The Affordable Care Act: What Public Employers Need to be Doing Now

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2 ACA Update Discussion Topics Learn what recent ACA updates you need to address now. Discover how the shared responsibility penalty, its delays and phase-ins could affect how you provide employee benefits. Take action to find out what impacts the 40% excise tax could have on your jurisdiction in Find out what health benefit designs and funding issues your jurisdiction will face now that federal exchange subsidies and Medicaid expansion must be considered. Determine what changes you may be required to make to benefit plans in order to maintain balance among participating groups as baby boomers retire. Gain insight into the pressures of competing for qualified public sector employees when health benefits are no longer the motivator they once were. 2

4 ACA Mandates a FLOOR for Health Insurance Extends access to health insurance coverage to all citizens by imposing mandates: Individual Mandate: have health coverage with minimum essential benefits or pay a tax penalty Employer Shared Responsibility: provide a minimum level of affordable health care for full-time employees or pay tax penalties Insurers: Fully insured policies must have no pre-existing conditions; limits on carrier profit margins Expands Medicaid eligibility To individuals under 65 with income under 133% of Federal Poverty Level (FPL) Increases Medicaid funding to states that expand coverage Expands certain Medicare benefits Creates new virtual marketplaces (exchanges) to buy coverage Provides subsidies for low-income individuals to buy Exchange coverage 4

5 ACA Mandates and Requirements Since 2010 Dependent coverage to age 26 No annual or lifetime dollar limits No preexisting condition exclusions No waiting period over 90 days Coverage of preventive care benefits Increased wellness program incentive allowances Medical Loss Ratios for insured and Medicare plans (85%) Uniform information disclosure Summary of Benefits and Coverage Comparative Effectiveness Research Fees W-2 Reporting of health benefit costs Employer Exchange-Related Notices 5

6 Individual Mandate The Individual Must be covered under minimum essential health coverage (including employer-sponsored or Medicare coverage) OR pay a penalty Penalty is the greater of: 2014: $95 per adult or 1% of income 2015: $325 per adult or 2% of income 2016: $695 per adult or 2.5% of income (indexed after 2016) No penalty if: Cost of coverage exceeds 8% of household income Coverage lapses of 3 months or less Income is below income tax filing threshold Native American Individual penalty accounted for as an additional amount of federal tax owed 6

7 Employer Shared Responsibility Penalty Applies to large employers - 50 or more full-time employee equivalents Full time = 30 or more hours of service per week (130 hours per month) Penalty triggered when a full-time employee receives a federal subsidy in a state Exchange Cannot retaliate against employees for subsidies Employees must have access to at least one plan of health benefit coverage for themselves and dependent children that is both Minimum actuarial value Provides at least a value of 60% of the cost of services Affordable Plan of minimum essential actuarial value must be at an affordable price for self only coverage (9.5% of gross taxable wages) 7

8 The 4980H(a) and (b) Penalties The Details (a) If a large employer does not offer minimum essential coverage to at least 95%* of its full-time employees (and dependent children under age 26) and if one full-time employee receives subsidized coverage on the Exchange: Penalty is $2,000 (annualized) times the total # of full-time employees (minus first 30 workers) (b) If a large employer does offer coverage to 95% of its full-time employees (and their dependent children under 26), but the coverage is either: Not affordable (premium for self-only coverage is 9.5% or more of household income), or Not of minimum value (actuarial value is less than 60%) and one full-time employee receives federally subsidized coverage in the Exchange Penalty is $3,000 (annualized) times the # of full-time employees getting a tax credit in an Exchange (subject to a penalty maximum) *Under a 2/10/14 transition rule, large employers (100 or more employees) must offer coverage to least 70% of employees for 2015, then 95% of employees for 2016 and after. 8

10 Major ACA Issues for 2014 Counting Full-Time Employees and Assessing Which Plans to Offer Non- Eligibles to Avoid the Employer Shared Responsibility Penalty Copyright 2014 by The Segal Group, Inc. All rights reserved. 10

11 Safe Harbors for Counting Full-Time Employees Voluntary safe harbors for employers to determine whether employees work full time for penalty purposes. Four categories: Variable Hour Employees Seasonal Employees Ongoing Employees New Employees Do not need to use safe harbors if it is reasonably clear which employees have 30 or more hours of service per week (130 hours per month) How it works: Count hours of service during measurement period Lock in status as full-time employee (or not) for associated stability period Employer can set length of measurement period, but must use a common period for all similar employees 11

12 Hours of Service Hours of service include: Hours paid based on performance of duties, as well as Paid time for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence Special rules apply for unpaid time under FMLA and USERRA Do not include hours worked outside the U.S. For employees not paid on an hourly basis, employers may use one of three methods to calculate hours of service: 1. Counting actual hours of service; 2. Using a days-worked equivalency, which credits the employee with 8 hours of service for each day; or 3. Using a weeks-worked equivalency of 40 hours of service per week (Also, new special equivalency rules for Adjunct Professors) 12

13 Testing Employees for Full-Time Status Example 1: Employee works variable hours per week for 1,200 hours in measurement period Average hours worked per month = 100 Works less than 130 hours per month standard so not considered as full time Example 2: Employee works different seasonal jobs in two different agencies, each for 40 hours per week for 20 weeks Average for each job is 67 hours per month, not full-time But when both jobs are considered together, employee works 133 hours per month average and must be considered full-time 13

14 Testing for Affordability If full-time employees have access to a health plan providing minimum essential coverage with a minimum value of at least 60%: Employee-Only Monthly Premium Pay Threshold at Which Employee Getting an Exchange Subsidy Would Trigger a $3,000 Penalty (Premium x 12 / 9.5%) $500 $63,158 $300 $37,895 $158 $20,000 $111 $9/hr. for 130 hrs/mo ($14,040) $90 $7.25/hr. for 130 hrs/mo ($11,310) Balance plan cost vs. subsidy required vs. penalty potential 14

15 Rethinking Plan Eligibility Redefining eligibility Seasonal and part-time employees with multiple part-time positions Adjunct faculty working full-time but not previously benefit eligible New Federal ACA penalty rules create a change of perspective in managing health benefit plan eligibility Previous eligibility definitions may no longer work under the ACA full-time employee rules Manage to the rule of no part-timer over 29 hours? Allow coverage in existing plans but how to fund the employer subsidy? Create separate minimum benefit plans for these employees but what about equity among full-time employees? 15

17 ACA Reporting Obligations (Final Rule ) Plan Reporting Obligations IRC Section 6055 requires health plans that provide health coverage that meets the minimum essential coverage criteria to report information to the IRS IRS Form 1095-B due on or before February 28 (March 31 if filed electronically) of the year following the calendar year for which minimum essential coverage was provided No exception for non-calendar year plans Plan sponsors must also furnish a statement to plan participants or retirees that includes the reportable information Due by January 31 of the year succeeding the calendar year to which the return relates Large Employer Reporting Obligations IRC Section 6056 requires large employers (more than 50 full-time employee equivalents) to report information to the IRS Employers report on IRS Form 1094-C (transmittal) and Form 1095-C (employee statement) on or before February 28 (March 31 if filed electronically) of the year following the calendar year to which the return relates No exception for non-calendar year plans Employers must also provide certain information to each full-time employee identified on the report Due by January 31 of the year succeeding the calendar year to which the return relates Plan and Employer filings begin in 2016 for the 2015 calendar year 17

18 Plan Reportable Data Plan sponsor information: Name, address, and employer identification number (EIN) Participant (covered employee or retiree) information: Name, address, and TIN (or date of birth if a TIN is not available) Information on each individual covered under the policy or program: Name and TIN (or date of birth if a TIN is not available) The months for which, for at least one day, the individual was enrolled in coverage and entitled to receive benefits Any other information specified in forms, instructions, or published guidance For group health plans, additional information is required: Name, address, and EIN of the employer sponsoring the plan Whether the coverage is a qualified health plan enrolled through the Small Business Health Options Program (SHOP) and the SHOP s unique identifier 18

19 Employer Reportable Data General information: Name, address, and employer identification number of the employer Name and telephone number of employer s contact person Calendar year for which the information is reported Certification as to whether the employer offered to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage, by calendar month Number of full-time employees for each month* Employee-specific information: For each full-time employee during the calendar year: Name, address, and TIN The months during the calendar year for which coverage under the plan was available The months the employee was covered under the plan* Each full-time employee s share of the lowest cost monthly premium (self-only) for coverage providing minimum value offered to that full-time employee under an eligible employersponsored plan, by calendar month * Items marked with an asterisk are adjusted under a simplified method of reporting 19

20 Some Data Doesn t Have To Be Reported Plan Supplements from same sponsor (e.g., Health Reimbursement Arrangements) Health Savings Accounts Portion of premium paid by an employer Specific dates of coverage (months are reported instead) Non-minimum essential coverage On-site medical clinics (excepted benefits) Medicare Part B Medicare supplement coverage Employer Length of any waiting period (but there will be a monthly code) Employer s share of total allowed benefit costs under the plan (but will have a minimum value indicator code) Monthly premium for lowest cost option in each enrollment category (self-only, family, etc.). Only cost for lowest-cost self-only coverage is relevant Months during which the employee s dependents were covered under the plan (this is reported by the plan, not the employer) 20

21 Alternative Methods for Employer Reporting under Section 6056 Reporting based on certification of qualifying offers Employer certifies that for all months of the year in which an employee was a full-time employee where the shared responsibility penalty could apply, the employer: Offered minimum essential coverage providing minimum value at an employee cost for employee-only coverage not exceeding 9.5% of the FPL to one or more of its full-time employees, and Offered minimum essential coverage to the employee s spouse and dependents Employer reports on Form 1095-C the employee s name, SSN, address and an indicator code that a qualifying offer was made for all 12 months of the calendar year. Employer furnishes a statement to the employee that the employee and his or her dependents received a qualifying offer for all 12 months and therefore are generally ineligible for a premium assistance tax credit for the entire 12 months. Reporting without specific identification of full-time employees Employer certifies that it offered affordable, minimum value, minimum essential coverage to at least 98% of its full-time employees and their dependents. Combination of alternative methods for different employees 21

23 ACA Imposes a CEILING on Tax Free Benefits 40% Excise Tax on High Cost Health Plans (2018) Threshold $10,200/$27,500 indexed to the CPI-U Based on total cost of coverage Employer + Employee cost No regional adjustment for cost of medical care or trend increases Increased thresholds ($11,850/$30,950) for high-risk professions and retirees Includes public safety, first responders, etc. Appears to exclude most dental and vision; Includes health FSAs and HRAs Tax payable by plan administrator No guidance yet! 23

24 Ten-Year Summary of Selected Medical, Prescription Drug Carve-Out and Dental Trends: Actual and 2013 and 2014 Projected 1 12% 10% 8% 6% 4% 2% 11.1% 10.5% 10.4% 10.6% 8.4% 5.0% 3.34% 10.0% 10.2% 9.6% 9.5% 7.2% 5.1% 2.52% 10.2% 9.8% 9.7% 9.5% 9.4% 9.7% 8.9% 9.5% 9.7% 7.7% 7.9% 7.9% 7.4% 7.0% 5.5% 4.7% 5.0% 4.11% 4.0% 2.82% 8.7% 8.0% 8.3% 7.6% 7.8% 7.5% 6.4% 5.0% 3.6% 4.5% 3.0% 3.1% 1.43% 3.02% 8.4% 7.3% 6.7% 5.5% 3.0% 2.6% 1.76% 9.3% 8.8% 8.2% 6.4% 5.8% 3.5% 1.49% 8.4% 7.9% 7.2% 6.3% 3.4% 3.3% 0.00% 0% PPO (without Rx) POS (without Rx) HMO (without Rx) MA HMO Rx DPO CPI-U Source: 2014 Segal Health Plan Cost Trend Survey 1 All trends are illustrated for actives and retirees under age 65, except for MA HMOs. 2 Prescription drug trend data for only reflects retail. For , prescription drug retail and mail order delivery channels are combined. 24

25 Even just a few points reduction in long term medical plan trend can help plans avoid the excise tax for years beyond 2018 But, at some point the lines will cross 25

27 Rethink Total Compensation Philosophy What is the employer s responsibility to provide and/or subsidize health insurance benefits beyond compliance with the law? What role will health benefits play in attracting and retaining talent? With limited budgets, what is the tipping point between benefits subsidy and infrastructure repair? Redefinition of full-time benefits eligible will drive significant changes to workforce composition Potential reduction or removal of pre-tax status for health benefit premiums What is the tipping point between group health plan cost and state exchange policy cost? 27

28 Compare Employer Coverage to the Exchange Family of four purchasing coverage in an Individual Exchange in 2014: Modified Adjusted Gross Income $58,875 Federal Poverty Level 250% (based on 2013 FPL) Family Share of Premium 8.05% Annual Cost of Second Lowest Silver Plan $12,000 Annual Premium Max $4,739 ($58,875 x.0805) <$395 per month> for Silver (70% value) plan Premium Assistance Tax Credit $7,261 Note likely lower value coverage than employer plan! Same family in employer plan: Total plan cost for family coverage - $12,000 Plan actuarial value = 90% Employer subsidy = 70% Employee family premium = $3,600 <$300 per month> 28

29 Major Strategies for Retiree Health Benefits Maximize Federal subsidies for retirees Maximize Medicaid benefits where possible Minimize GASB liability Carve out retirees into their own plans Not subject to most ACA mandates Different plan options for pre-65 and Medicare eligible retirees Consider a defined contribution subsidy approach Retiree may buy up or down in benefits 29

30 What Options For Retiree Coverage? Retirees are still subject to the individual mandate but not to the employer shared responsibility penalty Retirees not yet eligible for Medicare may: Purchase coverage on the state exchanges even if eligible for employer plan coverage Qualify for Medicaid and/or federal exchange subsidies due to limited (retirement benefit) income Find comparable cost coverage on the exchange Carve out Medicare retirees Maximize use of Medicare Advantage (Part C) and Medicare Rx (Part D) Outsource to a private exchange Provide Health Reimbursement Arrangement (HRA) or premium assistance to buy their own coverage 30

31 Is the Exchange Less Expensive? Case: Early retiree not yet eligible for Medicare Pension benefit = $29,175 per year; no other income Individual is at 250% of FPL Individual s maximum payment on exchange is 8.05% of income ($2, per year, $ per month) Assume Exchange premium for next to lowest Silver level plan is $800 per month Federal monthly subsidy (Medicaid + Exchange subsidy) is $ Concern: If premium charged by employer plan is more than $195.72, the exchange may appear more attractive Must remember to compare benefits! 31

32 Move Beyond Grandfathered Status Purpose is to preserve existing coverage; Advantage is plan does not have to comply with certain coverage mandates Limits on changes Cannot have: Elimination of all or substantially all benefits to diagnose or treat a particular condition Any increase in percentage cost-sharing requirement (i.e., coinsurance) Increase in deductible or out-of-pocket maximum by an amount that exceeds medical inflation + 15 percentage points Increase in copays by an amount that exceeds medical inflation +15 percentage points (or, if greater, $5 + medical inflation) Decrease in employer s contribution rate by more than 5 percentage points (and related increase in employee s contribution rate) Imposition of annual limits on the dollar value of benefits below certain amounts Only about 20% of plans grandfathered in March 2010 remain grandfathered today Medical cost inflation keeps increasing employer s share of cost. At some point the additional design and pricing flexibility outweighs the additional preventive benefits and other requirements 32

33 What Plan Sponsors Should Do Now Understand Your Organization What role do benefits play in attracting and retaining talent? How do employees value their health benefits as part of the overall compensation package? Understand and Manage The Cost Encourage and reward healthy behaviors that reduce future benefit costs Renegotiate vendor contracts to capture savings Explore alternative program designs to encourage appropriate utilization For Medicare retirees: MAPDs, EGWPs and Part D plans Understand Your Options Maintain your sponsored group plan or provide benefits through an exchange? Update your benefit strategy to recognize the developing state health insurance exchange environment 33

35 The Playing Field Has Changed! Why it s different now and for the future 1. Health Care Reform places new and increasingly more stringent requirements onto public sector health plans 2. The Federal Government is now a player in every state and local jurisdiction health plan. 3. Medicaid will now impact more employees, retirees, dependents 4. State and local government s traditional role in providing hire to grave health benefits for active and retired employees is changing 5. Public employers will have to make possibly significant changes to their health plan eligibility and/or workforce composition 6. Public plans have a developing new competitor (state health insurance exchanges) that may eventually be more cost effective for some groups 35

36 And Don t Forget the Environmental Factors The population is aging (Older = Sicker = Costlier) The cost of health care keeps rising faster than inflation Private employers will likely continue to cut or curtail employer sponsored and subsidized health benefits, making public employers even more attractive Public employees are likely to work longer just to keep subsidized health benefits (impact on budgets and retirement plan costs?) 36

37 Affordable Care Act Resources Patient Protection and Affordable Care Act of 2010 (Pub. L ) as amended by the Health Care and Education Reconciliation Act of 2010 (Pub. L ) The Center for Consumer Information & Insurance Oversight Affordable Care Act Tax Provisions Department of Labor Affordable Care Act 37

38 Health Reform Resources On the Segal Website: Rick Johnson Senior Vice President Health Care Reform Timeline Health Care Reform Insights Stat! Bulletins Public Sector Letters Webinar recordings and slides Health Reform Resources: 38