Selected ACA Tax, Fee, and Reporting Provisions. Financing Benefits in a Captive. Basil D. Pappas Kathleen Waslov November 7, 2013

Transcription

1 Selected ACA Tax, Fee, and Reporting Provisions & Financing Benefits in a Captive Basil D. Pappas Kathleen Waslov November 7, 2013

2 OVERVIEW The Affordable Care Act (ACA) was enacted in The ACA, as enacted, had over 43 tax provisions in it. In addition other requirements were included in the ACA that impact your premium or your costs. Overall the ACA imposes additional incremental cost to insurers, employers, and individuals. The provisions kick in at various dates with differing definitions of what is subject to the tax or fee. 2

3 Employer Mandate Applies to a business that has 50 or more full time or full time equivalent employees. Full time is defined as 30 hours. If an employer meets this dfiiti definition it must offer health insurance to its full time employees or face a penalty. The penalty is calculated monthly as follow: Penalty = (total FTEs for month 30)*$ This provision was to be effective in 2014 but has been delayed until

4 Individual Mandate Individuals are also required to have health insurance beginning in The coverage can be employer provided coverage or coverage purchased in the market or through the Exchange, a state by state marketplace created by the ACA. The penalty for not having coverage is not significant for the first several years. Open question is if younger uninsured individuals will opt to pay the penalty as opposed to acquiring insurance viewing it as a cheaper option. Effective in 2014 no delay on this one as yet. 4

5 Medical Loss Ratio The Medical Loss Ratio (MLR) requires es a health insurer to meet the following: Individual and small group mlr of 80%. Large group mlr of 85%. Ratio of claims and quality improvement costs (as defined) over premiumsless taxes and certain fees. If the insurer fails to meet the required mlr it must refund premium back to the customer in an amount that allows it to meet the mlr. This was effective in

6 PCORI Fee This is an excise tax designed to fund research. The tax is imposed on both the insurer s book of health business and a self insured health plan. The tax is determined on an usual approach. The tax is based on plan year ends after September 30, 2012 through September 30, 2019 when the tax sunsets. The tax is $1 per average member for plan year ends after September 30, 2012 and before September 30, It then goes to $2 per member until September 30,2014 after which it is indexed. 6

7 PCORI Fee If your plan is insured the tax is imposed on the insurance company. The cost will be built into your premium. If self insured the tax falls on the plan. Form 720 must be filed by July 31 for plan year ends in the prior year. Significantconfusionsamongst confusions amongst insuredandself self insured customers over the application of the provision, who is liable for it, and how it is paid. 7

8 Reinsurance Fee The fee is in place for years In 2014 the annual fee is $63 per average member. Decreases in 2015 and then again in Like the PCORI fee it is imposed on both the health insurer for its book of business and the self insured plan. While called a reinsurance fee, it is actually designed dto mitigate bad experience in the individual market place due to the expected impact of newly insured individuals. id Self insured group plans will not receive anything from the payment py of this reinsurance fee. 8

9 Reinsurance Fee Similar to the PCORI tax if insured edthe health insurance company pays it it too will likely be included in your premium. If self insured you will file with HHS no later than November 15 the average number of members in your plan. HHS will bill you by December 15 and payment is required no later than 30 days of the bill. The fee decreases in 2015 and After 2016 the fee sunsets. 9

10 10 Insurer Fee An industry fee imposed on companies that write health insurance (as defined) on US risk. The total industry fee is: 2014 $8.0 billion bll 2015 $11.3 billion 2016 $11.3 billion 2017 $13.9 billion 2018 $14.3 billion 2019 indexed from this point forward. The fee is based on an insurer s premium to total industry premium (as defined).

11 Insurer Fee The fee is not tax deductible to the insurance company. Impact on premium will be significant. The estimate for 2014 is that for every $1 of fee paid, the insurer must charge at least $1.54 just to recover the federal tax cost. The amount is higher when state taxes are also factored in. The range is approximately $1.54 to $1.65. Will increase as the fee increases. The pharmaceutical industry has a similar fee. 11

12 Reporting Obligations 12 Two new reporting obligations are also imposed. Section 6055 requires the insurer and/or a self insured employer to provide to IRS and the employee significant amounts of information, including the names and social security numbers of all dependents covered under the policy. Section 6056 requires employers to also provide information to IRS on its employees. Both provisions are effective in 2014 but have been postponed until This is on top of the W 2 reporting of the health insurance premium.

13 EMPLOYER SPONSORED MEDICAL BENEFIT PLANS WHEN TO USE YOUR CAPTIVE

14 Agenda In the wake of passage of the Patient Protection and Affordability At Act, employers who sponsor medical benefits plans for US employees are facing tough decisions about plan design and plan financing. Many of them are asking, Does it make sense to use my captive insurance company to underwrite all or some of our medical benefits liabilities? In some cases, employers will find that traditional self insurance delivers a lower cost and less complex solution than captive financing. But the ultimate decision on captive utilization will depend on a careful consideration of economic and regulatory factors thatareare specificto eachtransaction. This session offers advice and guidelines to help answer this question, and will describe Single Parent and Group Captive structures. 14

15 Risk management of medical benefit liabilities How big is the expense? Private Employer Costs % $ / hour Wages & Salaries 70.3% $20.48 Mandated Benefits (WC, SS, Medicare, Unemployment 8.2% $ 2.39 Fringe Benefits 21.5% $ Healthcare 7.8% $ 2.27 Paid Leave 6.9% $ 2.01 Supplemental Pay 2.8% $ 0.82 Life & Disability Insurance 0.4% $ 0.12 Retirement 3.6% $ 1.05 TOTAL 100% $29.13 EXAMPLE: 200 employees = $12 mm payroll with $1mm medical benefit payments 15

16 The trend towards self insurance Self lfinsured plans have lower costs and other advantages Required Compliance (sample list) Automatic Enrollment Notification of Modifications Outcomes Research Fees Emergency Services Cover Lifetime and Annual Limits Prohibition on Rescissions Preventive Health Services Provider Non Discrimination Access to Pediatric, OBGYN Clinical Trial Cover Extended Dependent Cover Not expressly required (but may result in penalties if not compliant) Comprehensive Coverage for Health Benefits Package Essential Health Benefits Prohibition of Discrimination based on Salary Annual Limitation on Deductibles Guaranteed Issue Guaranteed Renewability Jurisdiction of State Ombudsman Self insurance advantages ERISA preemption No mandated benefits No state premium tax Flexible premium rating Flexible plan design Eliminate new costs imposed on health insurers by PPACA, esp. the 2.46% premium tax/fee Avoid other overhead and profit loads of health insurers Keep underwriting gains Access to claims data 16

17 What about captives Delivers administrative advantages SELF INSURANCE PLAN SPONSOR Assets FUNDED TRUST VEBA TRUST Assets CAPTIVE CAPTIVE Use of Captive: Formalizes the self insurance transaction Pre funds the liability Segregates financial statements May allow insurance company status s for tax and accounting Improves governance (capital allocation, actuary, auditor) Assets 17

18 What about captives Dli Delivers economic advantages Compared to full insurance Retention of risk recovers commercial insurer underwriting and investment profits Compared to self funding May accelerate tax deductions for insurance claims reserve and defer income recognition Canpoolpremiums premiums ofmultiple business units, multiple employers and lines of coverage to achieve economy of scale and risk diversification. Result is lower capital requirements, service costs and stop loss costs. 18

19 What about captives Risk Structure TRANSITION FROM INSURED TO SELF-INSURED INCREASING CAPTIVE RISK ASSUMPTION Insured dplan Fully Insured Insured Excess Insured Excess Insured Excess Self Insured Rt Retentionti Captive Layer Example 1 Self Insured Retention Captive Layer Example 2 Self Insured Retention 19 Conversion from insured plan to self insurance The optimal amount of excess protection depends on market pricing and cost of capital Self-insured liabilities are accrued on B/S Employer s tax deductions are taken as payments are made Captive Financing Risk pooling allows increase in retained risk and decrease in transferred risk Liabilities are held in tax-deductible d tibl reserves Employer s tax deductions taken as premiums are paid

20 What about captives Pure Captive Comparison to SlfF Self Funding Before and After Costs Self-Funded Captive TPA and Other Services Same Self Insured Retention - Local Excess Stop Loss Protection Captive Funding Captive Operating Expenses Captive Capital Based on Spec & Agg Limits None Same or Lower Higher Limits & Lower Costs Portion of Retained Risk 2% - 5% of premium 25% of premium 20

21 Need to understand all component costs and compare risks and rewards to the self insurance option What about captives Group captive issues Insured Excess Captive Layer has Risk Sharing Rules Self Insured Retentions Volume from pooling can decrease per unit expenses Sharing can either decrease or increase individual annual net cost, but should smooth over time Group Captive adds transaction and administration costs of 5% to 10% Risks in the captive layer are shared Means to access lower reinsurance market rates on a group basis 21

22 What about captives Numerical example Sample Cost for Employer Group Renewal Self Insured Retention $1,200,000 TPA and Other Services $50,000 Captive Funding $350,000 Excess Stop Loss Protection and $250,000 Operating Expenses Total Annual Costs 125 EEs $1,850,000 Captive Collateral $175,000 22

23 Decision Tree Full or Self Insurance? First Dollar Coverage from Health Insurer How much risk to retain? Reserves deducted Accrue Expected Reserves on Captive B/S Use Captive Balance Sheet? Accrue Expected Reserves on Employer B/S Expenses deducted as Paid Single or Group Captive? Stop Loss Reinsurance Layer Captive Layer Employer Deductible Singleowner Risk Structure? Group Risk Structure? Stop Loss Reinsurance Captive Layer Shared Layer Employer Deductibles 23

24 Summary Reasons to Use Your Captive To formalize self funding for compliance, control and good governance To pool multiple businesses, coverages, or policy periods for risk consolidation, diversification, and distribution How to get started Optimize your program with the right mix of risk retention and risk transfer» Review historical data and project future claims costs» Set stop loss limits based on market rates and risk tolerance Investigate options to form or join a group captive» Understand all in costs» Clarify rules for risk sharing Do comparative analysis of alternatives to design best program 24

25 Impact of ACA on Captives How will the ACA impact a captive? Does the captive write real health insurance? Most do not for a variety of reasons. Does it provide stop loss coverage to affiliates? Is stop loss health insurance? Generally e no, the view is it is liability coverage. States have however attempted to regulate the attachment points in stop loss policies, with varying degrees of success. The NAIC is debating the appropriate attachment points. 25

26 Impact of ACA on Captives The IRS/DOL/HHS on March 12, 2012 published a notice in the Federal Register asking for information on how stop loss is used. In particular they wanted information on the prevalence and consequences of stop loss insurance with low attachment points. The request for comments expresses a concern that employers will migrate to self insured plans to minimize the impact of the ACA. The purpose p of the request appears to be an attempt to gather information to determine if a minimum attachment point should be proposed, similar to the NAIC Model Act. 26

27 Impact of ACA on Captives What adverse impact occurs if the captive is deemed a health insurer? All the taxes and fees previously mentioned may now apply to the captive. Since a self insured plan already py pays the PCORI tax and the reinsurance fee, these should have no impact. It will be subject to the insurer fee lk like any other health insurer. 27

28 Impact of ACA on Captives 28 It may subject its parent company and affiliates to section 162(m)(6) of the Internal Revenue Code. This provision limits the deductibility of compensation paid to $500,000, whether paid or deferred. The limitation is on a controlled group basis so everyone in the group is subject to it even if not part of the captive. A de minimis exception exists. If the captives premiums are less than 2% of the controlled group gross receipts it is excluded dfrom this provision. ii See Wall Street Journal 9/13/2013 editorial on the subject.

29 Conclusion Plan carefully. Plan carefully. Plan carefully. The end result of not planning carefully is expensive. 29

30 DISCLAIMER This presentation contains general information only and is not meant to provide tax or otherprofessional advice. Before making any decisions or taking any action you should consult a qualified advisor. This presentation may not be used as a basis to avoid federal or state tax penalties. 30