Since recent Supreme Court rulings made clear that the Affordable Healthcare Act is here to stay, employers are no longer holding their collective breath, and are more eager than ever to ensure that they are in full compliance with the employer shared responsibility rules that take effect this year.
A crucial component to success in this arena is following the corresponding reporting rules that kick in in 2016. As many chart their maiden voyages into seas of ACA paperwork and deadlines, HR professionals seek clear directions on navigating the complexities that can arise. Many matters that seem simple, such as counting a company’s number of full-time employees, can be deceptively complicated. Though the tasks overlap, rules for determining coverage eligibility for individual employees and tax liability for employers are not always congruent.|
Employers are also beginning to look ahead to avoid the so-called “Cadillac tax” on high-cost health plans that takes effect in 2018, or at least steel themselves for its impact. In addition to affecting employer taxes and finances, the tax outlined in Code 49801 will likely influence plan designs. As employers adapt to these changes, the ACA’s coming nondiscrimination rules lurk in the background.
Alden Bianchi presented to attendees at the TemPositions HR Roundtable Series on Thursday, October 1, 2015 to clarify the rules and tasks that are ahead for attendees. Bianchi is the Practice Group Leader of the Employee Benefits & Executive Compensation Practice at law firm Mintz Levin, and worked with the Romney governmental administration to help draft the 2006 Massachusetts healthcare law that served as a template for the ACA. Mintz Levin Member Richard Block also attended.
Bianchi began by asking Roundtable attendees about which areas of the ACA they had questions, were confused by, or needed more information. One attendee said that she wanted to get a better sense of the pros and cons of using different measurement periods. Another asked about the timing and design for the finalized version of some of the reporting forms. Someone else asked to discuss the tax of high-cost health plans and the limits, like those related to deductibles and co-pays.
Bianchi praised the third speaker for using the terminology used by the IRS in all of its official communications – “the tax on high-cost health plans” – as opposed to the colloquial “Cadillac tax.”
Another attendee wanted to be sure about the size of employers affected by different aspects of the regulations, as she has worked for several companies that toed the 50-employee border of applicability.
Bianchi pointed out that while the vast majority of companies knew without hesitation whether they have more or fewer than 50 employees, getting it right can be a tricky but important business for those near the line.
“There’s a lot at stake in counting to 50 right,” he said.
Bianchi traced the genesis of healthcare law changes back to the mid-2000s.
“There was broad agreement that something had to be done about three principal healthcare issues,” he said. “We had to expand coverage, we had to contain costs, and we had to increase the quality of outcomes.”
Though there was agreement on those three goals, there was not much agreement on how to achieve them. Without the political will to either institute a European-style publicly funded system, or to shift the burden of insurance costs entirely onto individuals, a “third way” incorporating existing public and private structures was devised.
Bianchi noted that both the Massachusetts healthcare reform law and the ACA are both based on five key features: an individual mandate, low-income subsidies, an employer mandate, insurance marketplaces, and tax reforms to help foot the bill.
The tax on high-cost health plans
Code 49801 imposes a non-deductible excise tax on certain forms of high-cost employer-sponsored health coverage. A 40% tax is imposed on the portion of the aggregate cost of “applicable coverage” in excess of a statutory dollar limit. The cost of applicable coverage is calculated using rules similar to COBRA, and the statutory dollar limit is determined from month to month. Applicable coverage is defined as coverage under a group health plan offered by an employer that can be excluded from an employee’s gross income (or would be excludable if it were employer-provided coverage).
Bianchi said that this tax, described in Code 49801, was initially well-liked by both healthcare economists and the government, but has earned the contempt of many as unanticipated consequences appear. There are some efforts in Congress to repeal it. Bianchi observed that Republicans seemed more willing to work across the aisle since the King v. Burwell Supreme Court decision, but see acquiescence to a repeal as a bargaining chip for other political goals that Democrats generally find repugnant, so was not optimistic that a repeal would actually happen.
Economists theorized that if employers provide benefits that are “too rich,” it would encourage employees to use the benefits to a wasteful extent, and that this tax would discourage such waste. Meanwhile, government projections estimated it would bring in $87 billion in tax revenue over the next 20 years.
Bianchi expressed skepticism about the $87 billion figure.
“It assumes that employers won’t just voluntarily keep their health plans the same and pay all of this money to the government, but instead of paying non-taxable health benefits, will give their employees more cash,” he said. “I’m not sure employers are gonna do that.”
In practice, if employers save money by trimming health benefits (which would increase co-pays and deductibles and limit networks for employees), they aren’t necessarily inclined to pass on these savings to employees in the form of raises. Without more money flowing to employees as taxable income, there is no new money for the government to tax.
Bianchi referenced surveys of two major trade organizations that revealed members were not planning to reduce benefits and pass on the money saved as additional income to employees.
Likely effects of the tax on high-cost health plans
“Medical flexible spending accounts are toast,” said Bianchi, noting that eliminating FSAs is likely one of the first and easiest ways employers will try to reduce exposure to the tax on high-cost health plans.
The law purports to include health savings accounts, but officially refers to HSAs as “group health plans.” However, this conflicts with the Department of Labor’s statement that a health savings account is NOT a group health plan. Bianchi said regulators will have to sort out this ambiguity.
So far, regulators have ruled that HSAs funded with employee after-tax dollars do not count as applicable coverage, but those funded with pre-tax dollars (i.e. employer contributions) do count.
This has set off a flurry of backlash from benefit organizations, as well as the Chamber of Commerce. Critics say that the only feasible way to have a high-deductible plan with an HSA without triggering the tax is to fund it with after-tax dollars. Bianchi said that he wouldn’t be surprised if the IRS backed off due to the weight of the opposition, but for now it remains.
An attendee asked if Bianchi would recommend getting rid of flexible spending accounts. He stopped short of saying that he would recommend that action given the current situation, but that many employers would do so to try to avoid the tax.
In response to another question, Bianchi said that even employee-funded FSAs count as applicable coverage.
Bianchi noted that the tax does not take geography into account, meaning that employers in higher-cost areas such as New York will encounter it sooner than those in other parts of the country.
The value of applicable coverage is calculated with rules similar to COBRA. While this is pretty straightforward for fully insured plans, how to make similar determinations for self-funded plans isn’t completely clear.
Typically, self-insured employers hire an actuary to determine costs based on a standard population that includes everyone at the company. In one of its two notices, the IRS objected to this method based on the complexity created by having multiple plans, and wants to determine it based on who selects each type of plan. Different employee groups tend to gravitate toward different types of plans; a middle-aged, higher-paid employee who is married with children is more likely to choose a high-level plan, while a young, unmarried employee is more likely to opt for a low-level plan. Given these demographics, this approach would greatly increase the cost of the high-level plan, triggering the tax.
There have been many critical comments in response to this idea put forth by the IRS from major employers and benefit associations, including Johnson & Johnson.
Another question raised is which party is liable for the tax. In the insured-claim context, the carrier is liable. However, the carrier will pass on the cost, and the money paid ends up being additional income for the carrier. The result necessitates a tax gross-up. When this occurs, usually the highest marginal tax rate is assumed, but the IRS proposal would not allow this, and instead demand a precise gross-up calculation.
The IRS has put forth two notices this year in an effort to clarify what counts as applicable coverage for the purposes of the high-cost health plan tax. The notices are open to comments.
In the notices, the IRS said that coverage provided to military members and their families can be excluded from “applicable coverage.”
It also exempted on-site medical clinics that provide minimal care. However, many companies’ on-site medical clinics have morphed into what Bianchi describes as “small hospitals,” providing services such as immunizations, allergy injections, nonprescription pain relievers, and treatment of workplace injuries. The notices are soliciting comments on whether larger on-site clinics should be included in the definition of applicable coverage; Bianchi anticipates that they will be.
He noted that depending on lobbying tactics and relationships, some industry groups are more likely to be heard than others. An attendee asked specifically about the Society for Human Resource Management, which Bianchi praised as a knowledgeable group with high levels of technical expertise.
“Because the law is clear about health FSAs, the battleground has shifted to health savings accounts,” said Bianchi. “You might see more of what looks like consumer-driven healthcare.”
Employer Shared Responsibility
Employer shared responsibility rules are outlined under Code 4980H.
For larger employers with relatively stable, well-compensated workforces and robust benefits, employer shared responsibility rules are merely a speed bump, Bianchi said.
“At the end of the day, it’s not really going to change the way you operate,” he said.
Businesses with higher turnover rates and more low-level staff who have traditionally not been offered benefits, such as restaurants, retailers, and even staffing firms, face different challenges. Bianchi gave the example of McDonald’s, a large company with a range of employee categories, from executives to corporate managers to store managers to a fleet of low-wage, high-turnover servers who have not been offered benefits in the past. For McDonald’s and similar companies, coverage is the biggest issue to tackle.
“For one group, the problem is the 4980H, the employer shared responsibility rules,” he said. “For the other group, it’s the tax.”
Counting to 50
The definition of an applicable large employer is a company that has 50 or more full-time AND/OR full-time-equivalent employees. This is determined by looking at the previous calendar year, and averaging out each employee’s hours for each month. Employees who average 130 hours/month or more are full-time-equivalent employees.
Things can get complicated when there are multiple companies under common ownership. If there is a parent company that owns at least 80 percent, all of the subsidiaries can be lumped together for employee-counting purposes. Brother-sister control groups (five or fewer owners who each own varying portions of each subsidiary) and family trust ownership structures vary, and cannot be dealt with according to a single overarching rule. Bianchi said that if companies are eligible to file a consolidated return, there is a good chance that they are in a subsidiary control group, but this is not always the case.
Seasonal workers vs. seasonal employees
Bianchi stressed that there is a difference between a seasonal worker when counting to 50, and a seasonal employee when figuring out penalties. Once an employer has taken into account seasonal workers in determining that it meets the threshold for being an applicable large employer, seasonal employees are taken into account when a large applicable employer is assessing its exposure using the look-back method.
Bianchi gave the example of holiday associates in retail as an example of seasonal workers. If a retail store hires holiday associates who are employed by the store for fewer than four months, they are considered seasonal workers, and are not included when counting to 50 to determine if the store is a large employer, even if they are working full-time during that period.
If said retail store does otherwise meet the threshold for a large employer and is using the look-back method, it does not need to count the holiday associates when assessing penalty risk; in this situation, they are classified as seasonal employees. Seasonal employees are employees who work for a large applicable employer for fewer than six months.
Another example Bianchi mentioned was summer associates and summer clerks at law firms. They may be treated as seasonal employees for penalty purposes because they are employed by the firm for fewer than six months. They may also be treated as seasonal workers if they meet the parameters for that category.
Mergers and acquisitions
Several issues unique to mergers and acquisitions emerge when it comes to figuring out exposure and the logistics of counting employees.
A category that has yet to be specifically defined by regulators is that of reserve employees. This comes into play with mergers and acquisitions when determining how to count employees from another company that has been acquired.
Bianchi said that the answers are unknown at this point, but he suspects that the rules will be similar to those under COBRA.
“For now, we’ve had clients do mergers – particularly in the restaurant space – where they treat all the acquired workers as new employees, and I think that’s fine,” said Bianchi.
In cases where there is a stock deal that involves a small employer merging with a large employer, from the date of purview, employees will show up on 1095C forms, but will not be considered employed for the first three months.
“There will be no penalties for the pre-merger months, but there might be exposure,” said Bianchi.
The 50-employee threshold and reporting requirements
Bianchi clarified a question from an attendee about the relevance about the 50-employee threshold to recording procedures.
“Once you hit the 50 threshold, you are an applicable large employer, and therefore you are subject to reporting requirements,” Bianchi explained.
He elaborated that reporting requirements are twofold.
“One set of reporting requirements apply to those who issue coverage, whether it’s a carrier or an employer,” he continued.
This is so the IRS can verify which employees actually have coverage, as citizens without coverage are taxed for not having it. All employers – even small employers that fall below the 50 threshold – are responsible for the 1095B form, as this simply helps the government verify whether individual citizens have insurance (and is not used for employer assessment purposes).
Unless the employer is self-funded, carriers will issue this form. If an employer is self-funded, then the employer must issue the form.
In addition to this requirement, larger companies must also report how they are complying with the Employer Shared Responsibility part of the ACA.
Though conventional wisdom says that the two options are to either offer employees coverage, or to not offer converge and pay a penalty, Bianchi said that in his view, there are actually three options: offering no coverage, offering “crappy coverage,” or offering good coverage.
He defined “crappy coverage” as insurance that is either unaffordable to employees, or doesn’t cover very many services due to high deductibles, anemic networks, or because it is a preventative-services-only plan.
Preventative-services-only plans are an example of Minimal Essential Coverage (MEC), which only covers very basic services such as check-ups, but does not cover things like hospital care.
However, having a MEC plan gets employers off the hook for the worst penalty. Bianchi said that this may change in the future with the nondiscrimination part of the ACA, the implementation of which has been postponed. He anticipates that it will be another 2-3 years before employers must take this into account.
An attendee asked how the 9.5 percent of household income threshold for affordability played into employers’ obligations.
Under the ACA, if the employee cost for self-only coverage does not exceed 9.5 percent of the employee’s household income, the coverage is considered affordable.
There are three safe harbors available to employers. The first is rate of pay, for which an employee’s hourly pay rate and hours worked per month are calculated to determine average monthly pay over a year. The affordability threshold is 9.5 percent of this figure. The second method is the W-2 method, which uses an employee’s W-2 to calculate affordability. The problem with this method is that a company does not get employee W-2 forms until the end of the year, so cannot calculate the threshold until then. The third method is to calculate based on the assumption that every employee’s income is 138 percent of the federal poverty rate, which is approximately $16,000. Of course, this method costs the employer more, as employees may be making more than this.
An attendee asked about what an employer’s responsibility would be in the case than a full-time employee with benefits resigned, and was hired back on a part-time basis with the company if part-time employees are not offered benefits. Would the employer be obligated by the ACA to offer benefits to this employee?
As he delved into the attendee’s question, Bianchi advised the room that two important questions to ask when trying to resolve such issues are: 1. Is the employer an applicable large employer? 2. What method is being used to establish full-time status?
The attendee said that her company is an applicable large employer, and uses the look-back method.
Determining full-time status
When an employee is hired, they must be classified one of four ways: full-time, part-time, seasonal, or variable. There are two methods that can be used to determine whether employees are classified as full-time and must be offered benefits.
The method entails looking at how many hours an employee worked in real time in a particular month. If the employee worked 130 hours or more, he/she is considered full time for that month. This method is useful for monthly ESR reporting, but not as useful for determining which employees are eligible for benefits.
This method looks back at a specific period of time – usually 12 months – and divides the hours worked during that time by 12 (monthly) or 52 (weekly). If the employee averaged 30 hours/week or more during that period, he/she is counted as full-time for a subsequent “stability period,” even if the employee is not working full time during that period.
This method is useful for companies with employees who work variable hours, seasonal employees, or other employees who otherwise may not consistently work 130 hours or more from one month to the next. It offers some stability to employers in terms of having a better idea of to whom they will be offering coverage.
Bianchi mentioned that there are two sets of stability periods under the look-back method: one for new hires, and one for employees who have worked for the company for a while.
“There is a standard measurement period,” said Bianchi. “Once you have worked through that, you are no longer full-time, part-time, seasonal, or variable. You are only ongoing.”
The initial measurement period for new employees is tied to either the date of hire, or to the first day of the following month. This period cannot exceed one year.
“If you’re using the look-back method, you can hold that person out of coverage for a year and not be penalized,” he said.
Bianchi used the example of a bartender to further explain how the look-back method works for cases where employees work variable amounts of hours each week or month. The bartender’s employer could delay offering coverage for the first year of the bartender’s employment until the employer determines if the bartender is a full-time employee. If the bartender works full-time for the first year, he is classified as s full-time employee for the following stability period (the following year), and the employer must offer coverage. However, if the bartender drops down to part-time during the stability period, she still must be offered coverage coverage, but the employer is not obligated to pay for the coverage; it could put the bartender on COBRA. While this is allowed, doing so may affect the employer’s affordability calculus and expose it to affordability-related penalties.
Alternately, if an employee is designated as a full-time employee upon hire, he must be offered coverage within three months. This employee can then be tested month-to-month through a whole standard measurement period.
An attendee asked if time taken off for accrued sick time and vacation is counted for monthly hours. Bianchi said these hours are counted, as are any other paid hours such as jury duty, bereavement leave, and any other paid leave. Unpaid leave is not counted, but an employee on unpaid leave is still treated as an employee during a stability period.
Measurement and stability periods
Measurement periods can be as short as three months, or as long as 12 months.
“Stability periods have to be at least six months,” Bianchi said. “So if you have a three-month measurement period, you have to have a six-month stability period.”
He advises most employers to use a 12-month measurement period and 12-month stability period. An 11-month measurement period followed by a 12-month stability period is also a good option, as it gives HR a month to sort out any changes or confusion, and can make reporting and administration easier.
An attendee asked about the best course of action for her company, which has more than 50 full-time employees, and is safe from penalties. The company offers a rich benefit plan for its full-time employees, and has a bunch of seasonal employees who are not offered benefits. She worried that if some seasonal employees end up qualifying to be offered healthcare, the company could face liability for the tax on high-cost health plans. She wanted to know if it was best to continue using the look-back method, and then depending on how things developed, possibly eliminate the company’s FSA and/or downgrade the health coverage offered.
Bianchi clarified that the company must offer coverage to eligible seasonal employees, but is not obligated to offer it at the at the same cost as it is offered to full-time employees, as the nondiscrimination aspect of the ACA is not yet in effect. As long as coverage is offered at a rate deemed affordable by the 9.5 percent calculation, the company should be in the clear.
Bianchi did point out that if an employer offers affordable coverage to employees, it makes them ineligible for income-based subsidies should they opt instead for a marketplace plan. Because of this, some employers opt to make coverage unaffordable to lower-paid employees to allow these employees to be eligible for subsidies (those who receive subsidies pay less than 9.5 percent of household income in premiums). This does open the employer to unaffordability penalties. Despite penalties, Bianchi noted that accepting the penalties may make more business sense in the big picture, as employees with other options will often quit in favor of a job that either provides affordable coverage, or allows them to find affordable coverage through the marketplace with the help of subsidies.
He advised offering more than one tier of coverage, as not all employees will want or value a rich plan. This saves the company money, allows it to comply with ACA regulations, and gives employees a sense of choice.
An attendee asked about measurement and stability periods that overlap calendar years. Her company’s year begins on April 1, and she wanted to know if it is feasible to have a 10-month measurement period followed by a two-month administrative period for a 12-month stability period, as doing so would go into the next calendar year.
Bianchi advised the attendee to begin the measurement period on February 1, and consider everyone hired on or before February 1, 2014 an ongoing employee (these employees would be offered coverage starting on April, if they did not already have it). Anyone hired after that date would be considered to be in an initial measurement period.
Another attendee asked about how to handle per-diem employees, as her company employs many per-diem residential aides. At her company, per-diem employees generally work two or three days a week, but some end up reaching 35 hours a week as a result of filling in for other employees.
“I think per-diem employees are the single biggest challenge of the Affordable Care Act,” Bianchi said.
He said per-diem employees’ hours and schedules tend to vary considerably, and hours of service can also be difficult to tabulate accurately because they often are doing administrative work even when not officially scheduled or on site. Nurses, residential aides, and adjunct professors are examples where employers are wise to be mindful of this.
Of adjuncts, Bianchi said, “It’s not just the hours in the classroom. It’s prep time, faculty meetings, office hours.”
The first set of reporting rules is for carriers and anyone who provides coverage, e.g. self-funded employers. This set of rules is relatively straightforward, and serves to inform the government that an individual has coverage and thus will not be changed a tax penalty.
The employer shared responsibility rules (ESR) are more slightly more particular.
“The simplest way to understand all of this is that the timing is just like W-2s,” said Bianchi. “You issue it in January, report it in February or March.”
He also drew a parallel between W-2 and W-3 forms and the Minimum Essential Coverage (MEC) reporting forms, explaining that Form 1094B was a statement like a W-2, and Form 1095B is a transmittal form like a W-3.
For ESR, the employee receives Form 1095C, and the transmittal form sent to the IRS is Form 1094C.
“The difference is that there is far more information packed into transmittal forms for these reporting purposes than there is for wage reporting on W-2s,” he said.
Bianchi reminded attendees that unless they are self-funded, companies with fewer than 50 employees do not need to file 1095B forms, as the carrier will be the one filing it.
For insured employers with more than 50 employees, the employers will give employees 1095C forms after filling out Parts 1 and 2. The insurer will supply the 1095B form to employees.
Self-insured large applicable employers will fill out all three parts of the 1095C forms. In this case, the employer will only file the 1095C form (this system was designed to to reduce the number of forms).
If an employer has a fully insured group health plan and also a health reimbursement account (HRA), draft rules initially mandated that even small employers separately file a 1095B form for the HRA. The IRS has changed this rule, and employers may now file a single form for both its HRA and group health plan.
An attendee asked how this would impact employers that offer coverage to retirees. Bianchi responded that if the retiree has been covered the entire year, the only information required will be the information on the B form, and employers may choose whether to include this on the B form or the C form (most opt for the B). If the company is insured, the retiree will receive a form from the carrier, instead of from the company.
If am employee retires during the year being reported, the retired months will be marked with the “not employed” code (1H), which means they cannot trigger a penalty.
An attendee asked when the 1095B will first be issued. Bianchi responded that they will be issued in January of 2016 for reporting on 2015.
Employers may use software through their payroll services or other third parties to work on compliance, but Bianchi expressed doubt about the efficacy of these programs.
“The good news is that the IRS has given us a good-faith compliance period,” he said.
Employers who make a concerted effort to comply and are generally on track will not be penalized. The good-faith compliance does not apply to late filing.
“If you’re going to file a complete mess, at least do it on time,” said Bianchi.
He stressed the importance of having warranties of representation in contracts with third-party vendors.
“They’re got to tell you in that contract that this thing will work for the purpose you intend it,” he said. “It’s called a warranty of merchant ability and fitness for a particular purpose.”
Bianchi also said contracts should also include a warranty that the third-party vendor will be on time in filing, given that employers send the necessary information on time. This ensures that they will be able to enjoy the benefit of the good-faith compliance rule.
An attendee asked if it is feasible for companies to do the reporting themselves, as many employees at her company are not in the current payroll system, and will not be put in because the company will soon have a new system. The company had an IT person design tools to track paid sick leave time, hours and more, and plans to do the reporting itself harnessing the information gathered with these tools.
Bianchi mentioned that many companies that do payroll in house use a Microsoft Office-backed solution that is being programmed for this purpose. From what he has heard, it seems to work pretty well so far, and he thinks it is likely a good alternative for companies that prefer to do payroll and reporting in house, or want to avoid the expense of third-party vendors.
He said that at this point, whether companies opt for in-house or third-party services, the most important part is that they are well into the process.
Andrea Burzynski is a freelance writer based in New York. Reach her at email@example.com.
The HR Roundtable is a breakfast forum for human resources professionals in New York City sponsored by The TemPositions Group of Companies. TemPositions, one of the largest staffing companies in the New York tri-state area with operations in California, has been helping businesses with their short- and long-term staffing needs since 1962.