May 23, 2013

1. May 23, 2013 Healthcare Reform Implications for Employers

2. The Law • The Patient Protection and Affordable Care Act of 2010 (PPACA) was signed March 23, 2010 • Amended by the Health Care and Education Reconciliation Act of 2010 (Reconciliation) signed March 30, 2010 • Jointly referred to as the “Healthcare Reform Law” • Phases in over several years • Delayed effective dates a possibility but strong likelihood that current provisions are here to stay

3. Agenda for Today • Overview of Healthcare Reform Law • What is it intended to do? • Who is affected? • Immediate Reforms • What happens now and through 2014? • How can employers prioritize? • Perspective from Market Data • Employer Implications • Managing costs and remaining competitive • Impact on compensation and overall employee benefits program • Wrap-up and Q&A

4. Healthcare Reform Goals • Expand coverage to all Americans • Require coverage for those employed • Provide subsidies for those who are not • Reform delivery and insurance systems • Reduce costs

5. Coverage – Reducing the Uninsured • Insurance Exchanges provided by States • Insurance Market Reforms • Individual Mandates • Employer Mandates – “Play or Pay”

6. Polling Question • What do you think most of your employees who currently waive coverage will do to comply with the mandatory coverage mandate? • Elect coverage under your employer plan. • Elect coverage under a spouse’s plan. • Elect coverage under and exchange plan • Not elect coverage / pay the penalty.

7. Delivery – How Care is to be Provided • Create payment and system incentives that are intended to improve efficiency and quality of care • Transition from a volume-based system to an outcome-based system

8. Financing – Who pays for it? • Savings from current health system • Excise taxes • Employer penalties • Insurance company penalties • Individual tax increases

9. Near-Term Requirements • Earliest changes began for plan years beginning on or after September 23, 2010 (six months after President Obama signed PPACA) • Most calendar year plans first affected with plan year beginning January 1, 2011 • Significant provisions become effective in 2014 and beyond

10. Post-Election Expectations • State governments will struggle with implementation decisions • Some will establish their own exchanges while others will rely on the Federal government • Some will expand Medicaid programs • More judicial challenges will receive press • Ability to access “pay or play” penalties against employers in states that do not operate their own state exchange • Application of preventive care mandate concerning contraceptives

11. Transition Period • Understanding “Grandfathered Health Plan” (GHP) • Nothing in the Act requires an individual to terminate current coverage • “If you like your coverage, you can keep it.” • Grandfathered plan is: • Any group health plan or • Individual health insurance coverage in which an individual was enrolled on the date of enactment • Family members may enroll, if such enrollment was permitted under the terms in effect as of March 23, 2010 • New employees and their families may enroll

12. Current Provisions – No Lifetime / Annual Limit • GHP’s prohibited from imposing lifetime dollar limits on “essential health benefits” • GHP’s may not impose “unreasonable” annual dollar limits • Unreasonable term eliminated in 2014

13. Current Provisions– Pre-existing Exclusion • Effective immediately, no pre-existing conditions exclusions for children under age 19 • Otherwise effective for all other individuals as of January 1, 2014

14. Current Provisions – Preventive Coverage • New GHP’s must provide first dollar coverage for: • Evidence-based preventive services (rated A or B by the US Preventive Services Task Force) • Recommended immunizations • Preventive care for infants, children and adolescents • Preventive care and screenings for women • Not applicable for grandfathered plans

15. Phase Two Impact – 2012 - 2013 • Form W-2 reporting must include the aggregate cost of employer provided group health coverage • Excludes coverage through an Archer MSA, an HSA or employee salary reductions to a FSA • Determined under COBRA-like rules • Delayed for employers that file fewer than 250 Forms W-2 in the preceding tax year

16. Phase 4 – 2013 Changes • Flexible Spending Account Limit • Caps the maximum health flexible spending account salary deferral at $2,500 • Indexed for years beginning in 2014 • Excludes true employer matching or other employer contributions to an FSA • Employer Notice Regarding Exchange • Originally set for March 1, 2013. Now delayed where DOL expects the new deadline will be late summer or fall of 2013, near open enrollment period for Exchanges. • Notice will inform employees about enrolling in Exchanges, affordability and lack of employer subsidy

17. 2013 – Additional Changes • Increase itemized deductions for unreimbursed medical expenses to 10% (currently 7.5%) • Increase payroll tax on earnings over $200,000 ($250,000 for joint filers) and tax unearned income (such as investment income) • Impose 2.3% excise tax on medical devices • Self-insured plans pay tax of $2 per covered member per year

18. Polling Question • What is your biggest challenge to implement? • Communicating employees • Determining employee / employer premiumssplit • Administrative requirement (i.e. W-2 reporting)

19. Phase 5 – 2014 • Individual mandate to obtain coverage • Penalty phases in up to greater of $695 or 2.5% of income by 2016 • Employers not required to offer coverage • If employer with 50 or more employees does not provide health coverage, then employer pays $2,000 assessment per employee (first 30 employees exempt) • Employers that do provide health coverage may still pay assessment if employee opts-out and buys through Exchange ($3,000 per employee opting out) • Employers must provide free choice vouchers to certain employees • Assessments are not tax deductible

20. 2014 – Insurance Exchanges • The Exchange would be offered to individuals and small groups (up to 50 or 100 employees) • New plans must comply with one of four benefit categories • “Essential benefits” must be offered • Insurance exchanges represent a way for individuals to obtain health coverage in addition to employer plans and individual policies • Challenging for employers to understand employees’ options for health coverage while still remaining competitive for quality employees at an affordable cost

21. Final Phase – 2018 • High Cost (“Cadillac”) Plan Tax • 40% excise tax would be imposed on insurers of employer sponsored health plans with aggregate values that exceed $10,200 for individual coverage and $27,500 for family coverage

22. High Priorities for Employers • National Federation of Independent Business reports that half of small employers view healthcare costs as their “most critical problem” • Monitor, update and communicate • Consider changes in context of overall compensation and benefits structure

23. Observations and Planning Ideas • Upward pressure on plan costs and premiums • Consider premium cost split between employer and employees • Industry surveys • Analysis of local labor market • Depending on eligibility for subsidy, it may be important to keep employees on employer plan vs. having them opt for an Exchange plan • Tax increases on upper-income filers (3.8% on unearned income and .9% on wages) beginning 2013 • Obligation to offer coverage that meets minimum standards or pay a penalty (2014) • Evaluation of overall plan design and whether to offer plan • Upward pressure on plan administration and compliance costs • Excise tax on high-cost plans (2018) • Downward pressure on value of plan coverage

24. Case for Comprehensive Benefits Review • Impact of health insurance costs felt by other plans • Qualified retirement plans • Deferred compensation • Executive benefits • Ancillary and voluntary benefits • Opportunity for a fresh look at compensation and benefits program • Employers must balance costs and overall benefits provided to remain competitive

25. Market Data • The source of data on the following slides is the 2012 Annual Survey “Employer Health Benefits” published by The Henry J. Kaiser Foundation and Health Research and Educational Trust

26. Healthcare Costs • Continue to increase in spite of reform (and to some extent because of it) • Average single premium in 2012 ($5,615) is 3% higher than in 2011 ($5,429) • Average family premium in 2012 ($15,745) is 4% higher than in 2011 ($15,073) • Average family premium in 2012 is 30% higher than it was in 2007 • The rate increase is similar in insured and self-insured plans • Employers need a plan in view of increasing costs irrespective of PPACA

27. Offering Healthcare • Towers Watson just reported that 88% of employers affirmed their commitment to offer healthcare benefits for the foreseeable future • 38% of surveyed employers are considering or plan to reduce dependent coverage • 55% plan to increase the employee cost-share • Nearly 60% offering retiree benefits will drop them when the exchanges become operational

28. 2013 Additional Payroll Tax • The Act imposes an additional .9% (for a total of 2.35%) Medicare tax on the wages and self-employment income of certain high-income taxpayers • The additional tax is applicable to wages in excess of: • $200,000 – single filers • $250,000 – married filing jointly or surviving spouse • $125,000 – married filing separately

29. 2014 Employer Responsibility • The Act adds a new “shared responsibility” requirement that “applicable large employers” must pay a non-deductible excise tax penalty if any of their full-time employees are certified as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee • This requirement has been referred to as a “free rider surcharge” because it is imposed only when the federal government subsidizes coverage for employees of an employer

30. Definitions • “Applicable large employer” • Means an employer that employed an average of at least 50 FTEs during the preceding calendar year • An employer is not an applicable large employer if its workforce exceeds 50 FTEs for 120 days or less during the calendar year and the employees that cause the employer’s workforce to exceed 50 FTEs are “seasonal workers” • Regs. issued 12/28/12 are complex for employees who are seasonal or have variable hours • Determined on a controlled group basis • IRS Notice 2012-58 • FTE means an employee who is employed on average at least 30 hours of service per week

31. 2014 Penalty for not offering coverage • For any month in which: • An applicable large employer fails to offer its FTEs and their dependents the opportunity to enroll in minimum essential coverage, and • At least one FTE enrolls in health coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid • The penalty is the product of the number of the employer’s FTEs (excluding the first 30 employees) multiplied by one-twelfth (1/12) of $2,000 (or $166.67 per month) • Determination is made without regard to the number of the employer’s FTEs who are receiving a premium tax credit or cost-sharing reduction • After 2014, this $2,000 amount will be indexed

32. Penalty for not offering coverage • Where an applicable large employer offers its FTEs and their dependents the opportunity to enroll in minimum essential coverage, the employer is still subject to the excise tax penalty if • At least one of its FTEs enrolls in health insurance coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee or employees, and • The coverage is “unaffordable” or the plan’s share of the total allowed cost of benefits is less than 60%. This is the “bronze plan” standard sometimes referred to as actuarial value. • Prior to healthcare reform, the National average actuarial value was around 83% meaning some employers have room to scale down benefits if needed (higher deductibles, co-pays, etc.)

33. Unaffordable Definition • Employer-provided coverage is “unaffordable” if the single premium required to be paid by the employee (regardless of whether he/she has family coverage) exceeds 9.5% of the employee's household income • To demonstrate that coverage is unaffordable, the employee must obtain an affordability waiver from the exchange • Note that current National average of employees’ household income spent on healthcare coverage is around 4.5% so many employers have room to raise prices if necessary (varies widely on demographics of workforce – i.e. fast food vs. professional services)

34. Penalty where coverage is unaffordable • Product of the number of employees who receive a premium tax credit or cost-sharing reduction for health insurance purchased through an exchange multiplied by one-twelfth (1/12) of $3,000 (or $250 per month) • Penalty in any month is capped at an amount equal to the number of FTEs during the month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) in excess of 30, multiplied by one-twelfth (1/12) of $2,000 • Penalty imposed on an employer offering coverage can never exceed the penalty imposed on an employer not offering coverage • Individual tax credits generally are available to individuals earning less than 400% of the Federal poverty line

35. Polling Question • What are your expectations for employees considering coverage through exchange? • Expect few if any employees to qualify for a subsidy • Are worried that many will leave for exchange plan • Have not yet considered, but plan to analyze

36. Results of Willis Survey • More than ½ of employers believe that other similar employers will pass more of the cost of dependent coverage to employees • 1/3 believe that similar employers will reduce coverage to lowest-cost package that will avoid “pay or play” penalty • Majority believe wellness programs will expand in scope • 2/3 believe employers expect to increase employee contributions

37. Defined Contribution Approach • Two employers are planning a radical change in the way they provide health benefits • Give employees a fixed sum of money and allow them to choose their medical coverage and insurer from an online marketplace • Sears and Darden Restaurants say the change isn't designed to make workers pay a higher share of health-coverage costs • Instead they say it is supposed to put more control over health benefits in the hands of employees • The approach will be closely watched. If it takes hold widely, it might parallel the transition from company providedpensions to 401(k) retirement-savings plans controlled by workers and funded partly by employer contributions • For employees, the concern will be that they could end up more directly exposed to the upward march of health costs

38. Key Financial Considerations for Employers • Scope of potential additions to group plan – how many of your current employees are ineligible or waive coverage? • Income of workforce – if you have relatively few employees under 400% of Federal poverty line, not many will qualify for State exchange subsidy and there may be room to increase employee cost sharing • Actuarial values of current plan designs and employer subsidization levels – if plan is relatively rich, you may look at scaling back benefit levels or increasing deductibles and co-pays if needed to remain competitive

39. Final Thoughts • PPACA does little to control health care costs in the short run • Most of the increased costs will be imposed on employees • Attempts to constrain the cost of labor may or may not impact other benefits • For the first time, employers will be competing with state exchanges for choices that employees have in obtaining coverage • Defined contribution healthcare is something to keep an eye on • Determining the cost sharing split between employer and employee has added significance

40. Utilizing Your Broker as a Resource • Understand general Pay or Play Rule Concepts • Confirm your plan • Offers Minimum Essential Coverage (MEC) • Provides Minimum Value (MV) • Is affordable and offered to all full-time employees • Review economic and strategic considerations • Focus on the gray areas • Perform high level analysis now • Be prepared to communicate with employees • Record keeping is an essential component

41. Questions

42. Contact Information Dave Horvath, CPA Crowe Horwath LLP One Mid-America Plaza Suite 700 Oakbrook Terrace, IL 60181 630-586-5117 David.Horvath@crowehorwath.com