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Understanding Recent Guidance Clarifying the Health Insurance Exchanges, Premium Tax Credit, Definition of Full-time Employee and the Employer Shared Responsibility ProvisionFord Darger, AVP, Benefits Compliance, CounselSuzanne Spradley, Senior Vice President, Senior Counsel
This material was created by NFP (National Financial Partners Corp.), its subsidiaries, or affiliates for distribution by their registered representatives, investment advisor representatives, and/or agents. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax of other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Neither NFP nor its subsidiaries or affiliates offer tax or legal advice.
Health Care Reform University Past Calls • PPACA’s Status in 2012: The Effect of the Supreme Court Decision and National Elections on PPACA’s Implementation • Examining PPACA’s Impact on Employers and Employees in 2013 and 2014 • Nondiscriminatory Plan Designs Before and After Health Care Reform
What You Can Expect Today … • Overview of Health Insurance Exchanges • Function of an Exchange • Status of State Exchanges • SHOP Exchanges • Premium Tax Credits and Cost-Sharing Subsidies • Eligibility • Amount of Tax Credits • Employer Mandate Penalty • Interplay of tax credits and penalty • Example of penalty calculation • Recent guidance on Full-Time Employees
What is a Health Insurance Exchange (HIX)? • Exchanges are state or federally-run entities that create an alternative market for buying health insurance with standardized plans, marketing, applications, etc. HIX • Beginning in 2014, Exchanges will serve primarily individuals and small businesses (up to 50 or 100 employees initially at the state’s discretion). • States are expected to establish Exchanges, which can be a government agency, a quasi-government agency or a non-profit organization.
What Do Exchanges Mean for Consumers? • The bottom line for most consumers remains unclear because it's still early – how much will health plans sold through the exchanges cost? That's impossible to know until the exchanges are operational. Cost of plans will, in part, depend on health of insureds participating in the exchange. • We do know that the exchanges will provide a range of plans with varying levels of benefits, based on the "actuarial value" of the benefits. • Think of “actuarial value” as plan’s coverage of health care services for the average insured. • Exchanges must provide consumer-assistance tools (toll-free call center, website with comparative information, calculator to determine cost of plans with premium tax credits).
The Time is Near … • States planning to operate a state-based exchange or a state-federal partnership exchange must submit a declaration letter signed by the Governor and an application to Health and Human Services (‘HHS’) by November 16, 2012. • Given these fast approaching deadlines and that most states’ legislative sessions have come to a close, states face serious challenges to making the necessary policy and implementation decisions. • HHS recognizes the challenges facing states in creating these marketplaces on a short timeline, and is offering an alternative. • Thus, states can: • elect to build a fully state-based exchange; • enter into a state-federal partnership exchange; or • default into a federally-facilitated exchange.
State Action Toward Exchanges Source: Kaiser Family Foundation
Health Benefit Exchange Status • To date, 15 states plus the District of Columbia have enacted legislation to establish state-based exchanges. • As of July 30, 2012, three states (Arkansas, Delaware, and Illinois) are planning to pursue a state-federal partnership exchange. • This option may become an increasingly viable strategy for states that have delayed establishing an exchange. • States with small populations, such as Montana and Wyoming, are considering the partnership model due to economies of scale. • To date, seven states have declared that they will not create a state-based exchange: • Louisiana’s Governor made the announcement in 2011 and in April, Maine’s Governor sent a letter to HHS stating it would not pursue a state based exchange. • In June 2012, NH’s Governor signed a law prohibiting the state from participating in or enabling a state-based exchange. • The Governors of Texas, Florida, South Carolina, and Alaska made their decisions public soon after the Supreme Court’s ruling on the ACA. • 16 states continue are evaluating the policy options related to a state-based exchange in the absence of legislation. • The remaining states have no significant activity to report.
Federally Facilitated Exchange • Federal guidance released in May 2012 indicates a clearinghouse model — certifying any health plan that meets all certification standards as a qualified health plan (‘QHP’). • The federal government will retain primary responsibility for operating these exchanges, but will seek to coordinate with states on: • plan certification; • plan oversight functions; • consumer assistance and outreach; and • streamlining eligibility determinations. • Over time, states may transition into a state-federal partnership model.
Small Business Health Options Program (SHOP) Exchange • States have flexibility to decide whether: • to limit the size of a qualified small-employer to 50 employees before 2016; • to include large employers beginning in 2017; and • to merge the individual and SHOP markets into a combined risk pool. • Examples: • Maryland passed legislation specifying that the definition of a small employer would be limited to those with an average of 50 or fewer employees until 2016. Also decided not to merge the small group and individual markets into a combined risk pool. • Vermont passed legislation that merges the individual and small group health insurance markets and requires all plans in those markets to be sold through the exchange. • Utah’s small-business exchange, established prior to federal health reform, allows employers with 50 or fewer employees to participate in a defined contribution arrangement.
QHPs offered in SHOP Exchange • SHOP exchange must certify that each qualified health plan (QHP) meets minimum federal requirements, such as: • Plans must provide coverage for essential benefits; • Plans must charge the same premium rate for a plan regardless of whether it is offered through the SHOP exchange, directly to consumers, or through agents; • Plans must report quality and outcome measures and enrollee satisfaction; and • Plans must comply with marketing practices that do not discourage enrollment of people with significant health needs.
SHOP Exchange Open Enrollment • SHOP exchanges must conduct initial, annual, and special open enrollment periods for each employer. • Enrollment in QHPs by SHOP exchanges will be done on a rolling basis based on each employer’s plan year rather than a single open enrollment period for all employers and employees participating in the exchange. • Ongoing questions concerning required notices and documents (e.g., Medicare Part D, CHIP notice, SPDs). • Cafeteria Plans are generally not permitted through the Exchange: • Exception for Exchange-eligible employers. Employees may pay for employer-sponsored group coverage in exchange with pre-tax dollars. • For large employers, individuals who qualify for premium tax credits may find buying unsubsidized pre-tax coverage outside the exchange is a better financial decision.
SHOP Exchange Alternatives • SHOP exchanges must establish employer options: • Exchanges must allow employers to choose one of the “metallic” levels of coverage and then have their employees choose from among all the health plans offered by the exchange at that level; • (ex. any silver plan (BCBS silver plan, Wellpoint silver plan, United silver plan, Aetna silver plan, etc.) • Exchanges may allow employees to enroll in any QHP at any level offered by the exchange, with the employer contribution being applied to the plan selected; or • (ex. defined contribution) • Exchanges may allow an employer to select a single health plan for its employees. • (ex. BCBS silver plan)
Premium Tax Credit Eligibility • Who is eligible for the Premium Tax Credit? • Taxpayers with modified adjusted gross income between 100% and 400% of federal poverty level (FPL); • Who are not eligible for qualifying minimum essential coverage because employer’s coverage; and • And who are not be claimed as a dependent by another taxpayer and, if married, must file a joint return. Neither NFP nor its subsidiaries or affiliates offer tax or legal advice
Premium Tax Credit Eligibility Qualifying Minimum Essential Coverage • Who is eligible for the Premium Tax Credit? • When does a person not have minimum essential coverage? • It is unaffordable (employee contributions exceed 9.5% of the employee's household income) or • It fails to provide minimum value (the plan's share of the total allowed costs of benefits is less than 60% of those costs) or • It is unavailable Neither NFP nor its subsidiaries or affiliates offer tax or legal advice
Premium Tax Credit Amount • Household Income = the sum of the total of modified adjusted gross income (‘MAGI’) for all members of the household required to file tax returns (including qualifying relatives who are unrelated), excluding income of dependents not required to file returns. • The household must spend a certain percentage of income on insurance (See table). • The premium tax credit will equal the lesser of: • The actual premium of the QHP in which he/she enrolls OR • The excess of the premium for the silver plan over the applicable percentage of the taxpayer’s household income.
Premium Tax Credit Example • John Smith is single and has no dependents • Smith earns $16,755 in 2012 (150% of FPL) • The Silver Plan costs $2,000 in EE premiums for the year • Smith must pay 4% of his income on insurance: • $16,755 x .04 = $670.20 • The Tax Credit for John Smith will be $1,329.80 for the year • $2,000 - $670.20 = $1,329.80
Exchange Coordination of Credit, Advance Payment of Credit, and Subsequent Reduction of Out-of-pocket Premiums • Exchanges coordinate enrollment in a QHP and the premium tax credit / cost-sharing reductions. • Exchange makes advance payments of the premium tax credit to the insurer of the QHP (instead of the individual). • Out-of-pocket premiums required to purchase coverage are thus reduced.
Reconciliation • The amount of tax credit advanced payments is determined at the beginning of the year based on the employee’s projected household income. • Amount of advanced payments is reconciled against the employee’s actual household income during tax time in April of the following year: • If taxpayer’s credit amount exceeds the amount of advance payments, he/she may receive the excess as income tax refund. • If the taxpayer’s advance payments exceed credit amount, then taxpayer must return the excess amount to IRS (but there is a graduated cap on tax liability ranging from $600 to $2500 depending on income). • If taxpayer’s household income exceeds 400%, the entire advance payments must be returned.
Employer Mandate Penalties Penalties do not apply to small employers. Does the employer have at least 50 full-time equivalent employees (FTE)? Start Here No Yes # of employees working 30+ hours / week (total part-time hours 120) FTE
Employer Mandate Penalties Yes The employer must pay a penalty Does the employer offer coverage to its workers? Did at least one employee receive a premium tax credit/subsidy in the Exchange? No Yes The penalty = $2000 annually x # of full-time workers (- 30) Yes
Employer Mandate Yes Employees will qualify for premium tax credit in the Exchange. Does ER plan pay for 60% of covered health care expenses? No The employer must pay a penalty Yes Does the employer offer affordable coverage to its workers? Employees will qualify for a premium tax credit in the Exchange No The penalty = $3000 x # of employees receiving premium tax credit (capped at total from above) No Penalty Yes
Affordability Test for Employer Mandate • Employer-sponsored coverage is affordable if the employee’s cost is less than 9.5% of an employee’s household income. • Employers don’t have access to household income data. • Under a safe harbor test: • Looks at employee’s W-2 wages from his/her job with employer only (not family income). • Looks at employee’s single coverage cost under the employer’s lowest cost plan. • So if cost of your cheapest single coverage plan is less than 9.5% of employee’s income, the employee has access to affordable coverage.
Employer Mandate Penalty Example • Amazon employs 4500 employees (EEs): • 500 full-time EEs (30+ hours/week) and 4000 part-time EEs. • All full-time employees are offered coverage. • The coverage is unaffordable for 200 / 500 employees • (e.g., employee contribution is > 9.5% of W2 wages). • 75 / 200 employees waive employer-sponsored coverage and buy insurance in the Exchange. • 50 / 75 qualify for premium tax credit. • (e.g., incomes are < 400% of FPL) • Annual penalty = 50 x $3000 = $15,000 (not tax deductible) • Penalty Cap = $2000 x [500 – 30 = 470] = $940,000
Full-time Employee Guidance • IRS released Notice 2012-58 on August 31, 2012: • Introduces safe harbor employers can use to determine which employees will be determined full-time for purposes of the employer mandate; • While providing guidance for how to treat a workforce with variable hours or seasonal, it can be a very complex process; • IRS recognized administrative difficulty in making full-time determinations monthly, so introduced the following safe harbors.
Basic Rules and Terminology • To help your understanding, we will be using simpler descriptive terms • The Notice uses different terms which we will introduce at the end • Rules • Snapshot Period • Can be anywhere from 3-12 months (employer’s discretion) • Admin Period • Cannot be more than 90 days • Coverage Period • Must be at least 6 months, but no shorter than Snapshot Period
Ongoing Employee Example Employer has 10-month Snapshot period Employer has 2-month Admin Period Employer has 12-month Coverage Period Admin Period #1 Admin Period #3 ‘13 ‘12 ‘14 ‘15 ‘16 Snapshot Period #1 Coverage Period #1 Snapshot Period #3 Coverage Period #3 Snapshot Period #2 Coverage Period #2 Admin Period #2
Ongoing Employee Specific Example • #1 John Smith is an ongoing employee • Works average of 30+ hours/week during Snapshot Period #1 (Jan. 1, 2012 – Oct. 1, 2012); • Enrolls in coverage during Admin Period #1; • Maintains insurance coverage during Coverage Period #1 (Jan. 1, 2013 – Dec. 31, 2013). • #2 John Smith drops to part-time in April 2013 and beyond • He loses FT status during Snapshot Period #2 (Jan. 1, 2013 – Oct. 1, 2013); • Not eligible for coverage during Coverage Period #2 (Jan. 1., 2014 – Dec. 31., 2014) but maintains eligibility while part-time throughout Coverage Period #1. Admin Period #1 Admin Period #2 Admin Period #3 ‘13 ‘12 ‘14 ‘15 ‘16 Snapshot Period #1 Coverage Period #1 Snapshot Period #3 Coverage Period #3 Snapshot Period #2 Coverage Period #2
Actual terms used by the IRS guidance • Snapshot Period = Measurement Period • Admin Period = Administrative Period • Coverage Period = Stability Period
Further Complexities • Many Additional Complexities • Different requirements for new employees versus ongoing employees • Snapshot and Admin Periods combined cannot extend beyond 13 months plus days to the end of the month for new employees • Employers can have different periods based on various employee classifications • Union/non-union • Salaried/hourly • Different entities • Different states This issue is more complex than we are able to explain in this webinar. If you should have any questions, please reach out to your advisor who can forward the specific question to our team.
Thank You for Attending NFP’s Health Care Reform University Please contact your Advisor with Questions This material was created by NFP (National Financial Partners Corp.), its subsidiaries, or affiliates for distribution by their registered representatives, investment advisor representatives, and/or agents. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. Neither NFP nor its subsidiaries or affiliates offer tax or legal advice.
