Pay, Play or Just Pray: In-Depth with the New “Employer Shared Responsibility” Rules

1. Pay, Play or Just Pray: In-Depth with the New “Employer Shared Responsibility” Rules John BarlamentQuarles & Brady LLPjohn.barlament@quarles.com414.277.5727

2. Play or Play: Topics for Today • Concordia Plan Services hired Quarles & Brady for assistance with Employer Shared Responsibility (“Pay or Play”) Rules • Concordia Plan Services thanks Quarles for permission to share resources (e.g., Pay or Play Guide) • Introduction / forecast • Seven steps to Pay or Play Rule • Strategic considerations for employers • Other Affordable Care Act (“ACA”) issues • Questions?

3. Seven Steps to Understanding Pay or Play • Understand general Pay or Play Rule concepts • Is the employer a “large employer”? • Will any employees receive federally-subsidized Exchange coverage? • Does the employer offer minimum essential coverage under an employer plan? • Does the plan provide minimum value? • Is the plan’s coverage affordable? • Is coverage offered to all “full-time” employees?

4. Step 1: Understand General Rules • 2014 and Before: Employer can refuse to offer coverage without any federal penalty • 2015 and Beyond: Employers are not required to provide health insurance to employees, but tax applies if full-time employee receives federally-subsidized Exchange coverage • No exclusion for governmental, church or non-profit employers • Complicated transitional relief (see upcoming slides) results in effective date going into 2015 or 2016 • Employers likely must measure in 2013 / 2014 to know who is full-time as of 2015 • Measure in 2014 / 2015 to know who is full-time as of 2016

5. Step 1: Effective Date • If do not qualify for effective date transitional relief, employer’s compliance date is 1/1/2015 • “Mid-sized” employer compliance date • For employers with 50-99 employees, compliance date is generally 1/1/2016, IF: • 50-99 determined based on average number of full-time and full-time equivalent (FTE) employees on business days in 2014 (can use 6-month rule) • From 2/9/2014 – 12/31/2014, employer does not “impermissibly” reduce workforce size • No “material reduction” in coverage offered as of 2/9/2014 during the “coverage maintenance period” • No “material reduction” in Concordia Health Plan coverage has occurred • Employer certifies it meets these requirements (Form 6056) • Practical thought: “Laminate” plan as of 2/9/2014

6. Step 1: Effective Date • For 2015, can determine large employer status by using 6+ consecutive calendar months in 2014 • E.g., if Fall is busiest time, can choose 1/1/2014 – 6/30/2014 to determine large employer size • For 2016 and beyond, rule goes away • But, “limited non-assessment period” (“LNP”) applies, so employer that has just become “large” has no penalty for January, February, March if offer minimum value coverage by April 1 (if no coverage offered in prior year) • Only applies once (e.g., if employer goes “up and down” in size)

7. Step 1: Dependent Coverage • Tax depends on whether “minimum essential coverage” was offered to full-time employees “(and their dependents)” • Dependents do not include spouses (so spousal carve-out ok for Pay or Play Rule purposes) • Must offer coverage to children (defined in Code Section 152(f)(1)) • Includes biological children and adopted children • New: Does not include stepchildren and foster children (but, under “age 26” mandate, usually must cover anyways) • New rules allow some technical changes (e.g., can exclude certain children who are not U.S. residents) • Some transitional relief also provided

8. Step 1: Possible Penalties • Subsection A Penalty: If employer does not offer minimum essential coverage: • $2,000 (annual, but calculated on monthly basis) tax per full-time employee, if at least one full-time employee obtains federally-subsidized Exchange coverage • Calculated after first 30 (80 for 2015 and part of 2016, if 100+) employees; 5% (30% for 2015 and part of 2016) de minimis • New: Employees in LNP do not “count” against 5% / 30% • LNP employees also include: • First three full calendar months of employment (Monthly Measurement Method; Look-Back Method for New, Full-Time) • Initial Measurement Period and Administrative Period for New, Variable Hour, Part-Time and Seasonal Employees • Also, if such employee experiences a “change in employment status” • Partial calendar months where start date is not 1st of month

9. Step 1: Possible Penalties • Subsection B Penalty: If employer does offer minimum essential coverage but at least one full-time employee obtains federally-subsidized Exchange coverage: • Tax is lesser of $3,000 per subsidized full-time employee, or $2,000 per all full-time employees (annual, but calculated on monthly basis)

10. Step 2: Is the Employer a Large Employer? • Check if employer has at least 50 full-time (including full-time equivalent (FTE)) employees during preceding calendar year • Includes common law employees, FTE part-time, FTE seasonal, controlled group • IRS guidance defines “employee” as: “a worker who is an employee under the common-law test” (excludes independent contractors) • No exclusion for H-2A or H-2B visa holders • For purposes of determining whether the rule applies, a “full-time” employee is an individual working 30+ hours per week • IRS: 130 hours of service in a calendar month = 30 hours of service per week

11. Step 2: Is the Employer a Large Employer? • “Hours of service” include: • Hour for which employee is paid, or entitled to payment, for the performance of duties for the employer; and • Hour for which employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence • Comments requested relief / clarification regarding disability (STD, LTD) but none provided • Argue person is no longer an “employee”? • What about workers’ compensation leave?

12. Step 2: Is the Employer a Large Employer? • Does NOT include: • Volunteer or intern with no compensation • “Bona fide volunteer” hours, if employee of government entity or 501(c) organization, if “limited” compensation • Students in position subsidized through federal/state work study program • Religious order employee if subject to vow of poverty

13. Step 2: Is the Employer a Large Employer? • “Hours” calculated on actual hours of service for hourly employees • Even that can be tricky • E.g., “on-call” hours where person is paid a nominal amount – use “reasonable method” • Not “reasonable” to fail to credit if: (1) payment is made or due; (2) employee required to remain on-call on employer’s premises; (3) imposes “substantial restrictions” on using employee’s time for own purposes

14. Step 2: Is the Employer a Large Employer? • Rules for non-hourly employees • “Must” use actual hours worked or an equivalency • Equivalency generous to employees • 8 hours of service for each day if have 1 hour of service (includes paid leave) • 40 hours for a week, if have 1 hour of service • But, do not use equivalency if effect is to substantially understate hours (e.g., surgeon working three 12-hour days) • Could also affect “large employer” status • Special rule for adjunct faculty • 2 ¼ hours for each hour of classroom teaching plus • 1 hour for each additional hour member “spends performing duties he or she is required to perform” (e.g., office hours or required attendance at faculty meetings) • So, must colleges “track” those hours?

15. Step 2: Is the Employer a Large Employer? • Step 2(d): Determine number of FTE part-time employees • Basically, convert part-time employees into full-time employees • Formula set out in regulations

16. Calculating Number of FTEs Illustration of Calculating Number of FTE Employees. Farmer Inc. has 40 full-time employees from January through December 2016. Farmer Inc. also has 30 additional employees who assist during the busiest time of the year, a five-month period from May through September. Ten of the 30 employees work 100 hours per month during those five months, while twenty of the 30 employees work 125 hours per month. How many FTEs does Farmer Inc. have? Is Farmer Inc. subject to the Pay or Play Rule? Farmer Inc. would calculate its FTEs as follows: • Aggregate Hours. The aggregate hours for each of the five months will equal: [(10 employees x 100) + (20 employees x 120)] = 1,000 + 2,400 = 3,400 aggregate hours per month. Note that the maximum number of hours considered is 120, even though twenty of the employees actually worked more (here, 125 hours). The extra five hours (125 - 120) are ignored. • Divide by 120. Divide the aggregate hours (3,400) by 120. The result is 28.33, which is the FTE number for each month. • Add Full-Time Employees. Now add to the FTE number (28.33) the number of full-time employees for that month (here, 40). For May through September, Farmer Inc. has 68.33 employees who are counted (full-time plus FTE).

17. (4) Add Each Month. Now add up the numbers for each month. (5) Divide by 12. Now divide the yearly total by 12. 621.65 / 12 = 51.80. Farmer Inc. has at least 50 counted employees (full-time plus FTE). Farmer Inc. is therefore subject to the Pay or Play Rule.

18. Seasonal Worker Special Rule • If employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year; AND • Employees in excess of 50 who were employed during that period of no more than 120 days were “seasonal workers”, employer would NOT be subject to Pay or Play Rule • “Seasonal worker” defined at 29 C.F.R. Section 500.20(s)(1) • “Reasonable, good faith interpretation” for now • Also, special rules for “seasonal employees” – generally limited to 6 months of employment • Likely that students hired to work summer months may be considered “seasonal” – but, what if also work year-round?

19. Seasonal Employee Special Rule • University may need to decide whether student employees are “seasonal” workers if, without student employees, University would not be a large employer • E.g., students work at summer camps, landscape maintenance, snow removal • With such a University, if student employees are “seasonal,” University not a large employer

20. Step 3: Will Employees Receive Subsidized Exchange Coverage? • Always possible for an employer (with help from insurer / TPA) to design health plan so employer never faces Pay or Play Rule penalty • But employer must follow three requirements • (a) Offer “Minimum Essential Coverage” under an “eligible employer-sponsored plan” to all its full-time employees (and dependents) who are eligible for subsidized Exchange coverage • (b) Ensure employer’s plan provides “Minimum Value” (“MV”) • (c) Ensure employee’s share of premium for self-only coverage for employer’s lowest-cost, Minimum Value plan is “Affordable” • Steps 4 – 6 discuss each point

21. Step 4: Offer Minimum Essential Coverage? • Easy test – Concordia Health Plan provides minimum essential coverage • How does an employer “offer” coverage? • IRS regulation: Generally must have opportunity to enroll (or not enroll) once per year if plan is not minimum value or not affordable

22. Step 5: Does Plan Provide Minimum Value? • “Minimum value” definition under ACA: No minimum value if “plan’s share of the total allowed cost of benefits provided under the plan is less than 60 percent of such costs” • Easy test – all Concordia Health Plan options provide more than minimum value

23. Step 6: Is Plan Coverage Affordable? • Employee can obtain subsidized Exchange coverage if income at least 100% of federal poverty level (“FPL”) and not more than 400% FPL (about $92,000 today for a family of four) and either not MV or: • Employee’s share of premium for “self-only” coverage for lowest-cost, MV plan > 9.5% of employee’s “household income” • “Household income” = modified adjusted gross income of employee and members of employee’s family who are required to file income tax return • Various adjustments (e.g., housing allowance) • Employers would not typically know household income

24. Step 6: Is Plan Coverage Affordable? • See Pay or Play Guide, Step 6(b), for safe harbors: • W-2 – Box 1; Salary reductions (e.g., 125 or 401(k)) not disregarded • Rate of Pay – Can use on monthly basis if compensation varies • Federal Poverty Line: Ok to use FPL guidelines in effect 6 months prior to start of plan year • Individuals can still use true “household income” for Exchange subsidy purposes • Some employees will receive subsidized Exchange coverage but no Subsection B Penalty for employer

25. Step 7: Determine “Full-Time” Employees and Calculate the Penalty • Three methods to determine “full-time” status • Monthly Measurement Method • Did employee work 130 hours in the month? If yes, full-time • May be “easiest” to determine • BUT, does not offer relief or forecasting ability • Look-Back Measurement Method – Measure for “block” of time, “lock in / lock out” status for same length • Complicated but provides certainty and forecasting ability • Combination Method • Can apply both of the above, among these employees: • Salaried / hourly • Primary work location in different states

26. Step 7: Determine Who isa “Full-Time” Employee? • Under Look-Back Method, generally divide employees into different categories: • Ongoing Employee • New Employees • New, Full-Time Employee • New, Variable Hour Employee • New, Seasonal Employee • New, Part-Time Employees

27. Step 7: Ongoing Employees • Employer selects Standard Measurement Period • 3-12 month period in which employer will determine whether employee has worked on average 30 hours per week • If Ongoing Employee is a full-time employee, he is “protected” and remains full-time employee during subsequent Stability Period • Stability Period must be at least 6 consecutive calendar months • Leads to awkward results if 3-month Measurement Period selected • Stability Period generally cannot be shorter than Standard Measurement Period • Start of Stability Period can be delayed for up-to-90-day Administrative Period • Employer can calculate employee’s hours, answer employee questions, etc.

28. Step 7: Ongoing Employees

29. Step 7: Determine Full-Time Status • Continuous MV Exception • Employer uses Look-Back Method • Employee has change in employment status, so that if had just started brand-new, would not have been expected to reach 30 hours per week • Over what time? Can it apply to “short term” employee? • Only applies if employer offered MV coverage by first day of calendar month following employee’s initial three full calendar months of employment • Through month in which change occurs • What if employee started in 2008? 1970? How would employer determine “minimum value” status of those old plans? • AND, employee must actually average less than 30 hours for 3 months following change

30. Step 7: Ongoing Employees • Can use different Measurement and Stability Periods for employee classes: • Salaried and hourly • Different entities • Different states • Consider administrative impact • Unclear if choices must be “documented” • May want to document for IRS purposes • E.g., reporting rule under Code Sections 6055 and 6056

31. Step 7: New Employees Expected to be Full-Time • To determine if New, Full-Time Employee is really expected to be “full-time”, consider various factors • Replacing former full-time employee? • Hours of employees in same or comparable positions • Advertised / communicated as full-time? • If full-time, offer coverage by start of fourth calendar month • E.g., Great University hires Frank on 6/15/2015 and Julie on 7/1/2015. Offer both coverage by October 1 • Also, coordinate with 90-day waiting period rules • Payroll Periods: Note that examples, etc. refer to calendar months but often can substitute pay periods • But, Stability Period must be calendar month

32. Step 7: New, Variable Hour Employee • Usually Variable Hour, Part-Time and Seasonal Employees treated the same • Variable Hour Employee involves New Employee with uncertain future hours (unknown if will average 30 hours / week) • Employment status change requires health plan coverage by 1st day of 4th month after change • Employer must assume that although employee’s hours of service may vary, employee will continue to be employed for entire “Initial” Measurement Period • Even if “really, really” certain employment will end? • Measure status using “Initial” Measurement Period • Also a period between 3 – 12 months • Employers may want shorter period (e.g., 11 months) due to special rule (discussed later)

33. Step 7: New, Variable Hour Employee

34. Step 7: New, Variable Hour Employee • For Variable Hour Employee, employer can “split” Administrative Period • Helpful to make dates “easier” (e.g., start counting as of first of month) • However, special rule: Combined Initial Measurement Period and Administrative Period may not extend beyond last day of first calendar month beginning on or after one-year anniversary of employee’s start date • Totals, at most, 13 months and a fraction of a month • Prevents employer from having 12-month Measurement Period and 90-day Administrative Period

35. Step 7: New, Variable Hour Employee

36. Step 7: New, Variable Hour Employee

37. Step 7: New, Variable Hour Employee • If Variable Hour Employee not treated as full-time during Initial Measurement Period, employer can treat employee as not “full-time” for a “Limited” Stability Period • Limited Stability Period: • Must not be longer than one month longer than the Initial Measurement Period • Must not exceed remainder of Standard Measurement Period (and any associated Administrative Period) for which employee has been employed • Appears to be designed to allow employee to “re-qualify” quickly for full-time status

38. Step 7: New, Variable Hour Employee

39. Step 7: New, Variable Hour Student Employee

40. Step 7: New, Variable Hour Student Employee

41. Step 7: Rehired Employees • What if employee has a period of no service then returns to service? • If break was “long enough” prior hours ignored and employee is a “New” employee • 13 weeks in general (26 weeks for “educational organizations”) • Optional rule of parity (at least 4 week break; compare break period to prior work period) • See following slide

42. Step 7: Rehired Employees

43. Step 7: Seasonal Employees • Key seems to be length of Initial Measurement Period (and Administrative Period) selected by employer • Long periods will prevent Seasonal Employees from being “full-time” • E.g., University has a 3-month Initial Measurement Period from 5/15/2014 – 8/14/2014. Administrative Period lasts until first of month following end of Initial Measurement Period. • University hires Ted on 5/15, who works 40 hours per week until 9/15/2014 • Ted’s Initial Measurement Period ends 8/14/2014 • Ted’s Administrative Period ends 8/30/2014 • Ted seems to be “full-time” as of 9/1/2014(before he terminates employment on 9/15)

44. Step 7: Rehired Employees • Special rules for counting hours if break due to unpaid FMLA leave, USERRA leave or jury duty • These rules apply when an employee of an educational organization is not credited with hours of service for 4 or more weeks (“employment break period”) during a measurement period • Employer can either: • Determine employee’s average hours of service by excluding employment break period; or • Treat employee as credited with hours of service for employment break period at rate = average weekly rate during weeks in measurement period not part of educational break period • Employer not required to take into account more than 501 hours of service for all employment break periods occurring in a single calendar year

45. Step 7: Special Rules for Educational Organizations

46. Step 7: Adjunct Employees • If adjunct is New Employee, determine if treated as Variable Hour, Seasonal, or Full-Time • If adjunct is returning, determine if can be treated as New Employee under rehire rules • If New Employee, determine whether adjunct must be treated as Variable Hour, Seasonal, or Full-Time • If adjunct not New Employee and had “employment break period,” apply special rule for educational organizations when determining whether adjunct is full-time 46

47. Step 7: Adjunct Employees

48. Step 7: Adjunct Employees

49. Practical Considerations • For employer with calendar year plan, “easiest” solution is to have: • 6-month Measurement Period from, e.g., April 15, 2014 – October 14, 2014 • 2.5-month Administrative Period from October 15, 2014 – December 31, 2014 • 12-month Stability Period from January 1, 2015– December 31, 2015 • Include all employees employed as of April 15, 2014 in that Measurement Period? • What about employees hired after that date? • Appears rules are “turned on” and should be followed • Maybe not, though, for New, Full-Time Employees

50. Employer Strategic Considerations • Soft Factors (e.g., loss of control over employee health; morale) • Comparison to competitors • Risk of increased penalties • Focus on removing “high risk” employees? • Hard factors • Start with $2,000 / $3,000 penalties • Extra compensation to pay employees? • See summary of Truven Health Analytics white paper