The View From 10,000 Feet and From The Trenches In California – How Healthcare Reform Impacts You

1. The View From 10,000 Feet and From The Trenches In California – How Healthcare Reform Impacts You January 29, 2014 Anaheim, California Sponsored by Ogletree, Deakins, Nash, Smoak & Stewart P.C. Moderator: Jeffrey B. Compangano, Esq. Panelist(s): Timothy J. Stanton, Esq. #IHCC12

2. Overview • Health Care Reform, 2014 and Beyond • Employer Mandate – our starting point • Exchanges and Related Issues • New IRS Reporting in 2015 • Waiting Periods • Continuing Legal Challenges

3. Overview (cont.) • Other Hot Health Benefit Issues • Health FSA Carryovers – as soon as now • Same-sex Marriage – Impact of Windsor • New Wellness Opportunities, Challenges in 2014 • HIPAA reminder • Summary & Key Takeaways • Open Forum

4. Shared Responsibility . . . . What Now?

5. Sharing is Mandatory • Affordable Care Act adopted two mandates as part of its emphasis on “shared responsibility” • The individual mandate – secure “minimum essential coverage” or pay a fine; and • The employer mandate – provide “minimum essential coverage” that is affordable and that offers minimum value or pay a fine • Individual mandate effective January 1, 2014 (or maybe March 31, 2014?) • Employer mandate effective (for now) January 1, 2015

6. Individual Mandate • Beginning January 1, 2014March 31, 2014, all (most) individuals are required to have enrolled in “minimum essential coverage” each month or they will owe a “shared responsibility payment” • Why? • Encourage individual responsibility • Stabilize health insurance pools after ACA market reforms take effect • Guaranteed issue • Preexisting conditions • Underwriting rules

7. Individual Mandate (cont.) • Who’s covered? • All taxpayers (with some exceptions – religious, “stealth immigrants,” incarcerated, low income, hardship) • One short gap (> 3 months) each year is permitted • Coverage for one day = coverage for a month • What’s required? • Maintain MEC each month for taxpayer and federal tax dependents • What is MEC? • Employer plans (incl. COBRA), individual insurance, government programs (Medicare, etc.)

8. Individual Mandate (cont.) • Penalty equal to greater of— • 2014: $95 per adult/$47.50 per child (max of $285/family) or 1% of household income • 2015: $325 per adult/$162.50 per child (max of $975/family) of 2% of household income • 2016: $695 per adult/$347.50 per child (max of $2,085/family) of 2.5% of household income • Penalty collected through individual income tax returns • No penalty for nonpayment but IRS will withhold from future refunds

9. Employer Mandate • Applicable large employers must offer minimum essential coverage that is both affordable and that provides minimum value to substantially all of their full-time employees and dependents • If an ALE does not offer such coverage and if one or more FT employee becomes eligible for a premium tax credit, an assessable payment will be due

10. Employer Mandate: Key Concepts and Issues

11. Who’s Covered? • The employer mandate applies to Applicable Large Employers • ALE = 50+ FTEs on average during the preceding calendar year • Tip: ALE status for 2015 is based on 2014 data • Key considerations— • Who’s the “Employer”? • Who’s the “Employee”?

12. Who’s Who? • Who’s the “Employer”? • For most benefit plan purposes, business entities that are related by common ownership are treated as if they are a single entity • Who’s an “Employee”? • Yes: W-2 employees (including temporary, seasonal, intern, commission-based, per diem/piece work, misclassified) • No: “Leased employees”, Sole proprietors, partners and 2-percent S corp. shareholders • Maybe so: non-414(n)(2) leased employees, staffing company workers, PEO workers

13. Coping with ALE Status

14. Who’s Who Under the Mandate? • FT status is key driver under the Mandate • Note: FT status for ALE determination ≠ FT status under Employer Mandate • Note also: FTEs are not relevant here • There are essentially three (3) types of employees for purposes of the mandate: • Variable hour - test • Seasonal - test • Everyone else – offer coverage • Accurate identification of FT employees is critical to managing exposure

15. An Employee in Full • FT status = reasonably expected to work 30 hours/week or 130 hours/month • IRS approach allows designation of a look-back to measure working hours • Assess hours of service on a monthly and ongoing basis • Hourly – count hours • Non-Hourly – use approved “equivalencies” • Actual hours of service • Use a days-worked equivalency of 8 hours / day • Weeks-worked equivalency of 40 hours / week • Equivalencies can’t be used if they substantially understate work hours and result in non-FT status

16. General Rules – Variable Hour/Seasonal Employees • For ongoing employees (Standard Periods) • Measurement Period: 3-12 consecutive months • Stability Period: Same as measurement period, but at least 6 mos. • Admin Period: Up to 90 days • For new employees (Initial Periods) • Measurement Period: 3-12 consecutive months • Stability Period: 6 months or standard measurement period length • Admin Period: From end of initial measurement period until last day of the next month thereafter (no more than 60 days)

17. Seasonal Employees • Different from “seasonal worker” used for determining ALE status • Through 2014, use “reasonable, good faith” interpretation • Employment must (arguably) be tied to a “season” • Period of employment must be limited – 6, 7, or 9 months? • After 2014, anticipate a time limit such as six (6) months during the year • Actual working hours not taken into consideration

18. Responses to Employer Mandate

19. Points to Ponder • Business reorganization • Schedule management • Terminate coverage • New tiers of coverage • Intelligent implementation • Focus on the lower end of the wage scale • “Magic” solutions

20. Business Reorganization • Try to break up the controlled group to avoid coverage as ALEs? • May be appropriate with some business structures • But: loss of control would accompany group break-up • Probably still need to assess CG status if you don’t know • Affects other benefit plans

21. Schedule Management • Many employers considering reduction of working hours below 30 and restructuring of many positions to “part-time” to reduce exposure to Employer Mandate • Concerns: • ERISA Section 510 – interference with right to coverage? • Title VII – Adverse impact? • Nondiscrimination?

22. Schedule Management (cont.) • Reducing hours below 30 for those who already have coverage (i.e., a take-away)? • Reducing hours below 30 for those who reasonably expect to have coverage in 2014 based on historical work schedule? • Eliminating full-time position and replacing it with two part-time positions? • Where are the qualified PT employees going to come from?

23. ERISA Section 510 • Precludes affecting the employer-employee relationship to the employee’s detriment if motive is to interfere with attainment of a right or benefit under ERISA or an ERISA plan • Federal cause of action, make whole relief and back pay available, plus attorneys fees • Claims available to plan participants and those with an expectation of coverage

24. Title VII • Title VII of the Civil Rights Act of 1964 prohibits discrimination on the basis of race, color, religion, sex, or national origin • Other federal and state laws expand the scope of coverage to include pregnancy, disability, etc. • Extends to terms and conditions of employment, including employee benefits • Concern lies in impact of changes to plan eligibility on protected classes • Schedule management could disproportionately burden employees in protected classes

25. Nondiscrimination Rules • ACA adopted nondiscrimination rule “similar to” Section 105(h), effective January 1, 2011 for non-GF plans under PHSA 2716 • But not excepted benefits or retiree-only plans • IRS guidance in 2010 • Unclear • Sought further comments • Penalties different than under Section 105(h) • Enforcement suspended until further notice

26. Terminate Your Plan • Consider the cost of paying the “big” penalty relative to the cost of compliance • Employees go to the exchange • Buy coverage after tax • Reduce your health care cost • Pay non-deductible penalty • Payment to make employees whole? • Third-party alternatives?

27. New Tiers of Coverage • Adopt new tiers of coverage? • May work but new (and old) nondiscrimination rules may frustrate attempts to offer “bare bones” coverage to lower-level employees • Can adversely impact employees in concert with Individual Mandate • Remember “soft” costs of creating a coverage class system • “Skinny” plan – MEC but not MV • Doesn’t automatically block access to tax credits • Watch for nondiscrimination rules • Change to MV affordable plan in 2015 will box out employees who got tax credit in 2014

28. Intelligent Implementation • Analyze the workforce and take full advantage of the rules • Determine who works 30/130 hours in any month – summer, project, temporary, holiday help? • Use 5% margin effectively • Impose 90-day waiting period • Use maximum measurement and stability periods for variable hour and seasonal employees

29. Intelligent Implementation (cont.) • Application for exchange coverage with a tax credit requires lack of affordable MV employer coverage • Exchanges will verify with employer • Avoid wrong answers to exchanges – could deprive employee of valuable subsidies • Don’t take action against employee after contact from exchange or risk retaliation claim

30. Targeting the PTC-Eligibles • Focus on ≤ 400% FPL, particularly ≤ 250% • Offer one low cost coverage option • Communicate cost of Exchange coverage • Loss of tax-exempt employer contributions • Loss of pre-tax employee contributions • Communicate value of Employer Coverage • Consider replacing vacant positions in this group with part-time workers

31. On Being An Informed Consumer • Expect to encounter many promoters of ACA-related products and solutions • Reimbursement-based “solutions” • Stand-alone HRAs – dead • Excepted benefits – not workable • Self-funding? • Availability of affordable stop-loss coverage? • Be aware of new administrative burdens • Be skeptical of “magic” solutions to the ACA

32. Marketplace Issues

33. Health Insurance Marketplaces – aka “Exchanges” • Federally supervised, but state-based, marketplaces for “qualified” insurance plans • Initially designed to let individuals, small employers shop more easily on basis of price, quality • States can open them up to employers with 100 or more employees – in 2017 • Disastrous initial rollout, likely technical fixes – lasting harm?

34. Your Interaction with Exchanges? • Exchanges likely to seek information from employers to verify premium tax credit eligibility – could start in 2013 • If Exchange determines an employee is full-time and eligible for premium tax credit, employer gets chance to appeal • Incentive for employers – avoid later tax penalties (separate IRS appeal regime) • What is your process for responding to notices and handling appeals?

35. Exchange Interactions (cont.) • Employer can contest finding of PTC eligibility but no access to information submitted by individual • If eligibility reversed, individual (and family members) get a re-appeal right • Possibility of conflicting determinations for multi-state employers • Possibility of conflict with IRS determination regarding assessable payments • Allow special enrollment in employer plan if tax credit denied?

36. Exchange Notice Issues • Employers subject to the FLSA required to provide notice regarding availability of exchange coverage • Prescribed content – use model notice but customize • Is MEC available? • Does plan offer minimum value? • Is coverage affordable? • Distribute by October 1, 2013 or within 14 days of hire • Electronic notices – not as easy as it could be

37. Notice Issues (cont.) • Model DOL COBRA notices updated: • Remove obsolete language • Provide info about exchanges as alternative • Content requirements for summaries of benefits and coverage (SBC) updated: • Is coverage affordable? • Does coverage offer minimum value? • Key: What is the message to employees?

38. Private Exchanges • Platform for employer to pay and let employee select from a range of products • Active or pre-Medicare retirees, multi- or single-insurer • Employer may step into secondary role in design & administration • Players include: AonHewitt, Mercer, Gallagher, Towers Watson/Extend Health

39. New Tax Reporting Requirements

40. New Reporting Obligation #1 • Code Section 6055 – Minimum Essential Coverage – Due for 2015 • Used to enforce Individual Mandate and establish eligibility for tax credits • Includes detailed info about each employee and related enrollees • Proposed regs eliminate some detail and require reporting by months (vs. days) of coverage

41. Who Must Report? • Fully-insured plan (any size): carrier • Self-funded plan (any size): employer • Each member of a controlled group has a reporting obligation • Can nominate a single filer but cannot outsource liability • Vendor can file for the employer • For multiemployer plans, plan reports • Issue for foreign employers? • No FEIN

42. New Reporting Obligation #2 • Code Section 6056 – ALE Reporting – Due for 2015 • Used to enforce Employer Mandate and inform individuals • Only applies to “Applicable Large Employers” • 50 or more FTEs on average during business days in the prior year • No 6056 reporting for health insurance issuers or non-ALEs

43. What is Reported? • Includes detailed information required • Somewhat simplified by proposed regulations • Certifications— • Was MEC made available to FT employees and dependents? • Was coverage “minimum value”? • Headcount by month • Name/address/TIN for each FT employee • Months of coverage for FT employees

44. Who Must Report? • Each ALE must report, even if a member of controlled group • Can nominate a single filer but cannot outsource liability • Vendor can file for the employer • For MEPs— • Two reports: eligible FT employees and ineligible FT employees • MEP administrator can report globally, but liability remains with participating employers

45. Individual Statements • Provide in conjunction with forms submitted to IRS • Specified content tracking Forms 1095-B and 1095-C • Provide to primary enrollee (6055) or each FT employee (6056) • Paper notices are permitted • Electronic distribution requires consent

46. Reporting Process • 6055 – Form 1095-B • 6056 – Form 1095-C • Both reports due by 2/28 (3/31 for electronic) • Electronic filing required for large filers • Individual statements due by 1/31 • No special timing allowance for FY plans

47. Consequences? • Same penalties as for information returns generally • $100 per return/statement; $1.5 million annual cap • Applies to report and statement • Reasonable cause exception for both • Reductions possible for quick fixes • IRS may review 6056 reports for accuracy

48. Reporting Recap • Not required to do anything in 2014 • Exchange notices for 2014 are informational only • 6055/6056 reporting goes live January 1, 2015 • But: well advised to use 2014 as a time to develop and test reporting process to capture required information • Exchange notices for 2014 will give a hint about exposure for 2015 • Use that data for planning a response to the Employer Mandate

49. ACA Plan Compliance Issues for 2014

50. Waiting Periods • Beginning January 1, 2014, the maximum permissible eligibility waiting period for health plans will be 90 days (not three months!) • Calendar days, not business days • Entry must occur by 90th day to comply • Note that some states (e.g., CA – 60 days) may impose shorter waiting periods for insured plans • Keep waiting period in mind in 2015 for dealing with temps and turnover