Counting Employees Under Health Care Reform (Part 2)

1. This UBA Employer Webinar Series is brought to you by United Benefit Advisorsin conjunction with Jackson Lewis For a copy of this presentation, please go to www.UBAbenefits.com. Go to the Wisdom tab and scroll down to HR Webinar Series and click. Under Employer Series click the Registration and Presentation link. Click the red Presentation button to see the slides.

2. Presented by: Randy Limbeck (Omaha) April 22, 2014 Counting Employees Under Health Care Reform (Part 2)

3. About the Firm Represents management exclusively in every aspect of employment, benefits, labor, and immigration law and related litigation Over 750 attorneys in 53 locations nationwide Current caseload of over 5,000 litigations and approximately 300 class actions Founding member of L&E Global

4. Disclaimer This presentation provides general information regarding its subject and explicitly may not be construed as providing any individualized advice concerning particular circumstances. Persons needing advice concerning particular circumstances must consult counsel concerning those circumstances.  Indeed, health care reform law is highly complicated and it supplements and amends an existing expansive and interconnected body of statutory and case law and regulations (e.g., ERISA, IRC, PHS, COBRA, HIPAA, etc.).  The solutions to any given business’s health care reform compliance and design issues depend on too many varied factors to list, including but not limited to, the size of the employer (which depends on complex business ownership and employee counting rules), whether the employer has a fully-insured or self-funded group health plan, whether its employees work full time or part time, the importance of group health coverage to the employer’s recruitment and retention goals,  whether the employer has a collectively-bargained workforce, whether the employer has leased employees, the cost of the current group health coverage and extent to which employees must pay that cost, where the employer/employees are located, whether the employer is a religious organization, what the current plan covers and whether that coverage meets minimum requirements, and many other factors.  IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)

5. Topics for Discussion Second of two programs to cover final regulations issued by the IRS on February 10, 2014, February 24, 2014, and March 5, 2014 Emphasize changes made by final regulations to the proposed regulations

6. Topics Discussed Last March • Transition relief from 2013 and 2014 • Foundation of basic concepts • Determine applicable large employer status • Who is an employee • Controlled group rules • Waiting periods

7. Topics for Discussion • This webinar will provide a deep dive into: • Calculating penalties • Full-time/part-time – what does it mean for penalty purposes • Measurement and stability periods • Minimum value and affordability • Final reporting rules issued by the IRS on March 5, 2014 (Code §§ 6055 and 6056)

8. The Role of Employers • If you are an applicable large employer • Required to offer substantially all full-time employees and their dependents minimum essential coverage that is affordable, and provides minimum value in order to avoid any potential penalties • Penalty is applicable for plan years beginning in 2015 (2016 for mid-sized employers)

9. What is Required to Avoid Penalties? • Coverage must be offered to “substantially all” full-time employees and their dependents; • Foster children and stepchildren are not “dependents” per final regulations • Coverage must be “Affordable” for the employee; and • Must provide “Minimum Value” (Plan pays at least 60% or actuarial cost)

10. The Role of Employers • 2014 is the year to determine: • Is the employer an applicable large employer • Whether employer will play or pay • What actions employers will take, e.g., reduce employees’ hours

11. Substantially All Full-Time Employees The regulations provide some flexibility by allowing an employer to meet this requirement if it offers minimum essential coverage to at least 95% of its full-time employees and their dependents Recognizes a margin of error – coverage will be considered to have been offered to substantially all full-time employees if it is offered to all but 5% or, if greater, 5 of its full-time employees The 95% is 70% for 2015 only Special transition rule for dependents in 2015 (See March 11, 2014 webinar materials)

12. Understand the §4980H Penalty • Play or Pay – No Health Coverage Offered: If minimum essential coverage is not offered to substantially “all” full-time employees and dependents and one or more fulltimer obtains subsidized Exchange coverage, employer must pay (annualized) penalty of $2,000 x (# fulltimers – 30 (including employees of related entity companies)) • The 30 is 80 for 2015 only • Monthly penalty ($166.66/month) • COLA adjustment beginning in 2015

13. Understand the §4980H Penalty (cont.) • Play and Pay – Health Coverage Offered: If minimum essential coverage is offered but one or more fulltimer obtains subsidized Exchange coverage because plan is not affordable or does not provide minimum value, employer must pay (annualized) penalty equal to lesser of: • $3,000 x # fulltimers who decline employer coverage and receive subsidized Exchange coverage or • $2,000 x (# fulltimers - 30) • The 30 is 80 for 2015 • Monthly penalty ($250/month) • COLA adjustment beginning in 2015

14. Full-Time Employee for ACA Penalty Purposes • Once you have determined you are a large employer subject to the Play or Pay requirements, you must determine who is a full-time employee who must be offered coverage to avoid penalty • Forget about counting employees for the “applicable large employer” analysis – a different set of rules apply

15. Full-Time Employee for ACA Penalty Purposes (cont.) • The methodology applicable to the determination whether an employee must be offered coverage (i.e., use of the standard measurement period or stability period) varies depending on type of employee circumstance: • On-going employees • Employees with change in employment status or position • New employees (non-variable hour and non-seasonal employees) • New employees who are variable hour or seasonal employees • Employees in transition • Employees determined to be “full-time” • Employees not determined to be “full-time”

16. What Full-Time Means • Full-time = employed on average for 30 hours of service per week (130 hours per month) • Which hours are counted • Hour of service is each hour for which an employee is paid or entitled to payment • Includes hours for which no services are performed, but payment is owed by employer (i.e., on-call or paid leave time) • Employer may use different calculations for different categories of employees

17. What Full-Time Means (cont.) • How do you count hours? • Hourly – count actual hours • Non-hourly – count actual hours or use equivalency rules • Daily – any time during a day equals 8 hours • Weekly – any time during a week equals 40 hours

18. Determining Full-Time Employees for Penalty Purposes The IRS has issued safe harbor rules to assist with determining who is considered a full-time employee – “measurement periods” and “stability periods” Variable hour employees are employees for whom it cannot be determined whether they will average 30 hours a week If a variable hour employee averages 30 hours a week over a “measurement period,” he is treated as a full-time employee for the following “stability period”

19. Determining Full-Time Employees for Penalty Purposes (cont.) • Final regulations set forth two basic methods to determine employees’ “full-time” status • Monthly measurement method – in essence, the default rule • Look-back measurement method – used to determine status of new variable hour, seasonal and part-time employees, and ongoing employees

20. Determining Full-Time Employees for Penalty Purposes (cont.) • Generally must use the same measurement approach for all employees, except for: • Collectively bargained and non-collectively bargained employees • Each group of collectively bargained employees covered by a separate collective bargaining agreement • Salaried and hourly employees • Employees whose primary hours of employment are in different states

21. Monthly Measurement Method: General Rules • Final regulations permit full-time status to be determined based on hours worked during a calendar month or hours worked using successive one-week periods (the “weekly rule”) • Monthly measurement using the weekly rule results in certain calendar months counted over 4 weeks and others over 5 weeks • Period measured for the month must contain either the week that includes the first day of the month or the week that includes the last day of the month • Four-week calendar months – 120 hours or more is full-time • Five-week calendar months – 150 hours or more is full-time

22. Monthly Measurement Method: General Rules (cont.) • New employee – treat as full-time by the end of the third full calendar month after the employee’s date of hire (i.e., the first day of the fourth calendar month after date of hire) • Penalty purposes only, the 90 day waiting period still applies

23. Monthly Measurement Method: When Would Employers Use It? Bulk of the employees are non-variable hour employees Existing health care plan eligibility systems are configured to count scheduled or actual hours on a monthly basis Coordination of the look-back measurement method rules to determine fixed schedule employees and variable hour employees is complicated and may require costly systems changes

24. Look-Back Measurement Method • The employer can select the length of the measurement period, between 3-12 consecutive calendar months • For 2015, 6 month measurement period can be used even with 12 month stability period • Measurement and stability periods must be applied in a uniform and consistent basis, but may use different periods for: • Collectively bargained and non-collectively bargained employees • Each group of collectively bargained employees covered by a separate collective bargaining agreement • Salaried and hourly employees • Employees whose primary hours of employment are in different states

25. Look-Back Measurement Method (cont.) • Look-back 12 months (“real” 12 months) or other chosen period for “standard measurement period” • Make determination whether employee is full-time or not full-time • If the employee is full-time, the employee must be treated as such for the “stability period” and administration period • “Stability period” may not be less than 6 months and may not be less than the “standard measurement period” • Except for 2015 transitional relief allows 6 month measurement period with longer stability period

26. Look-Back Measurement Method (cont.) Administrative period – the employer can set a period of up to 90 days between the end of the measurement period and the beginning of the stability period to determine who is eligible and notify eligible employees; the administrative period must overlap with the prior stability period

27. Advantages/Disadvantages: Look-Back Measurement Method Advantage of the look-back method: employer is not subject to 4980H excise taxes during initial measurement period (e.g., first 12 months) Disadvantages of the look-back method: complicated/systems changes

28. Look-Back Measurement Method • Ongoing Employees • The employer selects the months for the “standard measurement period” • If an employee averages 30 hours/week during the standard measurement period, he must be offered coverage for the entire stability period that follows • If the employee averages less than 30 hours/week in measurement period, he or she is treated as non full-time for a stability period no longer than the measurement period • Example: Calendar year plan – November 1 – October 31 measurement period

29. Look-Back Measurement Method (cont.) • New Employees • The “initial measurement period” can begin on any date between the employee’s start date and the first day of the month following the start date • If an employee averages 30 hours/week during the initial measurement period, he must be offered coverage for the entire stability period that follows

30. Determine Full-Time Status for a New Employee For new employees (i.e., employed for less than one measurement period), determine if: • Full-time: reasonably expected to be employed on average at least 30 hours per week, non-seasonal; or • Variable-hour/Seasonal: unable to determine at start date whether he or she will be full-time • For 2014 only, employer may take into account an anticipated termination date (after 2014, employers must assume that an employee will be employed for the entire measurement period) • Apply look-back measurement/stability safe harbor method and there’s no penalty with respect to a new employee during measurement

31. Determine Full-Time Status for a NewEmployee (cont.) Employer who utilizes the look-back measurement for new variable hour or seasonal employees must test the fixed-schedule employees of same category based on the look-back period applicable to ongoing employees (limited to permitted employee categories e.g., hourly vs salaried; different state; union vs non-union; different states; different employers)

32. Look-Back Measurement Method • If status changes during measurement period (reasonably expected to be full-time), treat as full-time starting on first day of 4th month after status change or, if earlier, first day of month after measurement period • Change to part-time status for full-time employees who were continuously offered minimum value coverage • Employer may change to the monthly measurement method for an employee who averages less than 30 hours per week during the 3 months following the change in status

33. Look-Back Measurement Method (cont.) A new variable employee that did not work 30 hours per week during the initial measurement period, but did work 30 hours per week, on average, during the subsequent or overlapping standard measurement period of the employer must be treated as “full-time” for purposes of the stability period that follows Thereafter the new employee joins all other variable, on-going employees, in the standard measurement period/stability period schedule

34. Look-Back Measurement Method (cont.) Any administrative period applicable to the employee may not extend past the last day of the first calendar month after the initial measurement period (i.e., if the IMP is 12 months – the last day of the month commencing after the employee’s first anniversary) This means that a variable hour, new employee that works an average of 30 hours per week during an initial measurement period of 6 months must be offered coverage by the last day of the 7th month following employment

35. Look-Back Measurement Period – Terminated and Rehired Employees Employee who has a break-in-service during which no hours of service are credited for 13 weeks is considered to be a new employee if hired after that break For special unpaid leave, the employer must treat the employee as a continuing employee and deem average hours during a look-back measurement period in which special unpaid leave occurs Final regulations do not permit employers to treat short-term employees as variable hour employees. Thus, short-term employees (other than seasonal employees) hired to work an average of 30 hours or more are treated as full-time

36. Understand the Penalty What’s “Subsidized Exchange Coverage” • Remember, a full-time employee must obtain subsidized Exchange coverage to potentially trigger a penalty • No subsidy for employee (and no penalty to employer) unless: • Employee is not offeredminimum essential coverage; or • Employer plan fails to provide affordable coverage or coverage with minimum value; and • Employee purchases Exchange coverage; and • Employee household income between 100% and 400% federal poverty line; and • Employee is not eligible for or enrolled in Medicaid

37. Understand the Penalty What it Means to “Offer” Coverage Employee must have effective opportunity to accept coverage at least once per year (offer of coverage by employer must be reasonable) If coverage is not affordable or does not meet minimum value, employee must also have had effective opportunity to decline coverage (i.e., mandatory or automatic coverage that’s not affordable or of minimum value will not prevent employee from obtaining subsidized Exchange coverage and triggering penalty) Offer is effective for a given month only if coverage is effective for full month if employee accepts offer Offer not negated by employee waiver of coverage or employer dropping employee’s coverage for nonpayment of premium

38. Understand the Penalty Meaning of Minimum Essential Coverage • Special rule: for employer-sponsored coverage to be minimum essential coverage, it must meet: • Affordability test: self-only coverage costs no more than 9.5% of household income • Minimum value test: plan’s share of total allowed cost of benefits must be at least 60% of covered costs (HHS-IRS calculator )

39. Understand the Penalty – Conclusions • Therefore – three general conclusions: • If do not offer coverage and one full-time employee obtains subsidized coverage – penalty of $2,000 x (# of fulltimers minus 30; 80 for 2015) • If offer coverage but (a) not affordable or not minimum value and (b) one full-time employee obtains subsidized coverage, penalty equal to $3,000 x # of fulltimers who decline coverage and receive subsidized Exchange coverage (not to exceed the amount computed in (1)) • If offer appropriate coverage which (a) meets minimum value test, and (b) is affordable, no penalty

40. PPACA Mandatory Reporting Code §§ 6055 and 6056 §§ 6055 and 6056 are PPACA reporting requirements intended to provide information to the IRS and employees in order to enforce certain PPACA requirements (i.e., 4980H penalties, the premium tax credits and the individual penalty tax for failure to have coverage)

41. PPACA Mandatory Reporting Code §§ 6055 and 6056 (cont.) • On September 5, 2013, the IRS issued proposed rules implementing the information reporting requirements under IRC §§ 6056 and 6055 • Massive and duplicative paperwork • IRS issued final regulations on March 10, 2014 • IRS intent is to streamline process for reporting duplicative information required by §§ 6055 and 6056 • Many had hoped for W-2 reporting • Final regulations helped, but requirements remain complex • Very detailed information still is required to be reported

42. PPACA Mandatory Reporting Code §§ 6055 and 6056 (cont.) • The requirements will require many employers to modify payroll and benefit systems • Systems will need to be in place for information accumulation by January 1, 2015

43. Who Must Report to Whom? Section 6056 – Applicable large employers (only) must report to the IRS and to employees Section 6055 – Insurers and employers that self-insure must report minimum essential coverage information to the IRS and to the individuals named in the report Final regulations create a single consolidated form for information reporting for self-insured plans, i.e., §§ 6056 and 6055 information is reported on same form

44. 6055 and 6056 Transitional Relief From Final Regulations • No penalties for failure to report in 2014 • No need to file for 2014 • Good faith standard for imposing 2015 reporting penalties for incorrect filings • Mid-size employers must comply with the reporting requirements for 2015

45. § 6056 Reporting • Who is subject to the 6056 reporting requirements? • Applicable large employers only • Applied on a controlled group basis • Employer can use third parties to submit filing, e.g., other members of controlled group or outside vendors • Does not eliminate applicable large employer’s liability for failure to file, untimely filing or improper filing • Employer must still sign the return • A filing must be made for each applicable large employer even if member of a controlled group (different EIN)

46. § 6056 Reporting (cont.) • What information must be reported to the IRS? • The employer’s name, date and employer identification number (EIN) • Name and telephone number of contact person • Calendar year for which the information is reported

47. § 6056 Reporting (cont.) • Information required to be provided per the proposed regulations (cont.): • A certification of whether the employer offers its full-time employees and their dependents the opportunity to enroll in “minimum essential coverage” under an eligible employer-sponsored plan per calendar month • The number of full-time employees the employer has for each month during the calendar year. This begins January 1, 2015 even for fiscal year plans

48. § 6056 Reporting (cont.) • Information required to be provided per the proposed regulations (cont.): • The name, address and taxpayer identification number of each full-time employee employed by the employer during the calendar year and the months during which the employee and any dependents were covered under a health benefit plan sponsored by the employer during the calendar year • Each full-time employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value offered to the full-time employee, by calendar month • Any other information required by the forms or instructions

49. § 6056 Reporting (cont.) • Additional information will be collected through the use of indicator codes (including whether the employer plan provided minimum value and whether spouses could enroll, the number of employees by month, whether an employee’s effective date of coverage was affected by a waiting period, plus certain other information about the filer)

50. § 6055 Reporting • Very similar to 6056 reporting/same delay to 2015 • Reporting is required for plan sponsors of self-insured plans, insurers and other entities that provide minimum essential coverage to an individual • The entities do not have to be an applicable large employer • Only report if “minimum essential coverage” is being provided