Joint Labor-Management Benefits Committee COMMITTEE REPORT 16-03

Joint Labor-Management Benefits Committee COMMITTEE REPORT 16-03 Date: January 14, 2016 To: From: Subject: Joint Labor-Management Benefits Committee Staff Affordable Care Act 2016 Tax Reporting, Annual Eligibility Reporting and Excise Tax Delay JOINT LABOR-MANAGEMENT BENEFITS COMMITTEE MEMBERS: Management Wendy G. Macy, Chairperson June Gibson Tony Royster Matthew Rudnick Miguel Santana Employee Organizations Cheryl Parisi, Vice-Chairperson Paul Bechely Chris Hannan David Sanders Gregory West RECOMMENDATION: That the Joint Labor-Management Benefits Committee (JLMBC) receive and file this report updating the impact of the Affordable Care Act (ACA) on the civilian Flex Benefits Program including a review of 2015 tax reporting, annual eligibility reporting for the ACA and the delay of the excise tax for high-cost employer sponsored medical plans. SUMMARY At the JLMBC s January 8, 2015, April 2, 2015 and August 6, 2015 meetings, staff provided reports regarding the Affordable Care Act (ACA) Employer Shared Responsibility (ESR), the ACA s Excise Tax, and efforts made by the Personnel Department to comply with ESR requirements and new ACA tax reporting requirements. This report will provide an update regarding efforts to comply with ACA tax reporting and employees identified as Full-Time under ACA and not presently eligible for City Health Subsidy based on the annual ACA eligibility review. DISCUSSION A. Affordable Care Act Tax-Reporting Update Two forms of tax reporting are required under the Affordable Care Act (ACA): Employer Provided Health Insurance Offer & Coverage (Forms 1094-C and 1095-C); and Minimum Essential Coverage (Forms 1094-B and 1095-B) The forms became mandatory with the 2015 tax year. For the Civilian Flex population, the City will be reporting for the Employer Provided Health Insurance Offer & Coverage (Forms 1094-C/1095-C). The health insurance plans offered through the Flex Program (Kaiser HMO and Blue Shield plans), because they are fully insured, will provide reporting for the Minimum Essential Coverage (Forms 1094-B/1095-B). 1

Reporting Deadline Extension - On December 28, 2015 the Internal Revenue Service issued Notice 2016-4 extending the due dates for the 2015 ACA tax-reporting requirements for 2015 filings. The notice extends the due date (1) for furnishing to individuals the 2015 Forms 1095-B and 1095-C from February 1, 2016, to March 31, 2016, and (2) for filing with IRS the 2015 transmittal Forms 1094-B and 1094-C from February 29, 2016, to May 31, 2016, if not filing electronically, and from March 31, 2016, to June 30, 2016 if filing electronically. The IRS determined that some employers and insurers needed additional time to adapt and implement systems to gather, analyze and report this information. Notwithstanding the extensions provided, the IRS is encouraging employers to furnish statements and file the information returns as soon as they are ready. Therefore, staff is proceeding with producing the returns by the original due date, February 1, 2016. In order to prevent delays in 2015 individual tax filings, the IRS indicated that the new ACA tax forms (Forms 1094-B and 1095-C) are not required to be submitted when the individual files their 2015 taxes; however, the ACA tax forms should be kept on file for record keeping purposes. Staff has been working with Mercer, the third-party-administrator and an external tax reporting firm, Benelogic, to generate the forms 1095-C. Key project milestones are listed below: Task Timing Mercer provides first test file to Benelogic November 13, 2016 Benelogic provides file feedback/file assessment November 30, 2015 Mercer provides second test file to Benelogic December 18, 2016 Benelogic provides second level feedback/file assessment Mercer provides 2015 annual ESR tax reporting file to Benelogic December 29, 2015 January 12, 2016 Benelogic loads ESR annual tax reporting file January 13, 2016 Benelogic generates 1095-C Forms January 15, 2016 Identify and resolve rejections or other errors January 15 18, 2016 Review 1095-C forms January 18-19, 2016 Approve 1095-C forms (data, totals, print file) January 19, 2016 Mail fulfillment January 20 31, 2016 Mail stamp forms February 1, 2016 2

Staff is working with Mercer Communication Consulting on developing and issuing the following communications to inform employees regarding the new ACA tax forms (see attached samples): Communication Timing ACA Tax Reporting Article posted on January 1, 2016 MyFlexla.com website Postcard informing employees about new ACA January 19, 2016 tax forms Frequently asked questions post on MyFlex February 1, 2016 Form 1095-C statement February 1, 2016 1095-C Statement insert February 1, 2016 Citywide Email February 1, 2016 B. Annual ACA Qualified Employees Eligibility Review The Employer Shared Responsibility (ESR) provisions of the ACA require employers with 50 or more full-time employees to offer them affordable health care coverage with a minimum value or potentially face penalties. Under the ACA, a full-time employee is defined as any employee working, on average, 30 hours per week (1,560 hours per year) over the applicable look-back period. The effective date of the ESR mandate is January 1, 2015. The City s existing health insurance benefits offered to full-time and half-time employees through the City s Flex Benefits Program exceed the minimum value and affordability requirements mandated by ACA. However, due to differences in eligibility requirements between the City s Flex Program and the ACA, some employees may now qualify for coverage under the ACA who were not previously eligible for City Flex Benefits under the current program. Employers are responsible for determining whether employees qualify for ACA benefits using the ACA definition of full-time employees. Under ACA, a full-time employee is defined as any employee working, on average, 30 hours per week (1,560 hours per year). To simplify administration, the ACA regulations introduced an optional lookback and stability period safe harbor method that allows an employer to determine its employees ACA full-time status during a period of time so that it can apply the ESR mandate to a future period of time. 3

A look-back period is a period of time designated by the employer over which the employer reviews the number of hours worked by its employees to determine how many met the 30 hour per week full-time employee definition. A stability period is a period of time during which an employee who has been classified as a full-time employee based on having met the 30 hour per week threshold during the look-back measurement period is eligible for coverage. The City has established a 12-month look-back period to determine ACA eligibility and a 12-month stability period during which a full-time employee is eligible for coverage. If an employee is classified as full-time under the ACA in the prior look-back period, the employer is required to offer the employee affordable health care coverage with a minimum value for the entire duration of the subsequent stability period or potentially face penalties. The look-back and stability period time frame will vary for current employees versus new hires. The 12-month look-back dates for current City employees are indicated below: Current Employees Look-back Period: November 1, 2014 October 31, 2015 Current Employees Stability Period: January 1, 2016 December 31, 2016 C. Stability Period Offering Affordable Care to ACA Qualified Employees Employers must offer affordable health care coverage with a minimum value or potentially pay a fee (penalties) if a full-time employee goes to a public exchange and receives a subsidy. Once an employee has been determined to meet the ACA fulltime definition, that employee will qualify for affordable health coverage during the entire stability period with some exceptions. Under ESR the stability period must be the same duration as the look back measurement period. Since the City has a 12- month look back period the corresponding stability period will be a 12-month period as well. If an employer fails to offer affordable coverage to ACA qualified employees, the employer may face a monthly penalty of $260 ($3,120 annually) per employee that seeks and is granted subsidized coverage through a healthcare exchange. The State of California s Covered California is one such exchange that a California resident can use to find affordable care and receive a subsidy. To receive subsidized healthcare through an exchange, an individual must apply for and be granted a federal premium tax credit health insurance subsidy (Federal subsidy). A Federal subsidy is financial assistance that helps individuals purchase health insurance through the exchange. The Federal subsidy amount is applied toward premium payments in the form of an advanced payment to the insurance company. Whether an individual qualifies for a Federal subsidy depends on income, family size and how much insurance costs where they live. Individuals making between 100 and 400 percent of the 4

federal poverty level can qualify for the Federal subsidy. In 2014, the maximum annual income for a single-individual household to qualify for a Federal subsidy is $46,680. Employers may also be subject to a penalty if they do not offer an ACA qualified plan to substantially all of their entire ACA full-time workforce. Substantially all is initially defined in 2015 as 70% of the employee population, but will be defined as 95% of the full-time employee population in 2016 and beyond. Staff s preliminary estimates are that the City is presently meeting both the 70% and 95% thresholds; more definitive data will be available once combined results for the City s entire workforce are made available in January 2016. There are two potential situations involving the City s workforce where ACA coverage applies and where the City would not be offering affordable coverage to an employee as follows: (1) Employees Identified as Full-Time Under ACA and Not Eligible for City Health Subsidy As indicated above, those employees that currently receive City sponsored health care coverage satisfy the City s requirement to offer ACA health coverage. In certain situations employees who average more than 30 hours per week during the look-back period may not be eligible for a City health subsidy. These types of cases typically involve intermittent employees that meet the ACA full-time hour threshold but do not qualify for a health subsidy under current Administrative Code or MOU provisions. In these cases the City may be subject to paying a penalty if the employee seeks coverage on an exchange and is granted a subsidy. (2) Employees on Leave Without Health Subsidy Employees who are off work for various reasons fall into one of two categories: those eligible for a City subsidy under existing subsidy continuation programs, or those ineligible and subject to paying the full health premium while on leave which staff refers to as Direct Billing. Employees who are on leaves of various types during their stability period and for which present City policies do not provide for payment of a City subsidy for health coverage would not receive an offer of affordable care from the City. In these cases the City may also be subject to paying a penalty if the employee seeks coverage on an exchange and is granted a subsidy. 5

C. Authority to Offer ACA Health Subsidy to Address Gaps Risks of incurring penalties can be mitigated if the City offers employees a subsidy meeting affordability requirements for employee-only coverage. Currently, an ACA subsidy has only been established for non-represented employees. Authority to provide an ACA health plan benefit to eligible employees is required in order to offer coverage to employees. For non-represented employees, the Kaiser single-party subsidy has been established as the ACA benefit. Absent or until execution of this or similar provision, represented City employees who are determined to be ACA qualified but for whom no authority exists to pay an ACA subsidy (and who are not otherwise eligible for health insurance under existing policies/agreements) would not be offered medical benefits. When the ACA subsidy can be offered thus depends upon the execution of any form of authority for offering the subsidy, the timing of the execution, and the operational requirements to administer the benefit through Mercer TPA. D. Employer Shared Responsibility (ESR) Tracking Tool Annual Look-back Period Results The City worked with Mercer TPA and the City Controller to develop a systems-based payroll analytic program called the ESR Tracking Tool, that aggregates hours of service data generated by the City s payroll system to identify those employees who worked more than 30 hours per week in the look-back period and who are not presently being offered health coverage. In December, 2015 Mercer TPA provided the results of the ESR Tool s annual lookback period review. The ESR tool analyzed the City s workforce data from Nov. 1 Oct. 31 look-back in order to identify the ACA-eligible population for the one-year stability period beginning January 1, 2016. The results identified 19 ACA qualified employees presently not being offered City medical benefits that would qualify for medical insurance under the ACA. Out of the 19 ACA qualified employees, only one employee is a non-represented employee, for whom there exists the authority to offer the ACA subsidy. Benefits staff will be working with the affected labor organizations and departments for these individuals to identify the specific circumstances involved and resolve issues as necessary. E. Delay of ACA Excise Tax on Certain Medical Plans On December 18, 2015 President Obama signed into law a large spending and tax bill that contained provisions postponing the implementation of two Affordable Care Act (ACA) taxes: (1) the 40% excise tax on high-cost health care plans (often referred to as the Excise tax ): and (2) the 2.3% tax on advanced medical devices. Along with this delay, the Excise tax will now be deductible by the payer. The bill further instructs the Controller General to study the underlying age and gender adjustments to the tax. 6

As previously reported, the Excise tax imposes a 40% excise tax on high-cost employer sponsored group health coverage that exceeds annual limitations or premium thresholds. The 2018 thresholds for triggering the excise tax were previously set at $10,200 annually ($850 per month) for individual coverage and $27,500 annually ($2,291.66 per month) for family coverage. The annual premium cost threshold will be indexed to inflation for future years and adjusted by the amount of the Consumer Price Index for All Urban Consumers (CPI-U) annually. Given the delay, it is anticipated that the threshold amounts will be updated for 2020. The 40% excise tax is imposed on the excess premium balance above the annual premium cost threshold. For example, if the annual premium for individual PPO coverage is $11,000, the excise tax will be calculated by subtracting the excise tax threshold $10,200 from the annual premium amount $11,000. The excess balance amount $800 is taxed by 40%. In this scenario, the excise tax amount is approximately $320. Costs subject to the Excise tax include total premiums paid by both employers and employees for employer sponsored group health coverage. In addition, the Excise tax also applies to other employer sponsored benefits such as Health Care Flexible Spending Accounts (FSAs), Health Care Savings Accounts (HSAs), Health Care Reimbursement Arrangements (HRAs), and on-site medical clinics. Nearly all employers are subject to the Excise tax which applies to fully insured or selfinsured health plans including government, retiree, union and multiemployer plans. The Excise tax will be calculated by employers, but assessed on insurers for fully-insured plans. It is likely that the insurance companies will pass along the costs by increasing the premium rates. Submitted by: Samantha Hanzy Reviewed by Ana Chavez Approved by: Steven Montagna 7

City of Los Angeles Employee Benefits Division 200 N. Spring Street, Room 867 Los Angeles, CA 90012 Presorted First Class Mail U.S. POSTAGE PAID Los Angeles CA Permit #12932 Be on the lookout for a new tax form

Coming Soon: New Tax Forms Regarding Your City Medical Coverage Under the Affordable Care Act (ACA), most Americans are required to have health insurance or pay a tax penalty. Beginning this year, employers and medical insurance carriers are required to send out new tax forms to assist in completing 2015 tax returns. In early February, all full-time employees will receive Form 1095-C from the City. This form includes information regarding when you were eligible for City coverage and the cost of that coverage. You may also receive a separate Form 1095-B from your medical insurance carrier. This form includes information on whether your coverage met Federal government minimum essential value requirements. For more information on the ACA, please see the City s Frequently Asked Questions (FAQs) at http://per.lacity.org/bens/index.html; go to the IRS ACA website at https://www.irs.gov/affordable-care-act; and/or consult a tax advisor. Save This Form with Your Tax Records You will need Form 1095-C and any insurance carrier forms to complete your 2015 tax return. You are not required to file Form 1095-C with your tax return, but a copy will be sent to the IRS and you should save your copy with your tax records.

Health Care Reform FAQs 1. How does the Affordable Care Act (ACA) impact me? The ACA is complex and has many objectives. Put simply, the ACA was created to improve accessibility of healthcare services. Under the ACA, most individuals are required to have medical coverage or pay a penalty. Most people who have employer-provided coverage such as most City of Los Angeles employees will meet ACA requirements. People who do not have access to employer-provided coverage can use the healthcare marketplace (exchanges) to buy individual coverage or get coverage through other sources such as Medicare or Medi-Cal. 2. What is the individual mandate? The individual mandate states that most people must have medical coverage meeting certain requirements or pay a tax penalty. 3. If I have medical coverage through the City, do I fulfill the individual mandate? Yes, in most instances, you will meet the individual mandate requirement for any month that you are covered under the City s medical plans. 4. Is anyone exempt from the individual mandate? Some people may be exempt from having to buy medical coverage or pay a penalty. These include people with very low incomes and people who would have to pay more than 8% of their household income for medical coverage. 5. Do I have to buy other coverage, like dental, life or disability insurance, under the ACA? No, only medical coverage is required. Most City employees are eligible for other benefits beyond health insurance. However, you are not required to have these benefits to avoid the individual mandate penalty. 6. Do I have to buy coverage through the City to avoid the individual mandate penalty if I m covered under my spouse s plan? No, as long as your medical coverage through your spouse meets certain ACA requirements. All that is required is having medical coverage. It doesn t have to be through your employer. 7. I am enrolled in a City health plan. How can I show that I have coverage to avoid the tax penalty? You will receive new tax forms called the 1095-B and 1095-C from the City and/or your medical insurance carrier. These new forms will be used to verify on your tax return that you and your dependents have coverage that qualifies for minimum health insurance coverage, as required by the ACA. 8. What information will be included on the new tax forms I receive in 2016 as part of ACA tax reporting requirements? If you are an employee receiving health coverage from the City of Los Angeles, you will receive a copy of Form 1095-C from the City. This form includes information about: which months during the year you were eligible for coverage and, the cost of the cheapest monthly premium you could have paid under the available plans.

In addition, if you are enrolled in a fully-insured health plan, you will receive a Form 1095-B from your medical insurance carrier. This form will include information about your specific coverage, your coverage period, and who from your family was covered. Forms for 2015 coverage will be mailed to your home address in late January 2016, and copies will also be sent to the IRS. What it means for you: The 1095-B form will be used to verify on your tax returns that you and your dependents have coverage that qualifies for minimum health insurance coverage as required by the ACA. If you did not have healthcare coverage for any part of the year you may have to pay a tax penalty. The check boxes in Part IV of Form 1095-B will help you calculate the penalty that applies, if any. Be sure to retain the forms with your other important tax records. You will need some of the information on the forms in order to file your personal income tax return on Form 1040. The Internal Revenue Service (IRS) has indicated that you are not required to attach Form 1095-C or 1095-B to your personal income tax return. 9. What if my 1095-B shows that I did not have coverage for all of 2015? Will I owe a tax penalty? When you file your 2015 taxes, you will be asked on your federal tax form if you and your dependents had coverage that meets ACA requirements for the entire year. If you did not have Flex coverage for all of 2015 and you did not have other coverage that meets the requirements you may owe a tax penalty. Please consult your tax advisor. 10. How many ACA related tax forms will I receive? In addition to forms issued by the City, you may receive additional forms if you had multiple employers during the calendar year and those other employers employ an average of at least 50 full-time employees, or if you were covered by more than one insurance carrier plan. 11. I declined City coverage, and I lost my other health coverage. Can I enroll in City coverage now to avoid the tax penalty? You can enroll during the year if you have a family status change in accordance with Section 125 of the Internal Revenue Code and applicable plan sponsor rules. Examples of family status changes include getting married or divorced, adding an eligible dependent, or losing other health coverage. 12. I did not provide documentation as proof of my dependent s eligibility, and my dependent s coverage was cancelled. How can I have my dependent s coverage reinstated so I will not owe any tax penalty? If your dependent s coverage was cancelled for any reason, you cannot reenroll your dependent until the next open enrollment unless you have an eligible family status change during the year. Your dependent must meet eligibility requirements in the future to be reenrolled, and coverage will not be retroactive. You will be responsible for any tax penalty you incur for gaps in coverage. Keep in mind, if you have family members who lose City coverage, those family members may qualify for coverage with the public healthcare marketplace. Go to the California marketplace (Covered California) at coveredca.com or call 1-888-975-1142 for more information. 13. I am a Civilian employee currently receiving Flex Benefits medical coverage under Direct Billing, where I pay the full cost of coverage because I was off the payroll or my scheduled hours dropped below the requirements for Flex eligibility. Does this coverage allow me to avoid the tax penalty? If you are covered under Benefits Direct Billing, you must pay your medical premiums by the due date on your billing notice to keep your medical coverage active. You will meet the individual mandate requirement and avoid the tax penalty for any months during which City medical coverage is active. It is important to understand that if you fail to pay your medical premiums by the due date on your billing notice, your medical coverage will be cancelled and cannot be reinstated retroactively. 2

You can continue your medical coverage under Benefits Direct Billing by paying the full cost shown on your billing notice for up to six months. When any coverage you have through Benefits Direct Billing ends, you will need to seek other coverage to avoid the tax penalty if you are not eligible for a City medical plan. You may want to consider coverage through the public health insurance marketplace. Go to coveredca.com to learn more. 14. Why does the City need to collect Social Security numbers (SSN) for my dependents? The City and/or the carriers for the Flex medical programs are required to collect SSNs for dependents to fulfill the reporting obligations under the ACA. Be aware that your medical plan insurance carrier may also ask for your dependent SSN under the ACA. 15. What is the public health insurance marketplace (exchange) created by the ACA? A health insurance marketplace is an online public shopping site where individuals, families, and small business owners can shop for plans. Each state offers a marketplace that offers quality medical insurance options. The California marketplace is called Covered California. Go to coveredca.com to learn more. 16. Who can buy coverage through the public health insurance marketplace? Almost everyone can buy coverage through the health insurance marketplace. If you are eligible for City medical coverage, however, the marketplace may not be the most cost-effective choice, especially since the City pays a large part of the premium for most City plans. 17. Is it true I can get help paying for insurance through the health insurance marketplace? Some people will qualify for subsidies to help them buy medical insurance through the public marketplace. If you and your dependents are eligible for City medical coverage, you most likely will not eligible for a government subsidy. If you are not eligible for City medical coverage and you don t have an affordable, minimum value coverage option available through another source, you may be eligible for a government subsidy if your household income falls between 100% and 400% of the federal poverty level, and you are not eligible for Medicaid. 3