Affordable Care Act Update: New Pay or Play Rules Applicable to Colleges and Universities. May 2, Patrick M. Allen

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1 Affordable Care Act Update: New Pay or Play Rules Applicable to Colleges and Universities May 2, 2014 Patrick M. Allen

2 Health Care Reform: Quick Overview Affordable Care Act ( ACA ) signed into law on March 23, 2010 Upheld by U.S. Supreme Court (5-4) on June 28, 2012 as constitutional exercise of taxing power Grandfathered plan: group health plan or health insurance coverage in which an individual was enrolled on March 23, 2010 A plan can lose grandfathered status by making too many changes to benefits or costs

3 Health Care Reform: Quick Overview Provisions effective prior to 2012 Dependent coverage up to 26 No lifetime limits/restrictions on annual limits No rescissions A plan cannot drop a person s coverage (except for fraud or intentional misrepresentation) No pre-existing condition exclusions for children No cost-sharing for preventive care services (non-gf plans) Appeals process changes (non-gf plans) No reimbursement for OTC medicines or drugs in a health FSA without a prescription W-2 reporting

4 Health Care Reform: Quick Overview Summary of Benefits and Coverage (SBC) Simple and concise explanation of benefits Must use DOL template Compliance Deadline: Generally, Sept. 23, Day Advance Notice of Material Modifications Material modifications not in connection with renewal must be described in a summary of material modifications (SMM) or an updated SBC Preventive Care for Women Notice of Existence of Health Benefit Exchange Individual Mandate (effective January 1, 2014)

5 Health Care Reform: Quick Overview Employer Reporting (delayed until 2015) More 2014 Changes No pre-existing condition exclusions or limitations (applies to everyone) Wellness program changes Limits on out-of-pocket expenses and cost-sharing No waiting periods over 90 days Coverage of clinical trial participation Guaranteed issue and renewal in all markets Cadillac Plan Tax (2018) Nondiscrimination Rules Coming for Fully Insured Plans Automatic Enrollment (not yet effective)

6 ACA Pay or Play Final Regulations: Overview Final Pay or Play Regulations released on February 10, 2014 Brief refreshers on the Pay or Play rules What did the final regulations delay? Transition Rules Changes from the proposed regulations Rules applicable to special employees, including adjunct professors

7 Two separate penalties: Pay or Play Penalties 4980H(a) or Sledgehammer Penalty 4980H(b) or Tackhammer Penalty

8 Sledgehammer Penalty Applies if employer fails to offer minimum essential coverage (MEC) to substantially all full-time employees (FTEs) (and their dependent children, but not spouses) and any FTE receives subsidized coverage from the exchange Must offer MEC to all but 5% or (if greater) 5 of the employer s FTEs Annual amount of penalty is $2,000 multiplied by the number of FTEs (less the first 30) Penalty based on all FTEs (not just those obtaining coverage from the exchange) There is no requirement that the coverage be affordable or provide minimum value (MV) Transition relief for 2015 was provided

9 Tackhammer Penalty Applies if employer offers health coverage that is unaffordable relative to the employee's household income, or does not provide the required MV Annual amount of penalty is $3,000 for each FTE who actually receives subsidized coverage from the exchange No transition relief for 2015

10 What Was Delayed? For employers with FTEs ( FTEs ) or equivalents, the entire mandate is delayed until For sponsors of calendar year plans: January 1, 2016 For sponsors of existing non-calendar year plans (and that meet certain criteria): First day of the sponsor s 2016 plan year Therefore, these employers are not subject to the Sledgehammer or Tackhammer Penalty until 2016 BUT, numerous requirements apply in order to qualify for the delay, so be careful!

11 Transition Rules Most, but not all, of the transition rules that were originally provided for 2014 remain for 2015 Certain additional transition rules were also provided

12 Transition Rules Sledgehammer Penalty Transition Relief So long as the applicable large employer (ALE) member offers MEC to at least 70% of its FTEs (and children, as required under the transition relief), then no Sledgehammer Penalty will apply Through 12/31/2015 for calendar year plans Through the close of the 2015 plan year for non-calendar year plans Also, the Sledgehammer Penalty is reduced by the employer s allocable share of 80 FTEs rather than just 30 There is no corresponding Tackhammer Penalty Relief Thus, the employer could be on the hook for penalties equal to $3,000 per FTE for any employee that goes to the exchange and gets subsidized individual coverage

13 Transition Rules Shorter measurement period permitted in 2014 for stability period starting during 2015 General rule is stability period cannot be longer than the measurement period (except if measurement period is 3 months, in which case the stability period must be 6 months) What does the relief provide? May use a transition measurement period that is at little as 6 months long and still use a longer stability period (up to 12 months), but the transition measurement period must begin by no later than 7/1/2014 and end no earlier than 90 days before the start of the 2015 plan year Only applies to employees hired on or before the first day of the transition measurement period

14 Transition Rules Shorter period for determining ALE status for 2015 Generally need to look over the course of the entire preceding calendar year to determine whether an employer is an applicable larger employer With 2014 underway, some employers may not be tracking hours worked for this purpose

15 What does the relief provide? Transition Rules An employer may determine whether it is an ALE by using a period of at least 6 consecutive months during the 2014 calendar year (rather than the entire 2014 calendar year) The seasonal worker exception continues to apply on a calendar year basis This rule applies for employers trying to determine whether they fit in the delay provision for employers with FTEs or equivalents

16 Transition Rules Offer of Coverage for January 2015 The final rules provide that if an ALE member fails to offer coverage to a FTE for any portion of a calendar month, the employee is treated as not being offered coverage during that month. Issue of the final 2014 payroll period that crosses into 2015 What does the relief provide? If an employer offers coverage to a FTE by no later than the first day of the first payroll period that begins in January 2015, the employee is treated as having been offered coverage for January 2015.

17 Transition Rules Offer of Coverage for Dependents Generally, to avoid a Sledgehammer Penalty, an employer must offer MEC to 95% of its FTEs and their children up to age 26 (Special 70% rule for 2015) Some employers may not yet be offering child coverage to all children up to age 26, or the coverage may not constitute MEC What does the relief provide? If an employer offers coverage to a FTE by no later than the first day of the first payroll period that begins in January 2015, the employee is treated as having been offered coverage for January 2015.

18 Transition Rules What does the relief provide? (cont d) So long as the employer takes steps towards satisfying this requirement, then it is not liable for a Sledgehammer Penalty for the 2015 plan year based solely on its failure to offer the requisite child coverage. The relief does not apply to employers that offered child coverage during the 2013 or 2014 plan years and drop it for The relief only applies to children not otherwise eligible for coverage during 2013 or 2014 plan years.

19 Employee and Employer Who is an employee for purposes of 4980H? A common law employee using the factor test What is full-time for purpose of 4980H? 30 or more hours of service per week OR 130 hours of service per month Note: This is not the same definition of full-time that applies when determining whether an employer is an ALE subject to 4980H in the first place. That definition uses 120 hours per month.

20 Employee and Employer What is an hour of service? Hours Worked. Each hour for which the employee is paid, or entitled to payment, for the performance of duties ; AND Paid Time Off. Each hour for which the employee is paid, or entitled to payment by the employer, for the period of time due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence

21 Employee and Employer Hours of Service Excluded Bona fide volunteers Students in a Federal/state work study program Certain members of a religious order Section 3508 Employees (certain real estate agents and direct sellers) Employees who perform certain services outside the United States Leased Employees (as defined in Code Section 414(n))

22 Hours of Service Excluded Bona Fide Volunteer Any volunteer who is an employee of a government entity or 501(c) organization Whose only compensation is in the form of: Reimbursement for reasonable expenses incurred as a volunteer; or Reasonable benefits (e.g., length of service awards) and nominal fees customarily paid similar entities Definition based on Code Section 457(e)(11) rules but not limited to firefighters and EMT Do the same 457(e)(11) length of service award limitations (i.e., $3,000 annual limit) apply?

23 Hours of Service Excluded Students in a federal/state work study program Hours of service performed by students in a position subsidized through the federal work study or substantially similar State/political subdivision program not counted as 4980H Hours of Service No general exception for students not otherwise in a federal/state work study program Paid interns? Hours of service counted Unpaid interns? Hours of service not counted for 4980H purposes

24 Hours of Service Excluded Members of a religious order Work performed by an individual under a vow of poverty as a member of the order if the work is a task usually required (and to the extent usually required) of an active member of that order through the federal work study or substantially similar State/political subdivision program not counted as 4980H Hours of Service What is a religious order? See Rev. Proc

25 Hours of Service Excluded Example: Members of a religious order Daniel and Rachel are members of a religious order and have taken vows of poverty. They renounce all claims to their earnings. The earnings belong to the order. Daniel is a licensed attorney. The superiors of the order instructed him to get a job with a law firm. Daniel joined a law firm as an employee and, as he requested, the firm made the salary payments directly to the order. Daniel s service are not tasks usually required of an active member of the order. Consequently, hours of service performed by Daniel for the law firm would constitute hours of service for the law firm. Rachel is a secretary. The superiors of the order instructed her to accept a job with the business office of the church that supervises the order. Rachel took the job and gave all her earnings to the order. Rachel s services are tasks usually required of an active member of the order.

26 Hours of Service Excluded Section 3508 Employees Who is a Section 3508 employee? (see Publication 15-A, statutory non-employees ) Licensed real estate agents Direct Sellers Companion sitters

27 Hours of Service Excluded Services Performed Outside the U.S. Do not treat hours of service performed outside the United States as 4980H hours of service if compensation for such services is considered income from a source without the United States Generally pay for services performed outside the United States is considered income from sources without the United States Do not confuse with income tax rules as U.S. citizens are taxed on income within and without the U.S. U.S. is the 50 states and D.C. Territories and possessions are not considered the U.S. for this purpose

28 Hours of Service Excluded Leased Employees (as defined in Code Section 414(n)) An individual is a leased employee if: Not an employee of recipient Performs services for recipient pursuant to an agreement between leasing organization and recipient The individual has performed service for the recipient on a substantially full-time basis for at least one year Such services are performed under primary direction and control of recipient

29 Employees Whose Hours are Difficult to Determine Tracking hours of service for some categories of employees or work will prove difficult due to the nature of employment/work Adjunct Faculty Commissioned salespeople Employees subject to a layover Employees on call Other similar categories/work?

30 Employees Whose Hours are Difficult to Determine With respect to such employees, employers must use a reasonable method of crediting hours of service that is consistent with Section 4980H A method is not reasonable if it takes into account only a portion of the employee s hours of service such that it re-characterizes as nonfull-time an employee in a position that traditionally averages 30 hours of service or more per week Final regulations identify reasonable methods for: Adjunct Faculty Employees subject to layover Employees on call

31 Employees Whose Hours are Difficult to Determine Adjunct Professors IRS method: rule Multiply each hour teaching by 2.25 This accounts for not only time in class but an additional 1.25 hours preparing for class Add any additional hours performing duties outside the classroom that faculty member is required to perform Required office hours Staff meetings Not the only method that might be considered reasonable Is the IRS rule a safe harbor? May be relied on at least through 2015

32 Employees Whose Hours are Difficult to Determine Example: Adjunct Professors Professor Kennedy teaches a 2 hour class 3 nights a week at ABC College. Professor Kennedy is also required to spend 3 hours per week in his office and he must attend weekly staff meetings that are typically 2 hours in duration How many hours of service per week does Professor Kennedy have? 2.25 x 6 hours of class time = hours of office time 2 hour staff meeting 18.5 hours

33 Employees Whose Hours are Difficult to Determine Employees subject to a layover (e.g., airline employees) Must credit layover hours if: Employee receives compensation for the layover hour beyond the compensation received without regard to the layover; or The layover hour is counted towards the required hours of service for the employee to earn his/her regular compensation Otherwise, if neither of the above apply, it would be deemed reasonable for an employer to credit 8 hours of service for each day in an overnight stay, unless that substantially understates the actual hours of service Not limited to airline employees Truck drivers

34 Employees Whose Hours are Difficult to Determine Example: Layover Employees John is a flight attendant for ABC Airlines. On Monday, John works three 3-hour flights during a day and then stays overnight. John is compensated for 3 additional hours during the layover. On Tuesday, John again works the same three 3-hour flights, returning home after the last flight. ABC Airlines credits John with 8 hours for Monday and 8 hours on Tuesday. Is that sufficient?

35 Employees Whose Hours are Difficult to Determine On Call Employees Must count hours of service for: Time required to stay on premises Hours during which activities while on call are subject to substantial restrictions The Kill Your Weekend rule

36 Employees Whose Hours are Difficult to Determine Employees of Educational Organizations What is an educational organization? Primary function is formal instruction Normally maintains a regular faculty Normally maintains a regular curriculum Has a regularly enrolled body of pupils in attendance at the place where activities carried on Every unpaid, break in service (other than special unpaid leave) 4 weeks or longer is presumably an employment break Not limited to summer breaks Either allocate hours to employment break or disregard weeks Limited to 501 hours No longer continuous if leave is longer than 26 weeks (as opposed to 13 weeks for all others)

37 Employees Whose Hours are Difficult to Determine Temporary employees Counted, if common law employee (but may be able to avoid penalties with respect to such employees if employment is 3 months or less) High turnover positions Counted, if common law employee Professional Employer Organizations (PEOs) Worksite employees are counted, if they are common law employees of the client organization (which is typically the case) Offer of coverage by the PEO is treated as offer of coverage by the client organization, but only if the fee the client organization pays is higher for worksite employees who are covered under the PEO plan

38 Employees Whose Hours are Difficult to Determine Employees with H2 visas Counted, if common law employee Seasonal Worker vs. Seasonal Employee Is a seasonal worker the same as a seasonal employee? No, not necessarily Seasonal worker (relevant for ALE determination only) may typically work more than 6 months Defined by reference to 29 CFR (s)(1); also includes retail workers employed during holiday seasons May use reasonable good faith interpretation (including application by analogy to other workers) Seasonal employee (relevant for variable treatment in look back measurement period method) defined as employee whose customary employment is 6 months or less

39 DOMA Defense of Marriage Act (DOMA) signed into law in 1996 Section 3 of DOMA: Defined marriage as a union between one man and one woman Defined spouse as a person of the opposite sex who is a husband or wife Section 2 of DOMA allowed states to deny recognition of same-sex marriages

40 Supreme Court: United States v. Windsor Same-sex couple Windsor and Spyer Legally married in Canada Resided in New York, which recognizes same-sex marriages Spyer passed away in 2010 and left her estate to Windsor Windsor sought the federal estate tax exemption for a surviving spouse IRS denied the exemption Windsor was not a spouse under federal law

41 Supreme Court: United States v. Windsor On June 26, 2013, the Supreme Court ruled in favor of Windsor Windsor was permitted to use the federal estate tax exemption for surviving spouses Section 3 of DOMA was ruled unconstitutional The ruling affects all federal laws, not just estate taxes The court s ruling is effective retroactively to the date DOMA was enacted The Supreme Court did not address Section 2 of DOMA. States are still allowed to deny recognition of same-sex marriages What is the impact of Windsor on employee benefit plans?

42 States Recognizing Same-Sex Marriage Massachusetts (2004) Connecticut (2008) Iowa (2009) Vermont (2009) New Hampshire (2010) District of Columbia (2010) New York (2011) Maine (2012) Washington (2012) California (2013) Maryland (2013) Rhode Island (2013) Minnesota (2013) Illinois (eff. June 1, 2014)

43 IRS Guidance: Rev. Rul Released on Aug. 29, 2013; effective Sept. 16, 2013 IRS recognizes all same-sex marriages for federal tax purposes Includes couples legally married in any of the 50 U.S. states, D.C., a U.S. territory or a foreign country State of Celebration Treated as married for federal tax purposes regardless of the state of residence It does not matter whether the marriage is recognized in the state or foreign country of residence All Internal Revenue Code and regulation references to husband, wife, and spouse include same-sex spouses

44 IRS Guidance: Rev. Rul The following are not recognized as marriages for federal tax purposes: Civil unions Domestic partnerships Other similar formal relationships

45 IRS Guidance: Rev. Rul Effective Sept. 16, 2013, all same-sex married couples must be treated as married and spouses for all federal tax purposes Employers must: Exclude the value of spousal health care benefits (and certain other fringe benefits) from the employee s wages for withholding purposes Extend certain retirement and health plan benefits to recognized same-sex spouses

46 DOL Guidance: Technical Release DOL takes the same position as the IRS Recognizes as married same-sex couples legally married in any of the 50 U.S. states, the District of Columbia, a U.S. territory or a foreign country Treated as married for federal tax purposes regardless of the state of residence It does not matter whether the marriage is recognized in the state or foreign country of residence

47 Impact on Retirement Plans Spousal Consent If a plan contains QJSA and QPSA provisions, a same-sex spouse must consent to a different form of payment Same-sex spousal consent required to name a non-spouse beneficiary Spousal consent required for: Plan loans In-Service Withdrawals Hardship Withdrawals May now be made for medical, educational and funeral expenses of same-sex spouses Qualified Domestic Relations Orders (QDROs) A QDRO for a same-sex couple is now treated the same as a QDRO for an opposite-sex couple Rollover Options

48 Retirement Plan Amendments IRS Notice Plan amendments generally need to be adopted by December 31, No amendment required if the plan s terms are not inconsistent with Windsor

49 Impact on Health and Welfare Plans Tax Treatment The value of the coverage provided to an employee s same-sex spouse is no longer taxable to the employee The employee can pay for coverage of a same-sex spouse on a pre-tax basis under a Section 125 cafeteria plan COBRA Plans must treat same-sex spouses as qualified beneficiaries The same-sex spouse must be given the opportunity to elect COBRA coverage after the employee has a qualifying event, even if the employee does not elect coverage The Supreme Court s ruling does not require employers to provide benefits to same-sex spouses If an employer does not offer benefits to same-sex spouses, could it be sued based on discrimination?

50 Impact on Health and Welfare Plans Affordable Care Act When considering whether an employee is offered coverage for purposes of the 95% test (70% for 2015), the employee s dependents must also be offered coverage Employers should consider whether a same-sex spouse s child is considered the employee s dependent. A dependent includes: A child under age 26 Son or daughter Stepson or stepdaughter An individual legally adopted A foster child Health Flexible Spending Arrangements (FSAs) Employees may now receive reimbursements from a health FSA for medical expenses incurred by a same-sex spouse

51 Health Savings Accounts (HSAs) HSAs may now reimburse medical expenses of same-sex spouses (this was previously prohibited) Same-sex couples may now find that their HSA contributions are limited to an amount that is less than when they were treated as being single Example: Prior to Windsor, one spouse has a high deductible health plan (HDHP), elected family coverage for his child, and contributed the statutory limit of $6,450 for family coverage The other spouse has an HDHP, elected single coverage, and contributed the statutory limit of $3,250 for single coverage Post-Windsor, the same-sex couple s maximum contribution to the HSA is $6,450

52 Dependent Care FSAs Individuals with children may contribute up to $5,000 to a dependent care FSA The $5,000 limit is applied per return filed, so a married couple can contribute a maximum of $5,000 Pre-Windsor: Each same-sex spouse could contribute up to $5,000 for their respective dependents, for an aggregate amount of $10,000 Post-Windsor: The aggregate contribution is limited to $5,000

53 Questions? Patrick M. Allen Womble Carlyle Sandridge & Rice, LLP One West Fourth Street Winston-Salem, NC Telephone: (336) Fax: (336)