the affordable care act – a deeper dive into counting and managing hours of service for public...

THE KINNEY FIRMMARK J. KINNEY

(952) [email protected]

The Affordable Care Act – A Deeper Dive into Counting and Managing Hours of Service for

Public Employers

MN GOVERNMENT FINANCE OFFICERS ASSOCIATIONJuly 31, 2013

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COPYRIGHT © 2013 MARK KINNEY JULY 31, 2013

Introduction• The 2,000-page Patient Protection and Affordable

Care Act (ACA) was passed on March 23, 2010• 20,000 pages of regulations have been issued to date• Much guidance is in proposed form, and many key

issues have not yet been addressed• Employer Responsibility Rules (and Penalties) have

been Delayed One Year until 2015• Other provisions of the ACA will continue on track,

including the requirement to pay PCORI and reinsurance taxes

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Concerns of Public Employers

• States, cities, counties and school districts make extensive use of the part-time workforce

• In 2015, they must offer health coverage to all employees who work an average of 30 or more hours per week

• There is a significant gap between past practice and the new federal requirements

• There is a significant, unknown and unfunded liability

• There are complex new administrative, payroll and recordkeeping requirements

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Concerns of Unions• Letter from James P. Hoffa, International Brotherhood of

Teamsters, and other union Presidents to Congressional leaders Pelosi and Reed (mid-July, 2013):

– The unintended consequences of the ACA are severe. – Perverse incentives are already creating nightmare

scenarios.– The law creates an incentive for employers to keep

employees’ work hours below 30 hours a week. – You pledged that if we liked the health plans we have now,

we could keep them.– Right now, unless you and the Obama Administration enact

an equitable fix, the ACA will shatter not only our hard-earned health benefits, but destroy the foundation of the 40 hour work week that is the backbone of the American middle class.

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Penalty Scheme in 2015• The $2,000 penalty

– When an applicable large employer fails to offer minimum essential coverage to at least 95% of all full-time employees and at least one full time employee receives a premium tax credit or cost-sharing reduction from an exchange, a monthly assessable payment is determined as follows:

1/12 of $2,000 X (# Full Time Employees - 30)• The $3,000 penalty

– When an applicable large employer offers minimum essential coverage that is not “affordable” for some employees or does not provide “minimum creditable coverage,” a monthly assessable payment is determined as follows:

1/12 of $3,000 X # Full Time Employees who enroll on exchange and receive tax credits or cost-sharing reductions

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Applicable Large Employers• An “applicable large employer” is an employer who

employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year

• For this purpose, – A full-time employee with respect to any month is an

employee who is employed on average at least 30 hours of service per week.

– The number of full-time equivalent employees is determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.

– Special rules allow employers to exclude seasonal employees if an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year.

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Who is the Employer?• Controlled group rules 414(b) or (c), or an affiliated service

group under section 414(m), are used to determine who is an “applicable large employer”

• Even if your organization is already an applicable large employer, members of its controlled group will be subject to the “pay or play” rules in 2015

• Liability for employer penalties assessed separately against controlled group members

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Joint Powers or Similar Entities• Does your organization participate in a joint powers or similar

arrangement for: – Police– Fire– General Governmental Services– Parks and Recreation– Sanitation– Correctional Facilities– Other

• Do these organizations have employees that work 30 or more hours per week?

• Are they part of your organization’s controlled group?

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Controlled Group Rules• Applicable large employers must include

employees of employers under “common control”

• IRS rules governing controlled groups are found in Code §§ 414(b), (c), (m) and (o)

• The ACA requires government entities to apply “reasonable, good faith interpretation” of controlled group rules

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How do Governmental Entities apply Controlled Group Rules?• A “parent-subsidiary” (vertical) control group exists

where a corporation, trade or business owns at least 80 percent of another business.

– Applied to governmental entities, non-binding IRS guidance suggests that there will be a controlled group where at least 80% of the directors, trustees or other individual members of one entity’s governing body are either representatives of or directly or indirectly control, or are controlled by, the other entity.

• Without further regulatory guidance, it is not clear exactly how the controlled group rules will apply to governmental entities: but watch this space.

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Who is an Employee?• “Common Law” Standard

An employment relationship exists when 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 accomplished by the work but also as to the details and means by which that result is accomplished.

• Regulations cite the 20-factor test in IRS Revenue Ruling 87-41

• Workers from temporary agencies or professional employer organizations (PEOs) MAY or MAY NOT be employees depending on the facts. See IRS Revenue Ruling 70-630.

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What Hours are Counted?• A full-time employee means persons who work an

average of 30 hours per week. • Employers may use 130 hours of service in a

calendar month as the monthly equivalent• For this purpose, an hour of service includes:

– Each hour for which the employee is paid, or entitled to payment

– Each hour for which the employee is paid, or entitled to payment, for vacation, holiday, sick time, disability, jury duty, military duty, or leave of absence (up to 160 continuous hours)

– hours of unpaid leave for FMLA, USERRA, and jury duty

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Special Rule for Educational Institutions• Applicable employment period is the academic

year• For purposes of determining average hours, the

measurement period must exclude employment breaks (winter break, spring break, summer break)

• In the alternative, the educational organization may credit hours during the break period equal to hours worked during the academic year (but not more than 501 hours need be credited)

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Measuring Hours for Employees• Days worked equivalency method. Credit employee

with 8 hours of service for each day for which the employee would be required to be credited with at least one hour of service (not available for 10-hour day schedules).

• Weeks worked equivalency method. Credit employee with 40 hours of service for each week for which the employee would be required to be credited with at least one hour of service.

• Actual Hours method. Use actual hours of service from records of hours worked and hours for which payment is made or due. Applies to all hourly workers.

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Example: Tracking Hours for a City

Job Classification Hours Crediting MethodMayor and full-time administration Weeks worked equivalency

(simplifies counting)Part-time city attorney Days worked equivalency

Municipal golf course employee Actual hours method

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Safe Harbor Rules: Determining Full-Time Status of Ongoing Employees

Step 3: Provide coverage during a “stability period” regardless of actual hours

At least 6 months in duration Not shorter than look-back period

Step 2: Determine who is a full-time employee during the look-back period

Average at least 30 hours of service per week

Step 1: Determine Standard Measuring Period (look-back period)

Not less than 3 months Not more than 12 months

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Administrative Period• Employers may separate the Standard Measurement

Period and the Stability Period by an Administrative period

• Purpose of the Administrative Period is to allow time to identify who is eligible and conduct enrollment

• Administrative Period may be up to 90 days• The Administrative Period should fall within the end

of a Stability Period to avoid any loss of coverage

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Example: 12-Month Measuring Period from Oct. 15, 2013 to Oct. 14, 2014

2013 Oct 15 Nov 15 Oct 14, 2014 Avg. Hrs FT

Smith 40 40 40 40 40 40 40 40 … 40 40 40 40 Y Jones 40 40 40 40 40 30 30 40 … 30 40 40 35 Y Ward 30 40 20 20 30 30 40 40 … 20 30 20 30 Y Dunn 25 32 18 40 37 10 30 40 … 15 27 35 29 N

• Smith is the City Administrator. She is an exempt employee and works full time. The City uses the “Weeks Worked Equivalency” method and credits her with 40 hours per week.

• Jones and Ward are part-time city attorneys. The City uses the Days Worked Equivalency method and credits them for 8 hours on every day they work an hour.

• Dunn is a part-time custodial worker. The City uses the Actual Hours Method.

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Reducing Hours of Part Time Employees Define part-time hours below 30 per week at level that can be managed

Positions with predictable hours may be scheduled for close 30 hours per week Example: Administrative assistant scheduled for 28 hours per week

Positions with unpredictable fluctuations in hours should be scheduled with fewer standard hours Example: Road crews workers with storm cleanup duties might be

scheduled for 25 or fewer hours per week. Use the “bottom up” method for least hardship

Start with those who are scheduled for 30 hours per week and reduce their hours by the minimum required amount

To the extent possible, replace lost hours by reallocating to current workers above or below 30. Or hire workers at lower hourly rates.

Warning: this approach can create hardship, it’s politically sensitive, it may not be permissible under collective bargaining agreements, and it heightens the risk of litigation.

Microsoft Office Excel Worksheet

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Hours Reduction in the News• Dearborn, MI Cutting hours for 700 workers down to 28 hours a week.• Ft. Wayne, IN school district cutting hours for 3/4th of its part-time aides.• Omaha, NE school district cutting hours for 281 part-time employees to avoid $2.5

million in new costs, which will result in pay cuts of up to $3,300.• Long Beach, CA cutting hours for 200 part-time workers to save $2 million• Salt Lake City, UT school district cutting hours for 1,000 to 29 hours per week to save

$14 million. • State of Virginia cutting hours for 7,000 government workers to 29 hours a week.• Kern County, CA cutting hours for 800 workers to avoid costs of $8 million a year.• Allegheny County, PA community college cutting hours for 400 adjunct faculty and

other employees so it wouldn't have to pay $6 million in costs.

Merline, John. “Local Governments Reeling under Obamacare Costs.” Investors Business Daily 19 Jun 2013

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New Employees• If an employee is reasonably expected at his or her start

date to work full-time, an employer must offer coverage no later than the end of the 90-day waiting period.

• If it cannot be determined on the start date whether the employee is reasonably expected to work on average at least 30 hours per week (a “variable hour employee”),

– The employer may use a measurement period of between 3 and 12 months and an administrative period of up to 90 days.

– The measurement period and the administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date (at most 13 months plus a partial month).

– The stability period for such employees must be the same length as the stability period for ongoing employees.

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Admin Period 3.0 Average Weekly Hours During Initial Measurement Period: 31Stability Period

VARIABLE HOUR/SEASONAL EMPLOYEEInit Msmt Period 6 Start 9 1 2014

12 Is Employee Entitled to Coverage During Stability Period? Yes

2012 2013 2014

Employee: Anderson, John F.

J A S O N DJ F M A M J J A S O N DJ F M A M J J A S O N DJ F M A M J

J A S O N D2015 2016 2017J F M A M J J A S O N DJ F M A M J J A S O N DJ F M A M J

ONGOING EMPLOYEEStnd Msmt Period 12 Start 10 1 2014 Employee: Anderson, John F.Admin Period 3.0 Average Weekly Hours During Stnd Measurement Period: 29Stability Period 12 Is Employee Entitled to Coverage During Stability Period? No

2012 2013 2014J F M A M D J F M A MJ J A S O N D J F M A MJ J A S O N

A MJ J A S O N

D

2015 2016 2017J F M A M

J J A S O N

DJ J A S O ND J F M A MJ J A S O ND J F M

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Break in Service Rules• If employer terminates and is rehired more than 26

week later, they may be treated as a new hire• Rule of Parity: if an employee terminates for at least

4 weeks, and period of termination exceeds original employment, they may be treated as a new hire

• Otherwise employees who return from a break in service who are still within a “stability period” for coverage must be offered coverage on the first day of hire

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Immediate Action Items for Public Employers1. Make someone responsible2. Determine applicable large employer status3. Identify all common law employees4. Identify all full-time employees5. Establish measurement, administrative and

stability periods for ongoing, variable hour and seasonal employees

6. Estimate potential exposure 7. Implement mitigation strategies as necessary8. Maintain comprehensive records to defend against

lawsuits, IRS audits and demands for penalties

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Example: City A in 2015• City A provides group health coverage for 100 of its

full-time employees, which it currently defines as employees who work 32 hours per week.

• City A has 15 employees who work at least 30 hours per week but less than 32 hours. They must be offered coverage.

• Option 1: Offer coverage to the 15 employees– Average cost to employer: $6,000 per employee– Cost to provide coverage:* $90,000 per year– Total cost (115 FTEs x $6,000): $690,000 per year* This assumes that all 15 accept the offer

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More Options. . .• Option 2: Decline coverage to the 15 employees

– Assessable payment: $2,000 x (115 full-time employees - 30) = $170,000

– Cost of coverage for 100: $600,000 (100 x $6,000)– Total Cost: $770,000. $80k more than Option 1.

• Option 3: Terminate Plan– Assessable payment: $170,000. – Employees may want to be paid the difference– Collective bargaining agreements may prohibit– Local communities may not support decision

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Options continued. . . • Option 4: Reduce hours

– Start with those at 30 and make minimum reduction that can be managed

– Rather than hire new temporary employees, start by allocating lost hours to employees below or above 30 hours

– Hours counting should begin in October for January 2014 enrollment; decisions should be made early to avoid hardship later

– This approach can create hardship and is politically sensitive

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Options continued. . . • Option 5: Reduce Employer Contributions

– Reduce employer contribution by $90,000 (or some lesser amount)

– Coverage may not be “affordable” for some employees– Employees at lower end of pay scale may drop out and

obtain coverage on the exchange – Subsidies and tax credits on the exchange may result

in better benefit package for lower paid employees– $3,000 penalty may be less than original contribution

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Collective Bargaining Reopeners• “Final regulations have not been issued under many

provisions of the Patient Protection and Affordable Care Act (ACA). This creates considerable uncertainty regarding the Employer’s financial obligations. This agreement may be reopened and all material terms of compensation, hours, and fringe benefits (include health benefits) may be subject to negotiation and change as reasonably necessary to comply with the ACA and to address any increase in cost that the ACA may require.”

• Some state laws prohibit reopening collective bargaining agreements (e.g., Minn. Stat. Sec. 179A.20).

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Notice Pursuant to Treasury Department Circular 230, and DisclaimerTo comply with certain Internal Revenue Service ("IRS") rules, we must inform you that any U.S. federal tax advice contained in this presentation, including handouts or verbal explanation, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the IRS. Under IRS rules governing tax advice, a taxpayer may rely on professional advice to avoid federal tax penalties only if that advice is provided in a tax opinion that conforms with extensive federal requirements. We understand that you do not intend to use or refer to anything contained in this presentation to promote, market, or recommend any particular entity, investment plan, or arrangement. DISCLAIMER: This presentation is intended for general information purposes only. It does not create an attorney-client relationship and should not be construed as legal advice or legal opinions on any specific facts or circumstances.

the affordable care act – a deeper dive into counting and managing hours of service for public...

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