Healthcare Reform – The State of the Union

Health Care Reform:
Focus on Employer
“Shared Responsibility”
Penalty
Wednesday, January 30, 2013

Presented By:

Lisa M. deFilippis
Senior Benefits Counsel, Cleveland Office

800 Corporate Drive, Ste 600 Ft. Lauderdale, FL 33334 | 888.335.9545 Toll-Free | alphastaff.com

Disclaimer

2012 Jackson Lewis LLP
• This presentation provides general information regarding its subject and
explicitly may not be construed as providing any individualized advice
concerning particular circumstances. Persons needing advice concerning
particular circumstances must consult counsel concerning those
circumstances.
• IRS Circular 230 disclosure: Any tax advice contained in this communication
(including any attachments or enclosures) is not intended or written to be
used, and cannot be used, for the purpose of (i) avoiding penalties under
the Internal Revenue Code or (ii) promoting, marketing or recommending
to another party any transaction or matter addressed in this
communication. (The foregoing disclaimer has been affixed pursuant to
U.S. Treasury regulations governing tax practitioners.)

Simplifying business. Benefiting people. 2

Context – How Key Parts Fit Together

Market
Reforms and
Mandates

Insurance
Exchanges

Shared Medicaid
Responsibility Expansion


Individual Mandate

• U.S. Supreme Court upheld constitutionality in 2012
• Individual must have minimum essential coverage
(employer-sponsored, Medicare, Medicaid, exchange,
etc.) or pay tax penalty for periods without coverage
that’s greater of –
– 1% AGI or $95 for 2014
– 2% AGI or $325 for 2015
– 2.5% AGI or $695 for 2016


2014 Employer Penalty

Internal Revenue Code § 4980H
Employer Shared Responsibility Penalties
• a/k/a “Pay or Play” penalty
• Nondeductible penalty applies to employers with 50 or more
fulltime employees
• “Assessable penalty” - generally are assessed and collected in
the same manner as taxes
• Guidance so far: Notice 2011-36, Notice 2012-58, Proposed
Regulations


Employers Subject to Penalties

“Applicable Large Employer”
• “Large” means the employer had an average of 50 or more
fulltime employees on business days in prior calendar year
• Employer status is determined on controlled group basis
(aggregation, like for retirement plan); different EIN ≠ different
employer
• Special rules for predecessor employers and new employers
• Common-law employment principles apply when determining
employment relationship
• Anti-abuse rules


Controlled Group Rules
• Parent-subsidiary group – an entity has an 80% or more controlling interest
in another entity
• Brother-sister group – same 5 or fewer people (or trusts/estates) together
own at least 80% of each entity and the same owners hold more than 50%
of each entity
• Affiliated service group – service organizations (e.g., medical practice,
architectural firm) where one performs services for the other or
management function group
• Attribution rules apply, too


New Employer Example
• NewCo is incorporated on January 1, 2015 and on that day
NewCo has just three employees. However, prior to
incorporation, NewCo's owners bought a factory they intended
to open within two months of incorporation and they intended
to employ 100 employees. By March 15, 2015, NewCo has over
75 fulltime employees
• Because NewCo can reasonably be expected to employ on
average at least 50 fulltime employees on business days during
2015, and actually does, NewCo is an applicable large employer


Who’s an Employee?
• Employee/Employer relationship determined based on
common law principles
– Subject to the company’s will and control not only as to
what but also how
– Facts and circumstances, not necessarily contract language
• Independent contractors are not employees (but be certain
they’re independent contractors!)
• Non-employee directors, sole proprietors, partners, 2-percent
or more shareholders in an S corporations and leased
employees (if they’re not your common law employees) are not
treated as employees.


What Fulltime Means
• Fulltime = employed on average for 30 hours of service per week (130 hours
per month)
– Hourly – count actual hours
– Non-hourly – count actual hours or use equivalency rules (8hrs=1day,
40hrs=1week)
• Okay to use different methods for different groups
• Use reasonable method for commission-only
• Service includes hours paid for performance of duties, vacation, sick, jury
duty, layoff, military service, holiday, incapacity (e.g., disability)
• Service does not include work performed outside the US
• For 2014, may use any 6-month period in 2013 (instead of all of 2013) to
determine average


Will Your Company be a Large Employer for
2014?
1. Count your fulltime employees (including seasonal) for each month
in 2013
2. Count your fulltime equivalents (including seasonal) for each month
in 2013
a. Add total hrs for non-fulltime employees but count no more
than 120/mo for any one non-fulltime employee
b. Divide # obtained in sub-step a) by 120; the result is the number
of fulltime-equivalents for that month
3. Add the two #s obtained in steps 1) and 2) above for each month
4. Add the twelve sums obtained in step 3) and divide the total by 12;
the result is the average number of fulltime employees/equivalents
5. If the # in step 4) is at least 50, determine whether seasonal
employee exception applies


Will Your Company be a Large Employer for
2014?
Seasonal employee exception
After determining that your company had at least 50 fulltime
employees/equivalents on average for 2013, determine whether –
– the number exceeded 50 for only 120 days/4 months (or fewer)
and
– the number in excess of 50 were seasonal employees
Seasonal = seasonal retail, agricultural and others included under
good faith reasonable interpretation

If the number of fulltime employees exceeded 50 for no more than
120 days/4 months and the excess employees were seasonal, your
company is not a large employer for 2014


Large Employer Determination
Seasonal Worker Exception Example
• Elves Inc has 40 fulltime non-seasonal employees for the full 2015 calendar
year, Elves also has 80 seasonal fulltime workers who pack and ship toys
from September through December. Elves has no part-time employees
• Before applying the exception, Elves Inc has 40 fulltime employees for 8
months of 2015 and 120 fulltime employees for 4 months of 2015, resulting
in an average of 66 employees for the year
• But, since Elves’ workforce equaled or exceeded 50 fulltime employees for
no more than 4 months and the number of fulltime employees would be less
than 50 in those months if seasonal elves were disregarded, it’s not an
applicable large employer for 2016


Understand the § 4980H Penalty

– Play or Pay (4980H(a)): If minimum essential coverage is not
offered to “all” fulltime employees and dependents and one or
more fulltimer obtains subsidized Exchange coverage, employer
must pay (annualized) penalty of $2,000 x (#fulltimers - 30)
– Play and Pay (4980H(b)): If minimum essential coverage is
offered but one or more fulltimer obtains subsidized Exchange
coverage, employer must pay (annualized) penalty equal to
lesser of –
• $3,000 x #fulltimers who decline employer coverage and
receive subsidized Exchange coverage or
• $2,000 x (#fulltimers - 30)


Pay or Play Example
ER with 100 FT EEs does not offer minimum essential
coverage to FT EEs and dependents and at least one FT
EE obtains subsidized exchange coverage

$2,000 x (100 – 30) = $140,000


Pay and Play Example
ER with 100 FT EEs offers minimum essential coverage to all FT EEs
and dependents but at least one FT EE obtains subsidized
exchange coverage

Lesser of –
• $2,000 x (100 – 30) = $140,000
• $3,000 x (# FT EEs who obtain subsidized exchange
coverage) = ??


Understand the Penalty
Meaning of Fulltime Employee
• Control group and common law employer concepts apply
• Works at least 30 hours per week with respect to a given month (non-
fulltime employees do not trigger penalty)
• Since monthly determination is administratively burdensome, IRS
offers safe harbor “measurement/stability” method
– Count hours during a look-back measurement period of 3-12
months to determine fulltime/non-fulltime status;
– Treat as fulltime/non-fulltime for stability period, depending on
status determined under measurement period


Safe Harbor to Determine Fulltime Status

For ongoing employees (i.e., employed for at least as long as the
measurement period you use) count actual hours for a look-back
measurement period
– If employee averages 30 hrs/wk in measurement period, treat
as fulltime for a stability period of at least 6 months and no
shorter than measurement period, regardless of actual hours
worked during that stability period
– If the employee averages less than 30 hrs/wk in measurement
period, he or she is treated as non-fulltime for a stability period
no longer than the measurement period


safe harbor – ongoing employees
– 3 to 12-mo measurement period
– Different measurement and stability periods may be used for categories
of employees: union/nonunion, different bargaining agreements,
salaried/hourly, different states
– May change length of periods each year but not with respect to an
employee who’s measurement period has begun **
– May use “administrative period” of up to 90 days between
measurement and stability periods but it cannot reduce or lengthen the
measurement or stability period
– Optional for 2014 only: use 6-mo look-back with 12-mo stability


Safe Harbor Method
Ongoing Employees Example
• Your company is an applicable large employer that offers
coverage only to fulltime employees and chooses to use:
– a 12-mo stability period that begins January 1
– a 12-mo standard measurement period that begins October
15; and
– an administrative period between the end of the standard
measurement period (October 14) and the beginning of the
stability period (January 1) to determine which employees
were employed on average 30 hours per week during the
measurement period


Safe Harbor Method
Ongoing Employees Example - continued
• Al was employed on average 30 hours per week during the standard measurement
period 10/15/2015 – 10/14/2016 and for the prior measurement period
– Because Al was employed for the entire standard measurement period, Al is an
ongoing employee with respect to the stability period 1/1/2017 – 12/31/2017
– Because Al was employed on average 30 hours per week during that standard
measurement period, Al is offered coverage for the entire 2017 stability period
(including the administrative period 10/15/2017 – 12/31/2017)
– Because Al was employed on average 30 hours per week during the prior
standard measurement period, he’s offered coverage for the entire 2016 stability
period and, if enrolled, coverage would continue during the administrative
period 10/15/2016 – 12/31/2016


Safe Harbor Method
Ongoing Employees Example - continued
• Bob also was employed on average 30 hours per week for all prior standard
measurement periods, but is not a fulltime employee during the standard
measurement period 10/15/2015 - 10/14/2016
– Because Bob was employed for the entire standard measurement period
10/15/2015 – 10/14/2016, Bob is an ongoing employee with respect to the
stability period in 2017
– Because Bob did not work full-time during this standard measurement period,
you don’t offer Bob coverage for the stability period in 2017 (including the
administrative period from 10/15/2017 – 12/31/2017)
– However, because Bob was employed on average 30 hours per week during the
prior standard measurement period, Bob was offered coverage through the end
of the 2016 stability period and, if enrolled, would continue such coverage
during the administrative period from 10/15/2016 through 12/31/2016


Safe Harbor to Determine Fulltime Status for
a New Employee
For new employees (i.e., employed for less than one measurement period),
determine if –
– Fulltime: reasonably expected to be employed on average at least 30 hours
per week, non-seasonal; or
– Variable-hour/Seasonal: unable to determine at start date whether he or
she will be fulltime
• For 2014 only, employer may take into account an anticipated
termination date (after 2014, employers must assume that an employee
will be employed for the entire measurement period)
• Apply look-back measurement/stability safe harbor method and there’s
no penalty with respect to a new employee during measurement
– If status changes during measurement period (reasonably expected to be
fulltime), treat as fulltime starting on first day of 4th month after status
change or, if earlier, first day of month after measurement period


Safe Harbor General Rules
• Rehired employees (and employees returning from unpaid leave) are
treated as new hires if the period of no service was at least 26
consecutive weeks
– As alternative can use parity rule for shorter periods of pre-break
employment
– If treated as new, restart measurement period
– If not treated as new, the rehired/resuming employee is treated
as “continuing” for purposes of measurement/stability period
• If using safe harbor, careful recordkeeping is essential (not just hours
– measurement/stability periods, start dates, termination dates, leave
dates, job category, coverage eligibility, coverage offers, enrollments,
etc.)


Understand the Penalty Meaning of
Dependent
• An employee’s child under age 26
– Child for federal tax purposes (§ 152(f)(1)) – son, daughter,
stepchild, adopted child, child placed for adoption, foster
child
– May rely on employee’s representation
• An employee’s spouse is not a dependent
• For 2014 only, an employer not currently offering dependent
coverage will not be liable for a penalty solely for failure to offer
dependent coverage as long as it takes steps in 2014 to begin
offering dependent coverage


What’s “Subsidized Exchange Coverage”

• Remember, a fulltime employee must obtain subsidized
Exchange coverage (§ 36B) to trigger a penalty
• No subsidy unless –
– Household income between 100% and 400% federal
poverty line (currently, $11,170 for a single person)
– Not offered: minimum essential coverage
– Buys Exchange coverage


What it Means to “Offer” Coverage?
• Employee must have effective opportunity to accept coverage at least
once per year
• If coverage is not affordable or does not meet minimum value,
employee must also have had effective opportunity to decline
coverage (i.e., mandatory or automatic coverage that’s not affordable
or of minimum value will not prevent employee from obtaining
subsidized Exchange coverage and triggering penalty)
• Offer is effective for a given month only if coverage is effective for full
month if employee accepts offer
• Offer not negated by employer dropping employee’s coverage for
nonpayment of premium


Meaning of Minimum Essential Coverage
• Coverage under a grandfathered plan, an eligible employer
sponsored plan, an individual plan, Medicare, Medicaid, CHIP,
TRICARE etc.
• Special rule: for employer-sponsored coverage to be
minimum essential coverage, it must meet –
– Affordability test
– Minimum value test


Meaning of Affordable Coverage
• Employer coverage meets affordability test if the employee is
required to pay no more than 9.5% of household income for
self-only coverage
Affordability Safe Harbors:
– Employee’s W-2 reported wages
– Based on monthly rate of pay (cost does not exceed 9.5% of
monthly pay)
– Coverage does not exceed 9.5% of Federal poverty level for
single individual


What is Minimum Value?
To avoid penalties, employer plan must provide
minimum value*:
• The plan’s share of the total allowed costs of benefits
provided under the plan must be at least 60% of the
Actuarial Value of those costs
• “Actuarial Value” is a general summary measure of health
plan generosity
*plans in the small group market must also provide
minimum value


Dependent Coverage
What if ER offers coverage for all full-time employees but does not
offer any coverage for their dependents? Is this the same as ER
not offering coverage? (i.e., to avoid play or pay penalty, must
offer dependent coverage)

No penalty possible if ER offers coverage to all full-time employees
and their children, pays full cost of employee coverage but does
not subsidize dependent coverage at all
*Note, that proposed regulations define “dependent” as child, not spouse


Some Special Rules
Multiemployer plans
• Through 2014, an employer that makes contributions to a multiemployer
plan will be treated as having satisfied 4980H if (i) it contributes to the plan
pursuant to a collective bargaining agreement, (ii) the coverage is offered to
fulltime employees and dependents, and (iii) the coverage is affordable and
provides minimum value

Non-calendar year plans
• Delayed effective date – first day of 2014 plan year if non-calendar year plan
was in effect as of 12/27/2012 and offers affordable minimum value
coverage no later than first day of 2014 plan year


Pay or Play Strategies

Play by PPACA
Rules
Play Using Private Drop Coverage &
Exchanges Pay Penalties

2014 Pay or
Play But Vary By Play
Location Play But Reduce
Options
Coverage

Play & Pay
Pay Penalties &
Unaffordability
Increase Salaries
Penalty


How to Avoid the Penalty

• Shrink/Don’t grow your business and remain below “large”
employer threshold– really?!
• Don’t let employees who’re ineligible for health coverage work
more than 30 hours per week?
• Provide health coverage (with at least 60% value) for all
employees working at least 30 hours per week and their
children under age 26 and don’t make any of those employees
pay more than 9.5% of compensation for single coverage?
– Don’t have to subsidize dependent coverage
– Can use alternate safe harbor to meet affordability test


Deciding Whether to Pay or
Avoid the Penalty
• How important is health coverage to recruitment and retention
of employees?
– What’s common in industry/geographic area?
– What does your company currently offer?
• How important is health coverage to other business
considerations (e.g., union avoidance, public relations)?
• If unionized, what does the collective bargaining agreement
say?
• If status quo, how much would it cost to avoid estimated
penalties compared with the cost of paying estimated
penalties?


One More Thing: PPACA Fees

• Transitional Reinsurance Fee (2014)
$63 Per Covered Life (4% Increase for Fully Insured Plans) ALL
Plans (Self Funded and Fully-Insured)
To Fund High Claimant Costs on Exchanges From 2014-2016

• Comparative Effectiveness Research Fee
(Plan Years On/After October 2012)
$1 Per Covered Life (Year 1) $2 (Year 2); Indexed to Medical
Inflation Patient-Centered Outcomes Research Institute (PCORI)
Funding until 2019


Staying up-to-date
• Jackson Lewis Health Care Reform Resource Center
http://www.jacksonlewis.com/healthcare/index.php
• Jackson Lewis Benefits Law Advisor Blog
http://www.benefitslawadvisor.com/
• Jackson Lewis e-mail updates
http://jlmarketing.jacksonlewis.com/reaction/RSGenPage.asp?RSID=k5_c7
IHYHsVmAKIhyttfRpWKlZt0NCGFtjTqbXpTSKk

IRS website:
http://www.irs.gov/uac/Affordable-Care-Act-Tax-Provisions
Kaiser Family Foundation Compliance Timeline:
http://healthreform.kff.org/timeline.aspx


Lisa M. deFilippis
Senior Benefits Counsel, Cleveland Office

contact
Email:defilipl@jacksonlewis.com
Phone: (216) 750-0404
Fax: (216) 750-0826
Web:www.jacksonlewis.com


Contact AlphaStaff !
• .
Email
hrsc@alphstaff.com
Phone
888-335-9545 (Option 8)

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Date: Thursday, February 21, 2013
Time: 2:00pm
Topic: Title VII: Stories of Shock and Awe

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