400% of the Federal Poverty Level (FPL)(A family of four with a household income of $93,000, or less). Additional subsidies will also be available to those qualifying for the premium tax credit if household incomes are below 250% of the FPL. While a family of four with a household income of $58,500, or less, would qualify for additional subsidies. Medicaid Expansion. The Act allows states to expand the Medicaid program to allow individuals with incomes up to 133% of the federal poverty level (FPL) to be eligible for the program. With over 2,000 pages of statutory language and well over 10,000 pages of related proposed or final regulations already released, not to mention an untold number of pages of yet to be released regulations, it is critical for employers to understand both the hard and soft costs associated with the Act. In addition to the sheer number of regulations, employers have to monitor and adhere to these requirements, coming from no less than three separate federal agencies and their sub-departments: The Department of Health and Human Services (HHS) o Centers for Medicare & Medicaid Services (CMS) Center for Consumer Information & Insurance Oversight (CCIIO) The Department of Labor (DOL) o Employee Benefits Security Administration (EBSA) o Wage and Hour Division The Department of Treasury o Internal Revenue Service (IRS) For small employers, the key choice is determining whether they can still be perceived as an employer of choice if they do not offer major medical benefits and, essentially, forcing their employees to use the state and/or federal marketplaces to obtain coverage. Further, for small employers, there is some anticipation the open market plans and rates will not be material different than those in Small Business Health Options Program (SHOP) in the marketplaces, the plan designs 3 ACA Compliance: Merit s Value Proposition

4 and the underwriting guidelines of which will now be more stringently controlled than ever. Large businesses, on the other hand, face the same question, but must add the cost of penalties into their decision making process. Irrespective of the employer s size or whether the employer offers health insurance, there are a host of new administrative, notification, and reporting requirements presenting enormous opportunity costs for small and large businesses alike. Employers must be prepared prior to the state and/or federal marketplaces open enrollment process, which begins in October As of January 2013, the monthly number of active FTEs should be calculated on an ongoing monthly basis to provide awareness of the applicability of the Employer Mandate scheduled to be effective in January Certainly a three-employee business, unless there is enormous growth planned, can confidently conclude they will be a small employer. Likewise, a business of 250 employees, assuming no impending mass layoffs, can confidently conclude they will be covered by the Employer Mandate as a large employer. Regardless, having a strategy to mitigate the related opportunity costs while not impacting the ability to be considered an employer of choice should be top of mind. Although not all inclusive, the following areas of the Act which must be considered when developing a strategy for responding to this new, complex, and far reaching law. Large Employer Status As employers move ahead with ACA compliance efforts, it will be imperative as a first step that they understand the definition of large employer to determine whether their company(ies) are subject to the employer mandate and thus need to undertake an accurate assessment of their potential liability for taxes. Large employers are subject to a $2,000 per full time employee, minus the first 30, on an annual basis ($ per month) if they do not offer insurance. The ACA defines large employer status as an employer who employs an average of 50 FTEs during the prior calendar year. Guidance, in the form regulation issued by the Department of Treasury, can be summarized as follows: Count the number of full-time employees (including seasonal employees) who work on average 30 hours per week per calendar month. Each of these employees is considered one full-time employee for calculating the total number of FTEs. Aggregating the number of hours worked by all non-full-time employees (including seasonal employees) who work an average of less than 30 hours per week during the calendar month and divide by 120. This number represents less than full time FTEs. Add the number of full-time employees and full-time equivalents calculated in the first two steps for each of the 12 months in the preceding calendar year. Add the monthly totals and divide by 12. If the average exceeds 50 full-time equivalents, determine whether the seasonal employee exception applies. There is a Seasonal Employee Exception provided for some qualifying employers. If the employer exceed the average of 50 FTEs for 120 consecutive days (four calendar months) and it was those 4 ACA Compliance: Merit s Value Proposition

5 seasonal employees causing the employer s average to rise above the threshold, the employer would not be covered by the mandate. Merit Resources does not adversely affect small employers who take advantage of Merit s HR outsourcing solution. The Act will look through the co-employment relationship to examine whether a Merit client would be covered by the Employer Mandate independently. For all employers, Merit eliminates countless hours associated with the administrative burden of tracking FTEs on a month-to-month basis. Further, Merit will continue to offer a suite of health insurance options, at least one of which will meet the Essential Health Benefits (EHB) and Actuarial Value (AV) requirements for both small and large groups. Controlled Group Rules An additional important and not widely publicized factor to consider when ascertaining an employer s size for the Employer Mandate determination is if the employer is measured on a controlled group basis. Internal Revenue Code sections 414 (b), (c), (m), and (o) specifically address how to determine whether or not a group of related employers would be considered a controlled group for purposes of this Act. To determine whether the employer mandate applies to them, an employer must combine the total number of employees of all corporations that are under common control and are members of that employer s particular controlled group. FTE calculation are conducted the same as in the above example, but all control group employees must be aggregated prior to calculating. The Act and current regulatory guidance clearly indicate that employers will determine whether they are large employers on an annual basis. However, there remains uncertainty regarding the circumstances when an employer s workforce reduces to such an extent it would not otherwise be covered by the employer mandate. While specific guidance has yet to be released regarding the form and process for reporting, the Act requires large employers to report their status to the IRS by Jan. 31 st each year. At minimum, one can reasonably anticipate the report consisting of the number of FTEs an employer had during each month in the preceding calendar year. Merit Resources enables commonly owned client companies the ability to ensure compliance through collecting necessary data through one single Human Resources Information System (HRIS) eliminating potentially hundreds of hours of extracting and compiling data from different systems. Further, for reporting purposes, Merit will further save numerous hours by providing the data necessary to meet the reporting requirement to their clients. Determination of Full-Time Employee Status An employer subject to the Employer Mandate, even if they offer health insurance coverage to employees, may still be exposed to a penalty if any full-time employee receives a premium tax credit as a result of either the employer s health care plan be deemed to be unaffordable or if it doesn t meet the required Minimum Value (MV) standards. Understanding which employees will be considered full time under the Act will be critical to understanding the total potential financial penalties of failing either of these requirements. If either the plan fails to meet the MV requirements or if the premium charged to the employee is unaffordable, (greater than 9.5% of the employee s household income) the employer will be assessed $3,000 per year ($250 per month) for each employee who subsequently obtains a premium tax credit in a public marketplace.

6 The ACA defines a full-time employee as one who provides an average of 30 hours of service per week in any month, which includes paid leaves (i.e., vacation, sick days, PTO, jury leave, etc.). This definition runs contrary to many employers current practices, which have had no such limitations. Traditionally, full-time employment is most often defined as working an average of 32 hours a week and it is not uncommon for some employers to have the weekly average be as high as 38 hours or even 40 hours. The result of this change is causing some consternation as most employers use benefit eligibility for all of their health and welfare plans, such as dental insurance, life insurance, Flexible Spending Accounts (FSAs), vacation/pto etc. Additionally, many insurance contracts stipulate who is considered eligible to participate based upon their full time status, which is typically defined in weekly hours of service. Assuming an employer does not want to administer various plans with inconsistent eligibility requirements, employers and their insurance brokers will need to review and request contract changes from carriers offering other ancillary insurance products to the employer s workforce where these terms are not aligned. Not every employer of every industry has a strict 9:00 AM 5:00 PM workweek for every employee. Inasmuch as full-time status is determined on a monthly calculation under the Act, there is a great deal of anxiety among employers as to those administrative issues associated with tracking employees hours, specifically those whose work hours fluctuate due to a wide variety of and often unforeseeable circumstances. In situations in which an employee is hired for or promoted to a position the employer classifies as or reasonably expects to be full time, the employee must be eligible for the employer s health plan after the employer s applicable waiting period. The administration has released proposed safe harbor guidance for measuring full-time employee status for variable-hour employees whose status is not known due to fluctuating hours or uncertain duration of employment. Measurement and Stability Periods Safe Harbor The regulatory guidance provided, which can be relied upon at least through the end of 2014, allows employers to choose a safe harbor, which allows a look-back measurement period to determine whether an employee should be considered full time based on an employee s actual hours of service. Per the notice, a new employee is a variable hour employee if, based on the facts and circumstances at the start date, it cannot be determined that an employee is reasonably expected to work on average at least 30 hours per week. While this provides some guidance, there still is uncertainty regarding how the safe harbor rules would apply to short-term assignment employees, temporary employees, and employees hired into high-turnover positions. Under the notice, employers can choose a standard measurement period of three to 12 months for ongoing employees, which is to be used to determine whether an employee meets the definition of full time, thus eligible for coverage, during the following Stability Period. The Stability Period must be equal to or greater than the look-back period (but not less than six months,) during which coverage must continue to be offered, regardless of the number of hours an employee works during the Stability Period. Importantly, while an employer cannot define these periods uniquely for each new employee, the notice states employers may use measurement periods and stability periods differing either in length or in their starting and ending dates for certain categories of employees. These categories include: Collectively bargained employees and non-collectively bargained employees Salaried employees and hourly employees Employees of different entities Employees located in different states 6 ACA Compliance: Merit s Value Proposition

7 Employers can use an initial measurement period to determine the status of newly hired variable hour or seasonal employees. The associated stability period for newly hired variable hour or seasonal employees must be the same length as the stability period for ongoing employees. Merit Resources will consult with clients in establishing appropriate application of Variable Hour Employees, determining whether this concept is appropriately applicable to their unique employment practices, and, as necessary, assume the administrative burden of tracking employee hours on a monthly basis. Administrative Period The guidance also allows for an optional administrative period not to exceed 90 days for current/ ongoing employees between the Standard Measurement Period and the associated Stability Period to accommodate notification and, as necessary, subsequent enrollment administrative processes. The notice states that the administrative period for ongoing employees must overlap with the previous stability period so as not to result in gaps in coverage. However, the notice limits the combined length of the initial measurement period and administrative period to effectively no more than 13 months (plus the fraction of a month to the first day of the next calendar month). Merit Resources hosts all of the required data to make full-time status determination under the ACA. Subsequently, Merit guarantees compliance on behalf of our clients for ensuring employees are accurately and timely notified of their benefit eligibility. Merit will assist clients with determining the status of current employees for application of ACA requirements and, as required, send notification of eligibility to affected employees. Limitation on Waiting Periods The law s limitation on waiting periods before coverage is offered and its interaction with the determination of employees full-time status is of importance to employers for a variety of reasons. The ACA s prohibition on waiting periods of more than 90 days applies to all employer-sponsored group health plans. The administration clarified that the calculation of the 90-day waiting period begins upon the date that an employee becomes eligible to participate in the plan. For a full time employee, this would be their hire date. When using the above safe harbor process for variable hour employees, it would begin with the end of their Initial or Standard Measurement Period. There is a penalty in the form $100 per day, per affected employee excise tax for non-compliance. Merit Resources ensures clients eligible employees are notified in a timely manner to ensure compliance with and avoid penalties related to the Limitation on Waiting Periods saving their clients approximately one hour per eligible employee. Affordability Standard & Safe Harbor Estimates As employers do not have access to information about employees household incomes, and will not be allowed to access employees Federal returns, the government has proposed a safe harbor mitigating any tax penalties if the employee s share of the employee only premium for the employer s lowest-cost, minimum value plan does not exceed 9.5 percent of the employee s current W-2 wages. While this safe harbor does provide a higher threshold than the modified adjusted household income, basing the calculation on current wages provides a more predictable and workable method for employers to confirm that they are offering affordable coverage to employees. 7 ACA Compliance: Merit s Value Proposition

8 It is important to note, too, regardless of the Safe Harbor, the marketplaces will make premium tax credit determinations based on modified adjusted household income. Thus an employee could qualify for the premium tax credit, while the employer is spared from any penalty. It is important to note that employers need to analyze their current workforce demographics, including full-time status now based on 30 hours per week and the premium contribution they make to employees of certain wages. In addition, employers are beginning to analyze what their benefit packages must look like under the minimum value test and other benefit requirements, such as the coverage of preventive care with no cost-sharing and the lifting of annual and lifetime limits on certain benefits, discussed later in this article. All of this must be taken into account for employers to determine not only if they are able to offer coverage that is affordable to the employee, but also to employers in setting their own premium contribution levels to the coverage they must offer. Merit Resources will consult with their clients as to the minimum contribution requirements to pass the Affordability Standard provisions of the ACA, as well as strategize with clients as to their contribution strategy as it relates to their unique industry and geography. Merit s ability to compile the necessary payroll data and insurance premiums will generally save clients 4 hours or more per month, while also saving potentially thousands of dollars in outside consulting fees. Minimum Value Standard & Essential Health Benefits Under this Act, the plans of both large and small employers who provide coverage to their employees are required to meet Minimum Value Standards or Essential Health Benefits respectively. Large employers will want to ensure their minimum affordable plan option meets the Minimum Value Standard requirement or be subject to the penalties as if not offering coverage at all. Conversely, for small groups, it is unlikely any major medical plans will be available, in our out of the Public Marketplaces, not containing Essential Health Benefits, the absence of which means employees would still be required to obtain other coverage to avoid the individual mandate penalties. How the Minimum Value Standard is defined may have a tremendous impact on the affordability and administration for large group health plans. Currently, it is anticipated most active large employers health care plans will meet or exceed this 60% Actuarial Value threshold without modifications. However, as the currently proposed regulations are finalized, it will be incumbent upon employers to ascertain whether their group health plan meets the Minimum Value Standard, of which the 60% Actuarial Value requirement is only a part, and what steps will be necessary to demonstrate compliance. By statutory language within the Act itself, minimum value is understood to be a 60 percent Actuarial Value test. This is generally accepted to mean a plan would pay for at least an average of 60% of medical expenses incurred, based on a standard population, for allowable charges. However, the Treasury is authorized and is expected to issue specific regulations further defining the Minimum Value Standard. There exists proposed regulations, but they have yet to be finalized. The proposed regulations include a requirement that HHS have a calculator available on their website enabling employers to test their plan(s). The requirement to cover the essential health benefits (EHB) package applies to products sold in the individual and small group markets, both inside and outside public marketplaces. The Act defines the small group market as each state currently defines the small group market, typically 2-50 employees or employees. Thus, some employers that are defined as large under the Employer Mandate may be considered small for public marketplace purposes. However, 8 ACA Compliance: Merit s Value Proposition

9 beginning in 2016, a small employer is defined as an employer with 100 or fewer employees, for all states. The result of this will be those employers defined as large for Employer Mandate purposes will be considered small for purposes of purchasing group health insurance and will therefore have less control over their benefit design. While there cannot be annual or lifetime limits for large employers on any Essential Health Benefit, large employers are not required to specifically offer the 10 Essential Health Benefits; however, the Minimum Value Standard will be determined by a comparison to the standard population as related to other large employer health plans claims data set of a specific geographic region. The administration has stated that the value of large employer health plans is primarily driven by spending on the provision of four core categories of benefits: Hospitalization and emergency room services Physician and midlevel practitioner care Pharmacy benefits Laboratory and imaging services On the other hand, based upon current proposed regulations, small group plans must contain benefits in the following 10 Essential Health Benefit categories: Ambulatory patient services Emergency services Hospitalization Maternity and newborn care Mental health and substance use disorder services, including behavioral health treatment Prescription drugs Rehabilitative and habilitative services and devices Laboratory services Preventive services and wellness services and chronic disease management Pediatric services, including oral and vision care There have been many comments on the proposed regulations regarding both Minimum Value Standards and Essential Health Benefits. The primary concern relates to the adverse impact these requirements will have on premiums for both individuals and groups as a result of increasing the values and/or benefits relative to an employer s current plan designs. Merit Resources, regardless of the final regulations, will ensure all clients participating under Merit s master group contract health insurance plans will have peace of mind knowing Merit is responsible for ensure compliance with these requirements. Part-Time Employees Hours worked by part-time employees are used in determining the number of full-time equivalents to determine whether an employer is subject to the Employer Mandate, but there is no requirement to offer part time employees health insurance coverage. However, a number of employers choose to extend coverage options to part-time employees. Should an employer choose to offer coverage part time employees, such coverage does not need to meet the affordability or minimum value standards for those part time employees. Conversely, an otherwise benefit eligible part time employee may still be eligible to receive the premium tax credit for marketplace coverage without the employer being subject to any penalty. Should an employer offer unique major medical plans to part-time employees, the plan designs will continue to be

10 subject to some of the insurance market reforms, such as preventive care without cost-sharing, and no annual and lifetime limits on Essential Health Benefits. Part time employees enrolling in employer plans may meet the Individual Mandate s requirement to maintain minimum essential coverage, thus avoiding the Individual Mandate penalties. Merit Resources will continue to monitor the evolving ACA regulatory environment to keep clients aware of their options as it pertains to part time employee health benefits. It is nearly impossible to calculate the total number of hours saved by Merit s clients in scanning for and reviewing proposed and final regulations to understand the impact on their unique businesses. With a staff of professionals, Merit stays apprised and consults with clients as to the potential impact of regulations and to explore what, if any, matters they may want to consider modifying to mitigate the impact. Employee Communications The Act has added two critical new employee notification requirements, in addition to current notifications required under the Employee Retirement Income Security Act (ERISA). Of the most time consuming is the Summary of Benefits and Coverage (SBC) which are not only required to be in a specified format (i.e., font size, margins, page limitations, etc.), they must be specifically distributed to employee(s) and, in certain instances, their beneficiaries potentially several times each year. The following events trigger when a notification must be provided: Automatically prior to enrolling 30 days prior to re-enrolling 30 days prior to plan renewal Notify 60 days prior to a Material Modification Within 7 days of a request If the employer is self-insured, it is their responsibility to create these documents within the stringent standards outlined in the regulations (it is anticipated this would be a service provided through thirdparty administrators, though it is not required of them). On the other hand, carriers are required to create the documents for employers offering their plan(s) through a fully insured arrangement. Regardless of document creation responsibility, it is incumbent upon employers to distribute the SBC in accordance with the regulations or, in failing to do so, face a $1,000 per day per each [affected] participant or beneficiary penalty. The ACA also amended the Fair Labor Standards Act (FLSA), requiring employers to inform employees of the existence of a Public Marketplace, including a description of the services provided by the Public Marketplace, and the manner in which the employee may contact the Public Marketplace to request assistance. Additionally, these new FLSA regulations requires the notice to include information to employees about their potential for the premium tax credit and other cost sharing subsidies for exchange coverage if the employer plan s share of the total allowed costs of benefits provided under the plan is less than 60% of such costs. Finally, notice is required convey to employees the consequences of purchasing coverage through a public marketplace may result in losing the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for federal income tax purposes. The Act required these notices be sent to necessary recipients by no later than March 1st, However, on January 24 th, 2013 announced they were delaying enforcement of this provision of the Act for several reasons. At this time there is no specific date for guidance or enforcement other than the Employee Benefits Security Administration (EBSA) of the Department of Labor (DOL) indicating late summer or fall of 2013.

11 Merit Resources, as the plan sponsor, will provide all SBC documents to all employees of clients covered by Merit s master group contract health insurance plan. In addition, Merit will provide all of the Public Marketplace notification requirements to employees upon final guidance as to what, specifically, must be included is published. It is anticipated that the fulfillment of these requirements may take as much as 2 hours per year per employee. Employee Application for Premium Tax Credits The entire process related to Premium Tax Credits has yet to be determined. At a minimum there will at least two new federal reporting requirements under new Internal Revenue Code Sections 6055 and Also, through an individual s application for the Premium Tax Credit, there will be a verification process to determine eligibility. A close practical analogy may be the process a separated employee goes through to obtain unemployment benefits, to include an appeals process for both the employee and the employer. Under the Act, employers must report to the IRS the following data no later than January 1 st of each year representing information from the prior calendar year: Whether the employer did offer coverage to its full-time employees and their dependents o The length of any waiting period o The months during the calendar year for which coverage under the plan was available o The monthly premium for the lowest cost option in each of the enrollment o categories under the plan The employer share of the total allowed costs of benefits provided under the plan. The monthly number of full time employees For employees covered under the plan (Additional information may be required) o o o Name Address Tax Identification Number (TIN) Furthermore, also by January 1 st, employers must provide each of their employees written notice of what was reported to the IRS, as it relates to the employee and/or their dependents. Those employed people seeking the Premium Tax Credits and, potentially, additional subsidies in the Public Marketplace, must attest they are not eligible for or their employer doesn t offer a plan meeting the Act s requirements or, if a plan is available, it is unaffordable to the employee. An employed person applying for the Premium Tax Credit must provide, at minimum, the following employer-related information to the Public Marketplace: The employer s name, address, and Federal Employer Identification Number (FEIN) Whether or not the applicant is full-time employee Whether or not the employer makes available covered as provided by the Act If the employer does provides qualified coverage, the lowest cost option and required employee contribution 11 ACA Compliance: Merit s Value Proposition

12 If an enrollee claims an employer s minimum essential coverage is unaffordable, the employee also must provide: The individuals Tax Identification Number (TIN) and filing status The deductions allowed, including the taxpayer and, if applicable, the taxpayer s spouse The Modified Adjusted Gross Income (MAGI) for all individuals and who are required to file a tax return (As there continues to be in many regulations) other information to be prescribed by the secretary. The ACA requires Public Marketplaces to notify employers whenever an employee is determined to be eligible for a tax credit for marketplace coverage. There will also be, as previously indicated, an appeals process for both employees and employers; much like there exists for claims for unemployment benefits. HHS has established the first open enrollment in state-based Public Marketplaces to run from October 1 st, 2013, through March 31 st, Subsequent open enrollments will run from October 15 th through December 7 th. Additionally, the ACA will require marketplaces to provide special enrollment periods for a variety of circumstances, including qualified individual loses access to coverage through their employer. Merit Resources will provide to clients all of the necessary data for annual reporting to the IRS. Merit will also provide all required related notices to applicable employees. Finally, as with unemployment claims management, Merit will respond to all requests from Public Marketplaces inquiring into an employee s premium tax credit eligibility verification. Collectively, this could save hundreds of hours each year, time Merit clients can devote to revenue producing opportunities. Additional Employer Reporting Requirements Employers that issue more than 250 Forms W-2 annually must comply with the requirement to report the cost of certain group health coverage on employees Forms W-2 issued after Jan. 1st, 2013 for 2012 W-2s. Merit Resources reports all necessary reporting data on employees Form W-2. Additionally, Merit will continue to monitor developing regulations related to employer reporting requirements. The additional information adds approximately 15% to the time a traditional employer may have taken in prior years preparing their employees Form W-2s. Small Business Tax Credit (See Image 1-A) Small business owners under 25 Full-Time-Equivalent (FTE) employees should be considering if they qualify for tax credits under the Act. The ACA requires all businesses to track hours and, as applicable, wages for all employees for calculating and reporting to the IRS data necessary to determine coverage and affordability of employee health insurance. Additionally, similar data must be collected for determining eligibility for and calculate the Small Business Tax Credit. Businesses with 10 FTEs or less, earning an average of $25,000 or less who are paying at least 50% of the employee-only premium are eligible for the full SBTC. The full credit is 35% of the employer s contribution toward an employee s insurance premium (25% for tax-exempt organizations) through The amount of the tax credit goes down, per a system of somewhat complicated algebraic 12 ACA Compliance: Merit s Value Proposition

13 Image 1-A Small Business Tax Credit Start Before you start, you need to know: FTE Average Wages Employer Premium Contribution If you re tax-exempt or not Other credits you get from the state. Average State Premiums Do you have less than 25 full-time equivalents? No Yes Is your average employee wage less than $50,000? Yes Do you provide 50% or more of your employee only premium? Yes If your total premium greater than or less than the average for the state? Yes Less than 10 full-time employees and less than $25,000 average wage? Yes Tax Credit = Lesser of 35% of Actual Employer Premium Contributions or proration of contributions against small group average for state. No No No Does not qualify Premium contribution - (((FTEs - 10)/15) x (Premium Contribution x 35% )) Box A Then Box A - (((Average Wage - $25,000)/$25,000) x (Premium Contribution x 35%)) = TAX CREDIT Example of Full-Time Employee Equivalent (Currently): 2 full-time, salaried (2080 hours each) 3 full-time, non-exempt (2080 hours each) 24 part-time, non-except (416 regular hours) so... (2x2080)+(3x2080)+(24x416) = 20,384 hours 20,384 hours/2080 = 9 full-time employees *Calculation excludes seasonal employees (working less than 120 days per calendar year) *Small Business Tax Credit only looks at FICA covered wages. Excludes wages of: Sole proprietors Partners in a partnership A shareholder owning more than 2% of an S Corporation Any owner of more than 5% of other types of business (i.e., LLC, C corporation, etc.) Family Members (defined as): Children (descendents of children) Siblings Step-Siblings Parents (or ancestor of parent) Step-Parents Nieces Nephews Aunts Uncles In-Laws

14 calculations as the business size and average wage amount goes up. Further, if the business has more than 25 FTEs or the average earnings are in excess of $50,000, the business won t be eligible for credit. Starting in 2014, the state-based Small Business Health Options Program (SHOP), or Public Marketplaces, will be open to small groups. Those businesses obtaining insurance through these marketplaces will be eligible for an SBTC of up to 50% (35% for tax-exempt organizations) of the employer contributions. However, the SBTC can only be applied for in any 2 years following Other Tax Issues Under the ACA Beginning in tax year 2013, the employee portion of the Medicare hospital insurance payroll tax will increase by 0.9% on wages in excess of $250,000 for joint returns, $125,000 for married filing separately, and $200,000 for all others. Although the law does not affect the employer portion of the Medicare Hospital Insurance tax, employers will be required to withhold an additional 0.9% Medicare tax but only as to amounts over $200,000. Merit Resources will, per regulation, automatically withhold the additional 0.9% on all wages in excess of $200,000 through the payroll process. Due to the complexity of withholding a tax from an employee s earnings traditionally matched by the employer, there s an approximate 25% increase in time to review the accuracy of employees pay affected by this additional withholding tax. Medical Loss Ratio (MLR) Rebates The DOL has very specific requirements regarding an employer s fiduciary duty in handling any checks or invoice credits received subsequent to a carrier s MLR calculations. It is critical for employers to handle any such rebates in a careful and deliberate manner, as they are considered to be plan assets under ERISA. An employer is entitled to its own prorated share of the rebate, while employees may receive the balance, based upon their individual total contributions. However, there are many issues to contemplate, such as: What are the advantages and disadvantages of the rebates being paid directly to the employees versus used to credit future premiums? How will rebates be posted within an employer s general ledger? For the employees, whether or how tax the rebate and how would might it be different, on an employee by employee basis, if the employee was utilizing a Section 125 benefit? What, if anything, must be done for employees who have separated, including those who are deceased? What of those former employees participating on COBRA? How do they impact the payroll process? According to healthcare.gov, insurers paid out a little more than $1.1 billion in MLR rebates to 12.8 million plans and individuals in 2012, which averages to $85.94 per member. Merit Resources, as the plan sponsor, is the sole fiduciary and will assume responsibility for and execute on responding to any rebates received from Merit s chosen carrier(s). Merit saves their clients thousands of dollars in consulting and labor expenses by eliminating this responsibility. 14 ACA Compliance: Merit s Value Proposition

15 Conclusion Typically, small business owners neither have an employment law attorney on staff nor do they generally keep one on retainer, but they may need one to assist in understanding the waterfall of new regulations over the past 3 years, never mind the huge volume of projected new ones over the next several years. The ACA is arguably the largest, furthest reaching, most complex law affecting employment. So large and complex, in fact, it was planned to phase in over an 8-year period, the bulk of it in the first 4. Much of the law s early regulations impacted group benefit plan designs, such as no-cost preventative care, insuring children through age 26, and limitations on annual/ lifetime maximum benefit. However, beginning in 2014, the Employer and Individual Mandates will dramatically change the health insurance landscape, as will the subsequent Public Marketplaces, one of the Act s cornerstone provisions. The exchanges, scheduled to begin open enrollment in October 2013, are critical to any potential of the Act succeeding in its primary goal; 100% national health insurance coverage. The elimination of pre-existing conditions exclusions, combined with both the Employer and Individual Mandates, will cause immediate increases in almost everyone s cost of coverage absence the Public Exchange. In fact, even with the Exchanges, professionals in the insurance industry are warning of material increases in the cost of insurance. In fact, in a recent survey of insurance companies offering coverage in 5 metropolitan areas showed the Act will cause small healthy groups premiums to go up at average of 149%. If the increase in cost doesn t have a material effect on the bottom line, the host of new regulatory requirements and penalties for non-compliance could put many business owners out of business. From the annual determination of whether a business is small or large to measuring each employee s full-time status on a month to month basis, introduces an enormous new burden, particularly on the small business community. Further, the plethora of new notice requirements, from Summary Benefits Coverage employee notifications, annual reporting of benefits on Form W-2s, to new IRS reporting requirements meant to demonstrate whether plans provide adequate coverage and whether they are affordable, and so many more, will come at an enormous opportunity cost. Worse, if these voluminous regulations were not complicated enough to understand, failures to comply could cost a business up to $1,000 per day per employee affected by such non-compliance. The most important thing business owners should be doing early in 2013 is ensuring they are completely confident their internal staff and/or external consultants are capable of developing and executing a strategy in response to health care reform. These advisors need to fully examining each facet of the Affordable Care Act s effect on the enterprise, in either choosing to offer health insurance to employees in 2014 and beyond or not. There will be a myriad of questions to answer in the decision making process, all of which must be scrutinized against the current and the reasonably anticipated future regulatory environment. 15 ACA Compliance: Merit s Value Proposition

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