LOCAL. HONEST. INDEPENDENT.

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1 LOCAL. HONEST. INDEPENDENT. WHAT SMALL BUSINESSES NEED TO KNOW ABOUT HEALTH CARE REFORM The information that matters most to your business and employees

2 Health care reform changes health insurance The Affordable Care Act (ACA) has changed how health insurance is provided by putting Americans back in charge of their health care. From essential coverage requirements to better access to health care, there are many changes the ACA has put into place. WPS is committed to providing you with the information that matters most to your business. That s why we ve put together this overview of the legislation, how it works, and how it may impact your business. 2

3 Employee health insurance is optional Technically, the ACA does not require any employer to provide coverage. Instead, it includes monetary penalties for large employers (50+ full-time equivalents, or FTEs) that do not offer adequate health coverage to their full-time employees and dependent children (see details in next section). For purposes of the Employer Shared Responsibility provisions, a dependent is an employee s child who has not reached the age of 26 (See Treas. Reg H-1(a)(12). This is strong encouragement for large companies to offer health insurance coverage. However, businesses can choose to pay the penalty taxes instead of offering coverage to their full-time employees and employees dependents. For businesses with less than 50 full-time equivalent (FTE) employees, offering health coverage to employees and their dependents is optional and there are no tax penalties. If you choose not to offer coverage, your employees will still be able to buy coverage and, depending on their income status, may qualify for a subsidy to help reduce the costs of premiums and care. In 2016, business with 50 or more FTE employees that do not offer coverage or alternatively do not offer coverage that provides minimum value and is affordable, may have to pay a shared responsibility penalty (for those with 100+ FTE employees, this starts in 2015). See Treas. Reg H-4 and H-5. Tax penalty for large employers not offering coverage 1 If a large employer* does not offer coverage that meets the ACA s minimum essential coverage requirements and an employee applies for a health care tax credit on a qualified health plan through the Marketplace*, then that business may have to pay a penalty (See 26 USCS 4980H(a)(2). The penalty tax increases for a large employer not offering coverage according to the size of the company s staff (See 26 USCS 4980H(a)-(c). For example, if a company has 50 full-time employees, the annual penalty for not providing coverage totals $40, full-time employees (the first 30 aren t counted) at $2,000 each. The total is then divided by 12 and the company is penalized monthly (See 26 USCS 4980H(a)-(c). In this example the company would have to pay $3, each month unless minimum essential coverage was made available to the employer s full-time employees and dependents (See 26 USCS 4980H(a). Full-time worker vs. full-time equivalent worker Full-time worker A person who works 30 hours per week or more, as defined by the ACA (See 26 USCS 4980H(c)(4). Full-time equivalent (FTE) worker Represents a ratio, not a person. The ACA updated United States Code Section 4980H to require that employers add up the hours worked by part-time employee in any given month and divide the total by 120 to get the number of FTE employees. This number is only used to determine if an employer is a large employer under ACA (See 26 USCS 4980H(c)(2)(e). *See glossary on page 10. 3

4 Understanding the employer rules The employer shared responsibility penalty, or pay or play penalty is made up of two separate taxes. To avoid the 1st tax, an employer with 50 or more FTE employees would need to offer minimum essential coverage to full-time employees and their dependent children (See 26 USCS 4980H(a).) To avoid the 2nd tax, an employer would need to offer minimum essential coverage to its full-time employees and their dependent children that is both affordable and provides minimum value (See 26 USCS 4980H(b). If an employer does not offer affordable health coverage that provides a minimum level of coverage to its full-time employees and their dependent children, the employer may be subject to an employer shared responsibility penalty if at least one of its full-time employees receives a premium tax credit for purchasing individual coverage on the Marketplace. Employers with 100 or more FTE employees, and average annual wages above $250,000, will need to insure at least 70% of their full-time workers in In 2016, this percentage will increase to 95% (See 79 Fed. Reg (Feb. 12, 2014). In 2016, businesses with FTE employees will need to offer coverage to their full-time employees and dependent children, if they wish to avoid penalties (See 79 Fed. Reg (Feb. 12, 2014). Minimum value A health plan provides minimum value if it pays at least 60% of the total allowed costs for covered services (See Treas. Reg H-1(a)(28). Affordable Coverage is considered affordable if employee contributions for self-only coverage do not exceed 9.56% of an employee s household income (9.66% in 2016). See 26 USCS 36B(c). There are three ways to make this determination: W-2, rate of pay, and federal poverty level (See Treas. Reg H-5(c). 4

5 Penalties for employers not offering coverage Do you offer coverage to the required percentage of employees and dependents? YES NO Does the plan provide minimum value? NO YES Is the coverage affordable? (< 9.56% of employees household income for single coverage) YES NO $2,000 (indexed for future years) per full-time employee minus 30 if at least one employee receives a federal premium subsidy in the Marketplace Lesser of: $3,000 (indexed for future years) per each full-time employee receiving subsidy OR $2,000 (indexed for future years) per full-time employee minus 30 NO PENALTY 5

6 Are you eligible for a tax credit? Some small businesses are eligible for the existing health care tax credit (See 26 USCS 45R). It rewards companies that provide Qualified Health Plan (QHP) coverage through the Small Business Health Options Program (SHOP) if they cover at least 50% of the premium cost, have 25 or fewer full-time equivalent (FTE) workers and pay average salaries of less than $51,600 for 2015*. (See Rev. Proc , I.R.B. 860 and 26 USCS 45R(d)(1)(B).) For certain non-profit organizations, the credit reduces income and Medicare taxes that employers are required to withhold from employees wages and the employer share of Medicare tax on employees wages. For-profit businesses can use the credit as a general business credit to reduce their tax liability. Tax credits For-profit businesses may receive tax credit on as much as 50% of the contribution they make to employee health insurance premiums. Non-profit businesses may receive as much as 35% of their premium contributions. These premium contributions must be made for employees who enroll in a QHP through the SHOP, which is only available through the Marketplace. The tax credit is only available for a maximum of two consecutive tax years on or after Who is eligible for the maximum credit? Small businesses can claim the full credit amount if they have 10 or fewer FTE employees and if the employees average taxable wages are $25,800 for 2015* or less. (See Rev. Proc , I.R.B. 860.) How do you claim the credit? Use Form 8941, Credit for Small Employer Health Insurance Premiums, to calculate the credit. For detailed information on filling out this form, see Form 8941 instructions. Include the amount as part of the general business credit on your income tax return. If you are a tax-exempt organization, include the amount on line 44f of the Form 990-T, Exempt Organization Business Income Tax Return. You must file the Form 990-T in order to claim the credit, even if you don t ordinarily do so. (See Treas. Reg. 1.45R-5.) *These amounts are indexed for inflation annually. 6

7 Shop for health plans on the Marketplace Solo entrepreneurs and small businesses can shop for health plans through Marketplaces* in each state 3 or outside the Marketplace. Employers can only purchase WPS Health Insurance plans outside the Marketplace by visiting or contacting your local agent. One-person businesses can save using a Marketplace for individuals. Companies with up to 50 employees (in some cases, up to 100 employees, if state law allows) may be able to make use of a Small Business Health Options Program (SHOP). Both options increase the size of the insured pool to spread out risk and keep costs lower. Marketplaces are designed to simplify shopping for and buying insurance. They offer consumers information on the quality of health plans. They don t sell plans that fail to meet minimum quality standards Metal Levels 4 and benefit packages set by the federal government. They group health plans into four metal levels bronze, silver, gold, platinum, plus catastrophic based on the total costs of an average person s care. This takes into account the plans monthly premiums, deductibles, copayments, coinsurance, and out-of-pocket maximums. If businesses do not offer health insurance to their employees, they are required to inform their workers about the Marketplace in their state and how to use it. The ACA ordered states to create Marketplaces, which may be set up as state agencies, independent governmental entities or non-profits. Some states have established Marketplaces; many did not. If states did not set them up, the federal government did. This federal Marketplace, at is frequently referred to as the Exchange. Plan category Bronze Silver Gold Platinum Catastrophic Benefits Covers 60% of costs with an individual out-of pocket limit of $6,850 and a family out-of-pocket limit of $13,700 for Provides essential health benefits. Covers 70% of costs with an individual out-of pocket limit of $6,850 and a family out-of-pocket limit of $13,700 for Provides essential health benefits. Covers 80% of costs with an individual out-of pocket limit of $6,850 and a family out-of-pocket limit of $13,700 for Provides essential health benefits. Provides essential health benefits. Covers 90% of costs with an individual out-of pocket limit of $6,850 and a family out-of-pocket limit of $13,700 for Provides essential health benefits. Covers less than 60% of the total cost of care. They re available only to people who are under 30 years old or who are exempt from the mandate to purchase coverage. Provides coverage of three primary care visits per year, and certain preventive services, at no cost. You have to pay all other medical costs until you reach your deductible of $6,850 for *See glossary on page 10. 7

8 Medical loss ratio under the ACA Many insurance companies spend a portion of consumers premium dollars on administrative costs and profits, including salaries, overhead, and marketing. Under the ACA, insurers are required to spend at least 80% of individual and small group premiums, and 85% of large group premiums, on medical care and quality improvement activities not administrative costs. 5 These percentages are referred to as the medical loss ratio (MLR). Calculating the MLR MLR is defined as the portion of premium income insurers pay out in the form of health care claims (claims divided by premiums). Under the ACA, insurers can make adjustments for quality improvement activities and expenditures on taxes, licensing, and regulatory fees. The illustration below shows the difference between traditional MLR calculations and the formula under the Affordable Care Act. Traditional MLR = Health Care Claims Premiums ACA MLR = Health Care Claims + Quality Improvement Expenses Premiums - Taxes, Licensing, and Regulatory Fees Source: Kaiser Family Foundation (March 5, 2015). Retrieved from: Annually health insurance companies will calculate their MLR and if they are below the appropriate MLR percentage, they will provide rebates to their policyholders. 8

9 Businesses are required to provide SBC to employees Health insurers and group health plans are required to provide employees with an easy-to-understand summary about a health plan s benefits and coverage. The ACA includes standardizing summary of benefits and coverage (SBC) information to make it easier for people to compare health plans. If your business offers health insurance to your workers, you will have to provide them with the appropriate documentation in writing and at no cost. This documentation may include an SBC template, sample language, and a glossary of terms commonly used in connection with health insurance coverage. Your insurance company will provide you with this information, but it is the responsibility of the employer to pass it along to employees. Employers are required to provide the SBC at various times:»» When an employee is first eligible for coverage»» At renewal/open enrollment»» By the first day coverage starts, if the SBC changed from the version provided during open enrollment»» After a request for special enrollment, as defined by HIPAA»» If there is a mid-year change to the plan that affects the information in the SBC»» Upon request If you offer more than one plan to your employees, only the SBC specific to the plan for which an employee is eligible must be provided to that employee at renewal. However, if an employee asks to see a different plan s SBC, you must also provide it so he or she can compare plans. Insurance issuers and businesses offering health insurance that willfully fail to provide the required SBC information may be subject to a $1000 penalty per offense. In addition plan sponsors may be subject to a $100 excise tax per day for each individual to whom the failure applies. See PHSA 2715(f), as added by PPACA, Pub. L. No (2010) for the $1000 penalty and 26 USCS 4980D for the $100 excise tax. 9

10 Glossary Marketplace Marketplaces are organizations that are set up to create a more organized and competitive market for buying health insurance. They offer a choice of different health plans, certifying plans that participate and providing information to help consumers better understand their options (See Treas. Reg H-1(a)(18). Large employer An applicable large employer is defined under ACA as an employer who employed an average of at least 50 full-time employees on business days during the preceding calendar year. (See Treas. Reg H-1(a)(4).) A full-time employee for any month is an employee who is employed for an average of at least 30 hours per week (See Treas. Reg H-1(a)(21). 10

11 Sources 1 Chaikind, H. and Peterson, C. (June 2, 2010). Summary of Potential Employer Penalties under the Patient Protection and Affordable Care Act (PPACA). Congressional Research Service. Retrieved from 2 The Employer Shared Responsibility Payment (March 5, 2015). Retrieved from: small-businesses/what-is-the-employer-shared-responsibility-payment 3 The Premium Tax Credit (Feb. 15, 2015). Retrieved from Individuals-and-Families/The-Premium-Tax-Credit Pagliery, J. (June 28, 2012). Health reform upheld: What companies need to know. Retrieved from 4 The Metal Categories: Bronze, Silver, Gold, and Platinum. (March 5, 2015). Retrieved from FAQs about Affordable Care Act Implementation (Part XXVII). (March 5, 2015). Retrieved from 5 Medical Loss Ratio: Getting Your Money s Worth on Health Insurance (Nov. 22, 2010). Retrieved from 11

12 Health care reform timeline snapshot This health care reform timeline lays out health insurance reforms and health care milestones contained within the Affordable Care Act for 2015 to Minimum essential coverage reporting employer shared responsibility provision 2017 Health Care Choice Compacts allow states to open insurance Marketplaces to any size employer % excise Cadillac Tax on high-cost employer health plans Find out about these issues and more inside! This guide is intended for informational purposes only and is not intended to be exhaustive nor should it be construed as legal advice. You should consult with legal counsel for legal advice and assistance. For detailed information and guidance related to the Affordable Care Act, talk with your health insurance agent/broker or WPS Health Insurance representative. In the emerging health care reform era, your agent is likely to become an even more important resource. You can also refer to your attorney, or tax accountant Wisconsin Physicians Service Insurance Corporation. All rights reserved