Proactive Preparation for Health Reform s Employer Shared Responsibility Penalty:

Proactive Preparation for Health Reform s Employer Shared Responsibility Penalty: 2014 Decisions Will Impact 2015 Liabilities Greta E. Cowart, Shareholder Winstead PC Dallas, TX

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ACA Employer Shared Responsibility Penalty Shared Responsibility applies to Applicable Large Employers - ALEs ALE status is determined based upon full-time employees and FTEEs in controlled group and common law employee status Controlled group status is key starting point Common Law Employees Microsoft v. Vizcaino Sun Capital controlled group status implications for private equity funds (1 st Cir.) 4

Controlled Group Parent Co. 80% or more Subsidiary 5

Controlled Group Status Brother-Sister Controlled Group Shareholder 1 Shareholder 2 Shareholder 3 Shareholder 4 Co. A Co. B Co. C 6

Controlled Group Status Brother-Sister Controlled Group (cont d) Company A Company B Company C Identical Ownership for C Shareholder 1 25% 25% 10% 10% Shareholder 2 25% 25% 10% 10% Shareholder 3 25% 25% 10% 10% Shareholder 4 25% 25% 25% 25% 5 or fewer shareholders own > 80% of both Co. A and Co. B and counting only identical ownership they own > 50% of both entities C is not in a brother-sister controlled group with A and B because the same 5 individuals do not own 80% or more in total even though they own > 50% counting identical ownership 7

Are You an ALE? Determine which entities employees to count That is which entities are in the controlled group or affiliated service group Determined as a general rule based on prior year s employment If new entity, determine based on number expected to employ as full-time for the plan year 8

ALE Status Determination - First Step Once you know which entities are in the ALE, you count the number of employees hired into full-time positions to work 30 or more hours per week in the prior calendar year (calculated on a month by month basis, summed and divided by 12 to get the annual number) If > 50 ALE If 50 99 2015 is a transition year If < 50 go to next step Must determine number of FTEEs by using a month by month review of hours worked by employees who are not full-time Lookback rule does not apply when determining ALE status 9

ALE Status Determination - Second Step Now determine the number of full-time equivalent employees by summing the hours of all non-full-time employees for each month in prior calendar year and divide that number by 120 hours per month for 12 months Add the number of FTEEs to number of FTEs and if sum > 50, then entity is an ALE and subject to shared responsibility If > 50 ALE If 50 99 2015 is a transition year If < 50 test again next year Special rule applies if 50 or more only for 120 days or less in prior calendar year and if the full-time employees in excess of 50 were seasonal workers and not employed for more than 120 days - note seasonal workers are different from seasonal employees 10

ALE Status Determination New Entity If the potential ALE was not in existence throughout the preceding calendar year, then ALE status is determined based upon whether the employer reasonably expects to employ on average at least 50 full-time employees (counting full-time equivalent employees) on business days during the calendar year An employer is treated as not being in existence in the preceding calendar year only if it was not in existence on any business day in the preceding calendar year 11

ALE Status Consequences If the controlled group is clearly an ALE, had greater than 50 FTEs and FTEEs combined and it is likely to remain in that status, then the ALE and its ALE members can determine how it wants to determine full-time status of its employees and it does not need to maintain the hours worked records on a month by month basis for each employee, unless it chooses that method 12

ALE Status Consequences An ALE that is clearly remaining in that status, may choose to maintain records to defend itself against shared responsibility penalty assessments by determining hours worked and full-time status on a month by month basis, or by using the lookback measurement/stability period method where full time status is determined based upon hours worked in a lookback period and the status holds during the stability period 13

ALE Status Consequences Initial Lookback/Stability period means lookback 3 to 12 months for hours worked in that period and did each employee average 30 or more per week, and if so then the individual is full-time status for the stability period of 6 to 12 months This means records must be maintained for each lookback period and stability period Initial hires tested for initial period, then switch to ongoing testing Ongoing employees tested annually Periods chosen determine records to capture and maintain 14

Borderline ALE Status Consequences If the controlled group of entities is on the verge of becoming an ALE or may be changing status, then the controlled group of entities must use the month by month calculation of full time status for purposes of determining its status as an ALE, but it can choose to use the month by month calculation of full-time status or the lookback/stability period for determining full-time status for purposes of defending against the shared responsibility penalty and for determining to which employees coverage must be offered to avoid the penalty This means that the entities must maintain records on both the month by month basis and on the lookback/stability period basis if the entities want to use the lookback stability period basis for penalty assessment 15

Transition Relief Fewer than 100 FTEs and FTEEs in 2014 and maintain workforce size 2/9/14 to 12/31/14 plus satisfy the conditions Maintain previously offered health coverage, no elimination or material reduction of coverage, and maintain contribution level at 95% and Q&A 34 issued 5/19 no change in eligibility means no penalty for 2015 Applies in 2016 Non-calendar year plans have several options 16

Shared Responsibility Record Keeping Realities Many systems have historically accumulated total hours per year (due to retirement plan record keeping requirements for years of service) and do not maintain records of hours worked on either a per week or per month basis Determine what records your payroll/hris maintains on hours worked and for which period and which records it retains for a month Determine if your controlled group is clearly an ALE and can choose one method of retaining hours worked records or If your controlled group is not clearly an ALE, determine if your system can be programmed for two methods of record capture and retention or if you are forced into the month by month method 17

Data Needed Hours worked data on month by month basis and employee status or equivalency method used - day/week for salaried Runs from running a regular testing protocol for FTE determination each month May use different rules to test FTE status data by specified groups separately CBU v. non-cbu Different CBU Hourly v. salaried Employee in different states 18

Shared Responsibility Record Keeping Realities Some ALEs that are clearly ALEs instead focus on designing eligibility and the offer of coverage to prevent the imposition of the shared responsibility penalty and to utilize the safe harbors for the penalty and alternative reporting rules so that they do not have to maintain hours worked records Caution: If business exigencies change and the employer may not be able to afford subsidizing coverage to the same extent in future years to use the safe harbors and alternative reporting rules (95% and 98% rules), then the employer will need to have the hours worked by month records for the preceding year captured and retained to be able to switch in a subsequent year So if in May 2015, the renewals for 2016 suggest that the employer will not be able to subsidize coverage for employees to be able to avoid the penalty and use the alternate rules, the employer will need month by month hours worked records for 2015 or the lookback periods in 2015 for ongoing employees 19

Shared Responsibility Record Keeping Realities Planning for the records you may or may not need in the future now will provide the ALE with the flexibility it will need to be able to make the determinations of full-time status in the future to change how it will defend against the penalty assessments if it must change how it subsidizes or offers coverage Failure to capture the records, will leave the ALE with fewer options if it must make a change in how it offers or subsidizes coverage in the future more difficult to defend against shared penalty responsibility Employer subsidization of coverage may need to change due to business environment changes 20

Shared Responsibility Record Keeping Realities Hourly employees have hours worked records Salaried employees generally do not but may impute hours using equivalencies Special Situation adjunct faculty, commissioned salespersons, airline employees with on call, layover pay use reasonable method till guidance 21

Are you an Applicable Large Employer Subject to Code 4980H (This flowchart does not address transition rules) Applicable large employers are employers who employ 50 or more full-time or full-time equivalent employees on 20 or more days in the month Are church or governmental employers excluded? Determine based solely on this employer's full-time employees and full-time equivalent employees No No Who is the potential ALE? Is the employer a member of a controlled group under Code 414(b), (c), (m) or (o)? Yes Make determination based on all full-time employees and full-time equivalent employees employed within the controlled group including the employer Did the employer have 50 or more full-time employees and full-time equivalent employees in the prior calendar year in the controlled group? May full-time employees who are exempt from the individual mandate or who have other coverage (Medicare, Medicaid or other group plan) be excluded from the count? No, all must be included in the count of full-time and full-time equivalent employees, including employees of healthcare ministries. A special rule applies with respect to counting individuals who qualify as "seasonal workers" for some employers. Yes No Not Applicable How many employees are expected to work 30 or more hours per week in their position in the controlled group? Exclude any employees working outside the U.S. for the entire prior calendar year. Is the total number of such full-time employees less than 50? Yes If 50 or more Less than 50 full-time employees Applicable large employer status applies - subject to Code section 4980H Determine the number of full-time employees and then calculate the number of full-time equivalent employees (see below). If the sum of the two numbers equals or exceeds 50, the employer is an ALE. Calculating Full-Time Equivalent Employees for 4980H Determination of Applicable Large Employers 1. Identify all employees who are not employed on the average at least 30 hours per week for a calendar month in the preceding calendar year. 2. Calculate the aggregate number of hours each non-full-time employee had in each month and then sum up all of the non-full-time employees monthly hours by month for a total number of hours worked by non-full-time employees for each month, but limit the hours worked by each employee in each month to 120 hours. 3. Divide the total number of hours worked by non-full-time employees for each month by 120 and that resulting number is the number of full time equivalent employees for that month. The resulting number for each month can be rounded to the nearest one-hundredth. 4. Review the resulting number of full-time employees plus the month's full-time equivalent employees (rounded to the next lowest whole number). If the employer had seasonal workers (not seasonal employees), the seasonal workers' hours are included in the calculation of full-time equivalent employees. (Treas. Reg. 54.4980H- 2(e)(i)). However, if the sum of an employer's full time employees and full time equivalent employees exceeds 50 for 120 days or less in the prior calendar year and if the employees employed during the period (when the number was in excess of 50) and those employees who were in excess of 50 were seasonal workers, the employer is not considered to be an applicable large employer and the seasonal worker exception applies. Treas. Reg. 54.4980H-2(b)(2). (Seasonal workers perform labor or services on a seasonal basis as defined by the Secretary of Labor, including workers covered by 29 C.F.R. 500.20(s)(1) and certain retail workers employed exclusively during the holiday season.) Seasonal employees are persons hired into a position in which the customary annual employment is 6 months or less.

High Level Overview of Employer Shared Responsibility Penalty Analysis (Effective 1-1-2014) Start Does the Employer have at least 50 full-time employees and r full-time equivalent employees, combined 4980H(a) and 4980H(c)(2)(E) No No penalty, but the Employer may be eligible for a special tax credit if it chooses to offer coverage 4980H(c) (2) and 45R Yes Is coverage offered to all full-time employees ( FTE ) (4980H(a) & (b) & (c)(4)) at least once per plan year 54.4980B-4(b) No Yes Did at least 1 FTE with household income below 400% FPL opt out of the Employer plan to obtain coverage via an Exchange? 4980H(b)(1)(B) & 36B(c)(1) & 36B(b)(3) & 5000A(e)(1) No Yes For this employee, is there at least one plan option available from the Employer that requires a premium contribution that is less than 9.5% of his/her household income? 4980H(b)(1)(B) & 36B(c)(1) & 36B(c)(2)(C) 5000A(e)(1); 5000A(f)(1)(C) No Yes Did at least 1 FTE obtain the federal premium credit or cost sharing reduction to buy health insurance coverage via an Exchange? 4980H(b)(1)(B) No No penalty required Yes Yes Does the plan that is affordable provide minimum value (60% actuarial value)? 36B(c)(2)(C)(ii) & 4980H(b) Employer pays No Offer of Coverage penalty of $2,000 per year per FTE (first 30 FTEs are excluded) 4980H(a) 4980H(c)(2)(D) & 4980H(c)(1) Employer pays penalty of $3,000 per year for each FTE who qualifies for a premium credit or cost sharing reduction from the Exchange (but not more than $2,000 for all FTEs in excess of 30) 4980H(b)(1) & (2)- Penalty for employer who offered coverage, but employees went to Exchange for subsidized coverage No An ALE member cannot be liable for both the penalty under 4980H(a) and under 4980H(b) in the same month. Treas. Reg. 54.4980H-5(d). This only addresses the shared responsibility penalty and does not address PCORIs, reinsurance fees, additional Medicare taxes or other costs that result from the decision.

4980H Full-Time Employee Status Determination under the Final Regulations for determining on which employees the penalty may be assessed At employment is this employee a seasonal employee hired to work in a position for which the customary annual employment is less than or equal to 6 months? No Yes Not counted as automatically being a full-time employee on whom the penalty may be assessed, but must be tested with variable hour employees below Yes Is this employee hired into a fulltime position expected to work 30 or more hours per week? No Variable Hour Employee No Not automatically a full-time employee but a variable hour or part-time employee and must determine if actual hours worked cause this person to be full-time under 4980H Count as full-time (FT) and 4980H penalty applies for failure to offer coverage or failure to provide affordable coverage that provides minimum value. No penalty if last 3 months of employment as PT employee if eligible to be offered coverage providing MV and after measurement period by last day of the month of the employee as FT Must test seasonal employees, part-time and variable hour employees under one of two methods Monthly facts and circumstances determination of application of 4980H penalty. Calculate hours worked or entitled to payment for each employee for each month and maintain monthly records. This method may be used to determine if the employer is an applicable large employer Lookback Measurement/stability period to determine application of 4980H penalty to individual measurement period; 3-12 months lookback; stability period of 6-12 but additional limits apply; measurement and stability periods can differ by groups as specified. Stability period for new employees must be same duration as stability period for existing employees. Measure and count based on initial and ongoing measurement and stability periods established by employer. Maintain records based on initial and ongoing measurement and stability periods. Categories of employees that can use different lookback/stability periods: CBA v. non CBA Different CBAs State in which located Hourly v. salaried Must offer coverage by first day of 4 th month month after end of measurement period to avoid 4980H penalty for first 3 months after measurement period ends This method cannot be used to determine if an employer is an applicable large employer.

Shared Responsibility Reporting 1/31/2016 employer must file Form 1095-C or 1094- C Offer of coverage by month for full-time employees MEC provided by month for self insured plans Dependents names, DOB and SSN if covered by month 25

Shared Responsibility Tax Mechanics January 31, 2016 employers file Form 1095-C and 1094-C reporting offers of coverage and give certificates to employees by month of offer and self insured employers also report MEC provided by month After individual tax returns filed April 15 to October 15, 2016 IRS will send notices of assessment to employers after reviewing individual returns and Forms 1095-C Employers must respond as to why Shared Responsibility Penalty should not apply for those employees for which it received an assessment Employers must have data on hours worked by month, safe harbors used, alternate reporting, full-time status of employees and offers of coverage, and cost of coverage for employee and dependents 26

Shared Responsibility & Transactions No transition rules for M&A to date Analysis described for application to M&A is to use the analysis in the regulations for new entities or who is part of the ALE? Key question is the entity resulting from the transaction a new entity or is it part of an existing applicable large employer? ( ALE ) - FIND THE ALE and where it began 27

Shared Responsibility & Transactions General rule ALE status determined based on full-time employees in the preceding calendar year For a new employer (no employees on any business day in the preceding calendar year), does the employer expect to employ 50 or more employees on more than 120 days in the current calendar year? 28

Shared Responsibility Newly Acquired Entity If an ALE acquires another business and brings it and its employees into the ALE s controlled group, then, absent any transition relief, the acquiring entity must start determining the full-time status under 4980H at the acquisition and make the offer of coverage or pay the penalty immediately (or after administrative period for new hires) May be an incentive for transition services agreements/purchasing COBRA from seller through 12-31 Remember shared responsibility employees include all common law employees 29

Shared Responsibility New Joint Venture If an ALE enters into a joint venture with another entity creating the new JV and the ALE does not own 80% or more of the JV, then the JV is in a separate controlled group from the ALE and the JV s status as an ALE is determined under the new entity rules depending upon whether it expects to employ 50 or more full-time employees in that year for 120 or more days, if not, it is not an ALE 30

Shared Responsibility Asset Purchase If an ALE buys the assets of another entity and combines that business within one of the entities in the ALE, the ALE Member taking over the operation of that business will be subject to the shared responsibility penalty on the employees acquired effective as of the date of the acquisition (after any administrative period for that group) currently, unless transition relief is provided 31

Why Care About Shared Responsibility Penalty Tax? Taxes are liabilities Unpaid taxes become liens on the company s assets Liens can cause issues under bank covenants acquisition agreements reps and warranties 32

Health Plan Liabilities in M&A Transactions after ACA 2 employers each with ACA exempt retiree only plans Retiree Plan A Retirees John and Sue Employer A Employer B Retiree Plan B A Retiree Plan Merger New Employer B Retiree Plan John and Sue retired from Employer A and participate in A s retiree medical plan John and Sue go to work for Employer B John and Sue will be current employees and retirees in the controlled group 33

Employers A & B merge into Newco Issues after ACA Newco continues to maintain Retiree Plan A and Retiree Plan B John & Sue continue to be employed by Newco and to participate in the Retire Plan A Retiree Plan A covers John & Sue as retirees, but they are now also current employees of the combined entity Newco employs John and Sue as of the first day of the next plan year and Retiree Plan A now covers 2 current employees of Newco and loses its exempt status No transition rule on exempt status post M&A - potential violation by retiree plan of all of ACA mandated coverage requirements- ($36,500 per person/year/requirement) No 4980H transition rule No 9815 transition rule No 4980D transition rule 34

Health Plan Issues after ACA Retiree Plan B May still be exempt as long as fewer than 2 current employees of Newco are covered Newco Retiree Plan A ceases to be exempt on January 1 because it now covers 2 current employees 35

Exempt Status Preservation for Retiree Only Plans Need to review whether the employees of the other entity involved in the acquisition s employees include any retirees covered by your retiree medical plan and vice versa Consider options for retirees who are employees of the other entity (remember ERISA 510, ADEA and MSP) Move to active coverage and address cost differential or amend retiree plan to exclude current employees of CG Loss of exempt status means no dollar limits on benefits and other mandates under ACA apply to retiree plan Retiree Plan in violation of ACA coverage mandates pays penalty of $36,500/year/person per standard violated. There are many standards No transition rule in the statute for violations of ACA coverage mandates for acquisitions 36

Strategies to Preserve Exempt Status Provide sufficient time between acquisition and end of plan year to address retirees hired by other entity Remember ERISA 510, ADEA, MSP etc. as you strategize Retaliatory discharge to prevent from obtaining benefits- first case survived motion to dismiss in Ohio No age based discrimination No discrimination based upon eligibility for Medicare due to age, disability or ESRD Consider Transition Service Agreements or purchase COBRA coverage for employees from seller 37

Why Care About Loss of Exempt Status? Increased costs to operate plan due to ACA coverage mandates Penalty taxes for violations of Standards Unpaid penalty taxes become tax liens 38

New Records to Review and Request Plan Status Exempt v. Covered by ACA v. Excepted Benefit Grandfathered v. Nongrandfathered Which employees offered coverage Which employees and dependents elected coverage Dependent name, DOB and SSN 39

New Records to Review and Request Data on safe harbors used Information on Alternative Reporting used Plans, SPDs, SBCs SMRs, SMMs 40

New Records to Review and Request Status codes of employees tested by different classification Records of any safe harbor designs Hours worked by month by employee Pay rates by employees 41

Questions? Thank you. Caveat: These slides do not constitute legal advice and no action should be taken based upon the contents of these slides because these are a very high level summary of the current rules and all circumstances must be considered when determining the application and best strategy for a particular employer or situation. Greta E. Cowart gcowart@winstead.com 42