THE NUTS AND BOLTS OF OBAMACARE: WHAT EVERY PRIVATE EMPLOYER NEEDS TO KNOW

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1 February 25 th, 2014 THE NUTS AND BOLTS OF OBAMACARE: WHAT EVERY PRIVATE EMPLOYER NEEDS TO KNOW Presented by: Kathy D. Aslinger, Ben D. Cunningham and Ashley N. Trotto Kennerly, Montgomery & Finley, P.C. Copyright 2014 Kennerly, Montgomery & Finley, P.C.

2 WHAT IS THE INDIVIDUAL MANDATE? The Backbone of the Affordable Care Act ( ACA ) The ACA requires most Americans to maintain qualifying health insurance coverage for themselves and their dependents or pay a penalty for noncompliance Dependents in this context is defined by IRC 152 to mean qualifying children and relatives Beware: divorce decree v. claiming child as dependent 2

3 WHO IS EXEMPT FROM THE INDIVIDUAL MANDATE? Individuals with religious objections Undocumented Immigrants Those without coverage for less than 3 continuous months in a year (aka short coverage gap exemption) Those who are incarcerated Those whose household income is below the minimum threshold for filing a tax return ($10,150 for an individual in 2014) Federally recognized Indian tribes Members of recognized healthcare sharing ministries Those who qualify for a hardship exemption through the Exchange 3

4 INDIVIDUAL MANDATE PENALTY Effective January 1, 2014 Tax penalty for not having coverage is the HIGHER of a flat dollar amount or a percentage of household income Penalty is first paid in 2015 when 2014 Federal Income Taxes are filed Joint liability of spouses 4

5 INDIVIDUAL MANDATE PENALTY 2014: $95 per person (family maximum of $285) OR 1% of household income 2015: $325 per person (family maximum of $975) OR 2% of household income 2016: $695 per person (family maximum of $2,085) OR 2.5% of household income After 2016: Same as 2016, adjusted annually for cost of living Note: flat dollar penalty for children is ½ that of an adult 5

6 INDIVIDUAL MANDATE PENALTY For purposes of the Individual Mandate, household income means the taxpayer s annual income minus the applicable filing threshold for that year Example: individual makes $50,000 per year $50,000 - $10,150 = $39,850 X 1% = $ penalty (% of income penalty) There is an overall penalty cap equal to the National average premium for a bronze level plan on the Exchange for a taxpayer s family size 6

7 WHAT IF YOU DON T PAY? No criminal prosecution or penalty for failure to pay No IRS liens or levies to collect payments related to the Individual Mandate IRS may offset penalty against any tax refund otherwise due IRS has stated that they will work with those who cannot afford the penalties 7

8 HAS THE INDIVIDUAL MANDATE BEEN DELAYED? The Individual Mandate is still effective January 1, 2014 Open enrollment through the Exchange is from October 1, 2013 to March 31, 2014, but under the original rule, an individual would need to be enrolled by February 15, 2014 to avoid a penalty HHS recently released guidance that allows individuals to enroll up until March 31, 2014 without incurring a penalty Those who enroll between February 16, 2014 and March 31, 2014 will be granted an automatic hardship exemption through the Exchange 8

9 CAN INDIVIDUALS KEEP NON-CONFORMING INSURANCE? The Obama administration recently announced that health insurers have the option to extend existing, non-conforming health plans through 2014 This would allow individuals to renew their current non-conforming insurance for another year This fix only allows renewal of 2013 policies through 2014 and NOT the sale of new non-conforming policies If an insurer chooses to extend its policies they must: (1) notify consumers of what protections these renewed plans do not include (what makes them non-conforming); and (2) notify consumers that there are more options available through the Exchange that offer better coverage and that tax credits may be available for many consumers 9

10 WHAT IS THE STATUS OF THE EMPLOYER MANDATE? The Employer Mandate originally had an effective date of January 1, 2014 Due to the complexity of reporting requirements, the Obama administration delayed enforcement of the Employer Mandate for one year Further transitional relief was published February 10 th which only applies in

11 WHAT IS THE EMPLOYER MANDATE? Requires large employers to offer at least 95% of its full-time employees and their dependents employersponsored health insurance which is affordable and provides minimum value Affordable = no more than 9.5% of the employee s household income Minimum value = insurance covers at least 60% of healthcare costs Dependents in this case means children under 26 years old excluding step-children and foster children Potential sizable penalties for non-compliance 11

12 WHO IS AFFECTED BY THE EMPLOYER MANDATE? The Employer Mandate only applies to large employers which are defined as employers with 50 or more full-time employees Both full-time and full-time equivalent employees are included in the count for large employer status Full-time employees = 30 or more working hours per week Full-time equivalent employees are calculated by taking the total number of hours of service (per month) by all parttime employees and dividing that number by 120 Hours of service includes hours paid or entitled to payment even if no work is performed 12

13 LARGE EMPLOYER EXAMPLE XYZ, Inc. has 35 full-time employees. XYZ, Inc. also has 20 part-time employees who work a total of 96 hours per month. To calculate the part-time employees equivalency to full-time employees: 20 part-time employees X 96 hours = = 16 Full-time equivalent employees 35 full-time employees + 16 full-time equivalent employees= 51 full-time employees XYZ, Inc. is a large employer 13

14 WHEN WILL A LARGE EMPLOYER BE PENALIZED? A large employer is potentially liable if at least one full-time employee obtains coverage through the Exchange and receives a premium tax credit Individuals with household incomes between 100% and 400% of the federal poverty line are eligible for a premium tax credit A large employer is NOT subject to a penalty if a part-time employee receives a premium credit even though part-time employees are included in the large employer calculation 14

15 HOW MUCH IS THE PENALTY IF NO INSURANCE IS OFFERED? Also known as the 4980H(a) penalty If a large employer does not offer insurance coverage and a full-time employee receives a premium credit from the Exchange: Annual penalty = number of full-time employees minus 30 times $2,000 Example: 60 full-time employees 30 X $2,000= $60,000 It is irrelevant whether 1 full-time employee or all 60 received a premium credit, the penalty remains $60,000 15

16 HOW MUCH IS THE PENALTY IF INSURANCE IS OFFERED? Also known as the 4980H(b) penalty If a large employer offers coverage but a full-time employee receives a premium credit from the Exchange because the employer s coverage (1) is unaffordable or (2) does not provide minimum value OR if the employer offers coverage to at least 95% of full-time employees and one of the 5% not offered coverage receives a premium credit: Annual penalty is the LESSER of: (a) The number of full-time employees minus 30 times $2,000; or (b) The number of full-time employees who actually receive a premium credit times $3,000 16

17 Safe harbor approaches: AFFORDABILITY W-2: employee s annual contribution cannot exceed 9.5% of W-2 wages for the year Rate of Pay: Hourly employee s monthly contribution cannot exceed 9.5% of an amount equal to 130 x employee s hourly rate of pay Salaried employee s monthly contribution cannot exceed 9.5% of the employee s monthly salary Federal Poverty Line: Employee s annual contribution cannot exceed 9.5% of the federal poverty line for a single individual for the year 17

18 EXAMPLE OF PENALTY CALCULATION IF INSURANCE IS OFFERED 60 full-time employees with 10 receiving premium credits (a) X $2,000 = $60,000 (b) 10 X $3,000 = $30,000 Employer will be liable for the lesser $30,000 penalty If only 1 full-time employee received a premium credit, the penalty would be a total of $3,000 rather than $30,000 Lower penalty incentive to offer coverage 18

19 TRANSITIONAL RELIEF FOR 2015 For employers with an average of employees on business days in 2014: no penalties will accrue in 2015 as long as you meet the following conditions: Between February 9, 2014 and December 31, 2014 the employer doesn t reduce the size of its workforce or overall hours of service of its employees in order to satisfy the workforce size condition Employer must not eliminate or materially reduce the health coverage offered as of February 9, 2014 Employer must certify on a prescribed form that it meets all eligibility requirements 19

20 TRANSITIONAL RELIEF FOR 2015 For employers with 100 or more employees: Must only offer conforming insurance to 70% of full-time employees rather than 95% Beware this only prevents penalties under 4980H(a)! For all large employers (50+): As long as an employer is taking steps to offer dependent coverage in 2014, there will be no penalties assessed solely for its failure to offer coverage to dependents in

21 2015 TRANSITIONAL PENALTY IF NO INSURANCE IS OFFERED Employers with 100 or more employees: Annual penalty = Number of full-time employees minus 80 times $2,000 Employers with employees: As long as these employers meet all criteria for transitional relief they will not be assessed a penalty for

22 2015 TRANSITIONAL PENALTY IF INSURANCE IS OFFERED Employer with 100 or more employees: If an employer chooses to take advantage of the transitional relief for 2015 (70% rule), it may be penalized if one of the 30% of employees not offered coverage receives a premium credit through the exchange OR if the employer s coverage is unaffordable OR if the employer s coverage doesn t provide minimum value Annual penalty is the LESSER of: (a) the number of full-time employees minus 80 times $2,000 OR (b) the number of full-time employees who actually receive a premium credit times $3,000 Employer with employees: As long as these employers meet all criteria for transitional relief there will be no assessable penalty in

23 CONTROL GROUPS All persons treated as a single employer under Code 414 are treated as one employer under the ACA Parent-Subsidiary control groups, Brother-Sister control groups, and Affiliated service groups This means that full-time employees from each employer member must be counted for purposes of determining large employer status If an individual is an employee of more than one large employer member during a month, the liability for any penalty accrued for that employee applies to the employer member for whom the employee has the greatest number of hours of service for that month 23

24 THE 2015 TRANSITIONAL RELIEF IS NOT ALL GOOD NEWS For some employers, the delay of enforcement of the Employer Mandate may have a negative effect Employers who delay offering insurance (or who use the 70% rule for 2015) are effectively giving their employees the advantage of the Exchange in 2014/2015 and then taking it away in Only affects employees between 100% and 400% of the federal poverty line (those who would be eligible for subsidies) 24

25 CADILLAC PLANS Beginning in 2018, a 40% excise tax will be imposed on the value of health insurance benefits exceeding certain thresholds The estimated thresholds are $10,200 for individual coverage and $27,500 for family coverage The thresholds may increase for individuals in high-risk professions and for employers that have a disproportionately older population The tax applies to both fully insured and self-funded plans 25

26 EMPLOYEE MISCLASSIFICATION UNDER THE ACA Several agencies, including the IRS and DOL, penalize employers who misclassify workers Employers may now face additional penalties under the ACA Employee misclassification is widespread the IRS estimates that approximately 30% of workers were misclassified in 2012 The ACA may tempt employers to misclassify to avoid large employer status and penalties; however employment contracts stating an employee s classification are meaningless 26

27 EMPLOYEE MISCLASSIFICATION UNDER THE ACA Misclassification can happen innocently, as it is difficult to classify employees under the multi-faceted common law standard Misclassifying employees as independent contractors, seasonal workers, or leased employees can trigger penalties under the ACA if misclassification improperly identifies a large employer as a small employer Misclassifying full-time workers can also result in penalties if any of these workers receives a premium tax credit through the Exchange 27

28 WHO IS AN EMPLOYEE? Previously, where the term employee was undefined, the Supreme court has held that Congress intended to use the conventional master-servant relationship as understood by common-law agency doctrine See, e.g., Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 323 (1992). The Proposed ACA regulations specifically define an employee by reference to this common law standard The common law employee is characterized by the employer s right to control the manner and means by which work product is accomplished There are 3 main considerations: (1) behavioral control; (2) financial control; (3) the parties relationship 28

29 BEHAVIORAL CONTROL Probably the main consideration Basic question: does the hiring party have the right to control what work will be done and how the work will be done? Factors to consider: Whether the hiring party has discretion over when and how long the worker works Whether the hiring party has the right to assign additional projects to the worker Whether the worker must comply with the hiring party s instructions Whether the hiring party provides ongoing training 29

30 Factors to consider: FINANCIAL CONTROL Whether the worker has a significant investment in the activities that are non-refundable expenses (e.g. tools and supplies) Whether the worker s services are available to others The method of payment (paid by the job v. paid hourly) Worker s opportunity for profit or loss Worker s financial dependency on the employer Whether the employer provides employee benefits The tax treatment of the worker Hiring party s role in hiring and paying worker s assistants 30

31 RELATIONSHIP BETWEEN THE PARTIES Factors to consider: The duration of the employment relationship Whether the worker has the right to refuse to work Whether the hiring party has the right to terminate the worker The extent to which the services rendered are an essential part of the hiring party s business 31

32 OTHER TYPES OF WORKERS Independent contractors: Individuals who are considered self-employed Control the manner and means of services performed for a client Responsible for providing his/her own benefits and paying taxes True independent contractors are NOT included in the large employer calculation 32

33 Leased employees: OTHER TYPES OF WORKERS Workers paid by an employee leasing organization to perform services for a client of the leasing organization Temporary staffing agencies Professional employer organizations ( PEOs ) Employment agencies Workers who are the common law employees of leasing organizations are excluded from the large employer calculation of the client However; if a leased worker is really a common law employee of the client, ACA penalties may arise The client employer may want to bargain for the leasing organization to indemnify the client employer from any ACA liability in the agreement 33

34 THE BOTTOM LINE There is no formula or magic phrase that can be applied to determine whether a worker is a common law employee. Each case must be assessed individually and thoroughly. Don t believe us? The Supreme Court has stated that there is no shorthand formula or magic phrase that can be applied to find the answer,... All of the incidents of the relationship must be assessed and weighed with no one factor being decisive. NLRB v United Ins. Co. of America, 390 U.S. 254, 258 (1968). 34

35 WHAT IF YOU HAVE MISCLASSIFIED EMPLOYEES IN THE PAST AND WANT TO COME CLEAN? The IRS has a program called the Voluntary Classification Settlement Program ( VCSP ) which allows an employer to voluntarily correct previous worker misclassifications To participate in VCSP, an employer must: (1) meet the program s qualifications; (2) receive approval from the IRS; and (3) enter into a closing agreement with the IRS where it agrees to prospectively treat the workers as employees To qualify for participation in VCSP, an employer: Must have consistently treated the relevant workers as non-employees Must have filed all Forms 1099 on the subject workers consistent with the misclassification for the previous 3 years Must not currently be under an employment tax audit by the IRS Must not currently be contesting the classification of workers from a previous IRS or DOL audit 35

36 APPLICATION TO VCSP Eligible employers start the process by filing a Form 8952, Application for VCSP at least 60 days before they want to start treating workers as employees Be sure to think about VCSP application requirements before changing employee classification for purposes of the ACA The IRS retains discretion whether to accept a taxpayer s application The IRS contacts the taxpayer when the application is approved 36

37 THE BENEFITS OF VCSP Allows employers to correct misclassification errors Reduces the employer s tax liability the employer will only be liable for just over 1% of the wages that were paid to reclassified workers in the last tax year No penalties or interest are assessed on this amount Precludes the employer from being subject to an employment tax audit with respect to the worker classification of the relevant class or classes of workers for prior years May allow employers to avoid penalties associated with the ACA s Employer Mandate Keep in mind that VCSP only protects an employer from the IRS the employer may still be exposed to liability under other federal and state laws for misclassification 37

38 TYPES OF EMPLOYEES UNDER THE ACA Full-time Employee: an employee who works an average of at least 30 hours of service per week Variable Hour Employee: An employee is considered a variable hour employee if, based on the facts and circumstances at the date the employee begins providing services to the employer, it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week Most employees hired as part-time employees will fall into this category 38

39 TYPES OF EMPLOYEES UNDER THE ACA Seasonal Workers: Workers who perform labor or services on a seasonal basis including but not limited to migrant and seasonal agricultural workers and retail employees hired exclusively for holidays (IRC 4980H(c)(2)(B)(ii)) ACA Seasonal Worker exception: Employers who exceed 50 fulltime employees during a period of 120 days or less because of seasonal workers can disregard them and avoid large employer status Seasonal Employee: An employee who is hired into a position for which the customary annual employment is six months or less 39

40 IDENTIFYING FULL TIME EMPLOYEES All employers must carefully identify and count their full-time employees Due to the arduous process of keeping track, the IRS has provided safe harbor rules for identifying ongoing employees and new employees The safe harbor rules are intended to provide stability and predictability to employers 40

41 SAFE HARBOR: IDENTIFYING FULL-TIME EMPLOYEES (ONGOING) A large employer may adopt a standard measurement period of 3 to 12 consecutive months to look back at whether an employee averaged at least 30 hours per week during the measurement period The measurement period is followed by a stability period, which must be at least 6 months and no shorter than the measurement period An employer may provide an administrative period of up to 90 days that begins immediately after the measurement period and ends before the associated stability period The administrative period may overlap the stability period An ongoing employee is defined as one who has been employed for at least one complete standard measurement period 41

42 EXAMPLE OF THE SAFE HARBOR APPROACH FOR AN ONGOING EMPLOYEE A large employer has a calendar year health plan and an open enrollment period in the fall. It might adopt the following for determining its full-time employees for the 2016 Plan Year: Measurement Period of October 15, 2014 to October 14, 2015 Administrative Period of October 15, 2015 to December 31, 2015 Stability Period of January, 1, 2016 to December 31,

43 SAFE HARBOR: IDENTIFYING FULL-TIME EMPLOYEES (NEW) If a new employee, who is not a seasonal employee, is reasonably expected to work more than 30 hours per week, a large employer must offer the new employee health coverage within the first 3 months of employment For new variable hour and seasonal employees, a large employer may adopt an initial measurement period of 3 to 12 months to determine whether an employee averages 30 or more hours per week, followed by an optional administrative period and stability period 43

44 SAFE HARBOR: IDENTIFYING FULL-TIME EMPLOYEES (NEW) The combined length of the initial measurement period and the administrative period may not extend beyond the last day of the first calendar month after the first anniversary of the employee s start date In general 13 months If the new employee averages 30 or more hours per week during the initial measurement period, he/she must be offered health coverage during the entire stability period which follows 44

45 REAL LIFE APPLICATION What if an employer has a temporary employee who works more than 30 hours per week during the initial measurement period? Regardless of whether the employer classifies the employee as a seasonal, occasional, Service Contract Act, temporary, PRN, project, non- Benefits Eligible, or any other type of classification, you must offer him/her insurance coverage through the entire stability period 45

46 A LITTLE ABOUT YOUR PRESENTERS As a leader of Kennerly Montgomery s employee benefits practice, Kathy Aslinger focuses on advising fiduciaries for the benefit of participants, assisting both private and governmental clients in the design, implementation and maintenance of their employee benefit plans, including 401(k), pension, cafeteria, and health plans. She commonly assists clients in maneuvering through the complex world of audits, fiduciary liability issues, DOL and IRS compliance, HIPAA, COBRA, ERISA and state law obligations, as well as Affordable Care Act compliance. Kathy has been practicing law for over 15 years and has been with Kennerly Montgomery since January In addition, Kathy serves on the Board of Directors for Uplands Village, a continuing care retirement community in Pleasant Hill, Tennessee. Ashley Trotto joined Kennerly Montgomery as a law clerk in 2012 and as an associate attorney in the Firm s employee benefits practice in Ashley concentrates on the Affordable Care Act and has been a frequent speaker on Affordable Care Act issues. She graduated cum laude from the University of Tennessee College of Law in 2013, and she also earned a Bachelor of Science in Psychology, summa cum laude, from the University of Tennessee in She s the energy behind the Firm s on-going kindergarten book project at Christenberry Elementary. 46

47 A LITTLE ABOUT YOUR PRESENTERS Ben Cunningham focuses his practice on representing businesses and individuals in the areas of labor and employment law and business and corporate law. He earned his Doctor of Jurisprudence cum laude from the University of Tennessee College of Law in 2011 with a concentration in advocacy and dispute resolution. Prior to joining Kennerly Montgomery in January 2014, Ben served as a federal prosecutor in the Eastern District of Tennessee representing the United States in a variety of civil and criminal cases, including. Prior to joining the Department of Justice, Mr. Cunningham practiced at a regional defense litigation firm representing employers in the areas of labor and employment law. 47

48 Kathy D. Aslinger: Ashley N. Trotto: Ben D. Cunningham: KENNERLY, MONTGOMERY & FINLEY, P.C. 550 MAIN STREET, FOURTH FLOOR KNOXVILLE, TN P.O. BOX 442 KNOXVILLE, TN PH (865) FX (865) Copyright 2014 Kennerly, Montgomery & Finley, P.C.

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