New ACA Pay or Play Penalty Regulations and Update on P.A Mary V. Bauman

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1 New ACA Pay or Play Penalty Regulations and Update on P.A. 152 Mary V. Bauman

2 The materials and information have been prepared for informational purposes only. This is not legal advice, nor intended to create or constitute a lawyer-client relationship. Before acting on the basis of any information or material, readers who have specific questions or problems should consult their lawyer. 2

3 Final Regulations The IRS published final regulations regarding the pay or play penalty on February 12, 2014 The new regulations modify proposed regulations issued more than one year ago and subsequent IRS guidance 3

4 Pay or Play Penalty The penalty applies to large employers with at least 50 full-time employees and full-time employee equivalents in the previous calendar year The pay or play penalty was set to take effect as of January 1, 2014 In July 2013, the IRS announced it was pushing back the effective date to January 1,

5 Pay or Play Penalty There are two different pay or play penalties: $2,000 Penalty If a large employer doesn t offer health coverage to at least 95% of its full-time employees and their dependent children and at least one low income full-time employee receives a premium credit, the employer must pay an annual penalty of $2,000 multiplied by all of the employer s full-time employees, disregarding the first 30 full-time employees Dependent children includes natural born and adopted children until the end of the month the child attains age 26 (transition relief is available in 2015 for employers taking steps to comply) 5

6 Pay or Play Penalty $3,000 Penalty If a large employer does offer health coverage to at least 95% of its full-time employees but it is not affordable or is not of minimum value and a low income full-time employee receives a premium credit, the employer must pay an annual penalty of $3,000 for each such full-time employee. This penalty is capped at the maximum amount under the $2,000 penalty. 6

7 Pay or Play Penalty Affordable means the employee s required contribution for single coverage under the employer s least expensive medical option doesn t exceed 9.5% of the employee s pay Safe harbor methods to determine pay: Box-1 W-2 Rate of pay Federal poverty line for single individual The cost of dependent coverage is disregarded under the affordability test Minimum value means the plan pays at least 60% of the total allowed cost of benefits provided under the plan 7

8 Transition Relief Large employers Large employers are subject to the pay or play penalty in 2015 However, large employers benefit from two transition rules for the first year: The $2,000 penalty can be avoided for 2015 if the employer offers coverage to 70% (vs. 95%) of its full-time employees If the employer is subject to the $2,000 penalty it may disregard the first 80 full-time employees (vs. 30) when calculating the penalty amount for

9 Transition Relief Non-calendar year plans The final regulations provide for a delayed effective date for employers with non-calendar year plans (from January 1, 2015 to the first day of the 2015 plan year) under 3 transition rules In order to qualify under each transition rule the plan must have been in existence on a non-calendar year basis as of December 27, 2012 and must not have been amended to move the start of the plan year to a later calendar year date 9

10 Transition Relief Transition rule #1 With respect to employees eligible for or enrolled in the employer s non-calendar year plan under its terms as in effect on February 9, 2014, the penalty will generally not apply until the first day of the employer s 2015 plan year 10

11 Transition Relief Transition rule #2 - However, if the employer doesn t offer group health coverage to all employees working at least 30 hours per week, transition rule #1 may not apply to those ineligible employees who will be considered full-time. As a result, under transition rule #2, the postponed effective date is available for all employees provided that: At least ¼ of all of the employer s employees were covered as of any date from February 10, 2013 to February 9, 2014; or At least 1 / 3 of all of the employer s employees were offered coverage during the most recent open enrollment period that ended before February 9,

12 Transition Relief Transition rule #3 If an employer can t satisfy transition rule #2, transition relief is available for all full-time employees provided that: At least 1 / 3 of all of the employer s full-time employees were covered as of any date from February 10, 2013 to February 9, 2014; or At least ½ of all of the employer s full-time employees were offered coverage during the most recent open enrollment period that ended before February 9,

13 Measurement Period The final regulations provide two methods for employers to determine whether an employee is full-time a monthly measurement period and a look back measurement period with a stability period Under the monthly measurement period, an employer will be required to offer coverage to any employee with at least 130 hours for the month Under the look back measurement period / stability period, an employer may determine which employees are full-time for a future period based on their hours of service during a look back period There may be a measurement period / stability period for certain new hires and a measurement period / stability period for all ongoing employees 13

14 Measurement Period New Hires Full-time employees Employees who are employed, on average, at least 30 hours per week Hours counted across all applicable large employer members If a new hire is reasonably expected to be full-time upon start date, coverage must be offered no later than the first day of the month following the employee s first three months of employment No exceptions for employees on short term assignments 14

15 Measurement Period Newly-hired variable hours, seasonal and part-time employees Variable hours employees employer can t determine on start date whether employee is reasonably expected an average of 30 or more hours per week Factors to determine include: Whether the employee is replacing a full-time or variable hours employee; The hours of employees in the same or comparable positions; and Whether the job was advertised or communicated as full-time or variable hours 15

16 Measurement Period Seasonal employees work in a position for which the customary annual employment period is six months or less, with the employment period beginning at approximately the same time each year Part-time employees employer reasonably expects on start date that employee will be employed, on average, less than 30 hours per week Newly-hired variable hours, seasonal and part-time new hires can be subjected to an initial measurement period of 3 to 12 months during which the employee must be credited with an average of 30 or more hours per week before health coverage is required to be offered under the pay or play 16

17 Measurement Period Example: Part-time employee hired 5/14/14 Initial measurement period: 6/1/14 5/31/15 - also could start on DOH or first day of first payroll period on or after DOH Administrative period: 6/1/15 6/30/15 - can t extend beyond the last day of the calendar month beginning on or after the anniversary date Stability period: 7/1/15 6/30/16 - must be at least 6 months and as long as the measurement period 17

18 Measurement Period Ongoing employees All ongoing employees (including variable hours, seasonal, part-time and full-time) may be subject to a measurement period in order to qualify for coverage for the immediately following stability period 18

19 Measurement Period Example Large employer group health plan operates on a calendar year plan year basis Standard measurement period 11/1/13 10/31/14 - also could start on the first day of a payroll period Administrative period: 11/1/14 12/31/14 - can t exceed 90 days Stability period: 1/1/15 12/31/15 - must be at least 6 months and as long as the measurement period - first stability period for employers with 100+ full-time employees should start on the first day of the 2015 plan year 19

20 Measurement Period Transition rule For stability periods beginning in 2015, the look back measurement period can be less than 12 months as long as: It begins by July 1, 2014; Is at least 6 months long; and Ends no earlier than 90 days before the start of the 2015 stability period 20

21 Measurement Period Example: Rather than first measurement period for ongoing employees in above example running from 11/1/13 to 10/31/14 it could run from 5/1/14 to 10/31/14 21

22 Measurement Period One size may not fit all The final regulations permit measurement and stability period differences in terms of length and starting and ending dates for the following groups of employees: Salaried vs. hourly Employees working in different states Union vs. non-union Union vs. union Large employer member by member 22

23 Measurement Period Transfers From variable hours, seasonal or part-time to full-time If during initial measurement period, must offer coverage by 1st day of 4 th month after transfer Otherwise may wait until 1 st stability period as of which employee is eligible based on look back measurement period 23

24 Measurement Period From full-time to less than 30 hours / week Continue eligibility until 1 st stability period as of which employee isn t eligible based on look back measurement period; or If employee initially offered coverage within 3 months of hire and later switches to less than full-time status, employer may apply a monthly measurement period mid-year to establish the reduction and terminate coverage before the end of the stability period 24

25 Hours of Service Hourly actual hours including: Paid and worked Paid but not working (e.g., vacation) Unpaid leave due to FMLA, USERRA or jury duty 25

26 Hours of Service Salaried Same as hourly (actual) or equivalency method (either 8 hours for each day credited with one hour or 40 hours for each week credited with one hour) Can use different methods for different reasonable categories of employees 26

27 Hours of Service Rehired Employees The final regulations change the rules for determining whether a rehired employee is treated as a new employee. An employee will generally be treated as a new employee only if the employee is absent from work for 13 weeks (26 weeks for educational organizations) Summer Breaks The final regulations retain the rule for summer breaks for educational organization employees Must credit coverage hours or exclude summer from measurement period 27

28 Temporary Staffing Agencies The final regulations offer a useful tool to large employers leasing full-time employees through a temporary staffing agency Where the employer retains the right to direct and control the employees, the employees will likely be considered the common-law employees of the client employer as opposed to the temporary staffing agency for purposes of the pay or play penalty 28

29 Temporary Staffing Agencies However, if the temporary staffing agency offers the leased employee group health coverage, the offer will be treated as an offer of coverage made by the client employer for purposes of avoiding the pay or play penalty. This relief is contingent on the temporary staffing agency charging the client employer a higher fee with respect to leased employees enrolling in the staffing agency s health plan. Large employers using temporary staffing agencies will want to review their service agreements to consider this option 29

30 What s Still Missing? Definitive guidance regarding temporary staffing agencies and how to determine whether individuals are the common-law employee of the agency or the client employer Guidance explaining the IRS excise tax for failure to meet group health plan requirements Unclear when the IRS will issue nondiscrimination regulations with respect to fully-insured nongrandfathered plans 30

31 What Should Be An Employer s Next Steps? Determine effective date for pay or play and applicability of transition rules Will you offer: Coverage to at least 95% (70% for 2015) of full-time employees? Will your coverage be affordable? Will your coverage meet the minimum value test? 31

32 What Should Be An Employer s Next Steps? Consider whether you will adopt a look back measurement period / stability period Establish look back measurement / stability periods for new hires Establish look back measurement / stability periods for ongoing employees Consider transition rule for first year Will you maintain different rules for different employee groups? 32

33 What Should Be An Employer s Next Steps? Develop a method for capturing hours Hourly employees Salaried employees 33

34 What Should Be An Employer s Next Steps? Modify your health plan and SPD Definition of eligible employee Communicate any measurement period/stability period Definition of dependent child Prepare for reporting to IRS and employees 34

35 P.A. 152 Michigan public employers will be challenged to comply with the Health Care Reform affordability test and, at the same time, comply with Michigan Public Act 152 Under P.A. 152 Michigan public employers may not contribute more than a hard cap toward the annual cost or illustrative rate of employee medical coverage 35

36 P.A. 152 For 2014, the adjusted dollar limits are: $5, (single) $11, (two-person) (but see below) $15, (family) 36

37 P.A. 152 Alternatively, a Michigan public employer s governing board can adopt a percentage cap and not pay more than 80% of the total annual cost for medical coverage Either limit can be allocated as the employer sees fit 37

38 P.A. 152 This may be workable an employer can allocate costsharing in such a way to ensure single coverage is affordable under Health Care Reform, with higher cost-sharing for twoperson and family coverage to address P.A. 152 The employer may want to introduce a lower cost option for single coverage to address the Health Care Reform affordability test and help facilitate P.A. 152 compliance 38

39 P.A. 152 In late December 2013, the Michigan Legislature modified P.A. 152: Employees electing coverage for themselves and one nonspouse dependent, must be included in the individual plus spouse category, not the family coverage category; The hard cap multiplier for the individual plus spouse category for a medical benefit plan coverage year beginning in 2014 was increased to $12,250; 39

40 P.A. 152 Additional compensation paid to employees who elect to waive employer-sponsored health coverage (i.e., cash-inlieu ) is not included in the public employer s total annual costs of employer-sponsored health coverage; and The following amounts are included in the public employer s total annual costs of employer-sponsored health coverage: The 1% claims tax imposed under the Michigan Health Insurance Claims Assessment ( HICA ) Act; Any tax or fee imposed by Health Care Reform; and Insurance agent or company commissions. 40

41 Mary V. Bauman Calder Plaza Building 250 Monroe Ave. NW Suite 800 Grand Rapids, MI Radisson Plaza Building 100 West Michigan Avenue Suite 200 Kalamazoo, MI