As the judicial challenges and political battles surrounding the Patient Protection and Affordable Care Act ( ACA ), also known as healthcare reform, come to an end, companies nationwide are faced with a daunting task in understanding healthcare reform, assessing its financial impact on their business, and developing strategies that ensure compliance with the ACA while protecting their bottom line. The first and most important step for a company interested in assessing their risk under the ACA is to identify the different elements of health care reform and determine how they will impact their business. The ACA will have a different effect on a company based on its size (number of full time equivalent employees), the type of medical benefits offered, the cost of their benefit coverage, and the demographics of the company s employee population. These elements will be analyzed under the three pillars of the ACA which will allow an employer to assess the financial impact of health care reform on its business. The three pillars of the ACA are: 1) Market reform changes; 2) Individual and Employer Play or Pay Mandates; and 3) Expansion of Healthcare coverage through Medicaid Expansion and the implementation of Exchanges (Marketplaces). I. MARKET REFORM CHANGES The first pillar of the ACA is market reform. Market reform includes a series of provisions that guarantee protection of the individual consumer of health care coverage. The new mandates apply to benefit coverage purchased through the private insurance market or an employer-sponsored plan. Many of the market reform changes apply to employer plans regardless of size, funding status (insured, self-insured or partially-self-insured) or grandfathered plan status, while others are directed to small employer plans (plans covering 50 or less employees) or non-grandfathered plans. The provisions that apply to employers regardless of size or grandfathered plan status include all of the following: 1) elimination of pre-existing condition exclusions; 2) elimination of restrictive annual and lifetime dollar limits on essential health benefits; 3) extension of coverage to children up to the age of 26 regardless of availability of other coverage (applicable to grandfathered plans in 2014); and 4) limits on waiting periods for coverage (not to exceed 90 calendar days from date of hire or 60 days from date of hire for policies issued in California or policies that insure CA residents). Other market reform changes apply exclusively to small employers and become effective on the first day of the plan year renewing in 2014. The most significant change impacting small employers is the adoption of community rating to establish the rate structure of an insured policy. The new underwriting guidelines for a small group are anticipated to increase the cost of coverage for certain small employers between 35% and 45% annually. Other provisions limit an employer s ability to design their group health by imposing limits on annual deductibles (not to exceed $2,000 for individual and $4,000 for family) and annual out-of-pocket expenses (OOP) which may not be greater than $6,350 for single coverage and $12,700 for family coverage (the OOP limits also apply to non-grandfathered plans regardless of size). Market reform changes applicable to non-grandfathered plans, regardless of size, include covering preventive care at no cost, covering clinical trials, granting access to a pediatrician and an OB/GYN without the need of a referral, and access to emergency services without the need of preauthorization.
Page 2 of 9 The second pillar of the ACA focuses on the new coverage mandates for both individuals and employers, which are respectively referred to as the individual mandate penalty and the employer Play or Pay mandate (Employer Shared Responsibility). II A. INDIVIDUAL MANDATE As of January 1, 2014, the ACA implements an individual mandate on all citizens and legal residents of the United States. The individual mandate requires all citizens and legal residents of the Unites States to retain minimum essential coverage. Minimum essential coverage can be obtained through any of the following channels: 1) a government-sponsored program, including coverage under Medicare Part A, Medicaid, the CHIP program, VETS and TRICARE; 2) an employer-sponsored medical plan that is not an excepted benefit plan (including a plan sponsored by a spouse s employer); 3) a health plan offered in the individual market; 4) a grandfathered health plan (insured or self-insured); 5) a plan offered by a Native American Tribe; and 6) other health benefits coverage, such as coverage from a State health benefits risk pool or an Insurance Exchange. Failure by an individual to retain minimum essential coverage during 2014 will result in the imposition of a penalty equivalent to the lesser of: The sum of the monthly penalty amounts The sum of the monthly national bronze plan premium for the member(s) in a household The monthly penalty will be the greater of: The flat dollar amount the lesser of penalty applicable to each member of household (one twelfth of $95 individual in household, or one twelfth of $47.50 for children under 18) or 300% of individual penalty (one twelfth of $95 for household of one or one twelfth of $285 per household). Amounts increase to $325 in 2015 and $695 in 2016, then adjusted by COLA. Excess income amount product of excess taxpayer s household income over taxpayer s filing threshold, and the income percentage (for 2014 1% of modified adjusted gross household income (MAGHI). Income percentage will increase annually to 2% in 2015 and 2.5% in 2016, then COLA adjustment. Note that the penalty will apply to all the members of a household, therefore if the taxpayer (employee) insures himself under an employer sponsored plan, but not his spouse and children, the taxpayer will be responsible for paying a penalty for the members of his household (tax dependents) that are uninsured. There are a few exceptions to the imposition of the individual penalty, the most notable are: 1) Members of recognized religious sects or divisions who have religious objections to healthcare ; 2) Incarcerated individuals for any month in which they spend at least one day in jail after the disposition of charges; 3) Individuals who have access to unaffordable coverage. Unaffordable coverage is coverage that costs more than 8% of the individual s MAGHI. The cost of coverage is determined based on the lowest cost plan offered under an employer-sponsored plan (if the individual is eligible for employersponsored coverage). If the individual is ineligible for employer-sponsored coverage, the coverage is deemed to be unaffordable if the cost of coverage under a Marketplace is greater than 8% of the individual s MAGHI; and 4) Gaps in coverage of less than 90 consecutive days (does not include gaps in coverage prior to January 1, 2014). It is important for companies to identify and quantify the number of employees currently waiving coverage, for themselves and/or their families, as these individuals may pursue employer-sponsored coverage in 2014 and 2015 in an effort to avoid the imposition of the individual mandate penalty. This analysis should also identify the newly eligible full-time employees as defined by the ACA as a sudden
Page 3 of 9 increase in enrollment (15% or more) in an employer s plan may lead an insurance carrier to re-rate the medical plan. Claim costs may increase for self-insured plans when new individuals are kept covered by the plan, which will likely impact the pricing of a stop-loss policy as the stop-loss carrier may also choose to re-rate the stop-loss policy. II B. EMPLOYER PLAY OR PAY MANDATE / EMPLOYER SHARED RESPONSIBILITY (ESR) Applies to large employers defined by the ACA as employing 50 or more equivalent full-time employees (FTE) during 120 calendar days or more in the previous calendar year. To determine the number of equivalent FTEs (employees not working at least 30 hours/week or 130 hours/month), the employer must aggregate the number of hours of service per month (capped at 120 hours of service per employee) for all non-full time employees, including seasonal employees, and divide the service hours by 120. The result represents the number of equivalent FTEs, which is the added to the number of full time employees of the employer. Employer members of a controlled group, as defined in IRC 414(b), (c), (m) or (o), must aggregate to determine if they are a large employer. However, each company that is part of a controlled group will be treated separately for the purpose of assessing penalties under the ESR. For the 2014 calendar year, employers who are close to the 50 employee threshold are provided transitional relief. The relief allows employers to select a period of at least six consecutive calendar months in the 2013 calendar year to determine if the employer employed an average of 50 full time employees or more. For example, an employer can use January-February to establish its counting method, March- August (six months) to determine if the employer employed 50 employees or more during 2013, and September through December to make arrangements to offer coverage to employees if the employer employed 50 or more employees during the six month period. It is unclear if this transition relief will extend to employers in 2015; therefore, employers that employ more than 50 FTE during 120 days or more in 2014 should make arrangements to comply with the Play or Pay mandate in 2015. Large employers are required to offer full-time employees (employees regularly scheduled to work 30 hours or more per week / 130 hours or more per month), minimum essential coverage (coverage other than an excepted benefit plan) that is affordable (cost of employee only coverage is not greater than 9.5% of the employee s household income) and is minimum essential value (has a 60% actuarial value). Coverage must be offered to full time employees no later than 90 calendar days counted from the employee s date of hire (for CA residents no later than 60 days from date of hire). An employer s failure to offer medical coverage to a FTE or to offer coverage that fails to meet the minimum essential value or that is unaffordable will result in the imposition of a penalty. Failure to offer minimum essential coverage The annual penalty for failure to offer minimum essential coverage (medical coverage other than excepted benefit coverage) to at least 95% of the employer s FTEs is assessed when as little as one of the uninsured FTEs of the employer purchases coverage from an Exchange (Marketplace) and receives a subsidy. If at least one employee receives subsidized coverage from an Exchange, note that if the employer is part of a controlled group, the employer does not receive the full 30 employee discount, but rather a prorated number of employees (from the 30) based on the total number of employees of the controlled group. The penalty assessed on that employer is $2,000 multiplied by the total number of FTEs of the employer discounted by the first 30 employees. This penalty will be assessed on a monthly
Page 4 of 9 basis ($166.67 X number of FTEs - 30) for as long as the employer fails to offer medical coverage to its FTEs and the employee(s) receive a subsidy from an Exchange. The penalty amounts will be indexed in 2015; therefore, the penalty could be greater than $2,000. Coverage that does not meet the minimum essential value or is unaffordable The other penalty an employer can be subject to even if the employer offers minimum essential coverage to full time employees is the penalty for failure to offer a plan that meets the minimum value or coverage that is affordable. A minimum value plan is a plan that has an actuarial value of at least 60%. A plan that fails to meet this requirement is usually a benefit plan with a high deductible, low coinsurance levels, and high copayments, as well as plans that are known as mini-med plans as those plans will no longer be available in 2014. An employer who fails to offer a minimum value plan will be subject to a $250 penalty per month, ($3,000 per year) for each FTE who waives employer coverage and receives subsidized coverage from an Exchange. A minimum essential coverage plan is deemed to be affordable if the annual cost of employee only coverage does not exceed 9.5% of the employee s household income. Due to the fact, that employers cannot determine what the employee s household income is in assessing the affordability of coverage, the IRS in proposed regulations offered employers three options to assess the affordability of their coverage. The three safe harbors are: Box 1 of Form W-2 Form: The employer uses the wages reported on Box 1 (annual wages reduced by Cafeteria Plan contributions and 401(k) and 403(b) contributions) of an employee s W-2 Form to determine if the annual cost of medical coverage is equal or less than 9.5% of the employee s income. The determination is made after the end of the calendar year and on an employee-byemployee basis (thus, the determination of whether an employer actually satisfied this safe harbor is made after the end of the applicable calendar year). However, the employer may also use the safe harbor prospectively, by setting the employee contribution for the year at 9.5 percent of that employee s W-2 wages for that year and automatically deducting 9.5 percent (or less) from each employee s W-2 wages each pay period. Rate of pay: Under the rate of pay safe harbor, the employer determines affordability by multiplying the hourly rate of pay for each hourly employee by 130 hours per month (or uses the monthly rate of pay for salaried employees) and then multiplies that amount by 9.5%. The resulting amount represents the employee contribution for employee only coverage under the employer s lowest cost plan that provides minimum value (has 60% actuarial value). Employers may use this method provided the employer does not reduce the rate of pay for employees during the year. Note that this option may be more beneficial for employers than the W-2 safe harbor in assessing the affordability of their plans, as it takes into account the employees full rate of pay or monthly wages (salaried employees) prior to any Cafeteria Plan or retirement plan deductions. Federal Poverty Level (FPL): Under this option, an employer s coverage is affordable if the employee s cost for self-only coverage does not exceed 9.5 percent of 100% of Federal Poverty Level for a single individual (i.e. for 2013 $11,490 x 9.5% = $1,092/12 = $91 per month).
Page 5 of 9 If the employer sponsored plan is unaffordable, a FTE is allowed to waive employer-sponsored coverage and enroll in an Insurance Exchange. If the FTE enrolls in an Insurance Exchange and receives tax subsidized coverage (adjusted gross household income is greater than 100% but below 400% FPL), the employer becomes subject to a monthly penalty of $250 ($3,000 per year) for each FTE that purchases subsidizes coverage under an Exchange. The maximum penalty that can be assessed on an employer that does not offer coverage to FTEs that meets the minimum essential value or coverage that is affordable is $2,000 multiplied by the total number of FTE of the employer minus the first 30 employees (penalty for not offering coverage to FTE). However neither penalty would apply to employers with full time employees who are not offered coverage or waive employer sponsored coverage and enroll in Medicaid coverage, employees who choose to remain uninsured, employees who choose to enroll in Medicare, or elect coverage under another plan, such as their spouse s plan, parent plan, TRICARE, VETS, or a retiree plans or a former employer s plan (COBRA). Full-time Employee Determination- New Hires For purposes of determining if a new employee works as a FTE (works 30 hours or more per week or 130 hours per month) during a 90-day period, the IRS stated in IRS Notice 2012-58 and interim final regulations issued on December 28, 2013, that an employer is required to perform the following analysis for each new employee: 1. If at the time the employee is hired, the employee is regularly scheduled to work 30 hours or more per week during a calendar year, the employee must be offered benefit coverage once the employee satisfies a 90-calendar day waiting period counted from the employee s date of hire (60 calendars days for CA residents). 2. If at the time the employee is hired, the employer cannot reasonably determine if the employee is or will be a full time employee (work hours fluctuate over and under 30 hours per week/130 hours per month), the employer may use an initial measurement period (IMP). The IMP may only be applied to variable hour employees and seasonal employees in determining their status as a full time employee. An IMP will apply independently to each new hire that is a variable hour or seasonal employee, and cannot be less than three months or greater than 12 months. The IMP may be counted as of the employee s date of hire or first of the month following the employee s hire date. Following the end of the IMP, the employer can use an administrative period (AP) no greater than 90 days (30 days and a fraction of a month for employers using 12 month initial measurement periods) to conduct the appropriate calculations and offer coverage to the new full time employees. Under no circumstance may the IMP and AP combined extend past 13 months and a fraction of a month counted from the employee s hire date. The AP will be followed by a stability period (SP) that will be the greater of six consecutive months or the duration of the IMP. Throughout the term of the SP an employee who was deemed to be a full time employee during the IMP, must be offered benefit coverage regardless of the number of hours worked. Benefit coverage under the SP can only be terminated if the employee ceases to be employed by the employer, assuming that the employee is not rehired during the term of the SP, or if the employee fails to makes timely premium payments. Premium payments are deemed to be timely if made within 30 days of their due date.
Page 6 of 9 Most employers in the food processing industry will benefit greatly from implementing a 12- month initial measurement period for variable hour and seasonal employees as it allows employers to capture cyclical changes in their businesses. In most cases, variable hour and seasonal employees subject to a 12-month measurement period will not meet the requisite number of hours worked (1560 hours in a 12 month period) to be treated as full time employee or become benefit eligible. In addition, the implementation of measurement periods for variable hour and seasonal employees will allow employers to run reports on a periodic basis to determine how to best manage the schedules of these employees. Full time determination-ongoing employees (employees who have worked for one measurement period) Under existing guidance, an employer may implement a measurement period, a look-back period, also known as the Standard Measurement Period (SMP) no greater than 12 months but not less than three months, to determine if all existing employees worked on average 30 hours or more per week (130 hours per month). Following the SMP, the employer is granted with an Administrative Period (AP) no greater than 90-calendar days to conduct its calculations and offer coverage to the new full time employees. The AP is followed by a stability period (SP) which not be less than six months, but not greater than 12. Assuming the SMP is 12 months, the SP must be also be 12 months, as the SP shall never be shorter than the SMP. If the SMP for ongoing employees is 12 months, the IMP for new variable hour and seasonal employees must be of the same duration (12 months), as new employees will be measured both under the IMP and the SMP. As described in the new hire calculations, coverage under a SP may not be terminated for a reason other than failure to pay premiums on a timely basis or termination of employment. As employers prepare to implement measurement periods, they must take into account the complexity associated with properly counting hours, as the employer is not only required to count hours worked by the employee, but also hours for which an employee is entitled to pay, even if the hours were not worked, such as in the case of vacation time, holiday pay, sick time, PTO, disability pay, etc. In addition, an employer is also required to track and count hours when an employee is on a special unpaid leave, such as unpaid leave under the Family and Medical Leave Act (FMLA), the Uniformed Services Employment and Reemployment Rights Act (USERRA), and jury duty, where the employee is deemed to be a continuing employee (employee resumes his position upon expiration of the leave). During the unpaid leaves, an employer is allowed to use one of the two methods in determining if an employee satisfied the definition of a full-time employee. The methods are the averaging method and the crediting hours method. The averaging method requires the employer to determine the average number of hours of service per week during the measurement period excluding the period of special unpaid leave, and to use that average for the entire measurement period. The crediting hours method requires the employer to credit the number of hours of special unpaid leave at a rate equal to the average weekly rate the employee earned during the period that was not special unpaid leave. Employers should carefully review the rules governing measurement periods (IMP and SMP) to ensure their payroll systems can properly track and report hours, especially if the employer intends to administer different measurement periods for any of the following employees: i) each group of collectively bargained employees subject to separate collectively bargained agreements; ii) collectively
Page 7 of 9 bargained and non-collectively bargained employees; iii) salaried and hourly employees; and iv) employees who are in different states. If an employer s payroll system is incapable of tracking or administering separate measurement periods, an employer may choose to adopt a uniform SMP for all employee classifications. Employers who had historically excluded from their benefit plans a large number of their full time employee population will face greater challenges, as they will have not only to extend coverage to newly eligible employees but also make sure that their plan is affordable and meets the minimum value. In addressing an employer s responsibility under the Play or Pay mandate, an employer should not only focus on identifying their new eligible full time employee population, but also identify the right plan design and contribution strategy that will accomplish the desired financial goals of the employer and migration into or out of the employer s benefit plans. The third pillar of the ACA is making health care coverage available to a larger number of Americans via Medicaid expansion and the creation of insurance marketplaces (Exchanges). III A. MEDICAID EXPANSION States pursuing Medicaid expansion will make Medicaid available to their legal residents under the age of 65 (and not entitled to Medicare), with household incomes less than 138% of the Federal Poverty Level (FPL). Medicaid expansion will allow low income individuals (in 2013 an individual with an annual household income not greater than $15,856 and a family of four with an annual household income not greater than $32,499) including those who have access to employer based coverage; to enroll in Medicaid for no cost or for a cost no greater than 2% of their adjusted gross household income. Enrollment in Medicaid commenced on October 1, 2013 with coverage becoming effective on January 1, 2014. Employers with employees residing in states expanding Medicaid will be at a lower risk of becoming subject to penalties under the employer Play or Pay mandate, as employees pursuing coverage under an Exchange (Marketplace) will be automatically enrolled in Medicaid if they qualify. On the contrary, employers with employees residing in states not expanding Medicaid will have a greater risk, as low income full time employees who are not offered benefit coverage or waive employer sponsored coverage because it is unaffordable or it is not minimum value will be enrolled in a subsidized plan offered through an Exchange, triggering penalties against their employer. In developing a healthcare reform strategy, employers should identify all of the states where their employees reside, whether the state is expanding Medicaid or not, and how many of its employees may potentially qualify for Medicaid, as that information will enable the employer to better define the plan design and benefit contribution structure to offer its employee. In some cases, the employer may consider implementing lower employer contributions for coverage in states where Medicaid is not expanding to mitigate its penalty exposure. III. B. INSURANCE EXCHANGES (MARKETPLACES) Effective January 1, 2014, exchanges will extend coverage to Medicaid recipients and make available tax credits to 24 million Americans who do not have access to minimum essential coverage and whose household incomes are greater than 100% of the FPL but less than 400% of the FPL. Exchanges will also offer small employers (employer with less than 50 employees) a Marketplace, the Small employer
Page 8 of 9 Health Options Program (SHOP), where the small employer will be able to purchase coverage from various carriers without concerns for meeting participation requirements. The marketplace will be predicated upon a defined contribution model which will allow the employer to set the level of coverage desired; consolidated billing and eligibility; and access to the Small employer s Health Business Tax Credit (when applicable). Those pursuing coverage from the public individual Exchanges will be a combination of uninsured individuals, the underinsured (those who are offered plans that are not minimum essential coverage), self-employed individuals, and employees who will find their employer health coverage not to be minimum value and/or affordable (cost is greater than 9.5% of the employee s household income for self-only coverage). Subsidies will be provided in the form of a premium credit and/or a reduction in outof-pocket expenses. Individuals with household incomes below 250% of the FPL will be recipients of both subsidies, while individuals with incomes above 250% of the FPL will only receive premium credits. Subsidies will be embedded in the plan design and premium cost of plans offered to individuals when they apply for coverage through an Exchange. Rates for medical coverage will be based on four factors: the individual s age (3:1); zip code; smoker or non-smoker status (1.5:1); and the tier of coverage sought (single or family). An individual s medical history or health risks will no longer be a factor. The plans offered by Exchanges will range from a 60% actuarial value (Bronze plan) to a 90% actuarial value (Platinum), which in most cases will mirror the plan design offerings of employer plans nationwide, however the cost structure of each plan in an Exchange will vary based on the individual s household income. Exchanges, like employer sponsored plans, will also limit enrollment to an annual open enrollment period (October 1, 2013 through March 31, 2014) and mid-year enrollments pursuant to a family status change. CONCLUSION As part of an employer s healthcare reform strategy, an employer should not only implement measurement periods to identify its new full time employee population, but also compare its lowest cost plan that is affordable and is minimum value against Medicaid (in states expanding) and coverage under an Exchange coverage in state(s) where its employees reside. This analysis will allow an employer to determine the type of migration the employer should anticipate in 2014 and beyond, as well as assess the cost that healthcare reform will have for its company. In most cases, employees who are offered employer coverage that is minimum essential coverage, affordable, and meets minimum value, will not qualify for subsidized Exchange coverage for either themselves or the members of their household. Therefore, a plan that is ACA compliant may see an increase in the number of employees electing coverage for themselves and their dependents as the cost of unsubsidized Exchange coverage will be unaffordable to most employees. In addition, many employees who have historically waived coverage will pursue employer based coverage in an effort to avoid the imposition of the individual mandate penalty. It is also anticipated that older employees with higher income thresholds (household incomes above 250% of the FPL), and employees with chronic health conditions will select employer sponsored coverage over Exchange coverage as employer sponsored coverage will be more affordable (not age rated and premiums are paid with pre-tax dollars) and provide access to greater networks and providers. In some states, carriers participating in Exchanges will be offering limited networks, and rates will be higher for older individuals. It is also important for the employer to assess the migration out of its
Page 9 of 9 benefit plan, especially in states expanding Medicaid, as many of the younger, healthier and lower compensated employees (good health risk) may qualify for coverage under Medicaid. Ultimately, the employer will be required to develop a plan design and contribution strategy that will enable the employer to avoid the imposition of penalties under the employer Play or Play mandate, retain a desirable insurable population, and control its health costs. ###