Implementing the Affordable Care Act

1. 2013 NMHC Human Resources Forum Implementing the Affordable Care Act Kate Saracene, Esq. May 15, 2013

2. Employer and Individual “Shared Responsibility” • What is the Play-or-Pay Mandate for Employers and Employees?

3. Why Play? • Pay-or-play mandates use both the “carrot” and the “stick” • Individual Incentives: • Carrot: Generous tax subsidies for eligible individuals with incomes up to 400% of the Federal Poverty Level who purchase health insurance through an exchange. • Premium subsidy • Cost-sharing subsidy • Stick: Tax penalties imposed on certain individuals who do not procure health insurance.

4. Why Play? • Pay-or-play mandates use both the “carrot” and the “stick” • Employer Incentives: • Carrot: Small employers can receive tax credits (up to 25 employees) and utilize SHOP exchanges (up to 100 employees) to offer affordable coverage opportunities. • Stick: Penalties for “large employers” (50 or more employees) who offer no coverage or whose coverage is unaffordable or does not offer minimum value.

5. Health Insurance Exchanges • What Are The Exchanges and How Will They Work?

6. Health Insurance Exchanges • To date, 18 states and DC intend to establish state-based exchanges. Seven states will partner with the federal government to facilitate an exchange. • States unable or unwilling to establish an exchange to begin functioning by January 2014 are to automatically default to a federal system. Source: Kaiser Family Foundationhttp://www.statehealthfacts.org/comparemaptable.jsp?ind=962&cat=17

7. Predicting Which Employees the Exchanges Might Benefit

8. Two Types of LargeEmployer Penalties • What is the Liability Exposure?

9. Penalty 1: No Employer Coverage (“Sledge Hammer”) • Effective January 1, 2014, large employers that do not offer health coverage to substantially all of their full-time employees and their dependents, and that have at least one full-time employee receiving a subsidy from the federal government, will have to pay an annual tax of $2,000 per each full-time employee. • Applies to every full-time employee on the employer’s headcount, including employees not receiving a government subsidy and employees who actually receive employer health insurance. • Disregards the first 30 full-time employees. • Calculated monthly.

10. Defining “Substantially All”: the 95% Rule • The 95% Rule: • Limited relief from the statutory requirement to offer coverage to “all” employees, by allowing up to 5% of the employer’s full-time workforce to remain ineligible for coverage without triggering the penalty. • Alternatively, 5 employees can remain ineligible if that is greater than 5%. • This provision is intended to give employers leeway for inadvertent errors in determining which employees are full-time and must be offered coverage. • But the failure to offer coverage need not be inadvertent.

11. Transition Rule: Dependent Coverage • Dependent Defined: • Biological, step, adopted, or foster children under age 26. • Regulations do not require employers to offer coverage to employees’ spouses or any other type of dependent. • An employer will be treated as providing health coverage to an employee and his dependents during plan years beginning in 2014 (i.e., the $2,000 penalty on all full-time employees would not apply): • Even if the employer does not offer coverage to the employees’ children under age 26; • So long as the employer is taking steps to offer this dependent coverage. • Coverage must be in place by 2015 plan year.

12. Penalty 2: Unaffordable Coverage/ Minimum Value Rule (“Tack Hammer”) A different penalty is imposed if the employer offers coverage to substantially all of its full-time employees, but the coverage does not meet minimum value standards or is not affordable. • Minimum Value Standard: The plan must pay at least 60% of the value of the benefits covered under the plan. • Affordability Standard: Employee’s share of the cost for single coverage (for the employer’s least expensive option providing minimum value) cannot exceed 9.5% of the employee’s household income.

13. Penalty 2: Unaffordable Coverage/ Minimum Value Rule • The penalty on an employer that offers coverage that is unaffordable or does not satisfy the minimum value rule is a tax of $3,000 per year for each full-time employee who actually receives federal premium assistance for coverage. • Only applies to employees who decline employer coverage and actually enroll for coverage through an exchange. • Calculated and paid monthly. • Penalty capped at $2,000 times the number of the employer’s total full-time employees but disregarding the first 30 full-time employees (i.e., the value of Penalty 1).

14. Minimum Value • The minimum value standard requires that the plan pay out at least 60% of the value of the benefits covered under the plan. • Current year employer HSA and HRA contributions will count in determining minimum value (so long as the HRA contribution cannot be applied toward the cost of premiums). • To determine if the health coverage provides minimum value, the IRS and the Department of Health and Human Services are developing a minimum value calculator. • Employers will be able to input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value. • The calculator uses the plan’s cost-sharing mechanisms to determine whether the plan would pay for at least 60% of the covered expenses for essential health benefits under a benchmark plan for a standard national population.

15. Minimum Value • Where the plan contains non-standard features not incorporated in the calculator, an actuary may evaluate the value of those features to develop the Minimum Value percentage. • The IRS has proposed several plan design safe harbors: • A plan with a $3,500 integrated medical and drug deductible, 80% plan cost-sharing, and $6,000 maximum out-of-pocket limit; • A plan with a $4,500 integrated medical and drug deductible, 70% plan cost-sharing, $6,400 maximum out-of-pocket limit, and $500 employer contribution to an HSA; and • A plan with a $3,500 medical deductible, $0 drug deductible, 60% plan medical expense cost-sharing, 75% plan drug cost-sharing, $6,400 maximum out-of-pocket limit, and drug co-pays of $10/$20/$50 for the first, second and third prescription drug tiers, with 75% coinsurance for specialty drugs. • Small group plans satisfying any “metal level” (bronze, silver, etc.)

16. Affordability Safe Harbors • Because employers generally will not have information about their employees’ household incomes, proposed regulations provide three “safe-harbors” that can be used as proxies for household income: • the employee’s W-2 wages • the employee’s current monthly pay rate • the Federal poverty line • An employer may use these optional safe harbors for all its employees or any reasonable classification on a uniform and consistent basis.

17. Unaffordable Coverage: Safe Harbors • Safe Harbor 1: W-2 Wages • Safe harbor is met if the employee cost for the lowest cost coverage that provides minimum value is not more than 9.5% of the wages reported in Box 1 of Form W-2. • Application of this safe harbor is determined after the end of the calendar year, and W-2 wages are adjusted for employees working less than a full-year. • Employer may apply the rules during the year by basing premiums on monthly W-2 wages, but this method may create an affordability issue for variable hour or seasonal employees whose hours worked declines during a stability period. • Elective pre-tax salary reductions, such as voluntary cafeteria plan and 401(k) contributions, do not appear in Box 1, and thus require a larger employer subsidy than would be required if measured against the employee’s salary.

18. Unaffordable Coverage: Safe Harbors • Safe Harbor 2: Rate of Pay • Safe harbor is met if the employee cost for the lowest cost coverage that provides minimum value is not more than 9.5% of the employee’s monthly salary (if exempt) or hourly rate of pay times 130 hours (if paid on an hourly basis). • May not reflect full wage for hourly employees, and will not include bonuses, but may address timing issues related to affordability for variable-hour employees. • Safe Harbor 3: Federal Poverty Line • Safe harbor is met if the employee cost for the lowest cost coverage that provides minimum value is not more than 9.5% of the most recent Federal Poverty Line for a single individual (currently $11,490) as of the first day of the applicable plan year.

19. Unaffordable Coverage: Examples • Assume employee puts 2% in 401(k) or 403(b), and 1% in cafeteria plan contributions.

20. Minimum Value and Affordability: Impact of Wellness Credits • Wellness program financial incentives that affect cost-sharing provisions (deductibles, coinsurance, co-pays, etc.) will count toward the MV percentage only to the extent the incentives relate to tobacco use. • The Affordability of an employer-sponsored plan will be affected only to the extent the wellness program financial incentive is delivered in the form of a premium subsidy or surcharge related to tobacco use. • Premiums discounts for other wellness incentives are ignored in the affordability calculation. • A transition rule permits non-tobacco wellness incentives to be considered for the 2014 plan year under the terms of the wellness program that were in place on May 3, 2013.

21. Transition Rule: Multiemployer Plans • For 2014, an employer will not be subject to a penalty if: • The employer is required to make a contribution to a multiemployer plan with respect to the full-time employee under a collective bargaining agreement or a related participation agreement, and • Affordable minimum value coverage under the multiemployer plan is offered to the full-time employee (and the employee’s dependents). • For purposes of measuring affordability, employers may compare the employee’s share of the cost for self-only coverage to the wages reported to the multiemployer plan. • These wages may be determined based on actual wages or an hourly wage rate under the applicable collective bargaining agreement.

22. Transition Rule: Fiscal Year Plans • If an employer offered health coverage through a fiscal year plan year on December 27, 2012, transition relief is available for fiscal plan years in 2014. No penalty will be imposed for: • Employees who were eligible to participate in the plan under its terms as of December 27, 2012 (whether or not they take the coverage). • Full-time employees who were not eligible to participate, if: • They are offered affordable coverage that provides minimum value no later than that first day of the plan year in 2014, and • The fiscal year plan was either: • offered to at least 1/3 of the employees) at the most recent open season, or • covered at least 1/4 of the employees at any day between 10/31/12 and 12/27/12.

23. Transition Rule: Fiscal Year Plans (cont’d) • Employers with fiscal year plans may amend their cafeteria plans to allow special one-time changes during the 2013-2014 plan year consistent with the fiscal year plan. • Intent is to allow employees to enter employer health plan to avoid individual tax penalty, or to exit employer health plan to enroll in an Exchange. • Employee does not need a qualifying election change event. • Applies to health coverage only. • Amendment must be made by December 31, 2014, and retroactive to beginning of cafeteria plan year.

24. “Large Employer” Defined • Am I a Covered Large Employer?

25. Covered “Large” Employers • The employer penalties are imposed on “large” employers. • A large employer is defined as an employer that had 50 or more common law employees, or an equivalent combination of full-time and part time employees (referred to as full-time equivalents), on average during the prior calendar year. • Employers will determine each year, based on their current number of employees, whether they will be considered a large employer for the next year. • For example, if an employer has at least 50 full-time equivalent employees for 2013, it will be considered a large employer for 2014.

26. Counting Employees • A full-time employee is an individual employed on average at least 30 “hours of service” per week (or 130 hours of service per month). • Hours of service means hours actually worked or paid time off. • Discussed in detail in the next section.

27. Full-Time Equivalence • Full-time equivalence is determined by aggregating part-time service hours (up to 120 for each part-time employee) each month and dividing by 120. • Employers will average their number of employees across the months in the year. • The number of employees is determined by taking the sum of the total number of full-time employees (including seasonal workers) for each calendar month in the preceding calendar year and the total number of FTEs (including seasonal workers) for each calendar month in the preceding calendar year, and dividing by 12. The result, if not a whole number, is then rounded to the next lowest whole number.

28. Seasonal Employers • Seasonal workers can be backed out of the equation in some circumstances. • For purposes of determining large employer status, an employer that employs over 50 employees for 120 days (or four calendar months) or fewer during the year, does not need to count “seasonal workers” who only worked for 120 days (or four calendar months) or less. • The four calendar months and the 120 days are not required to be consecutive.

29. Calculating FT Employees to Determine Large Employer Status

30. Employer Aggregation Rules • Employers with common ownership or control are aggregated for purposes of determining whether an employer has 50 employees. • Parent-Subsidiary: parent Co. owns 80% or more of a subsidiary. • Brother/sister: five or fewer shareholders (who are individuals, estates, or trusts): • own at least 80% of each corporation, and • own more than 50% of all corporations taking into account identical ownership interests with respect to each corporation.

31. Employer Aggregation Rules and Attribution • An individual's interest ownership must be attributed to certain family members, which can cause otherwise unrelated businesses held by family members or trusts to be caught up under the rules. • With certain limited exceptions, an individualis considered to own any interest owned by the individual's spouseas well as any interest owned by the individual's children under age 21. • If the individual is in effective control of an organization, then the individual also is considered to own an interest in the organization owned, directly or indirectly, by the individual's parents, grandparents, grandchildren, and children who have attained the age of 21.

32. Employer Aggregation Rules and Penalties • Although large employer status is determined on an aggregated basis, the determination of whether an employer is subject to a penalty (and the amount of any such penalty) is determined on a member-by-member basis. • If an employee is employed by more than one large employer member, an hour of service for one member counts as an hour of service for all members. • The 30-employee penalty reduction is shared by all of the members of the large employer. • Divided pro rata in proportion to the member’s FTEs.

33. Employer Aggregation Example • Example: • Two companies have common ownership. • Company A employs 40 full-time employees, and does not offer any of them health coverage. • Company B employs 35 employees, and offers all 35 full-time employees health coverage. • If one of A’s full-time employees receives a government subsidy through an Exchange, then A is subject to a penalty of $48,000, which is equal to 24 × $2,000 (40 full-time employees reduced by 16 (its allocable share of the 30-employee offset ((40/75) × 30 = 16)) and then multiplied by $2,000). • Company B is not subject to any penalty.

34. Full-Time Employee Defined • Which Employees Must be Offered Coverage?

35. Full-Time Employee Status: Hourly Employees • A full-time employee is defined as an employee who averages 30 “hours of service” for the employer per week, or 130 hours of service per month. • Hours of service include not only hours worked by the employee, but also those hours for which an employee was paid but did not perform work because of: • vacation • holiday • illness • incapacity (including disability) • layoff • jury duty • military duty • leave of absence

36. Full-Time Employee Status:Non-Hourly Employees • For hourly employees count actual hours taking into account hours for all members of the controlled group. • For employees who are not paid on an hourly basis, employers may count actual hours, or apply an equivalency method of: • 8 hours per day worked; or • 40 hours per week worked; but • only if this method does not substantially understate an employee’s hours of service. • Employer may use different methods for different classifications of employees.

37. Counting Hours: Current Month or Look-Back • The penalty is generally calculated for a month based on the employees working full-time in the current month. • Month-by-month determinations may be easy for employers with workforces with stable populations of full and part-time employees whose hours do not change. • Regulators adopted a safe harbor look-back approach that employers can optionally use for identifying their full-time employees. • The determination made during the “look back” period, known as the “measurement period,” defines the employee’s status for a subsequent “stability period.”

38. Determining Whether a Variable-Hour or Seasonal Employee is a Full-Time Employee • Different tests apply for: • Ongoing Employees: an employee who has been employed for at least one standard measurement period. • New Hires: an employee who has not been employed for at least one standard measurement period.

39. Standard Periods for Ongoing Employees • Hours are tracked during a Standard Measurement Period and used to determine the employee’s status during the Standard Stability Period. • Standard Measurement Period: period designated by the employer that lasts between 3 and 12 months. • Standard Administrative Period: optional period of time after a Standard measurement Period and before the next Standard Stability Period, which cannot exceed 90 days. Each Standard Administrative Period overlaps the prior Standard Stability Period. • Standard Stability Period: period designated by the employer that lasts between 6 and 12 months that begins after, and is no shorter than, the Standard Measurement Period.

40. Relationship of Standard Measurement and Stability Periods • If an employee is determined to be full-time during a standard measurement period, the following stability period must be at least six consecutive calendar months but no shorter than the measurement period. • If an employee is determined to be not full-time during a standard measurement period, the following stability must be no longer than the measurement period. • When you put the rules together, the standard measurement and stability periods must be the same length of time, and at least 6 but no more than 12 months.

41. How Standard Periods Works • Assume • Standard Stability Period: Calendar year Year 1 Year 2 Year 3 Jan Jan Jan Standard Stability Period

42. How Standard Periods Works • Assume • Standard Measurement Period: 12 month period ending October 15 • Standard Stability Period: Calendar year Year 1 Year 2 Year 3 Jan Jan Jan Standard Measurement Period Standard Stability Period

43. How Standard Periods Works • Assume • Standard Measurement Period: 12 month period ending October 15 • Standard Stability Period: Calendar year • Administrative Period: 77 day period from October 15 through December 31 Year 1 Year 2 Year 3 Jan Jan Jan Standard Measurement Period Admin. Period Standard Stability Period

44. Different Rules Can Be Adopted for Different Categories of Employees • Employers may adopt different measurement periods and stability periods that differ either in length or in their starting and ending dates for the following categories of employees: • Collectively bargained vs. nonunion employees; • Each group of collectively bargained employees covered by a separate CBA; • Salaried employees vs. hourly employees; • Employees of different entities; and • Employees located in different States.

45. New Full-Time Employees • Rule for New Full-Time Employees: • If a new employee is not a seasonal employee and is reasonably expected to be a full-time employee at the date of hire, the employee must be offered coverage at the end of three full calendar months of employment. • Note: this rule does not comport with the 90 day limit on waiting periods. • If a new employee is a seasonal employee or a variable employee, the employer may use an Initial Measurement Period to determine full-time status.

46. Safe-Harbor for New Variable-Houror Seasonal Employees • Seasonal Employee: Seasonal workers are not defined, relying on a good faith interpretation. • Must be the type of work that is only performed at certain times of the year. • Variable Employee: an employee who, on the employee’s start date, the employer cannot determine whether the employee is reasonably expected to average at least 30 hours of service per week. • Transitional Rule for Short-Term Employees: Until January 1, 2015, if objective facts and circumstances specific to the new employee demonstrate that the employee is not reasonably expected to work on average 30 hours during the initial stability period because his employment is reasonably expected to be of limited duration, the employee may be treated as a variable-hour employee.

47. Initial Periods for New Variable Hour and Seasonal Employees • Initial Measurement Period: 3-12 month period that begins at the date of hire or by the first of the month following hire. • Initial Stability Period: must begin by the first day of the second month following the employee’s first anniversary of employment and must be the same duration as the Standard Stability Period. • If the Employee is full-time, the Initial Stability Period must be at least 6 months and no shorter than initial measurement period. • If the Employee is not full-time, the Initial Stability Period can only be one month longer than the Initial Measurement Period and must end by the employee’s first Standard Stability Period. • Initial Administrative Period: Period of up to 90 days after the Initial Measurement Period and before the start of the Initial Stability Period. • The period between hire and the Initial Measurement Period counts toward 90 day limit.

48. How Standard and Initial Periods Work • Calendar Year Standard Stability Period, 12 Month Standard Measurement Period ending 10/15, Admin. Period 10/15-12/31 Year 1 Year 2 Year 3 Jan Jan Jan First Standard Measurement Period Admin. Period First Standard Stability Period

49. How Standard and Initial Periods Work • Calendar Year Standard Stability Period, 12 Month Standard Measurement Period ending 10/15, Admin. Period 10/15-12/31 • Hire Date of June 15th • 12 month Initial Measurement Period begins first of the month following hire • 1 month Initial Administrative Period Year 1 Year 2 Year 3 Jan Jan Jan Initial Measurement Period Initial Admin. Period First Standard Measurement Period Admin. Period First Standard Stability Period

50. How Standard and Initial Periods Work • Calendar Year Standard Stability Period, 12 Month Standard Measurement Period ending 10/15, Admin. Period 10/15-12/31 • Hire Date of June 15th • 12 month Initial Measurement Period begins first of the month following hire • 1 month Initial Administrative Period Year 1 Year 2 Year 3 Jan Jan Jan Initial Measurement Period Initial Admin. Period Initial Stability Period if FT First Standard Measurement Period Admin. Period First Standard Stability Period