Healthcare Reform Provisions Unique to Small Employers/Financial and Other Benefits Concerns for All Employers (updated May 2, 2014)

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1 /Financial and Other Benefits Concerns for All Employers (updated May 2, 2014) Lisa L. Carlson, J.D., Area Senior Vice President, Compliance Counsel Gallagher Benefit Services, Inc. While most healthcare reform provisions apply to employers uniformly, regardless of size, there are a few provisions that may benefit small employers. These include an exemption from penalty, the availability of coverage through state exchanges, health insurance tax credits, exemption from reporting health costs on W-2s, and the use of a SIMPLE Cafeteria Plan. These benefits are discussed below, and outline the employer size requirements for each. In addition, all employers should be aware that there are a number of benefit provisions, taxes and fees that are expected to increase health care costs in the near future. Are you exempt from penalty? If you employ fewer than 50 full time equivalent employees, you may be exempt from penalty if you do not provide coverage or do not provide affordable health care coverage to your employees. How do you determine if you have 50 or more? Count all of your employees who work 30 or more hours per week. Then count all of your part time employee hours and divide those hours by 30 (or by 120 on a monthly basis). For example, if you have 35 employees working 30 or more hours and 25 employees working 20 hours per week, you would take 25 multiplied by 20 and then divide that by 30 hours per week (for a result of full time equivalent employees). Rounding up, that would mean you employed 57 full time equivalent employees which would subject you to penalty if you did not offer affordable health care to all employees working 30 or more hours per week. If you have fewer than 50, if you offer health care, it must comply with all of the mandates under the healthcare reform law (i.e., coverage for dependents to age 26, first dollar coverage of preventive care, no annual or lifetime limits on essential benefits, etc.). However, there is no requirement that you offer coverage or that such coverage is considered affordable and no penalty is assessed if you fail to do so. Are there special rules for coverage on state exchanges? If you are eligible to purchase a small group health insurance product (currently limited to employers that have 2 to 50 employees in Minnesota), in 2014, you will be able to purchase health care coverage for your employees through the state exchange. Minnesota is establishing its own state exchange which will be an online based marketplace. Small employers in Minnesota will be able to purchase coverage from that marketplace to offer portable coverage to its employees.

2 Page 2 Can I get a special health insurance tax credit? The good news for some small employers is that you might be entitled to a tax credit if you provide health insurance to your employees. The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations. In 2014, this maximum credit increases to 50 and 35 percent of premiums, respectively. However, in 2014 the credit is only available if health insurance is purchased through the small group option under the state exchange. The credit is specifically targeted to help small businesses and tax-exempt organizations that primarily employ low and moderate income workers. It is generally available to employers that have fewer than 25 full-time equivalent (FTE) employees paying wages averaging less than $50,000 per employee per year. Because the eligibility formula is based in part on the number of FTEs, not the number of employees, many businesses will qualify even if they employ more than 25 individual workers. Cities or related organizations are only eligible for this credit if the small employer organization is set up as a tax exempt organization under Internal Revenue Code 501(c). Thus, this provision may benefit very few cities. Do I have to report health care costs on my employee s W-2? If you file fewer than 250 W-2 s in the year prior, you are exempt from reporting health care costs on your employee s W-2 for forms issued January 2013 and later. The IRS has indicated that this exemption will apply until they provide further guidance, and has promised to give at least 6 months for employers to modify practices if they need to begin reporting this information in the future. What is a SIMPLE cafeteria plan? An employer with 100 or fewer employees may adopt a SIMPLE Cafeteria Plan to allow employees to pay for eligible health, dental, vision and other employer sponsored plan premium on a pre-tax basis without worrying about nondiscrimination rules or testing. To qualify, the small employer must make contributions to the plan (a) that are equal to a uniform percentage (not less than 2 percent) of the employee s compensation for the plan year, or (b) equal to a 200% match of the employee contributions, up to a maximum of 6% of the employee s compensation for the plan year. For companies with a number of higher-paid employees, like a law firm or physician practice, adopting a SIMPLE Cafeteria Plan allows key employees and executives to maximize their benefits without concerns about passing nondiscrimination tests. In addition, the plan can reduce certain payroll costs for compensation that would have otherwise been taxable. What financial concerns apply to all employers? There are a number of fees and taxes that are imposed under healthcare reform. The following is a brief summary of the items that will likely increase your health care costs: 1. Patient Centered Outcomes Research Fee (Comparative Effectiveness Research Fee): Group health plans will be assessed a fee based on the average number of covered lives in the plan

3 Page 3 during that year. The tax will sunset for plan years ending after 9/30/2019. The amount will be $1 per participant for plan years ending in the fiscal year 2013, and $2 per participant thereafter, indexed annually. The tax will be paid by the insurer for insured plans and by the plan sponsor for self-funded plans. The revenue raised will be used for comparative clinical effectiveness research options; 2. Reinsurance Tax: Beginning in 2014, insurance carriers and self-funded employer plans will be responsible for paying a fee of approximately $63 per participant (including dependents) on an annual basis for a period of three years to fund a pool to address carrier losses on state exchanges; 3. Health Insurance Premium Tax: A premium tax is imposed on insurers providing health insurance for any U.S. health risk during the calendar year in which the tax is due. The amount of the tax that will be collected is $8 Billion for 2014, $11.3 Billion for 2015, $11.3 Billion for 2016, $13.9 Billion for 2017, and $14.3 Billion for For 2019 and following years, the aggregate fee is indexed to the rate of premium growth. Each year, the fee will be apportioned based on each insurer s relative market share of net premiums written for the prior year. It is anticipated that the cost of the tax will ultimately be assessed to each policyholder. Employers that self-insure their employees health risks are not subject to the fee. 4. Cadillac Plan Tax: Effective in 2018, a 40% tax on premium equivalent costs over a specific threshold is expected to be assessed on insured or self funded health plans that are deemed to be benefits rich. What other healthcare reform requirements or changes apply to all employers? 1. There is a new limit on medical care flexible spending accounts that did not exist prior to this year. As of plan years beginning on or after 1/1/2013, the new limit is $2,500 per person. 2. As of September 23, 2012, health insurance issuers and group health plans are required to provide covered employees with an easy-to-understand summary about a health plan s benefits and coverage. The new forms include: A short, plain language Summary of Benefits and Coverage, or SBC, and a uniform glossary of terms commonly used in health insurance coverage, such as "deductible" and "copayment." 3. The law prohibits health plans from placing a lifetime dollar limit on most benefits, specifically those determined to be essential health benefits. The law also restricts and phases out the annual dollar limits a health plan can place on essential health benefits for plans eligible to use these transitional rules and does away with these limits entirely in If an employer health plan covers children, employees can add or keep their children on your health insurance policy until they turn 26 years old. Children may join or remain on an employer plan even if they are: married, not living with the employee, are attending school, are not financially dependent on the employee, or are eligible to enroll in their employer s plan. There is

4 Page 4 one temporary exception: A grandfathered group health plan does not have to offer dependent coverage up to age 26 if a young adult dependent is eligible for group coverage under his or her own employer health plan but this exception is only in place until January 1, Employers must disclose certain information regarding the health insurance exchanges to their employees. A model notice issued by the Department of Labor includes information about: (a) the existence of the exchange, the services provided by the exchange and how the employee may contact or access the exchange; (b) whether the employer s offered plan covers 60% of the costs for care (if not, the employer must further inform employees that they may be eligible for a premium subsidy or a cost-sharing reduction by purchasing coverage on the exchange); and (c) that if they purchase coverage on the exchange, employees will lose any available employer contribution for employer-sponsored health coverage. Two notices are provided, one for employers that offer health coverage, and one for those that do not. Employers must issue this notice to all employees by or before October 1, 2013, and then to new employees within 14 days of hire. 6. The definition of out of pocket maximum must mirror that definition as it is used for high deductible health plans. This means that all copays, coinsurance and deductibles apply to the out of pocket maximum. Further, the maximum out of pocket maximum permitted is the high deductible health plan out of pocket maximum, which for 2013 was $6,250 for individuals and $12,500 for families. This number is indexed annually. There are other provisions and compliance issues associated with healthcare reform for all employers such as requirements for coverage of preventive care, prohibitions against pre-existing exclusions, essential benefits, break times for nursing mothers, and other employee protections. Your city should check with your health care provider to ensure that it is following all health plan benefit requirements. The League will continue to partner with Gallagher Benefits Services to provide updates as new information and resources regarding compliance requirements become available. FAQ s for Small Employers 1. Who is considered an employee? Generally, any person receiving a W-2 to report wages is considered an employee. The League suggests that cities count both paid on-call employees (usually firefighters) and council members (if W-2 employees). We suggest that you consider these individuals when counting to determine if you meet the 50 threshold. If actual hours are not available, the city can us one of two alternate methods. The city can allocate 8 hours for each day in which an employee works at least 1 hour, or the city can allocate 40 hours for each week in which an employee works at least one hour. 2. Are small cities required to provide health insurance coverage to their employees? No employer is required to provide health insurance but some may be subject to penalty if health insurance is not offered. If you determine that your city has fewer than 50 employees, there is no mandatory requirement that the employer provide health insurance to any employees, full-time or part-time and no penalty for failure to offer coverage. Even if your city has more than 50 employees, you are not required to provide health insurance coverage but will face penalties (which could be significant) if any employees receive a premium subsidy on a state exchange.

5 Page 5 3. Will there be any non-discrimination testing requirements for smaller sized cities offering health insurance? Nondiscrimination rules will apply to fully insured plans once the government issues regulations, but it is not clear when these regulations will be issued or what testing might be required. 4. Do employers with less than 50 FTEs have to provide the Exchange Notice to their employees? Yes, all employers must provide this notice initially to all employees by October 1, 2013 and then to each new hire within 14 days of date of hire. 5. We do not offer health insurance to our employees, however, we provide them cash (taxable income) each month to purchase their own. Can we still do this under health care reform? Yes, however, depending on the number of employees, you may be subject to penalties if you do not provide group health insurance coverage. See response to Question #2 above. Conclusion While healthcare reform does pose challenges to employers, the law does provide a number of benefits that are specific to the small employer market. Notwithstanding, there are benefits provisions as well as additional taxes and fees that should be considered in making decisions and budgeting for future health care costs. You should consult with your benefits advisor, broker or counsel to see if you might be able to benefit from any of these special small employer provisions and/or to address any expectation of cost increases or coverage requirements.