Compliance Audit Readiness for 2017

1. Compliance Audit Readiness for 2017 Jennifer Chung, Esq. Vice President, Senior Compliance Officer September 21 , 2016

2. The Affordable Care Act§4980H Pay or Play Refresher

3. The Affordable Care Act – 2016§4980H Pay or Play Mandate Review Review of §4980H Pay or Play Mandate Employers can either “Play” by complying or “Pay” the §4980H penalties To avoid potential §4980H penalties for 2016, ALEs must • (a) Offer MEC coverage to significant percentage (95%) of FT EEs + dependents and • (b) The coverage must (1) be “affordable” (at the EE-only level) and (2) provide minimum value Minimum Essential Coverage (MEC) • Any employer sponsored major medical group health plan will satisfy the MEC requirement Minimum Value is a look at the adequacy of coverage • Share of total allowed cost that plan is expected to cover ≥ 60%

4. The Affordable Care Act – 2016§4980H Pay or Play Mandate Review Review of §4980H Penalties §4980H(a) Sledgehammer Penalty—failure to offer to 95% • Failing to offer coverage to at least 95% of FT EEs • $180/month ($2,160/year) per EE x [entire work force minus 30 EEs] • Example → ABC has 500 FT EEs, offers coverage to 94% of them • 1 FT EE was able to get a Marketplace subsidy • ABC’s 4980H(a) Penalty → 500 – 30 = 470 × $180 = $84,600/month ($1,015,200/year) §4980H(b) Tack Hammer Penalty—inadequate coverage • The coverage offered is not adequate under the ACA • provides less than a 60% minimum value or • is not “affordable” to a FT EE at the EE-only coverage level • $270/month ($3,240/year) per EE who receives a Marketplace subsidy

5. The Affordable Care Act – 2016§4980H(a) Offering Coverage to 95% ACA Full-Time Employee  works or expected to work 30 hours/week Common Classification Issues • Temporary Employees • Not a recognized category under ACA • EE who works less than 12 months = “short-term” employee • Seasonal Employees • Works approximately same time each year for 6 months or less • Interns • If expected to work 30 hours/week, treat as FT employees • Unless interns satisfy the seasonal employee definition • Variable Hour Part-Time Employees • Hours fluctuate above and below the 30-hour mark • Count hours not worked as well (if entitled to payment for not working) • Leased Employees • Modify contract with staffing agency • Independent Contractors/Consultants • How much control does company exert on the IC/Consultant • What are the economic factors

6. The Affordable Care Act – 2016Employee or Independent Contractor IRS Independent Contractor 11-Factor Test • Instructions to the worker • When and where to do the work • What tools or equipment to use • What workers to hire or to assist with the work • Where to purchase supplies and services • What work must be performed by a specified individual • What order or sequence to follow • Training provided by the business for the worker (ICs ordinarily use their own methods) • Reimbursed or unreimbursed business expenses • Worker’s investment in facilities to perform work (less critical) • Does worker do work for other businesses

7. The Affordable Care Act – 2016Employee or Independent Contractor IRS Independent Contractor 11-Factor Test (continued) • Paid by wage or flat fee (less critical) • Can worker make a profit or incur a loss • Written contract that describes the relationship (least critical) • Does the business provide employee-type benefits such as insurance, pension, paid vacation or paid sick days • Will the work be for an indefinite period of time or terminate upon completion of a project • Are the services a “key aspect of the regular business of the company”

8. The Affordable Care Act – 2016Employee or Independent Contractor Department of Labor’s Independent Contractor Test • Previously, the DOL used a “common law control” test that examined the amount of control a business had over a worker • Now, the DOL supports an “economic factors” test • extent that the work done by the worker is an integral part of the company’s business • worker’s opportunity for profit or loss • extent of the worker’s economic investment • Requirement for special skills and initiative • permanent or temporary relationship • extent of control by company over the worker

9. The Affordable Care Act – 2016§4980H(b) Adequate Coverage ACA’s Affordability Determination  9.66% • Coverage is affordable if the EE’s self-only contribution for the lowest cost coverage option is 9.66% of “household income” Employers can use 3 affordability safe harbors instead of household income • Federal Poverty Level (FPL of the 48 states) • $11,880 FPL (in 2016) ÷ 12 months × 9.66% = $95.63/month • Rate of Pay (monthly salary or hourly rate at the start of the coverage month) • E.g. $40,000 salary (e.g. on 1/1) ÷ 12 months × 9.66% = $322/month • E.g. $12.25 hourly rate × 130 hours × 9.66% = $153.84/month • W-2 Wages (Box 1 taxable wages) • E.g., $38,000 in Box 1 × 9.66% = $3,670.08 for entire year (~$305.90/month) Can only use one affordability safe harbor consistently per EE category (e.g. job category or salary vs. hourly)

10. The Affordable Care Act –2016Affordability vs. Subsidy What if the coverage is not affordable? • Subsidies available if household income is between 100% and 400% of FPL

11. The Affordable Care ActPlan Integration Troubleshooting

12. The Affordable Care Act Health Plan Exceptions: FSA & HRA Integration • Standalone health plans must meet ACA rules • Non-integrated health plans are subject to the full range of the ACA’s healthcare mandates • Excepted benefits are not subject to the ACA’s standards for health plans • Health Reimbursement Account (HRA) Integration • HRAs are considered group health plans • An HRA is considered “integrated” if the participants are actually enrolled in the group medical • Flexible Spending Account (FSA) Integration • An FSA is an excepted benefit only if the participants are eligiblefor the group medical

13. The Affordable Care Act HRAs: Integration With Self-Only Coverage • New HRA Integration Rule For PY 2017 • If HRA is integrated with self-only (EE-only) coverage • Cannot reimburse expenses of a spouse or dependent who is not enrolled in the EE’s group health plan • HRA should state that it only applies to individuals enrolled under the group health plan • Example  Jen works for ABC and enrolls in EE-only coverage and the HRA plan • The money in Jen’s HRA cannot be used to reimburse Jen for her spouse or dependent’s medical expenses • 2016 Transition Relief  This (self-only) rule will not be enforced until PY 2017 • If the plan was already in place on 12/16/15 and satisfied integration requirements at that time

14. The Affordable Care ActCash Opt-Out Arrangements

15. The Affordable Care Act Eligible Opt-Out Arrangements Unconditional vs. Conditional Cash-in-Lieu of Benefits IRS Notice 2015-87 (Dec 2015)  Unconditional Cash-in-lieu of Benefits • Cash received in lieu of benefits increases the ACA calculation for cost of coverage • Conditional waivers potentially disregarded • Relief for arrangements that existed on December 16, 2015 IRS Proposed Rules (Jul 2016)  “Eligible Opt-Out Arrangements” • Payments made under an “eligible opt-out arrangement” can be disregarded • Employers will need employee attestation on an annual basis • Relief as stated in Notice 2015-87 will apply until final regulations are issued • Arrangements that existed on December 16, 2015 and not significantly changed

16. The Affordable Care ActEligible Opt-out Arrangements IRS Proposed Rules – Eligible Opt-Out Arrangements • Payments made under an “eligible opt-out arrangement” can be disregarded in the ACA affordability calculation: • Employee must provide proof of MEC through alternative group coverage (that is not individual Marketplace coverage) • Proof includes everyone in the employee’s expected tax family • Employee must provide “reasonable evidence” of MEC (e.g., attestation stating “I and every person in my expected tax family has or will have minimum essential coverage during the company’s plan year”) • Evidence must be provided (annually) every plan year • Evidence must be provided no earlier than a reasonable time before coverage starts (e.g., OE); and • No payment allowed if the employer knows that the employee/family member does not have alternative coverage

17. The Affordable Care ActCash-in-Lieu of Benefits and Overtime under FLSA Flores v. City of San Gabriel (9th Cir. Court, Jun 2016) • Cash payments received by employees in lieu of benefits must be included in those employees’ regular rate of pay for calculation of overtime under FLSA • If cash payments are more than an “incidental” part of the plan, the plan is not a “bona fide plan” under FLSA • All employer payments must be included in the employees’ rate of pay calculation for overtime • This includes payments to trustees and third parties (such as carriers) • DOL considers anything less than 20% as incidental but the Ninth Circuit rejected that % • Binding law for all states and territories within the Ninth Circuit’s jurisdiction • 1) Alaska; 2) Arizona; 3) California; 4) Guam; 5) Hawaii; 6) Idaho; 7) Montana; 8) Nevada; 9) Oregon; 10) Washington; and 11) the Northern Mariana Islands

18. The Affordable Care ActAppealing Exchange Subsidy Notices

19. The Affordable Care ActMarketplace Subsidy Notices §1411 Exchange Subsidy Notices • Employers have started to receive Exchange notices stating that an employee has received a subsidy for Marketplace coverage • Employers may submit an appeal to the Exchange if they disagree • Small employers (under 50 FT employees) can disregard the notice entirely Potential Courses of Action for ALEs (50 or more FT EEs) • Can disregard for PT employees if confident they aren’t FT • Can disregard for individuals who are not your employees (e.g., spouse or dependents) • If the notice is for a FT employee and coverage was not offered, there’s nothing to appeal, a penalty will likely soon follow • If the notice is for a FT employee and coverage was offered  either (1) appeal or (2) ensure the 1095-C accurately reflects that affordable, MV coverage was offered • Give employee a heads up that the IRS might seek repayment of the subsidy The information contained herein is proprietary & confidential and not to be distributed without the consent of Woodruff-Sawyer & Co.

20. The Affordable Care ActMarketplace Subsidy Notices 6 Different Exchange Appeals Processes • Federal (manages 38 states plus 8 states that defer to the federal appeals process) • Connecticut, Idaho, Minnesota, Rhode Island, and Washington • Employers have 90-days to appeal (automatic dismissal if late) • Appeals consist of written responses, evidentiary/document review, in-person hearings 3 Reasons for ALEs to Appeal • Good practice to respond to notices from government agencies • Creates an evidentiary record/trail that can be used later for the IRS penalty notice • CMs/HHS appeals process not related to IRS fines process • Help reduce an employees potential tax liability (if he/she has to repay the subsidy) • Long appeal timelines involved The information contained herein is proprietary & confidential and not to be distributed without the consent of Woodruff-Sawyer & Co.

21. The Affordable Care ActMarketplace Subsidy Notices Example of Timing of Appeals Process • January 1, 2016  Employee starts receiving subsidized Marketplace coverage • June 1, 2016  Employer receives Marketplace Subsidy Notice • August 31, 2016  Deadline to submit appeal (90-day deadline) • November 30, 2016  90 days for the Exchange to review appeal and make a decision • April 2017  HHS final determination if Employee appeals • The entire process can take up to 300 days (> 9 months) • Employee who wasn’t subsidy eligible would have to pay back 11-12 months of subsidies Appeal Form Available at: • https://www.healthcare.gov/downloads/marketplace-employer-appeal-form.pdf The information contained herein is proprietary & confidential and not to be distributed without the consent of Woodruff-Sawyer & Co.

22. Surviving Federal Agency AuditsThe DOL vs. IRS

23. Federal Agency AuditsDepartment of Labor • Audits of the group health plan – low hanging fruit • The DOL’s focus is whether employees are getting proper information/disclosures in accordance with ERISA • Examination of the plan involves a review of the following: • Plan documents, SPDs, Amendments, SMMs and all relevant Board resolutions adopting these documents • Insurance contracts, claims and appeals procedures, copies of any adverse determinations, cost-sharing arrangements, rebates received and/or distributed • Eligibility provisions, ACA compliance such as claiming grandfathered status, age 26 dependent coverage, etc. • FSA forfeitures • Distribution of mandated notices, such as COBRA, WHCRA, Newborn Act, HIPAA Special Enrollment, HIPAA Privacy Notice, Statement of ERISA Rights, etc. • Copies of all employee communications regarding the group health plan • Records relating to HIPAA compliance (but HHS deals with HIPAA Privacy and Security)

24. Federal Agency AuditsDepartment of Labor • Audits of the group health plan – low hanging fruit • The IRS’ focus is whether employers are complying with the rules under the Tax Code • Section 125 of the Internal Revenue Code • Whether there is a formal cafeteria plan document in place • Whether the employer is observing the rules of Section 125 • Cafeteria plan years can be no longer than 12 months • Elections must be irrevocable • Does not discriminate in favor of highly compensated employees/individuals • Non-discrimination testing should be done annually • Only employees are receiving pre-tax premium deductions

25. Federal Agency AuditsInternal Revenue Service • Cafeteria Plan Refresher • All §125 elections are irrevocable once the PY starts except for • HIPAA special enrollment events, e.g. marriage/birth of child • Status (life event) changes that cause a gain or loss of eligibility • A judgment, decree or order • Entitlement to Medicare or Medicaid • Significant cost/coverage changes, which includes loss of coverage under another employer’s plan • Special FMLA requirements • HIPAA special enrollment events are mandatoryvs §125 mid-year election change rules which are optional • The ER must include the optional election changes in the Plan document in order for them to be effective