Health Care Reform Pay or Play Rules Applicable to Colleges and Universities May 17, 2013 Patrick M. Allen
Health Care Reform: An Overview Phase I: 2010 2013 New patient protections Administrative changes Phase II: 2014 and Beyond Individual mandate Employer Shared Responsibility: Pay or Play Exchanges and expanded coverage New reporting obligations Cadillac tax
Phase I: 2010-2013 New Patient Protections Insurance coverage for adult children Elimination of lifetime limits on essential health benefits Elimination of preexisting condition exclusions for children up to age 19 Prohibition on rescissions of coverage Prohibition on discrimination in fully insured plans Provision of first dollar coverage for preventive services Updated claims and appeals procedures FSA/HSA Changes OTC drug reimbursement ending on 1/1/2011 Health FSA contribution limits reduced to $2,500 per year in 2013
Phase I: 2010 2013 (cont d) Summary of Benefits and Coverage Must be made available beginning on first day of the first open enrollment period that begins on or after September 23, 2012 No penalties for first year of applicability if plans are working in good faith No significant changes anticipated for 2014 Automatic enrollment for certain large employers DOL has indicated rules will not be ready before 2014 W-2 Reporting Generally required for 2012 Forms W-2 (provided in January, 2013) Interim guidance has been issued
Phase II: 2014 and Beyond Fundamental shift in health care market Individual mandate Exchanges and premium tax credits Employer shared responsibility Additional administrative changes Reporting Wellness Cadillac Tax
Pay or Play Requirements Overview What is an Applicable Large Employer How Full-Time Employee is Defined Special Rules for Rehires & Leaves of Absence Calculating Affordability Transition Rules (Fiscal Year Plans, 2014 Measurement Period) Special Issues Applicable to Colleges and Universities Strategies for Avoiding Penalties
Employers Have Lots of Questions Do I have to offer coverage to temporary employees? I have employees who occasionally work more than 30 hours/week, do I have to provide coverage to them? How do I count hours of service for salaried employees? Adjunct professors? Do I have to count hours when an employee is paid for vacation, PTO disability or other leave of absence? If someone changes to part-time status, do I have to continue to provide coverage? If an employee is rehired, do I have to count prior service? Can I make all of my employees part-time employees? Do I have to pay for coverage offered to dependents and spouses? How do I know if the coverage I offer is the minimum value required? How will I know if I am required to pay a penalty?
Applicable Large Employer An applicable large employer is defined generally as any employer who employed, on average, at least 50 full-time employees (including full-time equivalencies) on business days during the preceding calendar year. All employers that are members of a controlled group are considered a single employer. However, each member of the controlled group is treated separately for purposes of penalties. If the employer was not in existence during the preceding calendar year, the employer will qualify as an applicable large employer if the employer is reasonably expected to employ on average at least 50 full-time employees AND the employer actually employs an average of at least 50 full-time employees.
Sledgehammer Penalty No Coverage Sledgehammer Penalty Applies if employer fails to offer coverage to substantially all full-time employees (and their dependent children, but not spouses) and any fulltime employee receives subsidized coverage from the exchange Must offer coverage to all but 5% or (if greater) 5 of the employer s fulltime employees Annual amount of penalty is $2,000 multiplied by the number of full-time employees (less the first 30) Penalty based on all full-time employees (not just those obtaining coverage from the exchange)
Example 1 Sledgehammer Penalty (cont d) Employer A employs 100 full-time employees in each calendar month during 2014. Employer A does not sponsor an eligible employer-sponsored plan for any calendar month during 2014, and receives a Premium Subsidy Certification for 2014 with respect to at least one of its full-time employees. Employer A is subject to a Sledgehammer Penalty for 2014 of $140,000, which is equal to 70 x $2,000 (100 full-time employees reduced by 30 and then multiplied by $2,000).
Tackhammer Penalty Unaffordable Coverage Tackhammer Penalty Applies if employer offers health coverage that is unaffordable relative to the employee's household income, or does not provide the required minimum value Annual amount of penalty is $3,000 for each full-time employee who actually receives subsidized coverage from the exchange
Tackhammer Penalty (cont d) Example 2 Employer B employs 60 full-time employees in each calendar month during 2014. Employer B sponsors an eligible employer-sponsored plan under which all 60 of its full-time employees (and their dependents) are eligible during each month of the year; however, the coverage is not affordable in 2014. Employer B receives a Premium Subsidy Certification with respect to 3 of its full-time employees for 2014. Employer B is subject to a Tackhammer Penalty for 2014 of $9,000, which is equal to 3 x $3,000 (3 full-time employees who received a Premium Subsidy multiplied by $3,000).
Tackhammer Penalty (cont d) Example 3 Employer C employs 100 full-time employees in each calendar month during 2014. Employer C sponsors an eligible employer-sponsored plan under which 96 of its fulltime employees (and their dependents) are eligible during each month of the year. The coverage is affordable and provides minimum value. Employer C receives a Premium Subsidy Certification with respect to 2 of the 4 full-time employees who are not eligible for coverage during 2014. Even though Employer C offered affordable, minimum value coverage to 95 percent of its full-time employees and their dependents, 2 of the 4 to whom Employer C did not offer coverage received a Premium Subsidy for 2014. Employer C is subject to a Tackhammer Penalty for 2014 of $6,000, which is equal to 2 x $3,000 (2 full-time employees who received a Premium Subsidy multiplied by $3,000).
How Will Employers Know a Penalty is Due? Penalties only triggered if employer fails to offer coverage (or offer the right kind of coverage) AND the employee receives subsidized coverage on the exchange IRS to issue guidance on reporting obligations and employee certification process Likely will include some form of an appeals process Penalty to be paid after IRS issues notice and demand (i.e., based on current guidance, not required to self-report) Employers will need to keep good records to respond to IRS demand
Who is a Full-Time Employee? A full-time employee is a common law employee who is employed: on average at least 30 hours of service per week; or 130 hours of service in a month Hours of service means: each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer; and each hour for which an employee is paid, or entitled to payment, for the period of time where no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence
Who is a Full-Time Employee? (cont d) For hourly employees, count actual hours from records of hours worked or for which payment is made or due for vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence For employees not paid on an hourly basis: count actual hours same as for hourly employees; or use a days-worked equivalency of 8 hours of service per day for each day the employee would be required to be credited with at least one hour of service; or use a weeks-worked equivalency of 40 hours of service per week for each week the employee would be required to be credited with at least one hour of service
Who is a Full-Time Employee? (cont d) In determining full-time employee status: can use different methods for different classes of employees so long as the classifications are reasonable and consistently applied Cannot use equivalency methods if the result would be to substantially understate an employee s hours of service in a manner that would cause the employee not to be treated as a full-time employee does not have to include hours of service for which foreign source income is paid
Adjunct Faculty Members Preamble to proposed IRS regulations recognizes the difficulty that educational institutions may have in applying the rules for determining fulltime employee status to adjunct faculty. Until further guidance is issued, educational institutions must use a reasonable method for crediting hours of service for adjunct faculty that is consistent with the purposes of the employer shared responsibility requirements. not reasonable to take into account only classroom and other instruction time and not class preparation time in determining a reasonable method, measure against a 30 hours of service per week standard Transitional relief only applies to adjunct faculty, not temporary or contract employees, coaches, or student employees, etc.
Special Rules for Full-Time Employee Status If reasonably expected to work full-time schedule, then treat as a full-time employee If schedule uncertain, may use look-back/stability safe harbor for ongoing employees and new variable hour or seasonal employees Variable hour employee: Based on facts and circumstances, cannot determine whether full-time Seasonal employee: Good faith interpretation To date, no special rule for short-term (temporary) employees who are reasonably expected to work a full-time schedule Non-issue if employed less than 90 days
Overview of Full-Time Employee Safe Harbors Look at each employee s average hours over a Standard Measurement Period (3-12 months) Calculate the employee s hours for that period Determine whether employee is full-time (i.e., averages 30 hours/week) Apply that determination for the prospective Stability Period Special transition rules for 2014
Overview of Full-Time Employee Safe Harbors (cont d) Can include an Administrative Period (up to 90 days) between Standard Measurement Period and Stability Period to facilitate enrollment Can use different calculation periods for: Union/Non-Union and for each group covered by a separate collective bargaining agreement Salaried/Hourly Employees in different states
Ongoing Employees Stability Period Rules for Ongoing Employees If full-time employee, must have full-time status for a Stability Period of at least 6 months and at least as long as Standard Measurement Period regardless of employee s actual hours of service during the Stability Period If not full-time employee, Stability Period cannot be longer than Standard Measurement Period Status determined during Standard Measurement Period applies for entire Stability Period, even if employee changes employment status
Ongoing Employees (cont d) Example 4 Employer D uses a 4 month Standard Measurement Period from January 1 to April 30, 2014 for coverage effective July 1, 2014 Daniel works 650 hours during that 4 month period and is therefore a full-time employee (650 17.3 = 37.6 hours/week); Daniel must be given coverage from July 1 to December 31, 2014 (at least 6 months) Rachel works 400 hours during that 4 month period and is NOT a fulltime employee (400 17.3 = 23.12 hours/week); Rachel must be retested at the end of the next 4 month period (from May to August 2014)
Example 5 Ongoing Employees (cont d) Employer E implements a one-year Standard Measurement Period that runs from October 3, 2012 to October 2, 2013, with an Administrative Period of October 3, 2013 to December 31, 2013, and a Stability Period of January 1, 2014 to December 31, 2014 Heather works 1,600 hours from October 3, 2012 to October 2, 2013 Heather is a full-time employee for all of 2014 This is true even if Heather moves to another type of job or employment classification during 2014
Full-Time Employee Safe Harbor Recommendation For administrative ease, use a 12 month period for both the Standard Measurement and Stability Periods Administrative Period should overlap with annual open enrollment period Avoids multiple calculations in a single year For 2014, may want to consider using special transition rule which allows for shorter Standard Measurement Period (at least 6 months) Rules permit adjusting the Standard Measurement Period to coincide with payroll periods, but cannot create gaps
Special Rules for Educational Institutions The proposed IRS regulations recognize that educational institutions follow academic years and that employees may have an employment break period during which they are not credited with any hours of service during the summer In applying the Standard Measurement Period to an employment break period of at least 4 consecutive weeks (disregarding special unpaid leave, e.g., unpaid FMLA, military and jury duty leave), an educational institution must either: determine the average hours of service per week for the employee during the Standard Measurement Period excluding the employment break period (and special unpaid leave) and use that average as the average for the entire measurement period; or treat employees as credited with hours of service for the employment break period at a rate equal to the average weekly rate at which the employee was credited with hours of service during the weeks in the Standard Measurement Period that are not part of an employment break period (up to 501 hours of service, not including special unpaid leave).
Newly Hired Employees A new employee is an employee who has been employed for less than one complete Standard Measurement Period. If a new employee is reasonably expected at hire to work fulltime (and is not a seasonal employee), the employer must offer coverage no later than 3 months after hire to avoid penalties. For new variable hour employees and seasonal employees, an employer can use an Initial Measurement Period and an Initial Stability Period similar to those that apply for ongoing employees.
Special Safe Harbor Rules for New Variable Hour Employees The Initial Measurement Period must begin no later than the first day of the calendar month following the start date Example: Date of hire is August 15, 2013; Initial Measurement Period must begin by September 1, 2013 Maximum Combined Initial Measurement Period and New Hire Administrative Period: last day of the first calendar month beginning on or after first anniversary of start date Example: Continuing from above first anniversary is August 15, 2014; New Hire Administrative Period must end by September 30, 2014 and Initial Stability Period must start no later than October 1, 2014
Special Safe Harbor Rules for New Variable Hour Employees (Cont d) Must re-test the employee when that employee completes a Standard Measurement Period (i.e., the employee has been employed long enough to be considered an ongoing employee) If status has changed, employee treated as full-time under whichever Stability Period is most favorable If loses full-time status, then continues as full-time until end of original Stability Period If gains full-time status, then treated as full-time beginning with new Stability Period even if original one has not ended If new hire changes to position where reasonably expected to work 30 hours/week, must provide coverage on the earlier of: First day of fourth month following date of change in status Stability Period relating to the Initial Measurement Period
Special Safe Harbor Rules for New Variable Hour Employees (Cont d) Example 6 Employer F uses a calendar year Stability Period for ongoing employees, with a Standard Measurement Period of November 1 to October 31, and an Administrative Period covering November and December For new hires, employer begins initial Measurement Period on first day of the first calendar month after employee s date of hire and uses a 1 + partial month New Hire Administrative Period Dave hired on May 17, 2013 Initial Measurement Period is June 1, 2013 May 31, 2014 when Dave works 1,650 hours (31.7 hours/week average) Dave must be offered coverage for the entire stability period of July 1, 2014 through June 30, 2015 Dave must be retested for the November 1, 2013 to October 31, 2014 Standard Measurement Period
Rehires & Others with a Break in Service Treat as New Employee: If the period of no service was at least 26 consecutive weeks, an employer may treat an employee who returns to work as a new employee for purposes of determining the employee s status as a full-time employee. For no service periods of less than 26 weeks, the employer may apply an optional rule of parity, and treat the employee as a new employee if the no service period is at least 4 but less than 26 weeks long, and is no longer than the period of employment. Example: If an employee works 3 weeks, terminates for 10 weeks, and is rehired, the employee may be treated as new.
Rehires & Others with a Break in Service (cont d) Treat as Continuing Employee: If neither of the tests described in the previous slide is satisfied, the employer must treat the employee who returns to work as a continuing employee who retains the same Measurement and Stability Period that would have applied if the employee had not had a period of no service (e.g., if an employee who was being treated as a full-time employee for a Stability Period returns during that Stability Period, he or she must be treated as full-time for the balance of the Stability Period).
Rehires & Others with a Break in Service (cont d) Example 7 Ashley worked for Company G for 10 years before she has a 5 month break in service beginning April 1, 2015. Ashley returns to active service September 1, 2015. Because Ashley s break in service period is not longer than her prior period of employment and is less than 26 weeks, Ashley s prior hours of service must be taken into account. If instead, Ashley returned to active service on December 1, 2015, she could be treated as having terminated employment on April 1st and her pre-april 1, 2015 service may be disregarded
Special Transition Rules for 2014 Solely for purposes of Stability Periods beginning in 2014, employers may adopt a transition Measurement Period that is shorter than 12 months, but not less than 6 months and begins not later than July 1, 2013 and ends no earlier than 90 days before the first day of the plan year beginning on or after January 1, 2014.
Special Transition Rules for 2014 Applicable Large Employer Determination for 2014: For 2014, employers may use 6 consecutive months (or more) in 2013 to determine whether the employer employed an average of at least 50 full-time employees on business days during any consecutive 6-month period in 2013. Dependent Coverage: If an employer does not offer dependent coverage currently, it will not be liable for failure to offer dependent coverage in 2014 if it takes steps during the 2014 plan year to begin offering dependent coverage.
Transition Relief for Non-Calendar Year Plans No penalty for any employees eligible to participate under the terms of the plan on December 27, 2012 (regardless of whether elected coverage) No penalty until the first day of the first plan year beginning in 2014 if At the most recent enrollment period prior to December 27, 2012, at least 1/3 of all employees (full-time and part-time) were offered coverage or at least 1/4 of all employees were covered as of December 27, 2012 and All full-time employees offered affordable minimum value coverage for the plan year beginning in 2014
Transition Relief for Non-Calendar Year Plans (cont d) Reporting obligation still applies to all of 2014 Remember: individuals still required to have minimum essential coverage (or pay a penalty) as of January 1, 2014 New IRS mid-year election change rules for cafeteria plans May change 2013 fiscal year election once during the year, without regard to other IRS mid-year change rules Must adopt plan amendment by December 31, 2014
When is Coverage Considered Affordable? Problem: Employers won't know employees household income Unaffordable Coverage Penalty Safe Harbor: Coverage is affordable if employee contribution for single coverage for the lowest cost plan option that provides minimum value does not exceed 9.5% of: Employee's Box 1 Form W-2 wages OR Box 1 does not include 401(k) deferrals or pre-tax premium contributions Employee's rate of pay for the month (either hourly rate x 130 or monthly salary) OR Federal poverty level for a single individual ($11,490 in 2013)
Example 8 (W-2) When is Coverage Considered Affordable? (cont d) Joe is employed by Company H from January 1, 2015 through December 31, 2015 and his 2015 W-2 Box 1 Wages are $24,000. Company H offers Joe and his dependents minimum essential coverage that meets the minimum value rules. Joe s required employee contribution for self-only coverage is $1,500 for the calendar year. $1,500 is 6.25% of $24,000 = Affordable
When is Coverage Considered Affordable? (cont d) Example 9 (Rate of Pay) Jenny is paid $8/hour by her employer, Company I. Company I offers her (and her dependents) minimum essential coverage that meets the minimum value rules. Jenny is required to pay $85/month for self-only coverage. $8 x 130 = $1,040. $85 is < 8.2% of $1,040 = Affordable Example 10 (Federal Poverty Level) $11,490 x 9.5% = $1,091.55 annually Employee cost for single employee coverage cannot exceed $90.96 per month ($1,091.55 12 = $90.96)
When Does a Plan Provide Minimum Value? Percentage of the total allowed costs of benefits provided is no less than 60% Look at anticipated costs covered for essential health benefits for a standard population and compare to total anticipated charges... what does that mean??? Three Options for Determining Minimum Value: Minimum Value Calculator: http://cciio.cms.qov/resources/requlations/index.html#pm Safe Harbor Designs (Guidance released on April 30, 2013) Certification by Actuary
When Does a Plan Provide Minimum Value (cont d)? Safe Harbor Designs (Based on April 30, 2013 Guidance) A plan with a $3,500 integrated medical and drug deductible, 80% plan cost-sharing, and a $6,000 maximum out-of-pocket limit for employee cost-sharing A plan with a $4,500 integrated medical and drug deductible, 70% plan cost-sharing, a $6,400 maximum out-of-pocket limit, and a $500 employer contribution to an HSA A plan with a $3,500 medical deductible, $0 drug deductible, 60% plan medical expense cost-sharing, 75% plan drug cost-sharing, a $6,400 maximum out-of-pocket limit, and drug co-pays of $10/$20/$50 for the first, second and third prescription drug tiers, with 75% coinsurance for specialty drugs.
When Will an Employee be Eligible for Subsidized Coverage on the Exchange? Eligible for subsidized coverage if the employee is: Between 100% and 400% of the federal poverty level and enrolls for coverage on the exchange, Not eligible for coverage through a government-sponsored program (e.g., Medicaid or CHIP), AND Not eligible for employer coverage or the employer coverage is unaffordable or does not provide the minimum value NOTE: If employer offers affordable coverage that provides the minimum value, employee will not be able to get subsidized coverage and therefore employer will not be penalized
Strategies for Avoiding Penalties Focus on employees not currently eligible for coverage If less than 5%, evaluate cost of providing the coverage vs. total potential unaffordable coverage penalty Determine whether excluded employees are full-time under IRS rules If so, consider reclassifying employees or amending plans to expand eligibility Consider whether other employment policies can effectively minimize risk (e.g., part-time employees cannot work more than 25 hours/week)
Strategies for Avoiding Penalties (Cont d) If some employees work variable schedules, establish process to implement the safe harbors Capture hours data; keep good records If coverage is currently provided immediately (or after only one month), use a 90 day waiting period Helps address temporary employees Consider modifying premium structure Make single (employee only) coverage affordable but require employee pay higher portion of other coverage levels (family, employee+spouse, employee+child(ren))
Strategies for Avoiding the Penalties (Cont d) Make sure sufficient coverage offered Must be minimum essential coverage and pay for at least 60% of the covered health expenses Plan may currently provide above 60% value...could modify costsharing provisions (shift more cost to employee) and still be above 60% Consider eliminating benefits which are not essential health benefits Defined contribution approach to coverage Establish employer contribution amount and allow employees to pick coverage from a private exchange
Next Steps Establish a working group (HR, finance, payroll) Evaluate strategic options Financial analysis Cost of additional coverage Options for offsetting that cost (e.g., changing cost sharing terms or premium contribution rates for family coverage) Impact on employee relations (retention, unions, etc.) Implement decisions (plan amendments, employee communications, record retention policy) Ongoing administration (particularly if use safe harbors)
Questions? Patrick M. Allen Womble Carlyle Sandridge & Rice, LLP One West Fourth Street Winston-Salem, NC 27101 Telephone: (336) 721-3574 Fax: (336) 733-8373 Email: Pallen@wcsr.com