2018 IS NOT THAT FAR AWAY LOOMING EXCISE TAX ALREADY CHANGING EMPLOYER HEALTH INSURANCE & ACA...

2 0 1 8 I S N O T T H A T F A R A W A Y

L O O M I N G E X C I S E T A X A L R E A D Y C H A N G I N G E M P L O Y E R H E A L T H I N S U R A N C E

& A C A R E P O R T I N G 2 0 1 6

SEPTEMBER 24, 2015

© Marsh & McLennan Agency 2015 2This is for informational purposes only - not intended to be used as legal advice.

W H A T W E ’ L L C O V E R T O D A YT H E 2 0 1 8 E X C I S E T A X

• It’s a big deal to employers

• Strategic considerations and mitigation

• Reducing plan costs

• Health accounts

• Other insurance coverage

• Have you thought about…

• 2018 is not that far away – Let’s build a strategy!

• ACA reporting

• Overview


© Marsh & McLennan Agency 2015 3

THE 2018 EXCISE TAXIT’S A BIG DEAL TO EMPLOYERS


A B I G D E A L T O L A R G E A N D S M A L L E M P L O Y E R S !


Employee Family$7,500

$10,000

$12,500

$15,000

$17,500

$20,000

$22,500

$25,000

$27,500

$30,000

$32,500

$35,000

$37,500

2015 2018

E X C I S E T A X O N H I G H - C O S T P L A N SA T A G L A N C E

($35,600 − 27,500) × 40% = $3,240 per covered family

• Effective in 2018, a 40% excise tax (non-deductible) will apply to the total cost of an active or former employee’s health-related coverage exceeding the following dollar levels: Single: $10,200; Family: $27,500

• Includes medical coverage (employer and employee contributions), health FSAs, HRAs, HSAs (both employer and employee pre-tax contributions) and many on-site clinics

• Thresholds are indexed beyond 2018 (CPI + 1% in 2019; CPI thereafter)

• There are many further details and regulatory uncertainties that impact the determination of the excise tax


E X C I S E T A X S T R A T E G Y – O P T I M I Z I N G

• The ACA essentially establishes a “floor” and “ceiling” relative to employer‑sponsored health coverage. At a high level:

– The floor is the Bronze-level 60% actuarial value

- To avoid potential employers shared responsibility assessments

– The ceiling is the statutory excise tax threshold for high-cost health plans

- $10,200/single coverage and $27,500/family coverage, in 2018

• The overriding employer goal of managing the excise tax on high-cost health plans is to:

– Avoid the 40% tax

– Permit the employer plan sponsor and plan participants to optimize tax-protected benefits under the applicable statutory threshold


I S I T A B I G D E A L T O E M P L O Y E R S ?S U R V E Y ’ S R E C E N T E S T I M A T E …

2018 2019 2020 2021 2022

31% 35% 39%47% 51%

33%39%

45%52%

58%

All Employers Large Employers (500+ Employees)

E S T I M AT E S B A S E D O N D ATA F R O M M E R C E R ’ S N AT I O N A L S U R V E Y O F E M P L O Y E R ‑ S P O N S O R E D H E A LT H P L A N S 2 0 1 4 ; P R E M I U M T R E N D E D AT 6 % , TA X T H R E S H O L D T R E N D E D AT 3 % F O R 2 0 1 9 A N D 2 % F O R F U T U R E Y E A R S

P E R C E N T O F E M P L O Y E R S T H AT W I L L B E S U B J E C T TO TA X I F T H E Y M A K E N O C H A N G E S TO C U R R E N T P L A N S – E X C L U D I N G E M P L O Y E E C O N T R I B U T I O N S TO F S A / H S A

R E S U LT S A R E W O R S E W H E N H E A LT H A C C O U N T S A R E A D D E D TO T H E E Q U AT I O N !


W H A T A R E E M P L O Y E R S D O I N G , O R C O N S I D E R I N G , T O M I N I M I Z E T H E I M P A C T O F T H E E X C I S E T A X O N H I G H -C O S T P L A N S ?

41%25% 19% 13%

3% 2%

25%43%

42%36%

23% 21%

Have taken action Considering

Source: Preliminary results from Mercer’s National Survey of Employer-Sponsored Health Plans, 2015

B U T A R E T H E S E E M P L O Y E R S O P T I M I Z I N G T H E I R H S A

S T R U C T U R E S T O M A X I M I Z ETA X - E F F E C T I V E N E S S ?



THE 2018 EXCISE TAXSTRATEGIC CONSIDERATIONSAND MITIGATION


W H A T T Y P E S O F C O V E R A G E S A R E I N C L U D E D / E X C L U D E D F R O M T H E E X C I S E T A X ? 1

1.This description is largely based on Mercer's current interpretation, as official regulatory guidance is not yet available2.While ACA’s statutory language appears to include self-insured dental/vision plans and EAPs, the IRS is considering excluding such plans if they qualify as excepted benefits

[IRS Notice 2015–2016]

I N C L U D E

Employee and employer share of major medical cost/premium(e.g. PPO, HMO, HDHP, Rx)– Including executive medical/physical benefits and some

expatriate coverage

Health FSA, including employee pre-tax salary reduction contributions

HRA

“Employer contributions” to an HSA, including employee pre‑tax contributions made through a cafeteria plan

On-site medical clinics offering more than “de minimis” medical care

Medigap, TRICARE supplemental insurance, and other “similar supplemental coverage”

Specified disease or illness coverage, or hospital or other fixed indemnity insurance, if payment for coverage is excluded from employee’s gross income (e.g. employee pays for coverage withpre-tax salary reduction contributions and/or employer paid without imputed income)

E X C L U D E

Employee HSA contributions made on an after‑tax basis

Insured limited-scope dental and vision plans

Specified disease or illness coverage, or hospital or other fixed indemnity insurance, if payment for coverage is included in employee’s gross income (e.g. employee-pay-all on an after‑tax basis and/or employer paid with imputed income)

Long-term care insurance

Some expatriate coverage

Certain non-medical “excepted benefits” including: – Accident-only (including AD&D)– Disability income insurance– Liability insurance, including any automobile or supplemental

liability insurance– Workers’ compensation– Automobile medical payment insurance– Credit-only insurance– Other “similar” insurance coverage

? Limited-purpose dental/vision only FSAs

? Employee Assistance Programs, if excepted benefit1

? Self-insured limited-scope dental and vision plans, if excepted benefit2


E X C I S E T A X C O N S I D E R A T I O N S A N D M I T I G A T I O N

E N R O L L E D E M P L O Y E E S /

M E M B E R SP L A N C O S T T H R E S H O L D TA X× – =× 40%

• Who is covered?

• Underlying Cost of Care

• How Cost is Measured

• Plan Design

• Accounts

• Age/Gender adjustments

• High risk adjustments

• Retiree adjustments



REDUCING PLAN COSTHEALTH ACCOUNTS


R E D U C I N G P L A N C O S TH E A L T H A C C O U N T S

• The cost of the plan for excise tax purposes will include the value of health accounts, including FSAs, HRAs and HSAs (both employer and pre-taxemployee contributions)

• As the cost of the underlying comprehensive medical plan approaches the excisetax thresholds, employers will need to manage these accounts to avoid unnecessary taxes, as well as to fully utilize tax advantages that remain in place

• The next several pages look more closely at how to optimize account usageas plan costs approach, hit and exceed the excise tax thresholds

– Account limits are based on illustrative indexing to 2018


Non-HDHP Non-HDHP + FSA HDHP + pre-tax HSA HDHP + pre-tax HSA +LP FSA

$10,200

$7,500 $6,450

$3,750

$2,700 $3,750

$3,750

$2,700

Underlying plan cost FSA limit Pre-tax HSA Limited purpose FSA (including medical)

S T A G E 1 : “ A L L C L E A R ” ( F O R N O W )E M P L O Y E E - O N L Y C O V E R A G E

2018 excise tax threshold $10,200


Non-HDHP + FSA HDHP + pre-tax HSA HDHP + pre-tax HSA +LP FSA

$9,800$8,750

$6,050

2700 $3,750

$3,750

2700

Underlying plan cost FSA limit Pre-tax HSA Limited purpose FSA (including medical)

S T A G E 2 : A C C O U N T S T R I G G E R E X C I S E T A XE M P L O Y E E - O N L Y C O V E R A G E


Excise tax potential



• Reduce FSA contribution limit

• Eliminate FSA

• Convert FSA to dental/vision only (?)

• Reduce or eliminate pre‑tax HSA contributions

• Employee can independently fund tax‑preferred HSA

• Both sets of approaches can help

• Convert Limited purpose FSA to dental/vision only?


Non-HDHP (before the excise tax)

Non-HDHP (after the excise tax)

HDHP + post-tax HSA

$13,950 $10,200

$10,200

$1,500

3750

Underlying plan cost Employee post-tax funded HSA Excise tax Tax-favored value

$ 3 , 7 5 0 X 4 0 %

S T A G E 3 : U N D E R L Y I N G P L A N T R I G G E R S E X C I S E T A XE M P L O Y E E - O N L Y C O V E R A G E


Excise tax potentialAdditional taxsavings created

• After-tax or independent employee funded HSA contributions can drive tax effective value over the threshold

• Reduce plancost, or

• Convert toHDHP andreduce contributionsor increasetaxable compensation


T H E E X C I S E T A X O N H I G H - C O S T H E A L T H P L A N SA N D R I S I N G M A R G I N A L T A X R A T E S W I L L A C C E L E R A T E H S A A D O P T I O N

CONSIDERATIONS

• Post-tax HSA contributions may be made by participant

• Participants may take a federal tax deduction for post-tax HSA contributions; state income tax laws vary, but most states with income tax parallel the federal HSA contribution rules (except AL, CA and NJ)

• This effectively increases the 2018 tax-protected benefit threshold to approximately:

– $13,950/single (+37%)

– $35,000/family (+27%)

• Future increases in HSA contribution limits may further alleviate excise tax pressure

COMPENSATION CHANGES ARE NOT SIMPLE!


W H E N W I L L A 6 0 % P L A N H I T T H E T H R E S H O L D ?

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Employee + Family PEPY Excise Tax - Family Employee Only PEPY

E S T I M AT E S B A S E D O N D ATA F R O M M E R C E R ’ S N AT I O N A L S U R V E Y O F E M P L O Y E R ‑ S P O N S O R E D H E A LT H P L A N S 2 0 1 3 ; P R E M I U M T R E N D E D AT 6 % ,

TA X T H R E S H O L D T R E N D E D AT 3 % F O R 2 0 1 9 ; 2 % T H E R E A F T E R .

AV E R A G E P P O P L A N – 6 0 % P L A N VA L U E


E M P L O Y E R S C E N A R I O 1

CADILLAC TAX CALCULATOR

Current Effective Date: 1/1/2015

Annual Premium Trend: 8.0%

Cadillac Threshold Index: 2.5%

EnrollmentCurrent Monthly

Premium

HDHP/FSA Monthly Fund

Projected Annual Cadillac Tax

Plan 1 All Plans

Plan 1 2015 $0 $0EE Only 63 $1,045.00 2016 $0 $0EE + Spouse 15 $1,671.00 2017 $0 $0EE+ Child(ren) 12 $1,880.00 2018 $237,472 $237,472EE + Family 22 $2,612.00 2019 $290,473 $290,473Monthly Total 112 $170,924 $0 2020 $361,008 $361,008Annual Total $2,051,088 $0 2021 $436,168 $436,168

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2015 2016 2017 2018 2019 2020 2021

Annual Projected Cost by PlanIndividual Coverage

Plan 1 Cadillac Threshold

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

2015 2016 2017 2018 2019 2020 2021

Annual Projected Cost by PlanDependent Coverage


POPULATE GRAPHS(run after entering plan costs)


E M P L O Y E R S C E N A R I O 2

CADILLAC TAX CALCULATOR

Current Effective Date: 7/1/2015

Annual Premium Trend: 8.0%

Cadillac Threshold Index: 2.5%

EnrollmentCurrent Monthly

Premium

HDHP/FSA Monthly Fund

Projected Annual Cadillac Tax

Plan 1 All Plans

Plan 1 2015 $0 $0EE Only 202 $1,148.00 2016 $0 $0EE + Spouse 102 $1,739.00 2017 $0 $0EE+ Child(ren) 51 $2,297.00 2018 $1,365,706 $1,365,706EE + Family 89 $3,101.00 2019 $1,624,736 $1,624,736Monthly Total 444 $802,410 $0 2020 $1,960,017 $1,960,017Annual Total $9,628,920 $0 2021 $2,320,754 $2,320,754

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2015 2016 2017 2018 2019 2020 2021

Annual Projected Cost by PlanIndividual Coverage


$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

2015 2016 2017 2018 2019 2020 2021

Annual Projected Cost by PlanDependent Coverage


POPULATE GRAPHS(run after entering plan costs)



REDUCING PLAN COSTOTHER INSURANCE COVERAGE


O T H E R I N S U R A N C E C O V E R A G E A P P R O A C H

As employer re-design their health plans to reduce plan cost to avoid or help mitigate their excise tax obligations, employers might consider supplementing their benefit plans by offering…….

Voluntary benefits (employee or employer paid plans) on an after-tax basis. These approach could include:

• Critical illness insurance

• Accident Insurance

• Disability income insurance

• Hospital confinement indemnity insurance

This approach would help their employees cover their higher deductible and out-of-pockets maximums and these post-tax expenses would not be included in the total plan cost for excise tax purposes.



THE 2018 EXCISE TAX STRATEGIESHAVE YOUTHOUGHT ABOUT…


P R I V A T E E X C H A N G E S

Private exchanges provide a platform to efficiently execute the strategies we’ve discussed

80% 75%

AV E R A G E VA L U E O F M E D I C A L P L A N S P R E - M A R K E T P L A C E

AV E R A G E VA L U E O F M E D I C A L P L A N S P O S T- M A R K E T P L A C E

Expanded use of supplemental medical plans (generally not subject to excise tax) with voluntary benefits programs is expected


T H E B R O A D E R I M P A C T O F T H E 2 0 1 8 E X C I S E T A X

• Would a reduction in medical benefits impact your total rewards competitiveness?

• What are the potential impacts of changes in medical benefits on employment and business outcomes?

• What is your strategy for maintaining your employment value proposition if benefits are reduced?



2018 IS NOT THAT FAR AWAYLET’S BUILD A STRATEGY


W E N E E D T O P L A N F O R W H E N – N O T I F I T H A P P E N S …

A LOT CAN HAPPEN BETWEEN NOW AND 2018, BUT HOPING FOR A REPEAL OF THE TAX IS NOT A PRUDENT STRATEGY

IRS REQUESTS FOR INFORMATION PROVIDE INSIGHT, BUT NO FORMAL GUIDANCE HAS BEEN RELEASED

ADVANCE PLANNING IS REQUIRED, ESPECIALLY WITH RESPECT TO HEALTH ACCOUNTS, FOR PLANS EXPECTED TO TRIGGER THE TAX IN 2018 AND UNION PLANS WHERE COMMITMENTS EXTEND INTO 2018 .

THERE ARE STRATEGIES THAT NEED TO BE ASSESSED AND IMPLEMENTED DUE TO BOTH ACA EXCISE TAX AND GENERAL

COST REDUCTION

2018 IS NOT THAT FAR AWAY



ACA REPORTINGOVERVIEW

Additional Information


A C A R E P O R T I N G B E G I N S I N 2 0 1 6 ( F O R 2 0 1 5 D A T A )

Minimum Essential Coverage (§6055)

Employer Shared Responsibility (§6056)

2016 Due Dates

Purpose Enforce individual mandate Enforce employer mandate

Validate public exchange premium subsidy eligibility

Who Reports

Every entity providing MEC to an individual.

Every large employer with 50 or more full-time or equivalent employees.

IRS Reporting

Include all covered individuals enrolled in MEC.

Include each full-time employee.

E-file: March 31

Paper: Feb. 29

If filing at least 250 Forms 1095-C, must E-file.

Individual Reporting

To each “responsible individual” who enrolls self or others in MEC.

Each employee who was full time for at least one month during reporting year.

February 1

Penalties Failure to report – $250 per report, up to $3 million


A C A R E P O R T I N G B E G I N S I N 2 0 1 6 R E F E R E N C E C H A R T

Fully Insured Plan HRA’s/Self Funding Plan

Insurance Carrier Forms 1094-B and 1095-B Not Applicable

Non – ALE(Average fewer than 50 full-time equivalents in prior calendar year)

Not required to file Forms 1094-B and 1095-B

ALE(Average fewer than 50 full-time equivalents in prior calendar year)

Forms 1094-C and 1095-C

Forms 1094-C and 1095-C

Parts I and II only Parts I, II, and III

A L E R E F E R S TO “ A P P L I C A B L E L A R G E E M P L O Y E R ”


1094-C Transmittal

Form

1095-C Employee Statement

Employer IRS

Information Return

H O W L A R G E E M P L O Y E R S W I L L R E P O R T ( M E C A N D E S R )

1094-C Transmittal

Form

1095-C Employee Statement

Employer IRS

Information Return

1094-B Transmittal

Form

1095-B Employee Statement

Insurer IRS

Information Return

Sel

f-In

sure

d

Em

plo

yers

Fu

lly-

Insu

red

E

mp

loye

rs

Employer reports both MEC (6055) and ESR (6056) information on combined forms.*

Insurer will provide MEC (6055) information on Form 1094-B and 1095-B.

Employer will provide ESR (6056) information on Form 1094-C and 1095-C.

* Large employers with self-funded plans have the option to use the same forms as insurers — Forms 1094-B and 1095-B — to report MEC for persons who weren’t employees at any time during the reporting year, such as retirees who terminated in previous years or covered non-employee director. Small employers exempt from ESR reporting that have self-funded plans will use 1094-B and 1095-B to report MEC for all enrollees.

Due Dates• Employee statement: Feb 1, 2016 for 2015 coverage year

(annually on Jan 31 thereafter).• IRS: Annually by Mar. 31 for e-filers or Feb. 28 for paper filers

(Monday, Feb. 29, 2016 for 2015 coverage year for paper filers).


F O R M 1 0 9 4 - C T R A N S M I T T A L – P A R T S I A N D I I


F O R M 1 0 9 4 - C T R A N S M I T T A L – P A R T I I I


F O R M 1 0 9 5 - C I N D I V I D U A L S T A T E M E N T


G E N E R A L M E C R E P O R T I N GF O R M S 1 0 9 4 - B T R A N S M I T T A L A N D 1 0 9 5 - B P A R T I C I P A N T S T A T E M E N T


Marsh McLennan Agency (MMA) has prepared these projections exclusively for ASA to estimate the range of the impact of federal Health Care Reform. These estimates may not be used or relied upon by any other party or for any other purpose than for which they were issued by MMA. MMA is not responsible for the consequences of any unauthorized use.

All projections are based on the information and data available at a point in time and the projections are not a guarantee of results which might be achieved. The projections are subject to unforeseen and random events and so must be interpreted as having a potentially wide range of variability from the estimates.

Further, the estimates set forth in this report have been prepared before all regulations needed to implement the Patient Protection and Affordable Care Act (PPACA) and Health Care Education and Reconciliation Act (HCERA) have been issued, including clarifications and technical corrections, and without guidance on complex financial calculations that may be required. (For example, some Health Care Reform provisions will likely involve calculations at the individual employee level.) Accordingly, these estimates are not Actuarial Opinions. ASA is responsible for all financial and design decisions regarding PPACA and HCERA. Such decisions should be made only after ASA careful consideration of alternative future financial conditions and legislative scenarios, and not solely on the basis of the estimates illustrated here.

ASA understands that MMA is not engaged in the practice of law and this report, which may include commenting on legal issues or regulations, does not constitute and is not a substitute for legal advice. Accordingly, MMA recommends that ASA secures the advice of competent legal counsel with respect to any legal matters related to this report or otherwise.

The information contained in this document and in any attachments is not intended by MMA to be used, and it cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or imposed by any legislative body on the taxpayer or plan sponsor.

2018 IS NOT THAT FAR AWAY LOOMING EXCISE TAX ALREADY CHANGING EMPLOYER HEALTH INSURANCE & ACA...

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