October 20, 2014 | Boston, Massachusetts

1. NCSHA’s 2014 Annual Conference and ShowplaceFuture Implications of Healthcare Reform for Your Organization October 20, 2014 | Boston, Massachusetts Alden Bianchi, Mintz, Levin, Cohn, Ferris, Glovsky andPopeo, P.C., Boston, Massachusetts

2. Agenda • Shared Responsibly for Employers • Applicable Large Employers • Code Section 4980H—Structure • Option 1: 4980H(a) Liability • Option 2: 4980H(b) Liability • Option 3: No Liability • Determining Full-Time Employee Status • Measurement methods • Breaks in service

3. Agenda (cont’d) • Transition Rules • Employers with 50 to 100 employees • 2015 increase in excluded employees • Non-calendar year plan years • Reporting requirements • Section 6055—minimum essential coverage • Section 6056—large employers • Impact of ERISA on ACA compliance • Plan documents/summary plan descriptions • Claims by covered employees and beneficiaries

4. Shared Responsibly for Employers The Patient Protection and Affordable Care Act imposes responsibility for the reform of the nation's health care financing rules on individuals, states, employers, carriers and the Federal government, among others “Employer Shared Responsibility” refers to the obligations on “applicable large employers” to offer affordable coverage that provides minimum value or face the prospect of a excise tax (a/k/a "assessable payment") Originally slated to take effect Jan. 1, 2014, the rules were delayed one year to Jan. 1, 2015 (see IRS Notice 2013-45)

5. Applicable Large Employer • An employer that employed an average of at least 50 full-time employees (taking into account full-time equivalent employees or “FTEs”) on business days during the preceding calendar year • Includes governmental and tax exempt entities • Sole proprietors, partners, 2-percent S corporation shareholders, and leased employee are not employees

6. Applicable Large Employer • Status as an applicable large employer is determined by • Aggregating all trades or businesses treated as a single employer under Code Sections 414(b), 414(c), 414(m) and 414(o), and • Adding the number of full-time employees and FTEs for each calendar month in the preceding calendar year, dividing by 12, and rounding the quotient up to the next whole number

7. Applicable Large Employer (cont’d) • Full-time employees in excess of 50 who are “seasonal workers and FTEs ” are excluded if they were employed during a 120-day or shorter period • Seasonal worker” is defined with reference to DOL regulations • Four calendar months is equivalent to 120 days • Predecessor/successor employers included (but no guidance is yet provided) • New employers: if reasonably expected to employ an average of at least 50 full-time employees . . .

8. Employer Disaggregation • Assessable Payments are determined separately with respect to each “applicable large employer member” • Thus— • One member of a controlled group might choose to offer affordable coverage that provides minimum value across-the-board, thereby incurring no penalty • Another might offer no coverage and elect to pay the Code § 4980H(a) Liability • Another might make an offer of coverage that may not be affordable in each case, thereby incurring Code § 4980H(b) Liability

9. Assessable Payments Option 1 • Employer fails to make an offer (to at least 95% of it full-time employees) of • Minimum essential coverage under an • Eligible employer-sponsored plan • Code 4980H(a) Liability does not apply where an employer dependents) for a calendar month if, for that month, it offers coverage to all but five percent (i.e., 95%) or, if greater, five of its full-time employees

10. Assessable Payments Option 1 • Under a transition rule, 70% is substituted for 95% for the 2015 plan year • Option 1 Penalty (or “4980H(a) Liability”: an assessable payment determined monthly equal to • 1/12 of $2,000 multiplied by the number of the employer’s full-time employees • Excluding the first 30

11. Full-Time Employee A full-time employee means, with respect to a calendar month, a “common law employee” who averaged 30 or more hours of service per week or, if the employer elects, had 130 or more hours of service in the calendar month Under common law standard, an individual is an “employee” if the person for whom the services are performed “has the right to control and direct the individual who performs the services not only as to the result to be achieved by the work but also the details and means by which the result is achieved”

12. Measurement Methods • Monthly measurement method • An employer determines each employee’s status as a full-time employee by counting the employee’s hours of service for each month • Coverage need not be offered during the first three full months of employment • Look-back measurement method • An employer may determine the status of an employee as a full-time employee during a future period (referred to as the “stability period”), based upon the hours of service of the employee in a prior period (referred to as the “measurement period”) • Does not apply for purposes of determining whether an employer is an applicable large employer

13. Measurement Methods (cont’d) • Measurement methods may be applied by categories: • Salaried employees and hourly employees; • Employees whose primary places of employment are in different states; • Collectively bargained employees and non-collectively bargained employees; • and each group of collectively bargained employees covered by a separate collective bargaining arrangement • Rules for transitioning from one measurement period to the other in the case of a change in employment status

14. Monthly Measurement Method • Full-time status determined based on hours worked during a calendar month • Monthly measurement based on weeks per calendar months • Period measured for the month must contain either the week that includes the first day of the month or the week that includes the last day of the month • Four-week calendar months – 120 hours or more is full-time • Five-week calendar months – 150 hours or more is full-time

15. Look-Back Measurement Method • Answers the question, “What if I don’t know if a new hire is going to be full time?” • Applies to new variable-hour, new seasonal employees, new part-time employees, and ongoing employees • Does not apply to full-time employees • Hours are tested during the measurement period: If employee works 30 hours per week on average during the measurement period, he or she must be covered during the stability period, irrespective of hours 15

16. Variable Hour Employees • An employee is a variable hour employee “if, based on the facts and circumstances at the employee’s start date, the applicable large employer member cannot determine whether the employee is reasonably expected to be employed on average at least 30 hours of service per week during the initial measurement period because the employee’s hours are variable or otherwise uncertain” • Factors considered in making a variable hour determination include but are not limited to: • Whether the employee is replacing an employee who was a full-time employee or a variable hour employee,

17. Variable Hour Employees (cont’d) • The extent to which the hours of service of employees in the same or comparable positions have actually varied above and below an average of 30 hours of service per week during recent measurement periods, and • Whether the job was advertised, or otherwise communicated to the new employee or otherwise documented (for example, through a contract or job description) as requiring hours of service that would average at least 30 hours of service per week, less than 30 hours of service per week, or may vary above and below an average of 30 hours of service per week

18. Variable Hour Employees (cont’d) • Additional factors for employees placed through staffing firms include, but are not limited to, whether: • Other employees in the same position of employment with the temporary staffing firm, as part of their continuing employment, retain the right to reject temporary placements that the temporary staffing firm offers the employee; • The employees typically have periods during which no offer of temporary placement is made; • The employees typically are offered temporary placements for differing periods of time; and • The employees typically are offered temporary placements that do not extend beyond 13 weeks

19. Changes in Employment Status General rule: An employee must be treated as a continuing employee, rather than a new hire, unless the employee has had a period of at least 13 weeks during which no hours of service were credited For an employee of an educational organization, substitute 26 weeks for 13 weeks Rule of Parity: the employee may be treated as a new hire if the employee is not credited with any hours of service during a period that is both at least four consecutive weeks’ duration and longer than the employee’s immediately preceding period of employment

20. Special Unpaid Leave • For purposes of applying the look-back measurement method, the final regulations provide an averaging method for special unpaid leave • Under the averaging method, special unpaid leave is treated as paid time • Special unpaid leave is unpaid leave subject to: • The Family and Medical Leave Act; • The USERRA; or • Jury duty • Special unpaid leave rules don’t apply to the monthly measurement method

21. Employment Break Periods Employment break periods of employees of educational institutions are not treated as a period during which zero hours of service are credited when applying the look-back measurement method under a averaging method An “employment break period” is a period of at least four consecutive weeks (disregarding special unpaid leave), during which an employee is not credited with hours of service In no case, however, can the employer exclude (or credit) more than 501 hours of service during employment break periods in a calendar year (however no such limit applies for special unpaid leave)

22. Dependent Coverage • An applicable large employer may be liable for an assessable payment if the employer “fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage . . ..” (Emphasis added) • For Code § 4980H(b) Liability, dependent coverage is required • Dependent means a biological or adopted child who is under 26 years of age, but it does not include a stepchild or a foster child • Spousal coverage is not required • The final regulations provide a transition rule for the 2015 plan year for employers that did not previously cover dependents but are taking steps to do so

23. Assessable Payments Option 2 • Employer make makes an offer to at least 95% of it full-time employees of MEC: • Under an eligible employer-sponsored plan” • But the coverage in “inadequate” • Option 2 Penalty (4980H(b) Liability): Lesser of: • 1/12 of $3,000 multiplied by the number of full-time employees who qualify for and receive a premium tax credit or cost-sharing reduction from an exchange; or • Amount of the Option 1 penalty • Option 2 is a middle ground between "pay" and "play," which may eclipse Option 1 entirely

24. Premium Tax Credits • From and after 2014, a taxpayer with household income between 100% and 400% of the federal poverty line is eligible to receive a premium tax credit or cost-sharing subsidy to purchase insurance coverage a public insurance exchange if the taxpayer: • Is not eligible for government coverage such as Medicare, Medicaid or CHIP • Is not eligible for employer-provided coverage or is eligible only for employer provided coverage that is neither “affordable” nor provides “minimum value” • In 2014, the FPL (contiguous states and D.C.) is $$11,670 for an individual or $23,850 for a family of four (source: U.S. Dept. of Health and Human Services)

25. Affordability • Coverage is affordable if the employee’s required contribution for self-only coverage does not exceed 9.5 % of the employee’s household income for the taxable year • Recognizing that employers will not know, and would have difficulty determining, household income for a taxable year, the final rule provides three safe harbors • W-2 wages (the “W-2 safe-harbor) • Hourly rate of pay x 130 hours per month (“rate of pay” safe harbor) • Cost for self-only coverage < 9.5% of the FPL for a single individual (“Federal poverty line” safe harbor)

26. Minimum Value • Measure of the plan’s generosity: plan pays at least 60% of total allowed costs of benefits • Must include: physician and mid-level practitioner care, hospital and emergency room services, pharmacy benefits, and laboratory and imaging services • Three methods of determining MV: • IRS/HHS minimum value calculator • IRS or DHHS safe harbor checklists • Actuarial certification  • Special rule apply to the treatment of employer HRA contributions

27. Hours of Service • An employee's hours of service include the following • Each hour for which an employee is paid, or entitled to payment, • Each hour for which an employee is paid, or entitled to payment by the employer on account of a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence) • 130 hours of service in a calendar month as the monthly equivalent of 30 hours of service per week ((52 x 30) ÷ 12 = 130) • Excludes hours for which compensation is paid for services performed constitutes income from sources without the United States

28. Hours of Service (cont’d) • Actual hours of service from records of hours worked and hours for which payment is made • Days-worked equivalency: Eight hours of service for each day for which the employee would be required to be credited with at least one hour of service • Weeks-worked equivalency: 40 hours of service per week for each week for which the employee would be required to be credited with at least one hour of service • Hours of service don’t include hours of: • Bona fide volunteers • Students on Federal work study program • Certain religious (who have taken a vow of poverty)

29. Assessable Payments Option 3 • Employer make makes an offer to at least 95% of it full-time employees of MEC: • Under an eligible employer-sponsored plan” • And the coverage is “adequate” • Option 3 Penalty (4980H(b) Liability): zero • An offer of coverage is adequate if it is both • "Affordable” and • Provides “minimum value” • Coverage is affordable if the employee’s required contribution for self-only coverage does not exceed 9.5 % of the employee’s household income for the taxable year

31. Prior Transition Rules • Non-calendar year plans • Pre-2015 eligibility rule • Significant percentage (all employees) • Significant percentage (full-time employees) • Shorter measurement period for stability period starting in 2015 • Shorter measurement period for determining ALE status for 2015 • Offer of coverage in January 2015 • Coverage of dependents • Mid-year cafeteria plan elections

32. New Transition Rules • Compliance delayed to 2016 for employers with fewer than 100 full-time employees, provided • Employer employs on average at least 50 full-time employees (including full-time equivalents) but fewer than 100 full-time employees (including full-time equivalents) on business days during 2014 • Employer does not reduce the size of its workforce or the overall hours of service of its employees in order to qualify (other than for bona fide business reasons); and

33. New Transition Rules (cont’d) • Employer does not eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014 • 95% coverage requirement for 4980H(a) penalty reduced to 70% for the 2015 plan year

34. Reporting to Government Agencies • Code Section 6055: any person that provides minimum essential coverage must report to the IRS and furnish statements to “responsible individuals” (i.e., covered employees) • Reporting entities include: • Health insurance issuers (carriers) • Plan sponsors of self-funded plans (carrier, not employer/plan sponsor, files for fully insured plans) • Executive departments of governmental units • Plans must also furnish a statement to plan participants or covered retirees

35. New IRS Forms

36. Reporting of Taxpayer I.D. Numbers • Reporting of TINs (a/k/a/ social security numbers) is required for both Code § 6055 purposes • Special rule where a provide provider is usable to obtain a TIN—the three strike rule • Must make three requests: initial solicitation, the following December 31, and the next following December 31; • If unsuccessful, report birthdates in lieu of TINs • Practice pointer: the need to collect TINs might be explained in the summary plan description

37. Code §6055 Process, Content and Timing The calendar year is the reporting year Statements must be provided to employees by January 1 of the following year; and transmittal forms filed with the IRS by February 28 (or March 31 if filed electronically) Statements provided to employees must be provided via the U.S. mail to the last know permanent address, or a temporary address where appropriate Electronic delivery is permitted with employee consent Employer may hire a 3rd party to assist with compliance, but the legal obligation remains with the employer

38. Process, Content and Timing (cont’d) Reporting rules apply beginning in 2015 First returns are due to be filed in early 2016 Employers with 250 or more employees must file electronically Penalties are imposed under Code § 6721 for failure to timely file information returns, failure to include required information, or inclusion of incorrect information, but penalties may be waived under Code § 6724 upon a showing of reasonable cause

39. Reporting by Applicable Large Employers • Each applicable large employer must file information returns with the IRS and provide statements to their full-time employees about the coverage that they offer (or don’t offer) • IRS uses this information to assess compliance with Code § 4980H • Reporting is done by “applicable large group member” using its own E.I.N. • An employer that is not subject to Code § 4980H is not required to file, but an ALE member under 50 must file

40. Methods of Reporting Under Code § 6056 • General method • Requires employee-by-employee information • Uses alpha-numeric codes for certain information • Most burdensome of the reporting methods (also likely the most common) • Alternative methods • Qualifying offers: an offer of MEC that is affordable and provides minimum value • 98% offers of coverage

41. Combined Reporting for Self-Funded Plans • A self-funded plan maintained by an applicable large employer is subject to both: • Code §6055 by virtue of providing minimum essential coverage, and • Code §6056 by virtue of being maintained by applicable large employer • Under a special rule, the information normally reported on For 1095-B is instead include in a separate section of Form 1095-C

42. The “Authoritative Transmittal” • Generally, each applicable large employer member (i.e., each separate member of a group of employers under common control) must file a separate information return, i.e., Form 1094-C • If one Form 1094-C is being filed (i.e., there is only one ALE member), it must report all aggregate employer-level data • If multiple Form 1094-C is being filed (i.e., there is more than one ALE member), only one such form must be filed that reports all aggregate employer-level data (this is called the authoritative transmittal

43. Questions & Answers Alden J. Bianchi | Member Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center | Boston, MA 02111 Phone: 617.348.3057 | Fax: 617.542.2241 E-mail: abianchi@mintz.com

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