The Affordable Care Act: New Guidance for Minnesota School Districts

1. The Affordable Care Act: New Guidance for Minnesota School Districts South Central Service Cooperative School Pool Advisory Committee/ Membership Meeting

2. An Unknown, Unfunded Mandate • Many school districts do not offer health insurance to unlicensed employees or substitute teachers • Minnesota school districts employ approximately 63,000 non-licensed employees1 • Of the non-licensed group, 22,800 work at least 30 hours per week2 • No one tracks how many substitute teachers work an average of 30 hours per week in any month • The cost to cover 20,000 new enrollees with an average employer contribution of $4,000 is $80 million per year • Real impact will not be felt until 2016 1MN Dept. of Ed. Data Reports and Analytics 2 Steward, Tom. “Health Mandates mean Cuts or Higher Costs for Minnesota Schools.”  Watchdog 5 Nov. 2013.

3. New Administrative Burdens • ACA requires adoption and implementation of complex new policies and procedures • Applicable large employer determinations • Lookback measurement periods • Hours crediting policies • Employee classifications (i.e., variable hours employees) • Affordability safe harbors • New IRS reporting rules kick in for 2015 • Detailed information on plan-wide coverage, by month • Detailed information on coverage for individuals, by month • Investments in payroll systems and software

4. Federal Penalties for School Districts with 50 Full-Time Employees or Equivalents • Subject to transition rules (see following), • Up to $3,000 per year for each full-time employee who enrolls in an exchange and receives premium tax credits (if they are not offered the right health coverage) • Up to $2,000 x (full-time employees – 30) if even one full-time employee receives premium tax credits and the employer does not provide coverage to at least 95% of full-time employees • Misclassification of a handful of employees can lead to worst case scenario

5. Final Employer Responsibility Rules • Final “employer shared responsibility” rules issued February 10, 2014 • Significant transition relief until plan years beginning in 2016 • More flexibility but greater complexity • Hidden gems for school districts • Managed compliance strategies can mitigate risk and expense

6. Transition Rules: 50 to 99 • Employer penalties for applicable large employers were originally scheduled to be effective for plan years beginning in 2014 • Notice 2013-45 delayed the effective date until plan years beginning in 2015 • The final rules further delay penalties for employers with fewer than 100 full-time employees (including FTEs, as described later) until plan years beginning in 2016 • Applies to 4980H(a) ($3,000 penalty) and 4980H(b) ($2,000 penalty) • From February 9, 2014 to December 31, 2014, employers may not reduce the size of their workforce in order to qualify for transition relief

7. Transition Rules: 100+ • For plan years beginning in 2015, employers will not be subject to the $2,000 penalty under Section 4980H(a) if they offer coverage to 70% of their full-time employees • Compares favorably to the 95% rule that would otherwise apply • The $3,000 penalty under 4980H(b) still applies, not to exceed the maximum penalty possible if the $2,000 penalty applied • If the $2,000 penalty is calculated after subtracting 80 full-time employees rather than 30 full-time employees

8. 100+ Transition Rule Example • School District A has 80 full-time employees and 30 full-time equivalent employees (more later), for a total of 110 full time or equivalent employees. • District A offers coverage to 60 employees (75%) during the plan year beginning in 2015. Because it offers coverage to more than 75%, it is not subject to the $2,000 penalty under 4980H(a) • The 20 employees without offers of coverage enroll in the exchange and qualify for premium tax credits • District A is subject to a penalty of $3,000 x 20 or $60,000. But the penalty cannot exceed the most that could be charged under 4980H(a) ($2,000 penalty) • The penalty under 4980H(a) is $2000 x (80 full-time employees – 80) = 0. No penalty applies. (continued)

9. 100+ Transition Rule Example (Cont.) • District B has 150 full-time employees and 50 full-time equivalent employees. • It offers coverage to 70% of its full-time employees, or 105 employees, during the plan year beginning in 2015. It is not subject to the $2,000 penalty. • Of the 45 employees who are not offered coverage, 25 receive premium tax credits on the exchange. 10 enroll in coverage through a spouse, and 10 are not eligible because their household income is too high. • District B is subject to a penalty equal to $3,000 x 25 or $75,000. • The penalty cannot exceed the maximum penalty under 4980H(a) (the $2,000 penalty). That penalty is $2,000 x (150 – 80) = $140,000. District B pays $75,000.

10. Clarification on Applicable Large Employer Calculation • Control group rules continue to apply, but final regulations “reserved” on issue for government employees: reasonable, good faith interpretation is required • Applicable large employer status based on prior calendar year, even if plan is not on calendar year • Under transition rules, employers may use any contiguous six-month period during the calendar year • For purposes of determining applicable large employer status, hours are not credited or imputed during the summer months

11. Applicable Large Employers • An “applicable large employer” is an employer who employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year • For this purpose, • A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week. • The number of full-time equivalent employees is determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120. • Special rules allow employers to exclude seasonal employees if an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year.

12. New – “Bona Fide Volunteers” • The Final Rule provides that hours need not be counted for “bona fide volunteers.” • Individuals are bona fide volunteers if the only compensation received by such individual for performing services is in the form of: • reimbursement for (or a reasonable allowance for) reasonable expenses incurred in the performance of such services, or • reasonable benefits (including length of service awards), and nominal fees for such services, customarily paid by eligible employers in connection with the performance of such services by volunteers. • Reasonable benefits” to include expense reimbursements, stipends, contributions to employee benefit plans, and nominal wages. • Takeaway: hire your coaches from another district?

13. New: “Seasonal Employees” • For purposes of determining Applicable Large Employer status, the definition of seasonal employees is based on a reasonable, good faith interpretation of labor regulations which define seasonal labor as follows: Labor is performed on a seasonal basis where, ordinarily, the employment pertains to or is of the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year. • For purposes of classifying new employees as seasonal employees under lookback measurement periods, the definition is means an employee who is hired into a position whose customary annual employment is six months or less.

14. New: Monthly Measurement Period • Proposed regulations describe complex “lookback measurement periods” for determining whether an employee is a “full-time employee.” • The final regulations allow employers to determine full-time status based on the current month. • Of interest to school districts, this method is NOT subject to unpaid leave and employer break rules (and thus may be of interest to employers that do not wish to provide coverage during summer months) • Employers may use this method for specified categories of employees, and use the lookback measurement method for other employees • The Final Rules provide that employers may use different methods for counting hours for different classes of employees.

15. New: Part-Time Employees • Proposed regulations included rules that allowed employers to subject “variable hours employees” and “seasonal employees” to a measurement period of up to 12 months • The final rules allow employers to treat new employees who the employer reasonably expects to work less than 30 hours per week to the same measurement period as variable hours and seasonal employees

16. New: Affordability Safe Harbors • The proposed regulations described three “affordability” save harbors that would allow employers to establish contribution levels that would be “deemed” affordable to employees: • Amounts not exceeding 9.5% of the federal poverty level • Amounts not exceeding 9.5% of the rate of pay on the first day of the plan year • Amounts not exceeding 9.5% of W-2 pay • The final regulations clarify that employers may adopt different affordability safe harbors for “any reasonable classification of employees”

17. New: Hours Measurement by Employee Classification • The Final Rules provide that employers may use different methods for counting hours for different classes of employees. • Each separate union, for example, could use a different lookback measurement period (within permitted boundaries of the rule). • Employers should carefully analyze their data to select the hours measurement and crediting methods that minimize eligibility for coverage or delay the availability of coverage while satisfying all of the required elements under 4980H(a).

18. Consider: Flex Hours • The Congressional Budget Office issued a report indicating that large numbers of lower-paid employees will lose significant potential benefits under the ACA when they transition from part-time to full-time, depending on their household income • Rather than push employees into part-time work schedules to avoid offering coverage, allow employees in certain classifications of employment to choose part-time versus full-time employment to optimize the combination of employer-provided and government provided benefits • Consider providing access to brokers and other experts to assist in decision-making

19. Plan Fees and Taxes • PCORI fees • $2 per covered life for each plan or policy year ending on or after October 1, 2013 and before October 1, 2014. • Will fluctuate through 2018-2019 • Payable by plan sponsors • Reinsurance fees • $63 per covered life in 2014. $44 for 2015, and uncertain for 2016 • Payable by plans • Service Cooperatives will assist but will not file returns on behalf of employers or plans

20. VEBA and HRA Contributions in 2014 • Notice 2013-54 prohibits pre-tax employer funding of individual policies of insurance • It prohibits “standalone” HRAs or FSAs • In 2014, no contributions may be made to a VEBA or HRA unless the employee is enrolled in employer-sponsored group health coverage • In 2014, VEBA participants without employer-sponsored coverage much choose between VEBA accounts and premium-tax credits on the exchange • VEBA retirees who are eligible for subsidies on the MNsure will be permitted to elected “limited-purpose” VEBA coverage until Medicare eligibility, when they will be provided full-access.

21. Key Collective Bargaining Issues • Cadillac tax • Coverage for spouses • Increase in part-time positions • Increase in outsourced positions • Whether to pay or play • Sample reopener (not eligible for teachers): Final regulations have not been issued under many provisions of the Patient Protection and Affordable Care Act (ACA). This creates considerable uncertainty regarding the Employer’s financial obligations. This agreement may be reopened and all material terms of compensation, hours, and fringe benefits (include health benefits) may be subject to negotiation and change as reasonably necessary to comply with the ACA and to address any increase in cost that the ACA may require.”

22. Nondiscrimination Rules • The ACA subjects non-grandfathered fully-insured plans to nondiscrimination rules under Section 105(h) of the Internal Revenue Code • Employers with insured plans may be required to make identical contributions towards health insurance coverage for all non-collectively bargained employees • Penalty is excise tax on employer of $100 per day for each non-highly compensated employee • IRS guidance issued in December, 2010 delayed effective date until first plan year following issuance of additional guidance

23. Notice Pursuant to Treasury Department Circular 230, and Disclaimer To comply with certain Internal Revenue Service ("IRS") rules, we must inform you that any U.S. federal tax advice contained in this presentation, including handouts or verbal explanation, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the IRS. Under IRS rules governing tax advice, a taxpayer may rely on professional advice to avoid federal tax penalties only if that advice is provided in a tax opinion that conforms with extensive federal requirements. We understand that you do not intend to use or refer to anything contained in this presentation to promote, market, or recommend any particular entity, investment plan, or arrangement. DISCLAIMER: This presentation is intended for general information purposes only. It does not create an attorney-client relationship and should not be construed as legal advice or legal opinions on any specific facts or circumstances.