Washington State Transit Insurance Pool Quarterly Board Meeting Presented by: Melanie Curtice, Partner

1. Health Care Reform: Preparing for 2014 – Are You and Your Employees Ready? Washington State Transit Insurance Pool Quarterly Board Meeting Presented by: Melanie Curtice, Partner THURSDAY, JUNE 27, 2013 • VANCOUVER, WA

2. Today’s Topics • First four years of health care reform (“HCR”) • Rules already in effect for group health plans (“GHPs”) • New GHP fees and 2014 GHP changes • Individual mandate • Pay-or-play penalties • 2014 restrictions on HRAs

3. First Four Years of HCR • No aggregate lifetime dollar limits • Annual dollar limits on essential health benefits (“EHBs”) restricted • Children eligible for GHPs until 26 • GHP coverage tax-free through end of year in which child turns 26 • No pre-existing condition exclusions (“PCEs”) for children under 19

4. First Four Years of HCR • Summary of benefits and coverage (“SBC”) • Health FSA limit: $2,500 (indexed) per employee per plan year • W-2 reporting: cost of health coverage reported in Box 12, Code DD • Medical loss ratio rules • Restrictions on rescissions

5. First Four Years of HCR • Severe restrictions to keep GHPs grandfathered • Non-grandfathered GHPs • New internal and external review rules • Rules on designation of primary care physicians • Emergency room payment requirements

6. First Four Years of HCR • Non-grandfathered GHPs • Preventive care covered at 100% • Expanded preventive care rules for women • Contraceptive care, including sterilization • Preventive care OTC items must be covered without cost-sharing if prescribed • Folic acid • Aspirin

7. First Four Years of HCR • Supreme Court ruling on PPACA • Still various court challenges to PPACA provisions • Early Retiree Reinsurance Program (“ERRP”) has come and gone • 2013: Medicare tax increases for high-income taxpayers and deduction for Medicare retiree drug subsidy eliminated

8. Later in 2013: Exchange Notice • Notice to employees and new hires on exchanges • Explanation of exchange and services provided • Eligibility for premium tax credits • Impact of purchasing through exchange • Distributed by Oct. 1, 2013, to all existing employees and new hires as of Oct. 1, 2013 • Beginning of open enrollment period for exchanges

9. Later in 2013: Exchange Notice • Applicable to employers subject to Fair Labor Standards Act • Distributed to all employees • Even if not eligible for health plan (e.g., part-time employees) • No distribution to dependents • Distributed by first-class mail or under DOL safe harbor for electronic delivery

10. Later in 2013: Exchange Notice • Two model notices are available • Employers offering health plan • Employers not offering health plan • Notices require specific information on employer and employer’s health plan • New model COBRA election notice also available • Changes relating to PPACA

11. Later in 2013: HHS HIPAA Certification • HIPAA’s electronic data interchange rules • Part of HIPAA’s administrative simplification rules • Require standardized format, data content, and code set requirements for electronic transactions by covered entities (such as GHPs) • GHPs required to file certification with HHS documenting compliance by Dec. 31, 2013

12. Later in 2013: PCO Fee • Annual fee to fund a Patient-Centered Outcomes Research Institute/Trust Fund • Assessed based on number of average lives covered • $1/covered life for 2012 • $2/covered life (indexed) for 2013-2018 • First PCO fee due for most GHPs in July 2013 • Excise taxes reported on IRS Form 720 (now available)

13. Later in 2013: PCO Fee • Responsible parties • Plan sponsor (self-funded plans) • Insurer (insured plans) • Calculating covered lives in self-funded GHPs • Form 5500 method • Actual count method • Snapshot method • Transition relief: any reasonable method allowed for 2012 plan year

14. Later in 2013: PCO Fee • Many GHPs excepted • Ex-pats, stop-loss insurance • HRA integrated with self-funded GHP • HIPAA-excepted benefits • Health FSAs, on-site clinics • Limited-scope dental and vision, long-term care • EAPs, HSAs, wellness programs

15. Later in 2013: PCO Fee • PCO fee is applicable to: • Retirees and retiree-only GHPs • COBRA participants • Stand-alone HRA or HRA/insured GHPs • Not payable from plan assets • PCO fee is tax deductible as ordinary and necessary business expense

16. 2014: TRP Fee • Transitional Reinsurance Program (“TRP”) fee • To assist insurers who provide individual insurance to high-cost enrollees • To repay federal government for ERRP • HHS will collect $25B from 2014 to 2016 from health insurers and self-funded GHPs • TRP fee is per capita (per covered life)

17. 2014: TRP Fee • TRP fee for 2014 • $5.25 per month (or $63 per year) per covered life in major medical coverage • TRP fee will be lower in 2015 and 2016 • Most GHPs exempt from PCO fee also exempt from TRP fee • Difference: TRP fee not payable for persons whose coverage is secondary to Medicare • Retirees and COBRA participants

18. 2014: TRP Fee • Insurance company pays for insured GHPs, plan administrator for self-funded • Covered life count due to HHS by Nov. 15, 2014 • Use same counting methods as PCO fee (but just for first nine months of the year) • May use different methods for TRP fee and PCO fee • HHS calculates fee and sends bill by Dec. 15, 2014 • Payment due within 30 days • Payable from plan assets

19. 2014: Clinical Trials • Non-grandfathered plans may not deny right to participate in clinical trials • Must cover routine patient costs provided to participants not in a clinical trial • May not discriminate against the individual based on participation in the trial • Good-faith compliance, no regulations before 2014

20. 2014: Provider Discrimination • Cannot discriminate against any health care provider acting within the scope of the provider’s license • Does not require plans or insurers to accept all types of providers into a network • Does not apply to provider reimbursement rates • Good-faith compliance, no regulations before 2014

21. 2014: SBC • New SBC template for 2014 • Adds data elements requiring plan to disclose whether it • Constitutes minimum essential coverage; and • Provides minimum value • No new coverage examples

22. 2014: 90-Day Waiting Period • Maximum 90-day waiting periods • Waiting period is a period of time that must pass before an otherwise eligible person is allowed to enroll • Proposed regulations state that eligibility conditions (full-time status) will not count toward 90 days • No requirement to provide coverage to part-time employees

23. 2014: 90-Day Waiting Period • Maximum 90-day waiting periods • No violation if employee is slow to enroll • Enrollment must be available by the 90th day, even if the middle of the month • Many GHPs are changing to the first day of the month following 60 days • Cumulative service hours of not more than 1,200 acceptable as eligibility requirement • Enrollment must be offered within 90 days

24. 2014: Cost-Sharing Limits • Cost-sharing limits (non-grandfathered) • Out-of-pocket maximums may not exceed the maximums of HSA-eligible high-deductible GHPs (2014: $6,350/single, $12,700/family) • HCR’s limits on deductibles ($2,000/single, $4,000/family) only apply to the small group market (and not to self-funded or insured GHPs in the large group market)

25. 2014: PCEs, Adult Children • No PCEs for anyone (not just children) • HIPAA certificates of creditable coverage no longer required after Dec. 31, 2014 • Grandfathered plans must cover all adult children to age 26, even if the child has access to health coverage through the child’s own employer or the employer of the child’s spouse

26. 2014: Individual Mandate • Individuals must pay tax if they, their spouses, or their tax dependents do not have “minimum essential coverage” • Greater of percentage of income OR dollar amount multiplied by number of uncovered family members • 2014: 1% or $95 (not to exceed 300% of $95) • 2015: 2% or $325 • 2016: 2.5% or $695 • Capped at national average bronze-level plan premium • Flat dollar amount for individuals under 18 is half of these amounts

27. 2014: Individual Mandate • Minimum essential coverage includes • Any employer-sponsored GHP • Any government-sponsored plan, including Medicare Part A, Medicaid, CHIP, TRICARE • Policies in the individual market • State risk pool • Medicare Advantage • Self-funded student plans

28. 2014: Individual Mandate • Exemptions for: • Religious conscience • Health care sharing ministry participants • Taxpayers with income below filing threshold • Individuals who cannot afford coverage (contribution exceeds 8% of household income) • Compare to other affordability tests (9.5% of household income; 9.5% of wages) • Members of Indian tribes

29. 2014: Premium Tax Credit • Federal subsidy to help individuals purchase insurance at the exchanges • Individuals eligible for credit may also qualify for cost-sharing reductions (lower deductibles and co-pays) • HHS plans to pay premium tax credit amount directly to insurer to partially pay premiums when due • Lawsuit challenging whether subsidy is available in exchanges operated by federal government • PPACA says subsidies only available in state exchanges

30. 2014: Premium Tax Credit • Eligibility for premium tax credit • U.S. citizens and legal residents whose income is between 100% (133%) and 400% of federal poverty level • $46,000/individual, $94,000/family of four • But not eligible if: • Offered enrollment in an “affordable” employer-sponsored GHP providing minimum value (“MV”); • Offer also disqualifies all eligible dependents, even if dependent coverage not affordable • Actually enrolled in an employer-sponsored GHP (regardless of MV or affordability); or • Eligible for other coverage (such as Medicare Part A, Medicaid)

31. 2014: Premium Tax Credit • Minimum value: GHP pays at least 60% of the total allowed costs of GHP benefit • To determine MV • HHS has issued an MV calculator for use for 2014 • HHS checklists • Actuary opinion of MV • Affordable coverage: cost for employee-only coverage of lowest GHP option does not exceed 9.5% of household income • No affordability test for family coverage • Compare pay-or-play rule: 9.5% of wages

32. 2014: Pay-or-Play Penalties • Employer pay-or-play penalties apply to “applicable large employers” • Averaged 50 or more full-time equivalents on business days during previous calendar year • Full-time: 30 hours/week or 130 hours/month • Aggregation rule applies: count employees of all employers in same controlled group • Equivalents count for determining employer size but not for pay-or-play penalty amounts

33. 2014: Pay-or-Play Penalties • Two types of pay-or-play penalties • No coverage penalty: IRC § 4980H(a) • Insufficient coverage penalty: IRC § 4980H(b) • Only applicable to full-time employees (“FTEs”)

34. 2014: No Coverage Penalty • Employers who do not offer “minimum essential coverage” to at least 95% of FTEs and their children • Children by birth or adoption • Foster children • Stepchildren • First federal mandate to cover children of domestic partners or same-sex spouses? • One or more FTEs receive a premium tax credit at exchanges • “Offer” means chance to enroll at least once a year

35. 2014: No Coverage Penalty • Minimum essential coverage (“MEC”) • For this penalty, no requirement that MEC be affordable or provide minimum value • However, if the coverage is not affordable or does not provide minimum value, the employee must be able to reject coverage at least once a year • Most coverage, other than HIPAA-excepted benefits, qualifies under proposed regs • How minimal can this coverage be?

36. 2014: No Coverage Penalty • Calculating the no coverage penalty • Monthly penalty payment of $2,000 per FTE (after subtracting the first 30 FTEs), divided by 12 • Aggregation rules do not apply • Exemption for first 30 FTEs is split among the companies in the controlled group based on percentage of FTEs of controlled group each company employs

37. 2014: No Coverage Penalty • No Coverage Penalty Aggregation Example Controlled Group has total of 150 FTEs No. of FTEsPercentageExemption Company A 90 FTEs 60% 18 FTE Company B 30 FTEs 20% 6 FTE Company C 30 FTEs 20% 6 FTE Monthly No Coverage Penalties Company A $2,000 X 72 FTE divided by 12 = $12,000/month ($144,000/year) Company B $2,000 X 24 FTE divided by 12 = $4,000/month ($48,000/year) Company C $2,000 X 24 FTE divided by 12 = $4,000/month ($48,000/year)

38. 2014: Insufficient Coverage Penalty • Imposed when these requirements are met: • Employer offers coverage to 95% or more of FTEs • FTE receives a premium tax credit • Monthly penalty is lesser of following, divided by 12: • $2,000 per FTE (after subtracting first 30 FTEs) • $3,000 per FTE receiving premium tax credit

39. 2014: Insufficient Coverage Penalty • No insufficient coverage penalty if FTE was offered affordable GHP coverage with MV • Affordability rule for employers (in lieu of 9.5% of household income rule): the lowest cost option for employee-only coverage does not exceed • 9.5% of employee’s W-2 wages • 9.5% of employee’s monthly pay • 9.5% of federal poverty line for a single individual • Not applicable to dependents’ coverage and no requirement for employer to subsidize if 9.5% test is met

40. 2014: Minimum Value • MV percentage • Use anticipated spending for a standard population (developed by HHS based on typical plans) • Take into account benefits provided by the plan that are included in any one of the EHB-benchmark plans • Employer HSA contributions • New HRA contributions that can be used only for cost-sharing (not to pay premiums) • Wellness incentives not counted unless non-smoking incentive

41. 2014: Affordability Calculation • May consider • New HRA contributions that can be used for cost-sharing or to pay premiums • Non-smoking incentives, but not other wellness incentives

42. 2014: Full-Time Employee • Common-law employee • Excluded from the definition are: • Leased employees (for more than one year) • Sole proprietor • Partner in a partnership • 2% S corporation shareholder • Foreign employees with no U.S.-sourced income

43. 2014: Full-Time Employee • Employee working 30 hours per week or 130 hours per month is considered FTE • Employer must count all paid time off • Special rules for some unpaid leave (FMLA, USERRA, jury duty) • Special rules for determining working hours for certain employees • Non-hourly and commissions-based employees • School employees

44. 2014: FTEs and New Hires • FTEs must be offered coverage to avoid pay-or-play penalties • New FTE hires must be offered coverage within 90 days of hire • Employees in part-time positions need not be offered coverage

45. 2014: VHS Employees • Proposed regulations for variable hour and seasonal (“VHS”) employees • Variable hour employee: employer does not know on hire date whether employee will be FTE • Seasonal employee • Agricultural employees • Seasonal employees in department stores • Waiting for more guidance on how long “season” may be • 4-6 months likely maximum • 9-month school employees are not seasonal

46. 2014: New VHS Employees • Proposed regulations for new VHS employees • Initial measurement period (“IMP”) to measure how many hours employee is working • 3- to 12-month IMP allowed • At end of IMP, employer determines whether new VHS employee was FTE during IMP

47. 2014: New VHS Employees • If new VHS employee is determined to be FTE during IMP • Employer must offer coverage within 90 days of end of IMP (or 13 months from the date of hire, if sooner) (“Administrative Period”) to avoid pay-or-play penalties • Once it begins, coverage must last for “initial stability period” regardless of the number of hours worked during stability period

48. 2014: New VHS Employees • Length of initial stability period (“SP”) after IMP • If IMP was six months or less, initial stability period must be at least six months • If IMP was longer than six months, initial stability period must be at least as long as IMP • If VHS employee is terminated during SP, GHP would offer COBRA

49. 2014: New VHS Employees • If new VHS employee is determined not to be FTE during IMP, coverage need not be offered during the stability period to avoid pay-or-play penalties • However, if VHS employee is hired into a full-time position during administrative or stability periods, employer must offer coverage within 90 days of hire into full-time position

50. 2014: Example: New VHS • Three-month IMP, one-month administrative period, six-month initial SP • Employee hired Feb. 1, 2014 • IMP from Feb. 1 to Apr. 30, 2014 • Administrative period from May 1 to May 31, 2014 • Stability period from June 1 to Dec. 31, 2014