Affordable Care Act and Employers: Final Countdown to Compliance

Webinar, December 2015

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Ann Murray, Partner

ann.murray@nelsonmullins.com404-322-6603

Where Are We Now?

• ACA passed by Congress 5 years ago.• Formal regulations and guidance issued.• Most requirements have now taken effect.• Employer "pay or play" rules applied to non-

exempt (generally, bigger) applicable large employers in 2015

• Employer "pay or play" rules apply to all ALEs in 2016

• First employer reports due Jan-March 2016• Cadillac tax scheduled for 2018

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The ACA Employer Mandate – Does It Apply to Me?

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Am I Required to Comply?

• Only “Applicable Large Employers” (ALEs) are subject to the Mandate

• ALE is defined as 50 Full-Time Equivalents (FTEs) on average (special transition rule for 2015 allowed some ERs with 50-99 FTEs to delay 1 year)

• Measured over prior calendar year (special 6-month transition rule for 2015 only)

• If you have not already done so, run your calculations

• New test done every year.

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Do I Need To Count Related Orgs?

Include controlled group members, affiliated service groupmembers and predecessor entities:

Controlled Group – includes parent-child ownership and brother-sister entities.Attribution rules apply. Generally requires 80% or more ownership by 5 or fewerpersons.

Affiliated Service Group – includes traditional ASGs (A-org or B-org ASGs) andmanagement ASG. Generally exists where primary business of one entity isperforming services for or with another entity.

Predecessors/Successors – includes predecessor hours and compliance.Generally follow payroll tax successor employer rules. Beware in M&Atransactions!

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Which Employees Do I Count?

EE Category Used to determine “Large ER” status?

Full-time Counted as 1 FTE, based on 30-hr or more week

Part-Time Prorated (calculated by taking hours worked in a month up to

120, divided by 120)

Seasonal Possibly excluded if cause ER to exceed threshold less than

120 days/year

Staffing Agency If “common law employee” of agency, not counted as FTE. If

"common law employee" of client, client must count. Beware

of Worker Misclassification!

Typical Categories of Full-Time Equivalent

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Can I Delay My Compliance?

GENERAL RULE:

If you are subject to the Mandate and you do NOT offer affordable,minimum value employer health coverage to the requiredpercentage of full-time employees (and their non-spousedependents) for any day of a calendar month beginning withJanuary 2015, you may owe a “penalty” for that month.

Multiple Transition Rules Are Available,

But Beware That You Satisfy ALL Requirements

Can I Delay My Compliance?

Mid-Year Renewal Example:

I have 65 full-time equivalents and my renewal is mid-year. Will I need to comply with the ACA employer mandate at my 2016 mid-year renewal or 1/1/16?

If you qualify for transition relief, you can avoid the penalties for 2015 AND any calendar month during the portion of your 2015 plan year that falls in 2016. BUT, you must satisfy ALL of the following to qualify for the transition relief:

1) 50-99 FTEs,

2) From 2/9/14 – 12/31/14, you did not reduce the size of your workforce or hours of service of employees in order to satisfy the workforce size requirement,

3) You have not eliminated or materially reduced the health coverage (if any) you offered as of 2/9/14,

4) You did not modify your plan year after 2/9/14 to move it later in the year, and

5) You certify on a prescribed form that you satisfy the requirements.

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Can I Delay My Compliance?

Will These Transition Rules Be Available in 2016?

At this point, no. The various transition rules offered to large ERs in 2015 –non-calendar plan years, shorter measurement periods for initial year, coverage for dependents, bigger "gimme" for Penalty A, lower offer threshold for Penalty A – are currently not provided to mid-sized employers for the 2016 year.

*Note that mid-sized ERs will be able to take advantage of the transition rule that allows certain mid-sized ERs with mid-year renewals to delay compliance until their mid-year renewal in 2016.

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The ACA Employer Mandate –Compliance Steps

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"Pay or Play"

• Penalty A ($2,000 per FT EE per year) applies if ALE member fails to offer minimum essential coverage (MEC) covering EE & non-spouse dependents to at least 95% of ALE member's full-time EEs (or, if greater, 5) and at least 1 full-time EE purchases coverage through an Exchange with a subsidy

Monthly Penalty = $166.67 x total number of FT EEs (reduced by 30)

*(Special transition rule may reduce 95% to 70%, allow no dependent coverage and allow 80 EE "gimme", for 2015 only)

• Penalty B ($3,000 per FT EE per year) applies if coverage offered to a full-time EE is not affordable or does not provide minimum coverage and that EE purchases coverage through an Exchange with a subsidy.

Monthly Penalty = $250 x total number of full-time EEs who purchase coverage through the Exchange with a subsidy

*Penalty B can not exceed what ER would have owed for Penalty A*

"Pay or Play"

1) Compliance with ACA employer mandate is determined at entity level in a controlled group or affiliated service group (e.g., does that particular entity offer coverage to "all" of its full-time EEs?).

2) In calculating Penalty A, the EE (30 or 80) reduction is allocated among all members of the group, based on their full-time EE counts.

Example: Acme and Beta are each owned 80% by Joanne, and thusconstitute a controlled group. Each has 75 full-time EEs. Acme complieswith the ACA employer mandate. Beta does not. In calculating its penaltyunder the transition rule for 2015, Beta can only reduce its 75 FTEs by 40(which is ½ of the normal 80 EE reduction for 2015). Penalty = (75-40) x$2,000 = $75,000.

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Determining Who Is Full-Time

• Determination is made at time of hire – do you reasonably

expect the EE to average 30 hours or more per week (130

hrs/month), based on reasonable expectations? What does

your ad say? How much did the prior EE work?

• Ignore any temporariness of employment

• Consider all common-law EEs. Beware of classification

problems. Taking an overly aggressive approach in classifying

workers as independent contractors OR as variable hour

employees can be risky!

• Special rules give staffing companies more flexibility.

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Counting The Hours

• Count same hours as recognized for FLSA (overtime)

• Safe harbors are available based on days-worked or

weeks worked

• Special rules for schools, airlines, commissions– apply

“reasonableness”

• Special rules may apply to seasonal EEs

• Foreign EEs – generally exclude non-U.S. hours

(regardless of residency or citizenship)

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Counting The Hours

Special Break In Service Rules

FULL TIME EMPLOYEE (except educational institutions):

• Special rules for changes in job classification.

• Rehires after 13 week break may restart.

• Rehires after 4 week break may restart if break exceeded prior

employment period.

• Special unpaid leave (FMLA, USERRA or Jury) must be credited with

hours under averaging method.

OTHER:

• Special rule allows staffing firm to determine separation differently.

RECOMMEND ADOPTING/UPDATING COMPANY POLICIES TO REFLECT

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Counting The Hours

PROBLEM: Hours are measured each calendar month, so won't know until

end of month if EE qualifies.

SOLUTION: Look-back measurement periods (up to 12 months)

• Make sure you have these correctly structured.

• Be sure to track all required hours.

• Communicate your approach through written Company Policy.

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M & A Issues

1) Successor liability

2) Recognition of predecessor hours may be required, triggering immediate coverage obligation

3) Special rules apply to changed measurement periods

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M & A Issues - Example

Q1. We acquired a company with a calendar year plan year. Our plan year runs 9/1 – 8/31. How do we handle variable hour EE look-back measurement periods?

1) Apply new measurement period based on upcoming open enrollment.

2) Honor the status of EEs who already qualified as "full-time" under (a) prior measurement period, or (b) initial measurement period. They will qualify as full-time for remainder of current stability period.

3) If EE did not qualify as "full-time" during prior measurement period, he/she gets another chance by being measured during new measurement period.

*Based on proposed rules (subject to change when rules finalized)

The ACA Employer Mandate – Can I Take Credit For Someone Else's

Coverage?

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Staffing Company Plans

If you are or might be the common law employer (not the staffing company), but you want to take credit for staffing company health coverage: • Your staffing contract must include an additional charge for each full-time EE

who enrolls in the staffing company's health plan.• You can not spread the charge across your entire contingent work force.• No guidance on amount of additional charge.• Consider contractual protections, limiting contingent worker hours or length

of assignment.• You must still report on Form 1095-C.

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Union/Multiemployer Plans

You may take credit for union health plan if:

1) You are required by a CBA or participation agreement to contribute2) Coverage satisfies ACA requirements (minimum value, affordable, non-

spouse dependent coverage, etc…)

*You must still report on Form 1095-C, which may be difficult.

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ACA Employer Reporting

Reporting Requirements

• Insurer and Self-Insured (required by IRC 6055)– Reported to all enrolled responsible individuals (employees, retirees, COBRA,

etc)– Reports MEC coverage– Insurers and self-insured small employers use Form 1095-B– Self-insured ALEs generally use 1095-C (see below)

• Employer Reporting (required by IRC 6056)– Reported to all full-time employees– Reports Affordable and Minimum Value Coverage– Reporting is done by each ALE member– Employers use Form 1095-C (1094-C cover sheet to IRS)

• Due Dates:– 1095-B and 1095-C Reports due to employees by January 31 (February 1

for 2016)

– 1094-B and 1094-C Reports due to IRS by February 28 if paper filing; by March 31 if electronically filing (required if 250 or more forms).

Penalties for Noncompliance

• Originally same as penalties for failure to file correct information returns ($100 per return/$1.5 M cap)

• Trade bill signed in mid-2015 increased these penalties:– Generally, $250 for each return not filed correctly

to a total of $3.0M

– If failure applies to information return (i.e. 1095-C provided to IRS) and employee statement (same 1095-C given to employee), penalty may be doubled

– Penalties may be reduced or waived for good faith filing efforts or for timely corrections (one-year transition rule).

– No cap on penalties where intentional disregard exists.

Potential Financial Statement Impact

Q. Will the accrual of penalties be required for GAAP reporting purposes?

• ASC 450 – Contingencies

– Since penalty provisions apply to all ALEs with 100 or more employees for 2015, employers need to accrue for any materialpenalties on financial statements

• Need to discuss with your CPA

Technology is Key for Reporting

1. Can you capture and report required date for the IRS?

2. Do Payroll and HRIS systems contain all required info?

3. How will you combine this info on reports?

4. Will manual adjustments be needed? (e.g., COBRA, shared employees)

5. Do you need to engage someone to handle reporting?

Data Fields Needed

• Name

• Address

• TIN/EIN

• Company/Division

• Location

• Employment Status

• Pay Frequency

• Benefits Status

• Hours Worked

• Scheduled Hours

• Pay Rate

• W2 Wages

• Birth Date

• Hire Date

• Rehire Date

• Employment Status

• Full-time/Part-time/Seasonal Indicator

• Benefits Eligibility Date

• Benefits Enrolled Date(s)

• Dependent Age

• Coverage Begin Date

• Waive Reasons

• Miscellaneous…

Searching for Data

• Payroll System– Frequency of Pay– Pay Rate– W-2 Wages– Employee Data (name, address, etc)

• Time & Attendance System– Work Hours– Scheduled Hours– Leave of Absence information

• HR / Benefits System– Eligibility for Benefits– Status of benefits– Information on Dependents– Coverage date information

EXAMPLES

Q. Do non-benefits eligible employees need to receive a 1095 form?– Fully-Insured – Must provide a Form 1095-C to ALL full-time EEs,

regardless of benefits eligibility.• See IRC 6056(c) ("Every person required to make a return under subsection (a) shall

furnish to each full-time employee whose name is required to be set forth in such return under subsection (b)(2)(E) a written statement…..".

– Self-Insured – Must provide Form 1095-C to ALL full-time EEs AND must provide a Form 1095-C with Part III completed to all EEs (full-time or part-time) who are eligible for and enroll in the employer's self-insured health plan (note: self-insured employer may use 1095-B instead).

EXAMPLES

Q. COBRA : Will we only report COBRA information if the COBRA recipient starts COBRA during the calendar year that is being reported or will we need to report all members enrolled in COBRA during any part of that year?– Anyone enrolled in COBRA during the year, or any part thereof, is

reported. Note that in Form 1095-C, Part II, the cost of coverage reflects the COBRA premium for the lowest-cost, self-only coverage providing minimum value.

– An offer of COBRA made to a former EE due to termination of employment is NOT reported on Part II, unless the EE enrolls in COBRA.

– If COBRA was offered because the EE lost eligibility under the plan (e.g. reduction in hours), rather than termination of employment, the offer of COBRA is reported in Part II.

– Note that a self-insured employer can choose to instead report non-EEs on 1095-B rather than 1095-C (if the person was not an employee at any point during the 12 months).

EXAMPLES

Q. How do we handle non employee primary COBRA recipient?

Fully-insured: No requirement for employer to report.

Self-insured: Dependents who separately elect COBRA are

reported on a separate Form 1095C (or 1095-B). Dependents who receive COBRA through an EE

or former EE who elected coverage, the dependent coverage should be reported as part of the 1095-C (or 1095-B) provided to the EE/former EE.

EXAMPLES

Q. How do we split up employers? ––Each ALE member should be filing separately.

–The ALE member may file multiple Forms 1094-C for different groups of EEs (e.g., by location or by division), but one of those filings must be the "authoritative transmittal" that reports aggregate data for everyone.

–You do not split up 1094-C’s based on the which EEs meet which affordability safe harbors – the affordability safe harbors are something you report for each individual on their individual 1095-C (Using Codes 1A, or 2F-2H in Part II).

EXAMPLES

Q. On 1095-C Line 14: All of our plans offer EE + Family coverage choice. If an employee has no spouse, would we use 1B or 1E?

– Somewhat unclear, but best to use Code 1E if you offer Family coverage to everyone, but it's just that this particular EE doesn't have a family.

• Note: lack of clear guidance on what you report for COBRA enrollees

Looking To The Future

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CADILLAC TAX

40% excise tax will apply on health insurance benefits exceeding a certain threshold – known as “high cost” or Cadillac coverage

Current Thresholds Set for 2018 (indexed to inflation)

• $10,200 for individual coverage

• $27,500 for family coverage (indexed to inflation)

Thresholds increase for:

• individuals in high-risk professions

• employers that have a disproportionately older population

Effective 2018

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CADILLAC TAX

• Employers starting to investigate alternative approaches to avoid

• Long-term strategies (e.g., high-deductible health plans with HSAs)

• Value-based professional networks

• Centers of Excellence

Effective 2018

Questions?

Thank you for your time!

This presentation is for informational purposes only and does not constitute specific legal advice or opinions. Advice and opinions are provided by our firm only upon engagement with respect to specific factual situations.

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