Affordable Care Act: what tax directors need to know 14 May 2013
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Circular 230 disclaimer Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code (IRC) or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. 3
Today's presenters Jodi Bahl Colleen Driscoll Ali Master Frances Marbury John Heithaus 4
Agenda Overview of the key tax provisions of the Affordable Care Act (ACA) Tax directors and ACA implementation State health insurance exchanges Employer reporting requirements Strategic approaches Best practices: a holistic approach to ACA implementation Q&A (throughout) 5
Overview of the key tax provisions of the Affordable Care Act (ACA)
The time to act is now US Supreme Court held the major coverage provisions of the ACA to be constitutional. Re-election of President Obama means implementation of the ACA will move forward. Enrollment in the health care insurance Exchanges begins October 2013. Major coverage provisions become effective on 1 January 2014. New regulatory guidance on ACA employer coverage requirements has been released. Guidance affects benefit design, coverage and compliance costs, and tax risks, and presents planning opportunities. Looming deadlines and new regulatory guidance mean companies need to test their ACA compliance strategies and consider potential tax and other liabilities. 7
Major coverage requirements and expansion provisions affecting employers Effective in 2014, the ACA expands coverage through: Individual mandate: requires all Americans, with some exceptions, to maintain a minimum level of health coverage or face a tax Health care insurance exchanges and premium tax credits (PTCs): creates health care insurance exchanges and provides PTCs to assist eligible individuals with the purchase of coverage Medicaid expansion: allows states to expand medicaid for all individuals up to 133% of federal poverty level (FPL) Employer mandate: requires employers with 50 or more full-time equivalents (FTEs) to offer coverage to full-time employees (and their dependents) or pay an excise tax if any full-time employee obtains exchange coverage and a PTC 8
Calculation of coverage excise tax Tax for no coverage IRC 4980H(a) Tax for unaffordable coverage IRC 4980H(b) A large employer member that does not offer coverage to its full-time employees and their dependents may face a tax of: $2,000 x the total number of full-time employees if at least one FTE is receiving a premium assistance tax credit A large employer member that offers coverage to their full-time employees and their dependents, but the coverage is unaffordable to certain full-time employees or does not provide minimum value may face a tax of: The lesser of $3,000 x the number of FTEs receiving a premium assistance tax credit or $2,000 x the total number of FTEs Employers who do not offer coverage may subtract the first 30 workers when calculating their liability for taxes under IRC 4980H(a). Taxes under IRC 4980H(b) are capped at an amount not to exceed an employer s potential tax under IRC 4980H(a). 9
Critical elements to the coverage excise tax determination A large employer that is a single entity or a large employer member must assess whether they will be subject to an IRC 4980H excise tax by addressing: Who is a full-time employee? (defined as 30 hours per week per month) Is the employerprovided health care plan affordable? Does the employer-provided health care plan meet the minimum value requirement? What portion of the employee population is eligible for the premium tax credit? Is the employee reasonably expected to work full-time or part-time? Is the employee a variable-hour or seasonal employee? Determination of full-time status may be based on a look-back measurement period of up to 12 months. A plan is affordable if the employee s cost for self-only coverage does not exceed 9.5% of the employee s household income. Internal Revenue Service (IRS) guidance provides employers with a safe harbor to test affordability based on W-2 wages, rate of pay and federal poverty levels. A plan must pay for at least 60% of the cost of benefits (actuarial value test). An employee with household income between 100% and 400% of federal poverty level is eligible for the PTC. An employee who is not eligible for other minimum essential coverage (e.g., Medicaid, Medicare, employer-sponsored coverage) is eligible for the PTC. 10
Key dates for employers IRC 6051 W2 reporting Notice to current employees under FLSA 18B Open enrollment in exchanges begins Major coverage expansion takes effect Mandatory reporting under IRC 6055 and IRC 6056 31 January 2013 TBD 2013 1 October 2013 1 January 2014 31 January 2015 Applications for Exchange credits, subsidies 11
Tax directors and ACA implementation What are some of the key areas where tax should be involved in ACA implementation? What are the tax reporting requirements under the ACA? What is the anticipated IRS assessment and appeals process? 12
About the state exchange process: premium tax credits and appeals
State health insurance exchanges When are the state health insurance exchanges scheduled to open? Will they be ready in time? What is the process for the state health insurance exchange notices to employers, and how do the notices affect potential excise tax in 2015? 14
Health insurance marketplace by state State-run marketplace Federal marketplace State-federal partnership marketplace WA CA OR NV ID UT MT WY CO ND SD NE KS MN IA MO WI IL MI OH IN KY WV NY PA MD VA VT NH CT NJ DE DC ME R I MA AZ NM OK AR TN NC SC AK TX LA MS AL GA HI FL 15
Exchange notification process overview State marketplace Employer Employee applies for exchange coverage and APTC Exchange determines eligibility status Exchange notifies employer of which employees are eligible for APTC Employer determines validity of employee s APTC eligibility Initiates appeals process if determines employee is not eligible for APTC 16
Exchange appeal process: appeal by the employer Employer has 90 days from issuance of the notice to appeal Employer is permitted to appeal a determination and demonstrate that: Employer does not provide minimum essential coverage; or Employer does provide coverage that is affordable and meets the minimum value requirements (45 C.F.R 155.555(a)) Employer may provide the appeals entity, as part of the affordability determination, with information including: Evidence of employee s offer of employer-provided health care coverage Evidence of employee s required share of the lowest cost of self-only coverage option Information regarding employees earnings as additional evidence of employee s household income As part of the IRS audit and excise tax assessment process, employers are expected to be able to present additional information based on wage, hours and coverage data including whether: Employee is treated as a full-time employee Employee was enrolled in the employer-sponsored plan or other minimum essential coverage Employee eligible for Medicaid eligibility or other government plan Evaluate whether EE was offered coverage and rejected the offer 17
Burdens on the employer Company questions How do we collect, process and respond to exchange notices in a timely manner? What is the process to respond to the exchange notices and appeal to the appeal entity? How will we determine that the exchange determination of employee s eligibility is valid? (which are the right cases to appeal?) How will we be ready to appeal the notices within the 90-day window? Is the tax department able to handle these assessments? 18
Employer reporting requirements
Overview of reports due 31 January 2015 6055 report 6056 report Applies to: Providers or employers that sponsor self-insured plans Contains: Employer as well as employee-specific data such as name, address, TIN for covered employees Plan-specific data including costs, number of employees participating, time offered When: Beginning 31 January 2015 Applies to: Large employers subject to ACA Contains: Employer identifying information Identifying information for all full-time employees Plan data including employer/employee cost, time offered, etc. Certification When Beginning 31 January 2015 20
Data elements required Payroll system Human resource system Requirements: Employer information Certification of coverage offering to FT-employees Length of waiting period Months coverage was available Lowest monthly premium Employer s share of the total allowed cost Number of FT employees enrolled each month Name, address, and TIN for all enrolled employees during the year Health coverage system Time Management system 21
Reporting burdens on employer Company questions Which reports am I subject to? Do I have the systems capable of monitoring and accurately running the requisite reports by the compliance deadlines? Can I monitor this data on a monthly basis? Am I prepared to also report the information to the employees? How do I test the results to verify the accuracy of the reports coming out of my system? 22
Additional employer taxes and fees Employers are subject to the following additional taxes and fees: Excise tax equal to $100 per day, per individual to whom the failure to comply with ACA and HIPAA requirements relates Beginning in 2013, additional 0.9% hospital insurance tax imposed on wages and self-employment income in excess of $250,000 for joint returns, $125,000 for married taxpayers filing a separate return, $200,000 in all other cases Beginning in 2013, limitation on the annual tax deduction to $500,000 for compensation paid by a covered health insurance provider to any individual providing services Plan years ending after 30 September 2012, per capita fee that funds the Patient-Centered Outcome Research Institute $1 per covered life during fiscal year 2013 and $2 thereafter through 2019 applies to both insured and employer self-insured plans Beginning January 2014, per capita fee of $63 that funds a transitional reinsurance fund Beginning in 2018, 40% excise tax on the value of health plan coverage that exceeds certain dollar thresholds under IRC 4980I 23
Strategic approaches
Strategic approaches to ACA implementation What are the kinds of strategies we have seen in the marketplace that could trigger excise taxes? How do these strategies affect the tax function? How can tax executives bring a strategic perspective to ACA implementation and where might HR be playing it safe? 25
Affordability safe harbors to avoid the IRC 4980H(b) penalty ($3,000) Safe harbors: employers can demonstrate they offer coverage meeting the affordability standard by showing the employee premium share for self-only coverage under their lowest-cost plan that meets the minimum value standard utilizing the following safe harbors: Form W-2 safe harbor (<= 9.5% of W-2) Rate of pay safe harbor (get) Federal poverty line safe harbor (<= 9.5% of $XX) 26
Caution: safe can be expensive ACA strategy (i.e., pay or play, etc.) is primarily being driven by human resources/compensation and benefits In general, we are seeing a heavy reliance on the safe harbors allowed in the law to avoid the penalty Best practice: to carefully examine the margin between the safe harbors and 9.5% of household income and elect an optimal employee contribution level both from a cost and business standpoint Risks of a completely safe ACA strategy can include: Costly over-contributing as the employer Competitive disadvantage Fire-walling certain low income employees (and their dependents) from getting subsidized coverage from the exchange 27
Factual example of the potential savings FPL safe harbor causing this employer to charge only $1,152 per year $25,000,000 $20,000,000 Using a higher household income of $17,126 allows employer to charge $1,627/year but trigger some excise tax $15,000,000 $10,000,000 $5,000,000 Impact: net savings of ~ $17m over three years $- $1,152 $1,271 $1,389 $1,627 $1,864 $1,983 Employee Premium Health Care Savings Potential Excise 28
Other strategies for cost/risk mitigation Have a robust appeals process in place with good evidentiary documentation Appeal at the early stage upon receipt/review of notification within 90 days versus awaiting IRS assessments in 2015 Having a well-documented, audit-ready, ACA plan Conducting workforce analytics: Screening for marketplace eligibility for individuals earning 100% to 200% of FPL Screening for Medicaid and other government assistance eligibility Monitoring the 5% margin of error for the IRC 4980H(a) penalty Electing the right look-back period and monitoring variable hour employees Due diligence on acquisitions 29
Best practices: a holistic approach to ACA implementation
Best practices for ACA implementation To what extent do HR and tax need to integrate their efforts to implement ACA? 31
An integrated implementation approach is required HR Benefit strategy Communication with exchanges Finance Affordable Care Act Tax Cost management Compliance and reporting Internal audit 32
ACA implementation Assess ACA expense impacts, exposure to excise taxes and possible disclosure requirements affecting the effective tax rate or loss contingency Identify necessary documentation for IRS audit support and provide possible IRS representation, settlement and appeals services Prepare required IRS or employee reporting (IRC 6055 and IRC 6056) Monitor employee demographics and track ongoing data changes (such as variable-hour employees and Medicaid eligibility) Excise tax controversy Reporting requirements Financial statement implications Workforce analytics Readiness assessment/ cost analysis ACA implementation: a comprehensive view Exchange notification management Process and technology efficiencies Employee communication/ education Evaluate client readiness and risks from a compliance standpoint; help quantify costs under various ACA scenarios Address notification processing, appeals, tracking and reporting Implement processes by teaming with HRIS, payroll, benefits and Tax Develop employee education and awareness regarding implications and alternatives, including personal income tax ramifications 33
Questions and answers
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