Agenda Item C.1 DISCUSSION /ACTION ITEM Meeting Date: June 17, 2014

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1 CPMS Agenda Item C.1 DISCUSSION /ACTION ITEM Meeting Date: June 17, 2014 TO: FROM: Mayor and Councilmembers Michelle Greene, Interim City Manager CONTACT: Heidi Aten, Senior Management Analyst SUBJECT: Resolution Adopting Safe Harbors Under the Patient Protection and Affordable Care Act RECOMMENDATION: Adopt Resolution No.14- entitled A Resolution of the City Council of the City of Goleta, California, Adopting Safe Harbors under the Patient Protection and Affordability Care Act. BACKGROUND: The Patient Protection and Affordable Care Act ( ACA ) was enacted on March 23, The ACA adds new requirements for large employers, including the employer shared responsibility provisions and annual reporting requirements. The ACA establishes rules for determining whether an employer is considered a large employer under the ACA s definition. As explained below, ACA s shared responsibility provisions allow the Internal Revenue Service (IRS) to impose penalties on a large employer that fails to offer affordable health insurance coverage to substantially all full-time employees (and eligible dependents). IRS regulations provide safe harbors to determine which employees are considered full-time under the ACA, as well as to assess the affordability of employer sponsored health coverage. Starting in 2016, the City must submit an annual report to the IRS identifying its full-time employees under the ACA and coverage offered to those employees for the prior year or face penalties. This report describes these ACA regulations in greater detail. DISCUSSION: Under the ACA, a large employer (at least 50 full-time employees, including full-time equivalents) must offer affordable health coverage to substantially all of its full-time employees beginning January 1, 2015, or face potential penalties. The City of Goleta is considered a large employer because it employed an average of at least 50 full-time employees (including full-time equivalents) on business days during the preceding calendar year. Transition relief applies to employers between 50 and 99 full-time

2 Meeting Date: June 17, 2014 employees that meet specific requirements. For those employers that qualify for this transition relief, penalties will not apply until January 1, Beginning in 2016, large employers must also report data for the prior calendar year to the IRS identifying their full-time employees and the coverage offered to those employees. The City will need to report 2015 data to the IRS on or before February 28, 2016 (March 31 if filed electronically). The City has potential exposure to penalties when a full-time employee, as that term is defined by the ACA, purchases health coverage through Covered California, California s exchange, and receives a subsidy. The ACA defines a full-time employee as one who averages 30 or more hours of service per week in any given month. The IRS may assess a monthly penalty under the following two circumstances: 1) The City fails to offer substantially all (defined as 95%, or 70% during 2015 only) of its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan; or 2) The City offers substantially all of its full-time employees (and their dependents) the opportunity to enroll, but the employee s self-only coverage offered is unaffordable relative to an employee s household income or does not provide minimum value. In lieu of monthly measuring to identify full-time employees, the IRS allows employers to adopt a Look Back Measurement Method Safe Harbor. Under this Safe Harbor, the City looks back at a defined period of time (e.g., 12 months) to determine each employee s hours of service over that entire period (i.e. measurement period), rather than calculating hours on a monthly basis. The City must meet specific legal restrictions relating to the timing and length of the periods that must be established under the Look Back Safe Harbor. If an employee averages at least 30 hours of service per week over the measurement period, that employee will be reported to the IRS as full time during a subsequent period of time called a stability period. Likewise, if an employee does not average at least 30 hours of service per week over the entire measurement period, the employee will not be reported to the IRS as full-time during a subsequent stability period. If the City does not adopt the Look Back Safe Harbor, then the IRS will impose a monthly hours of service calculation method to determine the identity of the City s fulltime employees. This means that if a seasonal employee averages 30 or more hours of service in any given month, the employee will be considered full-time. With the adoption of the Look Back Safe Harbor, a seasonal employee s hours of service are averaged over 12 months and the City will not be subject to a potential penalty during a single month where a seasonal employee averages 30 or more hours of service per week. Page 2 of 4

3 Meeting Date: June 17, 2014 The IRS also allows employers such as the City to adopt Affordability Safe Harbors to determine the affordability of the minimum value coverage that the City may, if applicable, offer to its full-time employees. Staff recommends that Council adopt the Safe Harbors pursuant to the attached Resolution and delegate authority to the City Manager, or his/her designee, to implement and amend an Administrative Policy that will describe the operation of these Safe Harbors in compliance with the ACA. Council should be aware that the Departments of Treasury, Labor, and Health and Human Services continue to issue new regulations and guidance interpreting and applying the ACA. The ACA continues to evolve with new legal interpretations and may change with the release of new regulations and guidance. FISCAL IMPACTS: Under the ACA, a large employer must offer affordable health coverage (that provides minimum value) to substantially all of its full-time employees, and must offer coverage to eligible dependent children, or face potential penalties. Two potential penalties may apply: (1) A No-Coverage Penalty: large employers failing to offer health insurance to at least 95% (70% in 2015) of their full-time employees (and eligible dependent children) during each calendar month may be assessed a penalty of $166.67/month (or $2,000/year) multiplied by the number of full-time employees, less 30 (80 in 2015). (2) An Unaffordability Penalty: If coverage is unaffordable as defined by the ACA, a large employer may be assessed $250/month (or $3,000/year) multiplied by the number of full-time employees that enroll in coverage through Covered California and receive a subsidy. The penalties may be adjusted each year, and are likely to grow with the increase of insurance costs. ALTERNATIVES: The Council can choose to not adopt the resolution. If Council does not adopt the resolution, the IRS will determine full-time hours of service on a month by month basis. Any employee, including part-time and seasonal employees who average 30 or more hours of service per month during any given month could trigger a penalty. Council can choose to defer taking action until a later date. However, the City will be subject to the ACA regulations regardless of whether the Safe Harbor provisions are adopted. Page 3 of 4

4 Meeting Date: June 17, 2014 Adoption of the Safe Harbors provides the City with flexibility to designate specified measurement periods (up to 12 months) to determine whether a worker is full-time under the ACA, as well as to assess the affordability of the City s coverage under the ACA. Legal Review By: Approved By: Tim W. Giles City Attorney Michelle Greene Interim City Manager ATTACHMENTS: 1. A Resolution of the City Council of the City of Goleta, California, Adopting Safe Harbors under the Patient Protection and Affordability Care Act. 2. City of Goleta Patient Protection and Affordable Care Act Administrative Policy. Page 4 of 4

5 Meeting Date: June 17, 2014 ATTACHMENT 1: A Resolution of the City Council of the City of Goleta, California, Adopting Safe Harbors under the Patient Protection and Affordability Care Act

6 RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF GOLETA, CALIFORNIA, ADOPTING SAFE HARBORS UNDER THE PATIENT PROTECTION AND AFFORDABILITY CARE ACT WHEREAS, The Patient Protection and Affordable Care Act ( ACA ) was enacted on March 23, 2010; and WHEREAS, ACA added Section 4980H Shared Responsibility for Employers Regarding Health Care Coverage (Section 4980H) and Section 6056 Certain Employers Required to Report on Health Insurance Coverage (Section 6056) to Title 26 of the United States Code, the Internal Revenue Code; and WHEREAS, Section 4980H imposes an assessable payment on an applicable large employer when (1) it fails to offer substantially all of its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage or offers coverage to substantially all of its full-time employees (and their dependents), but that coverage is either unaffordable or does not provide minimum value and (2) any full-time employee is certified to the employer as having received a subsidy for coverage through the exchange ( Assessable Payment ); and WHEREAS, Section 6056 requires an applicable large employer to file with the Internal Revenue Service an annual return for each full-time employee; and WHEREAS, the City of Goleta ( City ) is considered an applicable large employer because it employed an average of at least 50 full-time employees (including full-time equivalents) on business days during the preceding calendar year; and WHEREAS, the Department of Treasury issued final regulations regarding Section 4980H that permit the City to adopt the Look Back Measurement Method Safe Harbor in order to determine the status of an employee as full-time for purposes of reporting and calculating the Assessable Payment, if any (79 Federal Register 8544, 8586, February 12, 2014); and WHEREAS, the City intends to adopt the provisions of the Look Back Measurement Method Safe Harbor in order to determine the full-time status of its employees for reporting purposes and for purposes of the Assessable Payment; and WHEREAS, the Department of Treasury issued final regulations regarding Section 4980H that permit the City to use one of three affordability safe harbors for any reasonable category of employees as long as it is applied on a uniform

7 and consistent basis for all employees in the category (79 Federal Register 8544, , February 12, 2014); and WHEREAS, the City intends to use the affordability safe harbors as contemplated in the final regulations; and WHEREAS, the City intends to use good faith efforts to comply with legal requirements under ACA despite the fact that they have not yet been fully developed; and WHEREAS, the City expects that further guidance and regulations may be issued regarding ACA. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF GOLETA AS FOLLOWS: SECTION 1. The City hereby establishes the Look Back Measurement Method Safe Harbor with regard to all employees for the purpose of identifying full-time employees for calculation of the Assessable Payment and for IRS reporting purposes. SECTION 2. The City does not establish the Look Back Measurement Method Safe Harbor for the purpose of determining eligibility for an offer of medical coverage as to any employee. All represented employees eligibility for an offer of medical coverage shall be governed by the terms of any applicable memorandum of understanding. SECTION 3. The City hereby delegates authority to the City Manager, including his/her designee(s), to create an ACA Administrative Policy that establishes measurement, administrative and stability periods, governs the measurement and tracking of employee hours of service, and/or otherwise establishes procedures in accordance with Section 4980H to comply with the Look Back Measurement Method Safe Harbor. SECTION 4. For each reasonable category of employees, the City in its sole discretion, but on a uniform and consistent basis for all of the employees in a reasonable category, will apply one of the three affordability safe-harbors (i.e. Form W-2 Safe Harbor, Rate of Pay Safe Harbor, or Federal Poverty Line Safe Harbor) to determine the affordability of the minimum value coverage that it offers its full-time employees.

8 SECTION 5. The City hereby delegates authority to the City Manager, including his/her designee(s), to establish the Administrative Policy to comply with any of the three affordability safe harbors in accordance with and as permitted by Section 4980H. SECTION 6. The City Manager, including his/her designee(s), shall have authority to modify the Administrative Policy to ensure the City s compliance with Sections 4980H and 6056 of the Internal Revenue Code. SECTION 7. The City Clerk shall certify to the passage and adoption of this resolution and enter it into the book of original resolutions. PASSED, APPROVED AND ADOPTED this 17 th day of June, MICHAEL T. BENNETT, MAYOR ATTEST: APPROVED AS TO FORM: DEBORAH S. LOPEZ CITY CLERK TIM W. GILES CITY ATTORNEY

9 STATE OF CALIFORNIA ) COUNTY OF SANTA BARBARA ) CITY OF GOLETA ) ss. I, DEBORAH S. LOPEZ, City Clerk of the City of Goleta, California, DO HEREBY CERTIFY that the foregoing Resolution No. 14- was duly adopted by the City Council of the City of Goleta at a regular meeting held on the 17 th day of June, 2014 by the following vote of the Council: AYES: NOES: ABSENT: (SEAL) DEBORAH S. LOPEZ CITY CLERK

10 Meeting Date: June 17, 2014 ATTACHMENT 2: Patient Protection and Affordable Care Act Administrative Policy

11 CITY OF GOLETA PATIENT PROTECTION AND AFFORDABLE CARE ACT ADMINISTRATIVE POLICY PURPOSE: The City of Goleta ( City ) is considered a largee employer becausee it employs an averagee of at least 50 full-time employees (including full-time equivalents) on businesss days during the preceding calendar year for the purpose of the Shared Responsibility Provisions (Section 4980H to Title 26 of the United States Code, the Internal Revenue Code) of the Patient Protection and Affordable Care Act ( ACA ). The City is also considered a large employer for the purposes of Section 6056 to Title 26 of the United States Code and, therefore, is subject to the reporting requirements referenced therein. Starting January 1, 2015, the Internal Revenue Service ( IRS ) will assess a penalty on the City if: (1) it fails to offer substantially all of its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage or offers coverage to substantially all of its full-time or does not provide minimum value ; and, (2) any full-time employee receives a subsidy for coverage through the exchange ( Employer Mandate ). Starting in 2016, the IRS will require the City to report the identity of, number of, and employees (and their dependents), but that coverage is either unaffordable coverage offered to, full-time employees, subject to certain potential alternative reporting, or face penalties. This Administrative Policy ( Policy ) establishes the Look Back Measurement Method Safe Harbor ( Look Back Safe Harbor ) under ACA. The City establishes this Look Back Safe Harbor as to all employees for the purpose of identifying full-time employees for IRS reporting requirements related to the Employer Mandate. This Policy also establishes the Affordability Safe Harbors to determine affordability of coverage offered, if any, to full-time employees for the Employer Mandate and reporting requirements. Nothing in this Policy shall be construed as the City s determination for eligibility for health coverage as to any employee. Qualification for health coverage shall continue to 1

12 be governed by the terms of any applicable Personnel Rules, Collective Bargaining Agreement, Memorandum of Understanding or other applicable contract. Look Back Measurement Method Safe Harbor The City adopts the Look Back Safe Harbor in order to determine the Hours of Service of all employees. Hours of Service are measured during the specified measurement period. If the employee averages 30 Hours of Service per week over the course of the specified measurement period, the City will report to the IRS the employee s status as full-time under the ACA for months during the stability period associated with that measurement period, subject to the following rules. If the City reports an employee to the IRS as full-time for this purpose, the employee does not become full-time for any other purpose. 1. Existing Employees as of May 1, 2014: The City establishes the Look-Back Safe Harbor with regard to all individuals who are employees as of May 1, 2014: Transitional Measurement Period: May 1, 2014 through November 1, 2014 Administrative Period: November 2, 2014 through December 31, 2014 Stability Period: January 1, 2015 through December 31, Hours of Service Calculation: Hour(s) of Service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the City and each hour for which an employee is paid or entitled to payment for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. The term Hour(s) of Service does not include any hour of services performed as a bona fide volunteer. The City will calculate actual Hours of Service and hours for which payment is due for hourly employees. For non-hourly employees, the City will apply one of three methods on a reasonable and consistent basis: a. Calculate actual Hours of Service from records of hours worked and hours for which payment is made or due; b. Calculate Hours of Service using a days-worked equivalency (8 hours per day for each day employee is credited with an Hour of Service); or c. Calculate Hours of Service using a weeks-worked equivalency (40 hours per week for each week employee is credited with an Hour of Service). Bona fide Volunteer: The City is not required to determine Hours of Service for a bona fide volunteer. A bona fide volunteer is an individual whose only compensation from the City is in the form of (a) reimbursement (or reasonable allowance) for reasonable expenses 2

13 incurred in the performance of volunteer service; or (b) reasonable benefits and nominal fees, customarily paid by similar entities in connection with the performance of services by volunteers. 3. New Seasonal Employees: This refers to an employee who is hired into a position for which the customary annual employment is six months or less is a seasonal employee. The City will measure a new seasonal employee s Hours of Service using the initial measurement period indicated in section New Non-Seasonal Employees: On the start date of a new non-seasonal employee, the City will determine (based on the facts and circumstances at the employee s start date) whether the employee is reasonably expected to be a full-time employee. The City will look at the following factors to determine whether an employee is reasonably expected to be a full-time employee: Whether the employee is replacing a full-time employee; Extent to which Hours of Service of ongoing employees in the same or comparable positions have varied above and below an average of 30 Hours of Service per week during recent measurement periods; Whether the job was advertised or communicated to the employee as requiring an average of 30 or more Hours of Service per week; Whether the job was documented (through a contract or job description) as requiring an average of 30 or more Hours of Service per week. No single factor is determinative. 5. New Full-Time Employee: If the City determines (pursuant to section 4) that the employee is reasonably expected to average at least 30 Hours of Service per week, then the employee will be a full-time employee. The City will measure a new full-time employee s Hours of Service on a monthly basis until the employee becomes an ongoing employee. An ongoing employee is one who has been employed for an entire measurement period. 6. New Part-Time Employee: If the City determines (pursuant to section 4) that the employee is reasonably expected to average less than 30 Hours of Service per week during the initial measurement period, then the employee will be a part-time employee. The City will measure a new part-time employee s Hours of Service using the initial measurement period indicated in paragraph New Variable Hour Employee: If the City cannot determine (pursuant to section 4) whether the employee is reasonably expected to be employed on average at least 30 Hours of Service per week during the initial measurement period because the employee s hours are variable or uncertain, then the employee will be a variable hour employee. The City may not take into account the likelihood that the employee may terminate employment before the end of the initial measurement period. The City will 3

14 measure a new variable hour employee s Hours of Service using the initial measurement period indicated in section Ongoing Employees: An ongoing employee is an employee who has been employed for at least one complete standard measurement period or one complete transitional measurement period. The City establishes the Look-Back Safe Harbor with regard to all ongoing employees as follows: Standard Measurement Period: Administrative period: Stability period: November 2 through November 1 (starting November 2, 2014 and continuing each year thereafter) November 2 through December 31 (starting November 2, 2015 and continuing each year thereafter) January 1 through December 31 (starting January 1, 2016 and continuing each year thereafter) The City will use these periods only for reporting purposes and, if necessary, determining potential penalties. The City will not use these periods to determine whether an employee qualifies for an offer of coverage. If an ongoing employee s employment status changes (from full time to less than full time or vice versa) before the end of a stability period, the change in status will not affect the classification of that employee s status for the remaining portion of the stability period. 9. New Variable Hour, New Seasonal, and New Part-Time Employees: The City establishes the following periods for new variable hour, new seasonal, and new part-time employees: Initial Measurement Period: Administrative period: Stability period: Twelve months (beginning on the first day of the month following the new employee s start date unless the employee starts on the first day of the month, in which case it begins on the start date). One month following the initial measurement period. Twelve months following the end of the administrative period unless the new variable hour employee does not measure as a full-time employee during the initial measurement period, then the stability period associated with the initial measurement period must not exceed the remainder of the standard 4

15 measurement period (plus any associated administrative period). 10. New Variable Hour, Seasonal, or Part-Time Employee s Change in Status During Initial Measurement Period: If a new variable hour, seasonal or part-time employee s position changes during the Initial Measurement Period, and had the employee started his or her employment in that new position, the City would have reasonably expected that new employee to average at least 30 Hours of Service per week, then for purposes of identifying a full-time employee for reporting purposes only, an employee will be considered a full-time employee on the earlier of (1) the first day of the fourth full calendar month following the change in employment status, or (2) the first day of the first month following the end of that employee s initial measurement period (including any associated administrative period) if the employee averaged 30 or more Hours of Service per week during the initial measurement period or earlier if required by law, the Personnel Rules, an applicable Memorandum of Understanding, or policy or procedure. 11. Transitioning from New to Ongoing Employee: The City will measure the Hours of Service of a new variable hour, seasonal or part-time employee during the first complete standard measurement period for which he or she is employed. This means that a new variable hour, seasonal or part-time employee s Hours of Service will be measured both under an initial measurement period and, at the same time, under the overlapping standard measurement period. a. If an employee s Hours of Service measure as full-time during the initial measurement period, he/she will retain full-time status for the entire associated stability period (even if the employee does not qualify as full-time during the standard measurement period). b. If an employee s Hours of Service do not measure as full-time during the initial measurement period, but do measure as full-time during the standard measurement period, the employee must be treated as full-time during the stability period associated with the standard measurement period (even if that stability period starts before the end of the stability period associated with the initial measurement period). 12. Hours Based On Payroll Periods: The City may calculate hours based on payroll periods. It has two options for doing so. The City may exclude the entire payroll period that contains November 2 (the first day of the Standard Measurement Period), as long as it includes the entire payroll period that contains November 1 (the last day of the Standard Measurement Period). Alternatively, the City may exclude the entire payroll period that contains November 1 (the last day of the Standard Measurement Period), as long as it includes the entire payroll period that contains November 2 (the first day of the Standard Measurement Period). During 2014, the City may exclude the entire payroll period that contains May 1 (the first day of the Transitional Measurement Period), as long as it includes the entire payroll period that contains November 1 (the last day of the Transitional Measurement Period). Alternatively, the City may exclude the entire payroll 5

16 period that contains November 1 (the last day of the Transitional Measurement Period), as long as it includes the entire payroll period that contains May 1 (the first day of the Transitional Measurement Period). 13. Breaks in Service: When an employee experiences a break in service without providing at least one Hour of Service, the employee will retain the status the employee had previously with respect to any stability period, except that an employee will be treated as a new employee: a. If the employee resumes employment after a period of at least 13 consecutive weeks with less than an Hour of Service; or b. If the employee s period of no service (measured in weeks) is at least four consecutive weeks long and exceeds the number of weeks of that employee s period of employment immediately preceding the period of no service (after application of averaging Special Unpaid Leave as set forth in section 14). 14. Special Unpaid Leave: Special Unpaid Leave is defined only as unpaid leave under the Family and Medical Leave Act of 1993, unpaid leave under the Uniformed Services Employment and Reemployment Rights Act of 1994, or unpaid leave on account of jury duty. When an employee takes Special Unpaid Leave, the City will determine the weekly average of Hours of Service by the employee for that portion of the measurement period that is not part of the Special Unpaid Leave ( Average Weekly Hours of Service ). The City will then determine the average Hours of Service for the entire measurement period using one of the following two methods: a. Exclude the period of Special Unpaid Leave and apply the Average Weekly Hours of Service over the entire measurement period; or b. Credit the Average Weekly Hours of Service to the period of Special Unpaid Leave. Affordability Safe Harbors The City intends to apply the Rate of Pay Safe Harbor to determine the affordability of the minimum essential coverage that it offers its full-time employees. The City in its sole discretion may also apply the Form W-2 Safe Harbor or Federal Poverty Line Safe Harbor. These affordability safe harbors will be applied on a uniform and consistent basis for all full time employees in a reasonable category. 1. Rate of Pay Safe Harbor a. The City measures whether the employee s required premium contribution for the calendar month to the lowest cost self-only coverage that provides minimum value exceeds 9.5 percent of the monthly wage. 6

17 b. For hourly employees, the monthly wage is equal to 130 hours multiplied by the lower of the employee s hourly rate of pay as of the first day of the coverage period or the employee s lowest hourly rate of pay during the calendar month. c. For salaried employees, the monthly wage is the monthly salary as of the first day of the coverage period. However, if the monthly salary is reduced, including due to a reduction in work hours, the safe harbor is not available. d. The coverage offered by the City will be deemed affordable if the employee s monthly premium contribution is equal to or less than 9.5 percent of the monthly wage. 2. Form W-2 Safe Harbor a. The City measures whether the employee s required premium contribution for the full calendar year for the lowest cost self-only coverage that provides minimum value exceeds 9.5 percent of the Form W-2 wages (as reported in Box 1) for the employee for the calendar year in which coverage is offered. b. For an employee who is not offered coverage for an entire calendar year, the City must adjust that employee s Form W-2 wages to reflect the period for which coverage was offered. To adjust wages, the Form W-2 wages are multiplied by a fraction equal to the number of calendar months the City offered coverage over the number of calendar months in the period of employment during the calendar year. c. The coverage offered by the City will be deemed affordable if the employee s annual premium contribution is equal to or less than 9.5% of the employee s Form W-2 wages as reported in Box 1 (or as adjusted, for an employee who is not offered coverage or an entire calendar year). 3. Federal Poverty Line Safe Harbor a. The City measures whether the employee s required premium contribution for the calendar month for the lowest cost self-only coverage that provides minimum value exceeds 9.5 percent of an amount determined by dividing the Federal Poverty Line ( FPL ) for a single individual for the applicable calendar year by twelve. b. The City will use the FPL in effect within six months before the first day of the plan year. 7

18 c. The coverage offered by the City will be deemed affordable if the employee s monthly premium contribution is equal to or less than 9.5 percent of the monthly FPL for a single individual for the applicable calendar year. The ACA continues to evolve with new legal interpretations and may change with the release of new regulations and guidance, therefore, this Policy is subject to change by Council if the law should change. 8