Basic Business Compliance with PPACA

Basic Business Compliance with PPACA The Five Questions Every Business Must Answer Accurately, Monthly, Forever. To Avoid the Major Fines in the Patient Protection and Affordable Care Act (As required under 26 USC 4980h and presented in IRS Bulletins 2011-36, 2012-58, 2012-59 and Treasury Rule (Federal Register Document) 2014-03082) By Michael Bertaut, Healthcare Economist and Exchange Coordinator, BCBSLA Seldom does any piece of legislation, even Federal Legislation, have the sweeping impact of the Patient Protection and Affordable Care Act/Healthcare Education and Reconciliation Act (PPACA/HCERA). Designed originally just to expand Medicaid and better regulate the Individual and Small Group marketplaces, the new authority provided to the Department of Health and Human Services, Treasury Department, and the Department of Labor have greatly expanded the regulatory burden of all businesses in America, even the ones who do not offer health benefit coverage to their employees. As of this writing, some 22,000 pages of regulation have been promulgated and the task is nowhere near complete. Note the rules in this document apply to ALL employers, including government entities. While tunneling through this regulatory torrent since April 2010 we noticed several important questions and strategies beginning to emerge that we believe will prove useful to business owners of all sizes. In this article we will delineate the core of compliance with PPACA, that is, the Five Questions Business need to be able to answer definitively on an ongoing basis accurately and in a well- documented fashion. Question 1: how many full time (health insurance benefit eligible) employees do I have? Prior to October 2012, an employer who wanted to offer health insurance benefits to his workforce had the discretion to set the threshold for benefit qualifications at an hourly number of his choosing. He could select 40 hours per week, 37 hours, 35, or 32.579; it was the employer s choice. With the passage of PPACA and subsequent regulations, employers lost that discretion and in general the threshold was set for purposes of PPACA- compliance at 30 hours/week or 130 hours/month, albeit with a few exceptions. Remember this standard does not apply in every aspect of employment, ONLY for the purposes of compliance with several sections of PPACA. This 30/130 hour count is important to compliance in two areas: 1. During the determination, as ordered by 26 USC 4980h, of employer status as an Applicable Large Employer (ALE) or Small Employer (non- ALE), employers must be able to report this number monthly to complete the computation, especially if they wish to claim status as a non- ALE. This data will eventually be reported to the IRS on Forms generated from Section 6055/6056, along with myriad other statistics and hard data

about participants in the health plan. The proposed form is a 1095- C. 2. Employers must have this number snapshot each month going forward to report on the 1095- c, and it will be used to determine the number of people to whom an ALE- sized employer must make an offer of health insurance to avoid the fines in the regulation. One of these situations will apply to every employer, either ALE or non- ALE, beginning with January 2015 Activity. Thus determination of the number of full- time employees under the new methodology is critical to each employer for compliance purposes, even if one is a very small employer not offering health benefits at all. To make an accurate assessment, employers must start counting in January 2014 no matter what size they are. Classifying an existing workforce already in motion can be challenging. The final guidance in Treasury Issue 2014-03082 gives several safe harbor methods including specified look- back periods (standard measurement periods in the text) and monthly measurement computations that can be used to determine full time status for existing employees who work varied hours. These methods can be quite complex, and different methods apply to different types of employees. Deep consultation with CPA s and HR professionals will be required to accurately classify a varied workforce. It is worth mentioning that Final Regulation 2014-03082 also specifies that no employer in general can have a waiting period for full enrollment in his health plan by an eligible employee beyond 90 days from hire date. Note this does not say, as is the practice today, the 1st of the month after the 90th day of employment, it simply says the employee must be COVERED by the 90th day. This would imply in most cases a maximum waiting period of perhaps 60 days to allow for insurance company processing of the new enrollee. Also we know that plans no longer may have waiting periods for pre- existing conditions, so coverage must have no specific restrictions on health conditions. It is worth noting that this portion of the Act was not waived when the 6056 reporting was delayed in July 2013. To sum up our first mandatory question, it is critical that all employers record, at least monthly, the number of employed individuals who meet the definition of full time (health insurance benefit eligible) under PPACA without regard to the size or configuration of the employer. Employers must record the number, and the identity/tin of the full time employees every month going forward for reporting on Form 1095- c. These forms and detailed instructions are still pending as of this writing. Question 2: Am I an applicable large employer (ALE) or not? Perhaps no determination or federal test applied to any employer will carry more weight and regulatory burden than the ALE (applicable large employer) determination. Run the testing and come out non- ALE and the employer is free to offer any health benefit program without regard to benefit levels and subsidies that he can find in the marketplace, or make no offer at all, it is completely at his discretion. Thus the determination of small may be, for once, a

cause for celebration for an employer. Exercise caution, however, if you believe yourself a small, non- ALE employer. There are a couple of things that can cause a false determination. First, note that an employer wanting to claim non- ALE status will be called upon to prove that status with accurate record keeping and the completion and submission of either form 6055 or 6056 (or the combined 1095c) on a regular basis. Anecdotal determination of size is not sufficient. I think we can safely say the IRS or EBSA will not take an employer s word for it. Accurate payroll records and job classification systems that support the computation of ALE status will be critical. The number of benefit eligible full time employees will need to be computed and recorded every month beginning in January 2014 and continue in perpetuity. Second, it is incumbent on any business owner to demonstrate PRIOR to performing the ALE computation whether his owned interest in multiple entities (if he has multiple ownership interests) constitute a controlled, associated, or affiliated group under IRS regulations. This is critical in the ALE computation, as any two interests that are considered any of the three classifications listed above, must result in the combination of the labor counts of the related entities PRIOR to performing the ALE computation. Any controlled, affiliated, or associated groups must be tested for ALE status as ONE aggregated entity. So how exactly does this work, i.e. How do you know if you are an ALE or not? The Bulletins lay out a counting methodology to determine ALE status. Since the first reporting will be for 1/1/15, the computation should begin in January 2014 at the latest. Here are the steps, and an illustration of the finished product: 1. Tabulate for each month going forward the number of employees classified as full time under the new bulletins (2012-58/59 and 2014-03082). In Figure 1, we have recorded these employees in the benefit eligible column. 2. Tabulate for each month going forward, all the PAID labor hours for all labor NOT performed by the benefit eligible employees. In Figure 1, these are the common law hours. Each non- full- time person performing labor for the company who would be classified as a common law employee by IRS regulation should have their paid hours put into this bucket of hours. 3. Divide the Common Law Hours total each month by 120. The result is the full time equivalents of labor contained in the common law hours bucket, i.e. hours not worked by the full time employees. Note the result in Figure 1 in the /120 FTE column.

4. Sum the totals of the Benefit Eligible plus the full time equivalents of the common law hours. In Figure 1 you can see the amount recorded in the Total FTE column. 5. Collect this data for each month of 2014. 6. Take a simple (un- weighted) average of the 12 months, and record the result. 7. If the number is greater than 49.99 (rounded to 2 decimal places) the entity is an Applicable Large Employer (ALE). 8. If the result is less than 50, the entity is a small employer, non- ALE. Some notes on the computation: 1. IF any non- full time person (non- benefit eligible) works more than 120 hours in a given month, only 120 hours of paid labor must be recorded in the Common Law Hours bucket. 2. If any two or more entities are considered Controlled, Affiliated, or Associated groups, their results must be added together into a single computation for determination of ALE status. If the total breaks 50, then every entity involved is considered a large employer regardless of size. 3. If the recording entity workforce exceeds 50 FTE s for 120 days or less during the calendar year AND the employees in excess of 50 are seasonal workers, then the employer is not considered to employ more than 50 FTE s. 4. If after recording an entire calendar year of data which demonstrates ALE status, the entity can isolate within that calendar year 6 continuous months which would demonstrate non- ALE status, then the entity can claim non- ALE status, if proper documentation is in place. Once ALE status has been determined, we can move on to subsequent questions depending on the outcome. Notice the FTE count requires rounding to the NEAREST HUNDRETH of an FTE. The ALE Computation (Figure 1) Month Benefit Eligible/FT Common Law Hours /120 FTE Total FTE ANNUAL AVERAGE JAN 2014 22 3300 27.50 49.50 FEB 2014 23 2800 23.33 46.33 MAR 2014 23 3250 27.08 50.08 APR 2014 23 3450 28.75 51.75 MAY 2014 24 3105 25.88 49.88 JUNE 2014 22 3271 27.26 49.26

JULY 2014 23 3655 30.46 53.46 AUG 2014 24 3705 30.88 54.88 SEPT 2014 25 3000 25.00 50.00 OCT 2014 26 3800 31.67 57.67 NOV 2014 27 3950 32.92 59.92 DEC 2014 30 4250 35.42 65.42 53.18 Note this employer is an Applicable Large Employer, even though his FT count was 30 or less. NOTE: Transitional Relief for 50-99.99- sized ALE s: On February 10, 2014, the Treasury Department issued, in notice 2014-03082, transitional relief for some ALE s. In general, ALE s whose FTE count falls between 50 and 99.99 during the 2014 averaging period will not be fined for non- compliance with 26 USC 4980H a) and b) during the 2015 calendar year. Full compliance will be expected beginning in 2016. This relief applies to ALE s between 50 and 99.99 FTE s as long as the following conditions are met: 1. Employer tests size in 2014, FTE count is 100 or higher, and employer does not reduce size of workforce specifically to access transitional relief; AND 2. Employer does not reduce coverage or offer of coverage already in place on 2/9/2014; AND 3. Employer does not reduce premium contribution to less than 95% of contributions on 2/9/2014. NOTE: Transitional relief for non- 1/1 (non- calendar year) renewing plans: In that same guidance, Treasury indicated that groups who are ALE- Sized may wait until their actual renewal date to come into compliance under certain circumstances in 2015: 1. They must not have changed their renewal date at any time after 12/27/2012; AND 2. As of February 9, 2014, for the previous 12 months, they have to prove ONE of the following four things: a. 25% of ALL EMPLOYEES (including part timers) were covered with insurance; OR b. 33% of all FULL TIME EMPLOYEES were covered with insurance; OR c. 33% of ALL EMPLOYEES (including part timers) were offered coverage; OR d. 50% of all FULL TIME EMPLOYEES were offered coverage. If a non- calendar year group can attest to #1 above AND #2 a, b, c, or d above, THEN they can wait until their anniversary date in 2015 to comply. Question 3: I m not an ALE. What now? Any entity that can document that they are, after testing for aggregation, sub- ALE in size, may

have cause for celebration. The penalties and restrictions in 26 USC 4980h of the Act do not apply to groups of this size and classification. Thus this employer may offer health benefits or not, subsidize them or not, and will often defer to existing state law in determining his health benefit obligations to his employees (and some older Federal Regulations) but cannot be fined under 4980h for failing to make an appropriate offer to their employees. Note that this determination MUST be documented monthly, essentially forever or until the law changes again. We must assume that the inquiry letters expected during 2016 from the IRS or EBSA (to be discussed later in this document) will apply equally to ALE s and non- ALE s alike. Question 4: I am an ALE, what are my obligations under 26 USC 4980h? As an ALE, an employer s primary goal should be to avoid paying the fines in 4980h. The employer s health plan offering will be subject to two layers of testing. Failing either test can generate fines as indicated below. The Sections outlining those responsibilities and the fines for failure are a) and b), so we have taken to calling these fines the ALPHA fine (a) and the BRAVO fine (b). I will use these terms going forward for simplification. In the ALPHA section, an ALE must be able to demonstrate that he made SOME sort of health insurance offer (called minimum essential coverage) to at least 95% of his benefit eligible employees. Thanks to the Transitional Relief offered employers on 2/10/14 via Treasury 2014-03082, ALE s between 50 and 99.99 FTE s in size will not have to comply with this rule until 1/1/16, and ALE s 100 FTE s or above may use a 70% offer standard in 2015, increasing to the full 95% offer standard in 2016. Note the employer s obligation ends at the OFFER. Thus, whatever we determined via Question 1 was our benefit eligible (full time) population now becomes the basis for determining whether our offer was extensive enough. This particular coverage is called minimum essential coverage and should not be confused with either a qualified health plan or essential health benefits under the Act. The minimum essential standard is very broadly defined and would not require in most cases rich health plan coverage. The standard is broadly any employer sponsored health coverage not composed of excepted benefits only. To avoid triggering ALPHA, the employer must insure that 95% of the benefit eligible (70% in 2015) receive some sort of offer of a health plan beginning on 1/1. Failing to meet the ALPHA standard can have a signficant cost. Let s illustrate this by way of example. Employer A has tabulated his benefit eligible population, and has determined that he has 400 employees that are full time under Treasury 2014-03082. At this time, he is offering health insurance to 100 supervisors and administrators, but the other 300 full time employees are not receiving any offer of health coverage. For his 2016 Plan Year, he expands his offer to a total of 350 full time employees, leaving 50 without an offer. Since his percentage receiving an offer is below 95%, he is vulnerable to the ALPHA fine. (Note that ALE s above 100 FTE s must achieve a 70% standard in 2015 to avoid ALPHA. Employers failing the 70% standard in 2015, where applicable, may deduct 80 full time

employees from their total before computing their fines. For 2016 and beyond, the deduction is 30.) How is the fine triggered? In the above example, if a single full time employee (just ONE) goes to the exchange and receives an advanced tax credit this will trigger the ALPHA fine on the ENTIRE workforce, INCLUDING THE EMPLOYEES HE ALREADY PROVIDES WITH HEALTH INSURANCE. In effect, for 350 employees, he will be paying fines, and paying for his share of coverage as well. A single employee can trigger the fine on the entire workforce. How is the fine computed? The ALPHA fine is computed monthly, but the annual amount is Total Full Time Workforce minus 30 (minus 80 in 2015, if applicable) times $2,000 per year. In this example, for 2016 his fine is 400-30=370; x $2,000 each = $740,000.00. Since the fines in this section are NOT considered legitimate business expenses by the IRS they may not be deducted or expensed. If Employer A s marginal tax rate is 28% the actual impact to profits of this fine is $947,200. Remember he is already offering to 350 of his workforce, which could easily run $2.1m (350 x $6,000/year) in premiums. Once an employer s group passes the ALPHA test, then we can apply Section b), the BRAVO test to the health benefits offer. BRAVO requires that the offer meet a federal test for actuarial value, and a test for affordability. This test will apply to each employee individually, and fines for non- compliance are applied to a single employee at a time, unlike in ALPHA where a single employee can trigger a fine on the entire workforce. Actuarial Value is a measure of plan generosity computed via a federal calculator tool or by an accredited actuary. The federal standard of 60% AV is relatively easy to hit, and almost all existing group coverage has an AV in excess of 60%. Affordability, however, is another matter. Thanks to Treasury 2014-03082, we now have final regulations on the definition of affordable. Employers may use three potential safe harbors as defined below. 1. The % of Federal Poverty Level Method An employer utilizing this safe harbor can simply download from the Fed 100% of the Federal Poverty level dollar amount for a single person and then multiply that times 9.5%. If all employees pay this amount or less, the employer plan is affordable. In 2014, 100% of FPL for a single person was $11,670 of income per year. 9.5% of this number is $1,108.65. Thus an employer can charge his employee up to $92.39/monthly ($1108.65/12) for his employee- only coverage and meet this standard. Note this standard uses the same threshold for every employee regardless of earnings, and is therefore very simple to administer and track. 2. The Hourly Rate Method This method is based on the hourly rate of the employee, times a fixed schedule to annualize the number, take 9.5% of that, and the final number becomes the maximum annual premium. So for example, for an employee earning $10

an hour, this is the computation: $10 x 130 x 12 x.095 = $1,482 annually (or $123.50/month) Where $10 is the hourly rate, 130 the monthly equivalent number of hours, 12 the months for a year, and.095 the relevant employee share. Thus for any $10/hour employee, the employer can charge up to $1,482 annually/$123.50 month for the employee s share of employee- only coverage and be safely affordable. Note this method is not available for tipped employees. 3. The 9.5% of Box 1 W2 Wages Method An employer can speculate as to what a given employee will earn in the upcoming year, specifically his Box 1 W2 wages, multiply that expectation times 9.5% to determine allowable premiums. For example, if our $10/hour employee is expected to work full time this year. $10 x 2,080 hours = $20,800 x.095 = $1,976 per year/$164.67 monthly premiums, for the employee s share of his employee- only premiums. These methods may be applied by class of employee, but all members of a class must be measured with the same method. So, if the employer cannot prove affordability and/or Actuarial Value within tolerances, what are his liabilities under the Section 4980h? If any single full time employee does not receive an offer that is affordable and actuarially sound, then that employee may go exchange shopping and if he draws an advanced tax credit, it will trigger a fine on the employer of up to $3,000 annually (computed monthly). Note that this fine, unlike ALPHA, is incremental and not applied to the entire workforce en masse. It s also worth noting that a bona fide employer offer of coverage must be made to the employee and his dependants, but not his spouse. Treasury 2014-03082 further clarified that dependant need not include foster or step- children at the employer s discretion, but must include non- citizen children IF they are citizens of Mexico or Canada. A bona fide offer must give the employee the opportunity to accept or reject annually. If our ALE employer makes an offer to 95% of his full time employees during 2016 (or 70% in 2015 for ALE s above 100 FTE s), the offer met standards for Actuarial Value and Affordability, was made annually, and included dependants to age 26, then he is on the road to compliance with 26 US 4980h. Question 5: How do I prepare now for the audit environment in 2016? Locally we have observed an unprecedented surge in business audits by the EBSA in the last two years. We do not expect this trend to abate. Note that the IRS/DOL/EBSA will have new sources of data they can use for audit activity, namely the records of www.healthcare.gov which will show which Americans in many states received advanced tax credits for health insurance coverage, W- 2 s from employers will include enhanced information about health plan offers and financing by employers, and information from Insurance Carriers (Section 6055) and ALE- sized Employers (Section 6056/1095- C) will contain person- level detail about health plan acceptance, offers, and financing. Utilizing this information to enhance audit activity will not be difficult. Treasury indicated in 2014-03082 that is would indeed use these sources for inquiries to employers when their employees received an advanced tax credit through a federal marketplace/exchange.

The relevant federal agencies are likely to merge the data in these three sources to create a list, by employer, of full time employees who received advanced tax credits from exchanges. We would expect this information to generate inquiry letters to employers (not the individuals) asking for confirmation and explanation. The burden on employers at that time will be to explain why their full time employees chose to seek federal funding instead of joining their health plans. We are now formulating strategies based on this expectation to help employers protect themselves from such inquiries. A failure to appropriately respond could EASILY turn into a $3,000 non- deductible fine per employee inquired about. How do we prepare for this scenario? Imagine that an employer receives an inquiry letter from the IRS in Q2 2016. That letter will contain a list of employees, most likely the ones that received an advanced tax credit from an Exchange, AND were eligible for health benefits under the employer health plan. As an employer, you cannot safely discourage or encourage an employee to leave your plan to go exchange shopping. Employees who feel coerced, and report this feeling to the EBSA will receive whistleblower protection from the Fed and that will certainly trigger an audit. Employers may be best served to have processes established to support the defense strategies listed below far in advance of 2015 when measurements begin for ALE s 100+ in size. Line of defense 1: I am NOT an ALE! The easiest way to avoid fines is to be able to prove that your firm is NOT an applicable large employer (ALE). Non- ALE employers are not subject to the fines in 26 USC 4980h. Thus a small employer must always have records readily available to document his non- ALE status. In addition, ALE s sized 50 to 99.99 FTE s are not required to comply in 2015, so for one year, even status as a small ALE may be a valid audit defense. This documentation should include ownership interests beyond the single entity discussed. Line of defense 2: The employees in the inquiry were NOT FULL TIME when they were in my employment. The ALPHA and BRAVO fines ONLY apply to employees that meet the new definition of full time. If you receive an inquiry, you should check your payroll records immediately to determine if the employees in question were full time when they worked for you. If not, you owe no fines. Line of defense 3: I made each and every one of those employees in question a bona fide offer of coverage. It was AFFORDABLE and had at least 60% AV and they received an offer at least once per year, but the EMPLOYEE TURNED IT DOWN! All employers without fail should require every employee offered health coverage to sign either an acceptance or a waiver of coverage. Collecting and safely storing waivers will be a critical part of audit defense in the future. Can you put your hands on your waiver file today? Is every single non- participant in your health plan represented by a signed waiver in your files? Would it help if I told you that every missing waiver was worth more than $3,000? So let s review: Make sure you know and can document, at all times, how many full time employees you

have, using the NEW definitions of full time employee (Treasury 2014-03082); Make sure you know and can document, whether or not you are an applicable large employer (ALE), using the determinations we discussed (IRS Bulletins 2012-58/59); Make sure you know, as a small employer (non- ALE) how to access the documentation proving your status. Make sure you know, as a large employer (ALE) to whom you must offer coverage and what the coverage must contain, including affordability and actuarial value testing, taking special care to record who takes the coverage, and who does not. Prepare your defenses for the coming inquiry letters. Please use this guide to help you ask the correct questions of your hired professionals; your CPA, insurance consultant/agent, and your benefits attorneys, to insure compliance and lower exposure for 2014-15 and beyond. DISCLAIMER: The information contained in this document is solely for illustrative purposes. Note that the author is not a CPA or Attorney. The information is based on certain assumptions, interpretations, and calculations that are not necessarily accurate with regard to provisions of PPACA, HCERA, HIPAA, COBRA, ERISA, and other rules, regulations, guidance and all other documents issued by relevant state and federal agencies with regard to these laws and any other relevant laws. The information provided should not be considered as legal, financial, accounting, planning, or tax advice. You should consult your attorneys, accountants, and other employees or experts of this type of advice based on their own interpretations, calculations, and determinations of applicable laws, rules, regulations, guidance, and any other documents and information that they determine may be relevant. The authors make no guarantees or other representations as to the accuracy or completeness of the data in this presentation. Michael R. Bertaut, MBA, CHC, PAHM Healthcare Economist/Exchange Coordinator Blue Cross Blue Shield of Louisiana 225-297- 2719 (desk) Michael.bertaut@bcbsla.com