Understanding the ACA: Unraveling the ACA

and the Implications for Hiring in the Future

September 24, 2014

Alden Bianchi, Mintz, Levin, Cohn, Ferris, Glovsky and

Popeo, P.C., Boston, Massachusetts

Agenda

• Shared Responsibly for Employers

• Preliminary Items and Key Definitions

–The individual mandate

–Minimum essential coverage

• Applicable Large Employers

• Code Section 4980H—Structure

–4980H(a) Liability

–4980H(a) Liability

• Determining Full-Time Employee Status

Agenda (cont’d)

–Monthly and look-back measurement methods

–Transition from one method to the other

–Changes in status

–Special unpaid leave and employment break periods

–Employees of staffing firms

• Transition Rules

–Carryover from proposed regulations

–Newly issued

• Waiting period final regulations

• Plan-level and employer reporting final regulations

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)

Individual Responsibility

• Commencing Jan. 1, 2014, U.S. citizens and green card holders have a

choice (unless an exception applies) to either:

–Obtain health care coverage (“minimum essential coverage”) for

themselves and their dependents; or

–Pay a tax

• Minimum essential coverage include coverage under an eligible

employer-sponsored plan

–Generally, an eligible "employer-sponsored plan must" provide

medical care other than excepted benefits

– If coverage is under a small group product, it must include minimum

essential coverage (or MEC)

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)

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

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

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 . . .

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

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

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

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)

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

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

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)

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

Compliance Strategies/Plan Designs

Sub-Minimum

Value

Minimum Value

MEC Plan Reference Pricing

Models

Major Medical

excluding inpatient

hospital services

Limit Networks

Self-funded Self-funded Self-funded Self-funded or fully

insured

• Preventive-

services only

• May have non-

coordinated

hospital

indemnity

feature

• Similar to most

major medical

products

• But

reimbursement

tied to a

reference price

(e.g., Medicare

plus 10%)

• Qualifies as MV

using HHS

calculator

• Not everyone is

convinced

• Regulators are

aware but have

not objected

(yet)

• Services limited

to a small

number of

participating

providers

• May be more

appropriate to

large urban

environments

The Sub-MV Plan Strategy

• Example of “sub-MV plan” coverage

– First-dollar preventative care

– Wellness

– Clinical trials

• Result: 4980H compliance tested under Option 2 ($3,000 x just employees who are subsidy eligible)

• Strategy is neither “abusive” (as some claim) nor a “panacea” (as others claim)

– Avoids the Option 1 penalty (which is far more onerous in most cases)

– Does not avoid the Option 2 penalty (which, while generally less, is hard to predict and almost impossible to model)

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The MVP Strategy

• A “Minimum Essential Coverage” or “MEC” plan

• A “hospital or fixed indemnity plan”

• An MVP arrangement;

–The goal is to reduce the aggregate premium cost of minimum value

coverage so that the cost of providing coverage that is “affordable” is

similarly lowered

–For example, the premium cost of a traditional major medial plan

offered on a fully-insured basis by a top-tier, national carrier might

be, say, $500 or more. But for an MVP arrangement the cost might

be $200. (MVP arrangements are generally if not universally self-

funded.)

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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”

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

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

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

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

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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,

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

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

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

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

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)

Special Staffing/PEO Rule • An offer of coverage made by a staffing firm on behalf of a client

organization under a plan maintained by the staffing firm, is treated as

an offer of coverage made by the client employer for purposes, if

• The fee the client employer would pay to the staffing firm for an

employee enrolled in health coverage under the plan is higher than the

fee the client employer would pay to the staffing firm for the same

employee if the employee did not enroll in health coverage under the

plan

• While welcome, this rule does not itself address determination of

common law employee status

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

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

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

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

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

Waiting Period Final Rule

• For plan years beginning on or after January 1, 2014, all group health

plans (irrespective of size) and group health insurance issuer must not

apply any waiting period that exceeds 90 days

• Waiting period means “the period that must pass before coverage for

an employee or dependent who is otherwise eligible to enroll under the

terms of a group health plan can become effective”

• A plan can require that an individual “satisfy a reasonable and bona

fide employment-based orientation period” prior to receiving an offer of

coverage

• Ninety days refers to calendar days — not three months or a quarter

• Plans that require completion of cumulative hours of service may do so

provided the hours-of-service requirement does not exceed 1,200 hours

Waiting Period Final Rule (cont'd)

• If the plan conditions eligibility on a specified number of hours of

service, and it cannot be determined that an employee is reasonably

expected to regularly work that number of hours

–The plan may have up to 12 months to measure whether the

employee meets the eligibility criteria

– In that case, coverage must begin no later than 13 months from the

employee’s start date, plus, if the start date was not the first day of

the month, the time remaining until the first day of the next month

–Essentially, this rule coordinates with the Code section 4980H look-

back measurement method

Plan Level Reporting • Under IRC Section 6055, information must be reported to the IRS by

health plans that provide health coverage that meets the “minimum

essential coverage” criteria

• Applies to self-insured plans and insurers

• Plans must also furnish a statement to plan participants or retirees

• Reporting must be done on IRS Form 1095-B on or before February 28

(or March 31 if filed electronically) of the year following the calendar

year in which they provided minimum essential coverage

• No exception is made for non-calendar year plans

Employer Reporting • Section 6056 requires large employers, defined as those with more

than 50 full-time employee equivalents, to report information to the IRS

• Employers must provide this information to each full-time employee

identified on the report by January 31, of the succeeding year

• Reporting must be done on IRS Form 1094-C (transmittal) and 1095-C

(employee statement) on or before February 28 (or March 31 if filed

electronically) of the year following the calendar year in which they

provided minimum essential coverage

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

Disclaimer

Any US tax advice contained herein is not intended or written to be used, and

cannot be used, for the purpose of avoiding penalties that may be imposed

under the Internal Revenue Code or applicable state or local tax law provisions.

These slides are for educational purposes only and are not intended, and

should not be relied upon, as tax or legal advice.

Recipients of this document should seek advice based on their particular

circumstances from an independent tax advisor or legal counsel.

Common Law Employee Definitions (cont’d)

13-Factor Test: National Mutual Insurance Co. v. Darden

The hiring party’s right to control the manner and means by which the

particular result is to be accomplished; the skill required; the source of the

instrumentalities and tools; the location of the work; the duration of the

relationship between the parties; whether the hiring party has the right to

assign additional projects to the hired party; the extent to which the hired

party may decide when and how long to work; the method of payment; the

role of the hired party in hiring and paying assistants; whether the work is

part of the hiring party’s regular business; whether the hiring party is in

business; the provision of employee benefits; and the tax treatment of the

hired party

Common Law Employee Definitions (cont’d)

IRS Training Guidelines

• Behavioral control, e.g., Instructions the business gives the worker;

training the business gives the worker

• Financial control, e.g., The extent to which the worker has unreimbursed

business expenses; the extent of the worker’s investment; the extent to

which the worker can realize a profit or incur a loss.

• Legal control, e.g., written contracts describing the relationship the parties

intended to create; whether the business provides the worker with

employee-type benefits, such as insurance, a pension plan, vacation pay,

or sick pay

Common Law Employee Definitions (cont’d)

Treas. Regs. §31.3401(c)-1(b)

Generally the relationship of employer and employee exists when the person

for whom services are performed has the right to control and direct the

individual who performs the services, not only as to the result to be

accomplished by the work but also as to the details and means by which that

result is accomplished. . . In this connection, it is not necessary that the

employer actually director control the manner in which the services are

performed; it is sufficient if he has the right to do so. . . .

Common Law Employee Definitions – Limitations

• Why are you asking?

– To distinguish a common law employee from and independent contractor?

– To determine from among two putative employers which is the common law employer of a

individual who is clearly someone’s employee (and not an independent contractor)?

• For tax and benefits purposes, there historically has been no such thing as “co-

employment” or “joint employment”

• Historically, for employment tax purposes, in three-party staffing arrangements that

contemplated the issuance of a W-2 and not a 1099, the potential for abuse was limited

• Code §4980H presents a similar regulatory profile

Staffing Industry vs. PEOs

• Historic treatment of workers places with client organizations:

– Staffing firms are the common law employer of workers placed by staffing firms

– Client organizations are the common law employer of workers placed by PEOs (although at least

one recent federal appeals court has held otherwise)

• Rationale: staffing firms traditionally recruited, trained, and generally retained the right to

control workers' place with client organizations

• These positions have not been challenged by the regulators to our knowledge

• IRS Notice 2002-21: PEO retirement plans are multiple employer plans—therefore

(despite that the notice nowhere mentions common law employer status), the client

organization is the common law employer

• March 1, 2006 DOL Information Letter: PEO welfare plan is a MEWA

Temporary Staffing Firm vs. Staffing Firm

• Neither term has independent legal significance

• From the preamble to the final Code § 4980H regulations, it appears that the term

“temporary staffing firm” means a firm that places variable hour employees in short-term,

high turnover assignments—i.e., positions with low job stability

• A “staffing firm” is presumably any staffing firm that is does not place temporary workers,

i.e., long-term assignments, temp-to-perm, placement services, and pay-rolling

• PEOs and similar arrangements are quite different from temporary staffing firms in two

key respects—PEOs generally do not recruit the employees, and the employees are

characterized by high job stability

The MEWA Conundrum

• If the client organization, and not the staffing firm, is the common law employer, then

– Any tax-qualified retirement (e.g., 401(k)) plan maintained by the staffing firm is a multiple

employer plan, and

– Any group health plan maintained by the staffing firm is a multiple employer welfare arrangement

(MEWA)

• MEWAs must file an Form M-1 annually with the Department of Labor (this is a public

filing, which is available on the DOL's website)

• A self-funded MEWA is subject to state law (and in most states is an unlicensed

insurance company)

• A fully-insured MEWA could not cover small groups in most states

Common Law Employer/Employee

Temporary Staffing

Firm

Staffing Firm PEO

Industry View Temporary staffing firm

is the common law

employer

Staffing firm is the

common law employer

Client organization is

the common law

employer

(Apparent) IRS View

under Code § 4980h

Final Regulations

Temporary staffing firm

is the common law

employer

Client organization is

the common law

employer

Client organization is

the common law

employer

Comment(s) A GHP of the TSF is a

single employer plan

A GHP of the Staffing

Firm is what?

A GHP of the PEO is a

Multiple Employer

Welfare Plan

The “Offer of Coverage” Safe Harbor

• Treas. Reg. §54.4980H-4(b)(2) (Offer of coverage on behalf of another entity)

• An offer of coverage made to an employee by a staffing firm under its group health plan

is treated as being made by the client organization in certain instances

• The rule applies in cases “in which the staffing firm is not the common law employer”

• The offer qualifies for safe harbor treatment only if “if the fee the client employer would

pay to the staffing firm for an employee enrolled in health coverage under the plan is

higher than the fee the client employer would pay the staffing firm for the same employee

if that employee did not enroll in health coverage under the plan”

• There is no requirement that the fee be a particular amount or be administered in a

particular way

Drafting Best Practices—4980H Safe Harbor

• Include the following provisions in staffing agreements:

– Reservation of rights: a recitation that the staffing firm reserves the right to control and direct the

individual who performs the services

– Intent the parties: a recitation that the parties intend that the employee be the common law

employee of the staffing firm and not the client organization

– Contingent safe harbor: state that, if in the event of audit, investigation, or claim, the client

organization and not the staffing firm is determined to be the common law employer, then the

parties intend to rely on the Treas. Reg. §54.4980H-4(b)(2) safe harbor

Drafting Best Practices—Indemnity Provisions

• Demands for broad indemnity provisions in staffing contracts are becoming more

common, and may be justified where directed at things within the control staffing firm,

which include

– What offers of coverage the staffing firm undertakes to make minimum essential coverage,

minimum value, etc., and

– What events will trigger liability

– But events within the control of the client organization should not trigger liability on the part of the

staffing firm, e.g., the client organization’s failure to offer coverage

Questions and Answers

Edward A. Lenz

Senior Counsel

American Staffing Association

277 S. Washington St., Suite 200

Alexandria, VA 22314-3675

Direct: (703) 253-2035

elenz@americanstaffing.net

Alden J. Bianchi

Member

Mintz, Levin, Cohn, Ferris, Glovsky and

Popeo, P.C.

One Financial Center

Boston, MA 02111

Direct: (617) 348-3057

ajbianchi@mintz.com