the affordable care act – compliance challenges for employers

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Executive Compensation and Employee Benefits Practice

The Affordable Care Act – Compliance Challenges for Employers

July 16, 2015


Today’s eLunch Presenters

Steve Flores

Executive Compensation and Employee Benefits

Chicago

[email protected]

Erin Kartheiser


Chicago

[email protected]

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Health Care Reform

• Impact of the Supreme Court’s Decision in King v. Burwell

• Employer Health Coverage Obligations for 2015 and 2016

• Employer Reporting Requirements for 2015

• Contingent Worker Risks

• Cadillac Tax Challenges

• Health Benefit Interference Claims

• Potential Penalties Under the Affordable Care Act

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Impact of the Supreme Court’s Decision in King v. Burwell


King v. Burwell

• Decided by the SCOTUS on June 25, 2015

• Central issue: Does the ACA provide subsidies for individuals purchasing coverage through the federal health care exchange?

• Holding: Yes, despite the plain language of the statute, the Court found that the provision wouldn’t make sense in the context of the entire law unless it was read to include subsides for coverage purchased on the federal exchange

• Employer penalties are tied to subsidies. No subsidies = no employer penalties. Without penalties to fund the program, the ACA would fall apart

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Employer Health Coverage Obligations for 2015 and 2016


Employer Health Coverage Obligations

• Coverage decisions are now driven by Affordable Care Act “pay or play” penalties

• There are two types of pay or play penalties • A penalty for failing to offer coverage to full-time employees and their dependents

• A penalty for offering coverage to full-time employees and their dependents that is not affordable or does not provide minimum value

• Final rules became effective December 31, 2014

• Calendar year plan years subject to penalties beginning January 1, 2015

• Non-calendar year plans subject to penalties beginning on the first day of the plan year provided that certain conditions are met

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Employer Health Coverage Obligations

• The triggering of a penalty for a failure to offer coverage (the “A penalty”) arises if: • an applicable large employer member

• fails to offer to its full-time employees (and their dependents)

• the opportunity to enroll in health coverage under an employer-sponsored plan for any calendar month

• the applicable large employer member receives a certification with respect to at least one full-time employee

• A separate penalty applies if coverage is offered, but the coverage is not affordable or fails to provide minimum value (the “B penalty”)

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Penalties

• The A penalty: • Applies with respect to all full-time employees whether or not such employees have

been offered the opportunity to enroll in a plan

• Is assessed on a calendar month basis and is calculated by multiplying the applicable payment amount of 1/12 of (approximately $2,084) by the number of all full-time employees during any month (reduced by 30*) • *Transition rule: for 2015, reduce by 80 instead of 30

• The B penalty: • Applies with respect to full-time employees who enroll in exchange coverage and

receive a subsidy

• Is assessed on a calendar month basis and is equal to number of full-time employees of employer who receive a premium tax credit or cost-sharing reduction times 1/12 of (approximately $3,126)

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Applicable Large Employer Member

• A applicable large employer member is a member of a “applicable large employer”

• An applicable large employer is determined on a controlled-group basis

• An applicable large employer for a calendar year includes an employer that employed an average of at least 50 full-time employees (including full-time equivalents) on business days during the preceding calendar year • In general, a full-time employee includes an employee who is employed an average

of 30 hours per week for each calendar month

• A full-time equivalent employee is determined by taking aggregate number of hours by non-full-time employees and dividing the number by 120

• To determine if you are (or are part of) an applicable large employer member, take the sum of full-time employees and full-time equivalent employees for each calendar month in 2014 and divide by 12 *Transition rule: for 2015, threshold is 100 full-time employees if certain requirements are met.

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• Although applicable large employer status is determined on a controlled group basis (e.g., parent-subsidiary, brother-sister, affiliated service groups)

• Each employer within the controlled group is separately responsible for providing coverage with respect to its own full-time employees irrespective of the number of employees employed by the employer

• The liability for the penalty for a calendar month with respect to a full-time employee applies solely to the applicable large employer member that was the employer of that employee for that calendar month

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• An employer is determined under the common law standard

• Regulations point to payroll tax rules which provide that 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

• The right to discharge is also an important factor indicating that the person possessing that right is an employer

• Other factors: Furnishing of tools and the furnishing of a place to work, etc.

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Failure to Offer Coverage • For purposes of the A penalty, an applicable large employer member is

treated as having offered coverage to its full-time employees (and their dependents) for a calendar month if, for that month, it offers coverage to all but 5 percent* of its full-time employees and their dependents

• An offer of coverage by one applicable large employer member to an employee (and their dependents) for a calendar month is treated as an offer of coverage by all applicable large employer members for that calendar month

• Importantly, the rules do not require that spouses be covered

*Transition rule: For 2015, an employer is treated as having offered coverage to its full-time employees (and their dependents) for a calendar month if, for that month, it offers coverage to all but 30 percent of its full-time employees and their dependents

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Failure to Offer Affordable/Minimum Value Coverage • For purposes of the B penalty, coverage must provide minimum value and be

affordable

• Coverage provides minimum value if plan’s share of allowed costs of benefits provided under the plan is at least 60% of such costs • HHS minimum value calculator,

• Safe harbor designs proposed by HHS and IRS, or

• Actuarial certification

• Coverage is affordable if employee’s required contribution does not exceed 9.5% of the employee’s household income (modified adjusted gross income of employee and spouses and dependents) for the taxable year, or any of the following safe harbors: • Form W-2

• Rate of Pay

• Rate of Poverty

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Full-Time Employees

• Penalties and large employer determination tied to full-time employees

• Average of 30 hours a week or 130 hours a month

• For hourly employees, count hours; for other employees, must use one of the following methods: • Actual hours

• Assumed hours (per day or per week)

• Can use different methods for different classifications of employees, and each controlled group member can use different methods

• Can determine full-time status by using one of two methods: • Monthly measurement method

• Look-back measurement method

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Full-Time Employees

• Look-back measurement period requires employers to set up processes to measure whether variable-hour ongoing employees are full-time employees • Must establish an observation period (“standard measurement period”)

• If it is determined that someone is full-time, then must be treated as such for the stability period (“stability period”)

• Can include optional “administrative period” of up to 90 days, but that period may not reduce the stability period

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Full-Time Employees—New Employees

• For new (as opposed to ongoing) employees who are expected to be full-time for the initial measurement period, employer has three months to begin coverage

• For new employees with uncertain hours (variable-hour employees) or seasonal employees: • Must use standard measurement period that begins within a month of employee’s

start date to determine full-time status (“initial measurement period”)

• If employee is determined to be employed on average at least 30 hours a week, employee must be treated as a full-time employee for stability period beginning after initial measurement period

• Can include optional “administrative period” of up to 90 days where hours are not counted—combined measurement period and administrative period cannot extend beyond last day of first calendar month following first anniversary of employee’s start date

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Full-Time Employees—New Employees

• If variable-hour employee remains employed beyond the initial measurement period and remains employed at the end of next standard measurement period, then the employee must be tested along with all other ongoing employees

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Certification With Respect to a Full-Time Employee • In order to trigger an A or B penalty, a full-time employee must enroll in

exchange coverage and receive a premium tax credit

• Who is eligible for exchange subsidies? • Premium Tax Credits – Income must be between 100% and 400% of poverty line for

applicable family size

Family Size 2015 Yearly Income (400% FPL)

1 $47,080

2 $63,720

3 $80,360

4 $97,000

5 $113,640

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Certification With Respect to a Full-Time Employee • The IRS will contact employers to inform them of their potential liability and

provide them an opportunity to respond before any liability is assessed or notice and demand for payment is made

• It is anticipated that additional guidance of general applicability will provide that the contact for a given calendar year will not occur until after employees’ individual tax returns are due for that year claiming premium tax credits and after the due date for employers that meet the 50 full-time employee (plus FTE) threshold to file the information returns identifying their full-time employees and describing the coverage that was offered (if any)

• Note that this is a separate notice than an exchange 1411 certification

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Pay or Play Decision Tree

Did you have 50 or more full-time equivalent employees last

year?

Yes. You are a large

employer.

Do you offer coverage to all

of your full- time

employees?

No. You may be subject to a

penalty for all full-time employees.

Yes. Did the coverage provide minimum value

and was it affordable?

No. You may be subject to a

penalty for each full-time

employee with unaffordable or non-minimum

value coverage.

Yes. No pay or play penalties

for the relevant month.

No. You are not a large employer. No pay or play penalties apply

this year.

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Employer Reporting Requirements for 2015


Employer Reporting Requirements

• Employers may be subject to two distinct reporting requirements for 2015

• 6056 Reporting: • In general. Section 6056 requires an applicable large employer subject to the

requirements of Section 4980H to report certain health insurance coverage information to the Internal Revenue Service, and to furnish certain related employee statements to its full-time employees

• 6055 Reporting: • Every person that provides minimum essential coverage to an individual during a

calendar year must file an information return and transmittal and furnish statements to responsible individuals on forms prescribed by the Internal Revenue Service

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Employer Reporting—6055

• 6055 Reporting—Providers of health coverage • Reporting required for 2015 calendar year

• Health insurance issuers

• Plan sponsors of self-insured health plans

• Any other person that provides minimum essential coverage to an individual

• Employer sponsored coverage includes COBRA and retiree coverage

• Employer of insured plan is not required to report. Insurer maintains the responsibility

• Required to report: • Employer identifying information (name, address, EIN)

• Primary insured’s identifying information (name, address, TIN)

• Each covered individual’s identifying information (name, address, TIN)

• Not required to report for coverage offered to individuals who do not enroll

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• Applicable Large Employer Members use Form 1095-C and 1094-C to report to the IRS • One entity can report for the controlled group

• File by February 28 (March 31 if filed electronically) of year following calendar year of coverage

• Statement must be provided to primary insured • Must include contact information

• Furnishing a copy of form filed with the IRS is sufficient

• Must furnish the form by January 31 of the year following calendar year of coverage

• Must mail or can send electronically if participant affirmatively consents

• Statement can be provided by third parties, but entering into a reporting arrangement does not transfer ultimate liability

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• 6056 Reporting--Minimum Essential Coverage (6056) Reporting

• Reporting of information related to health coverage offered by applicable large employer member to its full-time employees

• A separate statement must be filed for each applicable large employer member

• Required to report terms and conditions of coverage offered to full-time employees

• Applicable large employer member identification information

• Certification as to whether employer offered an opportunity to enroll in coverage to its full-time employees, by calendar month

• Months during which coverage was available

• Each full-time employees share of lowest cost monthly premium

• Number of full-time employees for each month during the calendar year

• Identifying information for each full-time employee, including months during which employee was covered under the plan

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• Reporting required on Form 1095-C and 1094-C • Simplified reporting available if applicable large employer member certifies that

qualifying offer was made • Qualifying offer is an offer of minimum value and affordable coverage to a full-time employee

(including spouse and dependents) for all months during the year

• Applicable large employee member is not required to identify whether a particular employee is a full-time employee or report total number of full-time employees if it certifies that it offered minimum value, affordable, coverage to at least 98% of employees

• File by February 28 (March 31 if filed electronically) of year following calendar year of coverage

• Applicable large employer member must also furnish a statement to each of its full-time employees • Can fulfill this requirement by providing a Form 1095-C

• Must furnish the form by January 31 of the year following calendar year of coverage

• Must mail or can send electronically if participant affirmatively consents

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Penalties for Reporting Failures

• Each applicable large employer member is required to file 1094-C and 1095-C and provide a statement to full-time employees

• Failure to file with the IRS (or providing incomplete or incorrect information) can result in penalty of $100 (recently increased to $250) per failure up to $1,500,000 (recently increased to $3,000,000)

• Failure to furnish timely or correct statement to employees can result in the same penalty

• Good faith relief available for 2015 reporting • Accordingly, the IRS will not impose penalties under sections 6721 and 6722 for

2015 returns and statements filed and furnished in 2016 on reporting entities that can show that they have made good faith efforts to comply with the information reporting requirements. No relief is provided in the case of reporting entities that cannot show a good faith effort to comply with the information reporting requirements or that fail to timely file an information return or furnish a statement

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Contingent Worker Risks



• For these purposes, contingent workers mean: • Interns

• Staffing firm employees

• Independent contractors

• Employers that use a large number of contingent workers may be at a higher risk of incurring penalties because these workers are excluded from employer plans

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• ACA does not provide special rules for interns • For purposes of determining whether an employee is a full-time employee, hours of

service are counted only if the employee is paid, or entitled to payment, for the performance of duties

• Unpaid interns would not be counted for purposes of triggering penalties under Code Section 4980H

• Consider using 4980H waiting period • No penalties assessed with respect to a full-time employee for any month during the

three month period beginning with the first day of the first full calendar month employment

• The employee must be otherwise eligible for an offer of coverage under the terms of the employer’s health plan

• An offer of coverage is made no later than the first day of the fourth calendar month if the employee is still employed as of that date

• Does not apply if you exclude interns altogether!

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Pay or Play – Staffing Agencies

• Employers who use temporary staffing agencies have special considerations • Must accurately determine common-law employee status as common-law employer

is responsible for penalties and reporting

• IRS on the lookout for arrangements that purport to relieve liability for penalties by splitting work between employer and temporary staffing agency

• A determination that staffing firm employees can result in applicable large employer member failing to offer coverage resulting in the A penalty

• Coverage provided by staffing firm to employees of a client employer under a staffing firm plan will not be treated as an offer of coverage by the client employer unless the fee the client employer would pay to the staffing firm 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 • Unclear what the additional fee must be

• Consider indemnification and other contractual protections

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Pay or Play – Independent Contractors

• Independent contractors present a unique risk

• ACA does not change the analysis, but it adds the additional risk of penalty A because independent contractors are excluded from employer health coverage

• The IRS specifically declined to provide relief to employers who trigger penalties due to the reclassification of workers • Section 530 relief does not apply in the context of Code Section 4980H penalties

• IRS concerned that providing relief will increase the potential for worker misclassification

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Contingent Worker Example

• Employer employs 900 full-time employees in each calendar month in 2016. Employer supplements its full-time workforce with 100 full-time temporary contract employees in 2016. During 2016, Employer offers all of its full-time employees and their dependents the opportunity to enroll in its health plan. The IRS later determines that the 100 temporary contract employees were common law employees of Employer for all of 2016. Because Employer did not offer the opportunity to enroll in its health plan to at least 950 of its full-time employees (including reclassified employees), Employer may be subject to a penalty of $2,021,480 ($2,084 x 970 (1,000 full-time employees reduced by 30) if one of the reclassified employees enrolls in the exchange and obtains a subsidy

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Cadillac Tax Challenges



• Section 4980I(a) imposes a 40% excise tax on any “excess benefit” provided to an employee

• The excess benefit is the excess, if any, of the aggregate cost of the applicable coverage of the employee for the month over the applicable dollar limit for the employee for the month

• The limits are generally $10,200 for individual coverage and $27,500 for coverage that is not individual coverage

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• The applicable premium is: • For fully-insured plans, the full premium (employer and employee)

• For self-funded plans, the COBRA rate

• Generally includes contributions to FSAs, HSAs, and HRAs

• Cadillac Tax Goals • Finance the ACA

• Reduce health care costs

• Cap the amount of tax deductions that employers can receive from providing employee health coverage

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• What kind of coverage is included? Employer-sponsored coverage that is: • Active employee medical coverage

• Retiree medical coverage

• HRAs

• Employer contributions to HSAs

• Health FSAs

• Executive physical programs

• We still have questions about: • Employee HSA contributions

• Dental and/or vision plans that are not under a separate insurance policy

• EAPs and on-site clinics that are group health plans

• Expatriate plans

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• How do you determine the premium? • Add both employer and employee portions

• For insured plans, this is pretty clear-cut

• For self-funded plans, the COBRA rate is determined using factors that can vary

• Subtract from this amount the applicable thresholds ($10,200 for individual coverage) ($27,500 for other-than-individual coverage)

• Adjusted limits may apply to plans that cover: • Pre-Medicare retirees

• Employees in high-risk occupations

• High composition of female participants or older participants

• No adjustment for geography

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• Who pays the tax? How? • Employer determines the amount monthly and allocates to the appropriate “coverage

provider”

• “Coverage provider” is: • Insured plans—the insurer

• Self-funded plans—the administrator of the plan benefits

• HSAs—the employer

• More guidance needed on how to determine the “administrator” for self-funded plan purposes

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• Collective Bargaining Agreements

• CBAs being negotiated now may be effective through 2018 and beyond

• Employers must preserve as much flexibility as possible

• Strategies for CBAs: • Reduce plan benefits and increase deductibles

• Include language allowing the employer to reduce benefits to the extent necessary to avoid the Cadillac Tax

• Include language allowing negotiations to reopen in 2017

• Unions may be at a higher risk of triggering the tax

• Employers will reduce coverage and pass more cost to employees to avoid the tax

• Cadillac tax will likely not produce the revenue that the government expected

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Health Benefit Interference Claims



• We have begun seeing benefit interference lawsuits under the ACA

• Claims focus on reduction of employees’ hours to avoid providing them with ACA-compliant benefits

• ERISA Section 510 provides the mechanism for these claims

• ERISA § 510 prohibits interference with an employee’s participation of employment benefits through various actions, including, but not limited to discharge, discipline, and discrimination: • It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or

discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan…29 U.S.C. § 1140

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• To prevail on a § 510 claim, the employee must prove the following elements: 1. the employee was a protected participant or beneficiary

2. the employee was qualified for his or her position

3. the employee was discharged (or subjected to other adverse action by the employer) under circumstances that support the inference that the employer intended to deprive the employee of benefits

• Element (3) requires specific intent; many claims fail on this point

• If the employee can show the above three elements, the burden shifts to the employer to show a legitimate reason for the adverse action

• If the employer can show legitimate reason for the adverse action, the burden shifts back to the employee to show that the “legitimate reason” was merely a pretext

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• Current class-action pending in the Southern District of New York, alleging that the employer cut employees’ hours to avoid providing ACA-compliant coverage

• Allegations: • Managers called a meeting and told employees that their hours would be cut due to

increased benefits expense resulting from the ACA

• Sr. VP of HR gave statements to local media indicating that the company was reducing hours in response to the ACA

• SEC filings contained statements indicating that complying with the ACA could have a significant, negative impact on the company

• Relief sought: Reinstatement to full-time positions, restitution for inability to participate in the health plan, lost wages, and attorneys’ fees

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Potential Penalties Under the Affordable Care Act


IRS Excise Taxes

• What happens if you get it wrong? • Excise tax and Form 8928

• $100 per day for each individual to whom failure relates

• Beginning on date failure occurs and ending when failure is corrected

• Exception for reasonable cause failures

• If did not know, or exercising reasonable diligence would not have known failure occurred, or

• Corrected within 30 days after knew or should have known

• No exception for failures due to willful neglect or on audit

• Will require self-reporting of errors to the IRS

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IRS Excise Taxes

• Calculated annually, the total potential excise tax with respect to a single individual for a continuous violation of a single requirement could be $36,500—which dwarfs the annual pay or play penalty

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IRS Excise Taxes

• No preexisting condition exclusions

• No discrimination against individual participants and beneficiaries based on health status

• No discrimination in health care providers

• Cost-sharing limitations on essential health benefits

• No waiting periods in excess of 90 days

• Coverage for individuals participating in approved clinical trials

• No lifetime or annual limits on essential health benefits

• No rescissions of coverage

• Coverage of preventive health services

• Extension of dependent coverage until age 26

• Periodic disclosures required in summary of benefits and coverage

• Health plan reporting requirements

• No discrimination in favor of highly compensated individuals

• Health plan claim and appeals protections

• Patient protections, including the selection of primary care provider, coverage of emergency services, and access to pediatric, obstetrical and gynecological care providers

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IRS Excise Taxes

• $100/day/individual penalty is imposed on the plan sponsor

• Minimum of $2,500 if a compliance failure is discovered by the IRS on audit ($15,000 for significant violations)

• Maximum amount is, for unintentional failures, the lesser of 10% of the aggregate amount paid by the employer during the preceding tax year for group health plan coverage, or $500,000

• A failure can be retroactively corrected

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IRS Excise Taxes

• $1,000 penalty for willful failure to provide a required SBC, in addition to $100/day/individual

• $1,000 penalty for willful failure to provide at least 60 days’ advance notice of any material modifications to plan terms, in addition to $100/day/individual

• Failure to comply with associated W-2 reporting triggers penalties of $30 per Form W-2 up to a maximum of $1.5 million per calendar year

• Intentional disregard of the W-2 filing triggers penalties of $250 per Form W-2, with no maximum

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IRS Excise Taxes

• PCORI fees that are not timely paid are subject to penalties for failure to file a tax return

• Reinsurance fees that are not timely paid will be subject to the federal debt collection rules

• Failure to accurately calculate the Cadillac tax attributable to each coverage provider results in a penalty equal to 100% of the additional tax due, plus interest

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Questions?


Thank You.

Steve Flores


Chicago

[email protected]

Erin Kartheiser


Chicago

[email protected]

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the affordable care act – compliance challenges for employers

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