Small Employers and the Kentucky Health Benefit Exchange Sarah Charles Wright, Esq. Sturgill, Turner, Barker & Moloney, PLLC March 19, 2013 All Rights Reserved 333 WEST VINE STREET SUITE 1400 LEXINGTON, KENTUCKY 40507 PHONE: 859.255.8581 FAX: 859.231.0851 WWW.STURGILLTURNER.COM
A Little History About Employer Group Insurance Commercial Insurers including BC/BS started offering health insurance products beginning in the 1930s. The Internal Revenue Code first exempted employer contributions to employees health insurance plan from income tax in 1954. Between the early 1950s and 2011, federal spending on healthcare increased from less than 1% to 24.%.
Enter Health Care Reform! In recognition that America s health care system is dysfunctional at best, and that more and more Americans do not have health insurance or adequate access to quality health care, Congress passed the Affordable Care Act or ACA in March 2010. The end goal of the ACA is in-part to give middle class families better and more affordable health care options. The means to accomplish this is comprehensive legislation that holds insurers accountable for premium costs and how the money is spent, and for the quality and extent of the health care and coverage provided to insureds.
Will These Health Insurance Reforms Reduce the Cost of Group Premiums for Employers? The ACA is expected over time to slow the growth of health care costs and consequently health insurance premiums. Slowing the growth of costs does not equate to reducing premiums which are predicted by some experts to rise 1-2% more over the next ten years than they would have without the reforms implemented under the ACA.
Some Key Insurance Reforms Under the ACA Guaranteed availability/renewability of coverage --all markets (large and small group, and individual) No pre-existing condition exclusions for children under 19 No more pre-existing condition exclusions beginning 2014 Coverage cannot be canceled if you become seriously ill No more lifetime caps on coverage Coverage available under a parent s plan for children until age 26 Annual Medical Loss Ratio reporting by insurers and obligation to rebate premium to members when insurer spends less than 85% of total premium paid (large group market) or 80% (small group market) on healthcare services instead of overhead Minimum essential benefits required under all fully-insured Small Group and Individual health plans Individual Mandate Upheld -- National Federation of Independent Business Owners v. Sebelius, 567 U.S. (2012)
REFORMS AFFECTING EMPLOYERS LARGE EMPLOYERS (GROUPS) Large Employers for purposes of group health plans are defined by Kentucky law as employing on annual average 50 or more full-time workers -- through 2015 101 or more full-time workers -- beginning 2016 BUT Only Applicable Large Employers face penalties of $2,000 per worker in excess of the first 30 workers if they do not offer group health insurance, or do not offer Affordable and Adequate group health insurance to workers, and one full-time worker purchases coverage on the Individual Exchange and qualifies for a premium subsidy due to low income. Affordable means a worker pays 9.5% or less of his or her annual household income in insurance premiums for coverage under Employer s group plan. Adequate means the Employer s group plan is designed to cover on average at least 60% of a worker s medical costs. Applicable Large Employer for purposes of determining whether a Shared Responsibility Payment is owed means an employer employing at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year. Subsidiaries owned by one corporation are combined to determine status as Applicable Large Employer.
PLEASE CONSULT YOUR TAX PROFESSIONAL TO CALCULATE FULL-TIME EMPLOYEES AND FULL-TIME EQUIVALENTS! FULL-TIME WORKER = 30 OR MORE HOURS A WEEK PART-TIME WORKERS ARE COUNTED TO DETERMINE FULL-TIME EQUIVALENTS SEASONAL WORKERS WORKING LESS THAN 120 DAYS ARE NOT COUNTED IN FTE CALCULATION BUT MAY RESULT IN PENALTY IF QUALIFY FOR A PREMIUM SUBSIDY THROUGH THE INDIVIDUAL HEALTH INSURANCE EXCHANGE WHILE WORKING FULL-TIME FOR APPLICABLE EMPLOYER LEASED OR TEMPORARY WORKERS MAY BE COUNTED EMPLOYEES OF SUBSIDIARIES ( Applicable Employer Members ) OWNED BY SAME PARENT COMPANY ARE AGGREGATED FOR EMPLOYEE CALCULATION TO DETERMINE STATUS AS APPLICABLE LARGE EMPLOYER
IRS Example of Applicable Large Employer Shared Responsibility Payment (i) Facts. Applicable large employer member A and applicable large employer member B are the two members of an applicable large employer. Applicable large employer member A employs 40 full-time employees in each calendar month of 2015. Applicable large employer member B employs 35 full-time employees in each calendar month of 2015. For 2015, the applicable payment amount for a calendar month is $2,000 divided by 12. Applicable large employer member A does not sponsor an eligible employer-sponsored plan for any calendar month of 2015, and receives a Section 1411 Certification for 2015* with respect to at least one of its full-time employees. Applicable large employer member B sponsors an eligible employer-sponsored plan under which all of its full-time employees are eligible for minimum essential coverage. (ii) Conclusion. Pursuant to section 4980H(a) and this section, applicable large employer member A is subject to an assessable payment under section 4980H(a) for 2015 of $48,000, which is equal to 24 x $2,000 (40 full-time employees reduced by 16 (its allocable share of the 30-employee offset ((40/75) x 30 = 16)) and then multiplied by $2,000). Applicable large employer member B is not subject to an assessable payment under section 4980H(a) for 2015. *Employee went to Individual Exchange and Qualified for a Premium Subsidy based on Income. 26 CFR 54.4980H-4(e) (1/2013)
Small Employer Tax Credit For Exchange purposes, Kentucky Small Employers are those that employ on average, annually At least 1 but not more than 50 full-time workers through 2015 At least 1 but not more than 100 full-time workers beginning 2016 No Penalties For Small Employers That Do Not Offer Group Health Insurance Benefits to Employees Eligible Small Employers Providing Employee Health Insurance Benefits Can Receive Tax Credit To Offset Contribution to Employee Premium Cost. Tax Credit Maxes Out at 35% of Paid Premium for Small Employers with 10 or less FTEs and Average Annual Wage per FTE of less than $25,000 Maximum Credit Rises to 50% of Paid Premium beginning 2014. Tax Credit Can Be Carried Forward Up to 20 years or Applied to Prior Year s Return Credit limited if average premium in KY small group market is less than Employer premiums paid. (2012 KY average single employee-only coverage = $4,660.) Excess Premium That is Not Offset By Available Tax Credit is Still a Deductible Expense
IRS Examples -- Small Employer Tax Credit Example 1: Auto Repair Shop Main Street Mechanic Full-time Employees: 10 Wages: $250,000 total / $25,000 per worker Employee Health Care Costs: $70,000 2010 Tax Credit: $24,500 (35% credit) 2014 Tax Credit: $35,000 (50% credit) Example 2: Restaurant Downtown Diner Employees: 40 half-time employees (service hours equal 20 FTEs) Wages: $500,000 total, or $25,000 per FTE Employee Health Care Costs: $240,000 2010 Tax Credit: $28,000 (35% credit with phase-out) 2014 Tax Credit: $40,000 (50% credit with phase-out) Copyright 3/19/2013 Sarah Charles Wright - Sturgill, Turner, Barker & Moloney, PLLC All Rights Reserved
QUALIFYING FOR THE SMALL EMPLOYER TAX CREDIT Three Basic Criteria Average of Less Than 25 Full-Time Equivalent Workers ( FTEs ) Employed Annually Average Annual Wage Paid Per FTE of Less Than $50,000 Employer contribution of AT LEAST 50% Toward Each Eligible Full-time Worker s Group Health Insurance Premium under a qualifying arrangement. A qualifying arrangement is generally an arrangement that requires you to pay: a uniform percentage (but not less than 50%) of the premium cost for each enrolled employee s health insurance coverage or A uniform premium for each enrollee (composite billing) with different tiers of coverage (e.g. self-only, spouse, family) although it may be less than 50% for enrollees not enrolled for self-only coverage Other arrangements such as multi-employer plans may also be qualifying arrangements Employer sponsored self-funded plans are not qualifying arrangements See IRS 2012 Instructions for Form 8941 http://www.irs.gov.pub.irs-pdf/i8941.pdf 3/19/2013 Sarah Charles Wright - Sturgill, Turner, Barker & Moloney, PLLC All Rights Reserved
To Get an Idea of Whether Your Business Qualifies Access the IRS Instructions at http://www.irs.gov/pub/irs-pdf/i8941.pdf or the Small Business Tax Credit Calculator at http://healthbenefitexchange.ky.gov/ THEN, IF YOU THINK YOU MAY QUALIFY, CONSULT YOUR TAX PROFESSIONAL Calculating FTEs and Average Annual Wage Can Be Tricky For example: One FTE = 2,080 hours of service per year for which wages are paid or owing Business owners are not counted towards FTEs no sole proprietors, partners, shareholders owning more than 2% of an S-corp. or more than 5% of a C-corp Family members of business owners are not counted towards FTEs spouses, children, grand-children, nieces, nephews, uncles, aunts, step-relations, other dependents Seasonal employees those who work 120 days or less during the tax year -- are not counted in calculating FTEs Leased employees (temps) must meet certain criteria to be counted Must have reliable records of the total hours of service for all individuals that can be included in the FTE calculation
Snapshot of Calculator Page on KYHBE Website
Kentucky Health Benefit Exchange http://healthbenefitexchange.ky.gov Scheduled to Go Live October 2013 Available to Individuals and to Small Employers and their eligible Employees if Employer chooses to offer all Full-time employees health insurance coverage in a Qualified Health Plan through the Small Business Health Options Program (SHOP) Exchange and Small Employer s principle business address or covered employee s worksite is located in a SHOP service area Kentucky requires 75% eligible employee participation Kentucky s Individual and SHOP Exchanges Will Be Merged -- Both Accessible on the website.
What the Exchange Will Offer: Qualified Health Plans (QHPs) in the Individual and Small Employer Group Markets must offer minimum essential benefits required by ACA* Selection for Qualified Small Employers of group coverage level, e.g., Bronze, Silver or Gold, in which all Qualified Health Plans (QHPs) within that level are available to their eligible employees A premium calculator so employees can compare available QHPs within the level the Employer selects, after applying the employer s premium contribution Small Business calculator for preliminary calculation of Small Employer tax credit Determination of an individual s eligibility for premium tax credits in advance and issue payment to insurers to offset premium Streamline group and individual enrollment process
What the Exchange Will Offer -- continued: KYHBE will bill Small Employers and individuals for premium, accept premium payments and remit aggregated premium payments to insurers. Management of non-payment or late payment of premiums and notifications to Employers. Requires Insurer accreditation by government approved accrediting agency Monitors and rates health insurer/health plan quality and premium costs Electronic reporting to the IRS for tax administration purposes of: When an employee is eligible for a premium tax credit (subsidy) because the Employer is not Providing minimum essential benefits coverage Affordable or Adequate coverage When employees / individuals cancel coverage under a QHP When an employee notifies the Exchange that they have changed employers Notice to Small Employers when employees cancel coverage under a QHP
QUALIFIED HEALTH PLANS Only QHPs can sell coverage through the Exchange Must offer Minimum Essential Benefits Hospitalization Laboratory Rehabilitation/Habilitation services Pediatric services Ambulatory services Emergency services Maternity care Wellness/Preventive Care Mental / Behavioral health services Prescription Drug Coverage 60% Minimum Actuarial Value the percent paid by the health plan No cost-sharing for preventive/wellness care No annual limits on coverage No lifetime limits Cap out-of-pocket expenses/cost-shares based on Silver level of coverage Must meet accreditation standards of approved accrediting agency (NCQA or URAC)
Examples of Expected Coverage Levels BRONZE SILVER GOLD Lower Monthly Premium Cost to Employer/Employee Higher out-of-pocket costs when covered person receives medical services Insurance covers 60% (the Actuarial Value or A/V) Employee pays 40% in costshares Higher Monthly Premium Cost than Bronze Lower out-of-pocket costs when covered person receives medical services compared to Bronze Insurance covers 70% A/V Employee pays 30% in costshares For example, if you have $10,000 in covered expenses, the plan pays $7,000. Highest Monthly Premium Lowest out-of-pocket costs when covered person receives medical services Insurance covers 80% Employee pays 20% in costshares
PROS AND CONS OF BUYING THROUGH THE EXCHANGE THE PROS: Small business tax credit Eliminates annual hunt for one-design-fits-all group plan from one insurer Employees can choose among range of insurers within Employer s selected metal level Eliminates tracking which plan design each employee has selected for premium payments, HSA contributions, etc. Less enrollment and benefit administration for employer No haggling with insurers over premium quotes Broader range of plan design choices for employees Consumer guidance provided by Exchange
CONS -- Why a Small Employer May Still Choose to Buy Group Coverage Outside the SHOP Exchange Employer and employees must enroll in the Exchange annually Purchasing outside the Exchange allows Employer to stay with the same insurer for consecutive years without re-enrollment Most QHPs available through the Exchange will also be available outside the Exchange through a broker for the same premium but with the ability to add more plan options More flexibility to create plan design that works best for your employees as long as it meets applicable regulations More options to purchase medical, vision and dental care coverage through the same insurer one-stop shopping for all three. If buying health insurance coverage on the Exchange, Employers offering dental or vision coverage will have to shop for and separately administer those plans
HOW TO DECIDE C O N S I D E R Cost of group coverage with or without available tax credit to offset premium Personnel (HR) administrative concerns Affect on employees in terms of benefits and their share of premium costs SHOP Exchange is good for higher-paid employees Individual Exchange is better for low wage employees because they may then take advantage of premium tax credit/subsidy
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