5 Steps to Take Now: Preparing for the Affordable Care Act Shared Responsibility Excise Tax

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1 5 Steps to Take Now: Preparing for the Affordable Care Act Shared Responsibility Excise Tax By Gregory L. Needles, Morgan, Lewis & Bockius LLP This article is a companion piece to the CUPA-HR webinar Looking Forward to 2014: ACA Considerations for Higher Ed Employers, which was originally webcast on June 6, The recorded webinar is available for viewing at any time. The Affordable Care Act (ACA) contains dozens of new and revised rules applicable to employer-provided group health plans. While a full overview of the ACA rules is beyond the scope of this article, there are five steps for educational employers to take now to begin to prepare for the impact of the ACA Shared Responsibility Excise Tax upon their group health plans. Even though the excise tax provision has been delayed, as detailed below, it is not too early for educational employers to prepare to meet its requirements. Step #1: Does the ACA Shared Responsibility Excise Tax Apply To My Institution? All employers who have 50 or more full-time employees (defined under the ACA as employees who work 30 or more hours per week) or full-time equivalent employees during 2014 are subject to the ACA Shared Responsibility Excise Tax. In determining whether the Shared Responsibility Excise Tax applies, all employees across an employer s entire controlled group count towards the determination. There are none of the usual employee benefits exceptions for government or church institutions, and most, if not all, readers of this article will be part of an educational employer that is large enough to be subject to the Shared Responsibility Excise Tax. As such, your operating assumption, until carefully proven otherwise, should be that the Shared Responsibility Excise Tax applies to your educational institution. Note: Most educational institutions will be applicable large employers because they staff 50 or more full-time employees.however, in calculating whether an employer is in fact an applicable large employer, the IRS has proposed that not only full-time employees be counted, but also full-time equivalent employees (FTEs). The IRS defines FTE as a combination of employees who are each employed on average for less than 30 hours per week, but taken together to reach the 30 hour per week threshold. This is important for smaller colleges or colleges where a majority of the employees are part-time adjunct professors. The proposed rule provides a specific calculation employers should use to determine who is an FTE. All part-time employees, including adjunct professors, need to be taken into consideration to determine whether your school is an applicable large employer.

2 Step #2: When does the ACA Shared Responsibility Excise Tax Requirement Apply to Me? The ACA Shared Responsibility Excise Tax for failure to offer group health coverage originally applied, according to the statutory language, to months beginning after December 31, 2013 which meant, practically, January 1, However, in July 2013, the IRS issued formal guidance stating that it will not enforce the ACA Shared Responsibility Excise Tax until As originally proposed, the IRS recognized that this rule would be difficult to administer for non-calendar year plans (for example, educational group health plans that run on an academic year basis). Accordingly, the proposed regulations issued in late 2012 offered special transitional relief for The transitional rules allowed employers who sponsor non-calendar year plans as of December 27, 2012, to not be subject to the ACA Shared Responsibility Excise Tax until the first plan year beginning after January 1, 2014, with respect to employees who were eligible under the plan at that time. This meant that if an employer s non-calendar year plan that was in effect on December 27, 2012, required employees to work more than 30 hours per week in order to be eligible for coverage, there would not be transition relief for the ACA Shared Responsibility Excise Tax with respect to those employees who are considered full-time under the employer shared responsibility rules (i.e., those who work at least 30 hours per week) but were not eligible under the plan. A second transitional rule allowed employers with non-calendar plan years that offered coverage to at least 33 percent of their employees (full-time and part-time) at the most recent annual enrollment or covered at least 25 percent of their employees to not be subject to the ACA Shared Responsibility Excise Tax until the first plan year beginning after January 1, These rules became outdated when the IRS adopted a blanket delay of the ACA Shared Responsibility Excise Tax until 2015 and, unfortunately, the delay guidance does not specifically address how it will affect these special rules. If the transitional relief is extended in the same manner as the original rule, the ACA Shared Responsibility Excise Tax should not apply until the start of the 2015 plan year for non-calendar year plans. Nevertheless, educational employers should keep in mind that unless these transitional rules are extended by IRS, those who sponsor non-calendar year plans will have to decide whether to implement needed changes as of the first day of either their 2014 plan year or on January 1, 2015, which may be mid-plan year. This is particularly crucial for employees determined to be full-time under the ACA rules but not currently offered group health coverage (i.e., adjunct professors who work at least 30 hours per week) who may need to be offered coverage on January 1, 2015, either way.

3 Step #3: Who Are My Full-Time Employees? Given that most educational employers are subject to the Shared Responsibility Excise Tax, the single most critical task is to determine which employees are full-time as defined under the ACA. Employers have to offer group health coverage to all full-time employees in 2015 or be subject to a no coverage penalty. For details of the no coverage and inadequate coverage Shared Responsibility Excise Tax penalties, view the webinar. First, individuals are determined to be employees on the basis of traditional commonlaw concepts and tests, which are beyond the scope of this article. Individuals who should be carefully reviewed are leased employees and independent contractors. Until further guidance is issued, educational employers will need to consider their students who work on campus as employees for purposes of this calculation. An employer s employees must be offered group health coverage in 2015 if they are paid, on average, for 30 or more hours of work each week. It is important to note that this measure is based on hours actually worked, and not hours that an individual is merely scheduled to work. Hours worked must be counted across an employer s entire controlled group, which is challenging for individuals who work at two or more related educational institutions over the span of a year. Further, for a governmental educational institution, if a state determines all state agencies, including its colleges and universities, are within the same control group, work performed by an employee for another state agency must be taken into consideration. As almost all educational employers have employees that are not paid on an hourly basis, it can be very difficult to determine which of these employees are subject to the Shared Responsibility Excise Tax in 2015 and beyond. For employees who are not paid on an hourly basis, or for whom an employer does not have records of hours worked, governing proposed regulations establish equivalencies that can be used to determine an employee s number of hours. For example, colleges and universities where adjuncts are paid by the course, not the hour, may use a reasonable method for crediting hours. The proposed rule notes that some have suggested an equivalency that credits an adjunct with three hours of service a week for each course credit taught or have attempted to determine what a full class load would be for a full-time professor, and then determine the maximum hours an adjunct might work based on a percentage of what constitutes a full-time load. Others have relied on formulas based on state retirement systems or equivalencies that credit adjuncts with two hours of service a week for each course credit taught. The IRS has not formally signed off on these methods, but it does note that it is NOT reasonable to use a method that takes into account only classroom or instructional time and fails to reflect other hours such as class preparation time. What is not addressed under the governing proposed regulations is how students who work on campus in a non-hourly, non-work-study position (such as a resident assistant) should have their hours tracked or what an appropriate equivalency would be for these

4 individuals. Until further guidance is issued, educational employers who staff students in these positions will need to develop a reasonable method for calculating their hours of service. Under the ACA, full-time employees are determined monthly on an ongoing basis, which is administratively difficult and unpredictable for variable-hour or seasonal employees whose full-time status is unknown. As such, applicable proposed regulations create a voluntary safe harbor method for new variable-hour and seasonal employees. This safe harbor method permits employers to calculate employee hours during an initial measurement period (3-12 months after employment begins) and locks in the resulting status for the following stability period (6-12 months). Employers can define periods, subject to consistency based on categories of employees. Employers can also elect to use a voluntary safe harbor method for ongoing employees, which permits employers to calculate employee hours during a consistent ongoing measurement period (3-12 months) and locks in the resulting status for the following stability period (6-12 months). This ongoing measurement period is also subject to consistency rules based on categories of employees. While these voluntary safe harbors are useful for employers, the ACA regulators realize that they could be used by educational employers to prevent employees from attaining full-time status under the ACA due to the unique work patterns of educational employers. As such, educational employers cannot treat individuals who work during active portions of academic year as seasonal employees. Also, educational employers must disregard traditional breaks when averaging service over measurement periods. The purpose of the traditional break rule is to basically ignore summer breaks when determining whether an individual attained full-time status under the ACA. It is important to note that the Treasury guidance delaying the implementation of the excise tax until 2015 did not address how the delay affects the availability of these safe harbor methods. If new transitional rules are not provided in future guidance, employers who plan to use a 12-month measurement period for identifying full-time employees for 2015 and who operate their plans on a calendar year basis should start tracking hours as soon as October 2013 to establish a measurement period in Step #4: When Do I Have To Offer Coverage to My Full-Time Employees? There are a number of milestones regarding when an educational employer has to offer group health coverage to its ACA full-time employees. First, to kick off the ACA Shared Responsibility Excise Tax requirements, an educational employer will have to offer group health care coverage as of the first day of its 2015 plan year (but see #2 above) to all of its ongoing individuals who were determined to be full-time on the basis of its 2014 data regarding hours worked. Next, if the educational employer uses the initial measurement period for its new variable hour employees, such individuals have to be offered group health coverage within a few months after the end of their initial measurement period. Assuming that an employer

5 uses the maximum-length 12-month initial measurement period, it will practically conduct an initial measurement determination each month for variable hour employees hired 12 months prior to the measurement date. Further, if the employer uses the ongoing measurement period for employees who have worked for it for at least a year, such individuals will have to be offered group health coverage within a few months after the end of the ongoing measurement period. Assuming that an employer used the maximum 12-month ongoing measurement period, it will conduct an ongoing measurement period before each annual open enrollment period in order to determine who is full-time and should be offered group health coverage as of the upcoming annual enrollment period. Last, anytime an employer hires a new full-time employee (not a variable hour employee), related waiting period rules require offering that individual group health coverage within 90 calendar days after their date of hire. As you can see by the complicated Shared Responsibility Excise Tax requirements, educational employers taking full advantage of the full-time employee safe harbors will perform 13 determinations each plan year regarding which employees are full-time and, hence, subject to the ACA Share Responsibility Excise Tax. This means that educational employers will conduct a mini-enrollment every month for individuals who are newly determined to be full-time employees and that annual open enrollment tasks will also need to take into account any newly determined full-time employees due to the related ongoing measurement determination. Step #5: Is My Coverage Good Enough and Cheap Enough? Even if an educational employer successfully navigates steps 1-4 above, it must still satisfy one remaining major step in order to avoid an ACA Shared Responsibility Excise Tax in Namely, in order to avoid a Shared Responsibility tax triggered by the inadequate coverage penalty, the employer must be able to prove that its group health coverage is good enough and cheap enough. For details of the no coverage and inadequate coverage Shared Responsibility Excise Tax penalties, view the webinar. In order for group health coverage to be good enough, it must be able to determine that the health coverage offered through the plan meets ACA s minimum standards. Generally, the group health plan must cover at least 60% of total allowed costs in four core categories of benefits: physician and midlevel practitioner care, hospital and emergency room services, pharmacy benefits, and laboratory and imaging services. In order to prove that the benefits offered, and the amount of the benefits paid, is good enough, the group health coverage can use one of three different methods of determining its value.

6 This determination can be made on the basis of satisfying design-based safe harbors, an online calculator, or by obtaining an actuarial certification. These three methods are borrowed from similar concepts applicable to Exchange coverage. While most broad employer group health plans will satisfy the good enough requirement, it will be more difficult to prove that the cost of the least expensive employee-only coverage option is cheap enough. Under the ACA statutory language, coverage is cheap enough when the premium for the least expensive employee-only coverage option is less than 9.5% of the employee s household income. Fortunately, here again the regulators realized that it is impossible for employers to determine an employee s household income and came up with three different voluntary safe harbors for employers. These three alternate safe harbors are: Form W-2 Wages: Premium cannot exceed 9.5% of the employee s W-2 wages from the employer for that year. Rate of Pay: Premium cannot exceed 9.5% of the employee s hourly rate of pay (or monthly salary) multiplied by 130 hours at the beginning of the coverage period. This is particularly useful when hours worked (and pay earned) drops during the course of a year but note that it ignores pay for hours in excess of 130. Federal Poverty Line: Premium cannot exceed 9.5% of an amount equal to the federal poverty line for the year divided by 12. This is also useful when hours worked drop or as a design-based fail-safe approach. This amount is roughly $90 for 2013 and will increase a small amount each year due to indexing rules. If the least expensive employee-only coverage is not cheap enough for the lowest-paid full-time employee, an employer will have to decrease the cost of such coverage to avoid the ACA Shared Responsibility Excise Tax. With regard to students who work on campus, one question many higher education employers have posed is whether offering student health plans is good Enough and cheap enough for employers to meet obligations under the ACA Shared Responsibility Excise Tax. While CUPA-HR has requested guidance on this issue, the IRS has yet to provide any clear answers. Even though the ACA Shared Responsibility Excise Tax is delayed until 2015, employers will still need to determine whether their plans are good enough and cheap enough in 2014 for reporting in the marketplace notice and the summary of benefits and coverage. Furthermore, employees will still be eligible for the premium tax credit through the marketplaces in 2014 if their household income is within a specified range and if they are not eligible for employer-sponsored coverage that is good enough and cheap enough. Conclusion The preceding five steps for educational employers should head them well down the path to prepare for the impact of the ACA Shared Responsibility Excise Tax on their

7 group health plans. As highlighted above, however, the regulatory environment is still developing and subject to change. As such, educational employers should continue to monitor the ACA rules applicable to their group health plans. Additional ACA-Related Morgan Lewis Material ACA Considerations for Group Health Plans ACA Considerations for Individuals Disclaimer: This communication is provided as a general informational service to friends of Morgan, Lewis & Bockius LLP. It should not be construed as, and does not constitute, legal advice on any specific matter, nor does this message create an attorney-client relationship. IRS Circular 230 Disclosure To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. For information about why we are required to include this legend, please see