RECORDED WEBINAR: UNRAVELING THE ACA AND THE IMPLICATIONS FOR THE FUTURE WORKFORCE
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Transcript of RECORDED WEBINAR: UNRAVELING THE ACA AND THE IMPLICATIONS FOR THE FUTURE WORKFORCE
Understanding the ACA: Unraveling the ACA
and the Implications for Hiring in the Future
September 24, 2014
Alden Bianchi, Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C., Boston, Massachusetts
Agenda
• Shared Responsibly for Employers
• Preliminary Items and Key Definitions
–The individual mandate
–Minimum essential coverage
• Applicable Large Employers
• Code Section 4980H—Structure
–4980H(a) Liability
–4980H(a) Liability
• Determining Full-Time Employee Status
Agenda (cont’d)
–Monthly and look-back measurement methods
–Transition from one method to the other
–Changes in status
–Special unpaid leave and employment break periods
–Employees of staffing firms
• Transition Rules
–Carryover from proposed regulations
–Newly issued
• Waiting period final regulations
• Plan-level and employer reporting final regulations
Shared Responsibly for Employers
• The Patient Protection and Affordable Care Act imposes responsibility
for the reform of the nation's health care financing rules on individuals,
states, employers, carriers and the Federal government, among others
• “Employer Shared Responsibility” refers to the obligations on
“applicable large employers” to offer affordable coverage that provides
minimum value or face the prospect of a excise tax (a/k/a "assessable
payment")
• Originally slated to take effect Jan. 1, 2014, the rules were delayed one
year to Jan. 1, 2015 (see IRS Notice 2013-45)
Individual Responsibility
• Commencing Jan. 1, 2014, U.S. citizens and green card holders have a
choice (unless an exception applies) to either:
–Obtain health care coverage (“minimum essential coverage”) for
themselves and their dependents; or
–Pay a tax
• Minimum essential coverage include coverage under an eligible
employer-sponsored plan
–Generally, an eligible "employer-sponsored plan must" provide
medical care other than excepted benefits
– If coverage is under a small group product, it must include minimum
essential coverage (or MEC)
Premium Tax Credits • From and after 2014, a taxpayer with household income between
100% and 400% of the federal poverty line is eligible to receive a
premium tax credit or cost-sharing subsidy to purchase insurance
coverage a public insurance exchange if the taxpayer:
– Is not eligible for government coverage such as Medicare, Medicaid
or CHIP
– Is not eligible for employer-provided coverage or is eligible only for
employer provided coverage that is neither “affordable” nor provides
“minimum value”
– In 2014, the FPL (contiguous states and D.C.) is $$11,670 for an
individual or $23,850 for a family of four (source: U.S. Dept. of Health
and Human Services)
Applicable Large Employer
• An employer that employed an average of at least 50 full-
time employees (taking into account full-time equivalent
employees or “FTEs”) on business days during the
preceding calendar year
–Includes governmental and tax exempt entities
–Sole proprietors, partners, 2-percent S corporation
shareholders, and leased employee are not employees
Applicable Large Employer
• Status as an applicable large employer is determined by
–Aggregating all trades or businesses treated as a single
employer under Code Sections 414(b), 414(c), 414(m) and
414(o), and
–Adding the number of full-time employees and FTEs for each
calendar month in the preceding calendar year, dividing by 12,
and rounding the quotient up to the next whole number
Applicable Large Employer (cont’d)
• Full-time employees in excess of 50 who are “seasonal
workers and FTEs ” are excluded if they were employed
during a 120-day or shorter period
–Seasonal worker” is defined with reference to DOL
regulations
–Four calendar months is equivalent to 120 days
• Predecessor/successor employers included (but no
guidance is yet provided)
• New employers: if reasonably expected to employ an
average of at least 50 full-time employees . . .
Assessable Payments Option 1
• Employer fails to make an offer (to at least 95% of it full-
time employees) of
–Minimum essential coverage under an
–Eligible employer-sponsored plan
• Code 4980H(a) Liability does not apply where an employer
dependents) for a calendar month if, for that month, it offers
coverage to all but five percent (i.e., 95%) or, if greater, five
of its full-time employees
Assessable Payments Option 1
• Under a transition rule, 70% is substituted for 95% for the
2015 plan year
• Option 1 Penalty (or “4980H(a) Liability”: an assessable
payment determined monthly equal to
–1/12 of $2,000 multiplied by the number of the
employer’s full-time employees
–Excluding the first 30
Assessable Payments Option 2
• Employer make makes an offer to at least 95% of it full-time employees of MEC:
–Under an eligible employer-sponsored plan”
–But the coverage in “inadequate”
• Option 2 Penalty (4980H(b) Liability): Lesser of:
–1/12 of $3,000 multiplied by the number of full-time employees who qualify for and receive a premium tax credit or cost-sharing reduction from an exchange; or
–Amount of the Option 1 penalty
• Option 2 is a middle ground between "pay" and "play," which may eclipse Option 1 entirely
Affordability • Coverage is affordable if the employee’s required contribution for self-
only coverage does not exceed 9.5 % of the employee’s household
income for the taxable year
• Recognizing that employers will not know, and would have difficulty
determining, household income for a taxable year, the final rule
provides three safe harbors
–W-2 wages (the “W-2 safe-harbor)
–Hourly rate of pay x 130 hours per month (“rate of pay” safe harbor)
–Cost for self-only coverage < 9.5% of the FPL for a single individual
(“Federal poverty line” safe harbor)
Minimum Value
• Measure of the plan’s generosity: plan pays at least 60% of total
allowed costs of benefits
• Must include: physician and mid-level practitioner care, hospital and
emergency room services, pharmacy benefits, and laboratory and
imaging services
• Three methods of determining MV:
– IRS/HHS minimum value calculator
– IRS or DHHS safe harbor checklists
–Actuarial certification
• Special rule apply to the treatment of employer HRA contributions
Hours of Service • An employee's hours of service include the following
–Each hour for which an employee is paid, or entitled to payment,
–Each hour for which an employee is paid, or entitled to payment by
the employer on account of a period of time during which no duties
are performed due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty or leave of absence)
• 130 hours of service in a calendar month as the monthly equivalent of
30 hours of service per week ((52 x 30) ÷ 12 = 130)
• Excludes hours for which compensation is paid for services performed
constitutes income from sources without the United States
Hours of Service (cont’d) • Actual hours of service from records of hours worked and hours for
which payment is made
–Days-worked equivalency: Eight hours of service for each day for
which the employee would be required to be credited with at least
one hour of service
–Weeks-worked equivalency: 40 hours of service per week for each
week for which the employee would be required to be credited with
at least one hour of service
• Hours of service don’t include hours of:
–Bona fide volunteers
–Students on Federal work study program
–Certain religious (who have taken a vow of poverty)
Assessable Payments Option 3
• Employer make makes an offer to at least 95% of it full-time employees of MEC:
–Under an eligible employer-sponsored plan”
–And the coverage is “adequate”
• Option 3 Penalty (4980H(b) Liability): zero
• An offer of coverage is adequate if it is both
–"Affordable” and
–Provides “minimum value”
• Coverage is affordable if the employee’s required contribution for self-only coverage does not exceed 9.5 % of the employee’s household income for the taxable year
Compliance Strategies/Plan Designs
Sub-Minimum
Value
Minimum Value
MEC Plan Reference Pricing
Models
Major Medical
excluding inpatient
hospital services
Limit Networks
Self-funded Self-funded Self-funded Self-funded or fully
insured
• Preventive-
services only
• May have non-
coordinated
hospital
indemnity
feature
• Similar to most
major medical
products
• But
reimbursement
tied to a
reference price
(e.g., Medicare
plus 10%)
• Qualifies as MV
using HHS
calculator
• Not everyone is
convinced
• Regulators are
aware but have
not objected
(yet)
• Services limited
to a small
number of
participating
providers
• May be more
appropriate to
large urban
environments
The Sub-MV Plan Strategy
• Example of “sub-MV plan” coverage
– First-dollar preventative care
– Wellness
– Clinical trials
• Result: 4980H compliance tested under Option 2 ($3,000 x just employees who are subsidy eligible)
• Strategy is neither “abusive” (as some claim) nor a “panacea” (as others claim)
– Avoids the Option 1 penalty (which is far more onerous in most cases)
– Does not avoid the Option 2 penalty (which, while generally less, is hard to predict and almost impossible to model)
19
The MVP Strategy
• A “Minimum Essential Coverage” or “MEC” plan
• A “hospital or fixed indemnity plan”
• An MVP arrangement;
–The goal is to reduce the aggregate premium cost of minimum value
coverage so that the cost of providing coverage that is “affordable” is
similarly lowered
–For example, the premium cost of a traditional major medial plan
offered on a fully-insured basis by a top-tier, national carrier might
be, say, $500 or more. But for an MVP arrangement the cost might
be $200. (MVP arrangements are generally if not universally self-
funded.)
20
Full-Time Employee • A full-time employee means, with respect to a calendar month, a
“common law employee” who averaged 30 or more hours of service per
week or, if the employer elects, had 130 or more hours of service in the
calendar month
• Under common law standard, an individual is an “employee” if the
person for whom the services are performed “has the right to control
and direct the individual who performs the services not only as to the
result to be achieved by the work but also the details and means by
which the result is achieved”
Measurement Methods
• Monthly measurement method
–An employer determines each employee’s status as a full-time employee by counting the employee’s hours of service for each month
–Coverage need not be offered during the first three full months of employment
• Look-back measurement method
–An employer may determine the status of an employee as a full-time employee during a future period (referred to as the “stability period”), based upon the hours of service of the employee in a prior period (referred to as the “measurement period”)
–Does not apply for purposes of determining whether an employer is an applicable large employer
Measurement Methods (cont’d) • Measurement methods may be applied by categories:
–Salaried employees and hourly employees;
– Employees whose primary places of employment are in different
states;
–Collectively bargained employees and non-collectively bargained
employees;
–and each group of collectively bargained employees covered by a
separate collective bargaining arrangement
• Rules for transitioning from one measurement period to the other in the
case of a change in employment status
Monthly Measurement Method • Full-time status determined based on hours worked during a calendar
month
• Monthly measurement based on weeks per calendar months
–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
Look-Back Measurement Method
• Answers the question, “What if I don’t know if a new hire is going
to be full time?”
– Applies to new variable-hour, new seasonal employees, new
part-time employees, and ongoing employees
– Does not apply to full-time employees
• Hours are tested during the measurement period: If employee
works 30 hours per week on average during the measurement
period, he or she must be covered during the stability period,
irrespective of hours
25
Variable Hour Employees • An employee is a variable hour employee “if, based on the facts and
circumstances at the employee’s start date, the applicable large
employer member cannot determine whether the employee is
reasonably expected to be employed on average at least 30 hours of
service per week during the initial measurement period because the
employee’s hours are variable or otherwise uncertain”
• Factors considered in making a variable hour determination include but
are not limited to:
–Whether the employee is replacing an employee who was a full-time
employee or a variable hour employee,
Variable Hour Employees (cont’d) –The extent to which the hours of service of employees in the same or
comparable positions have actually varied above and below an
average of 30 hours of service per week during recent measurement
periods, and
–Whether the job was advertised, or otherwise communicated to the
new employee or otherwise documented (for example, through a
contract or job description) as requiring hours of service that would
average at least 30 hours of service per week, less than 30 hours of
service per week, or may vary above and below an average of 30
hours of service per week
Variable Hour Employees (cont’d) • Additional factors for employees placed through staffing firms include,
but are not limited to, whether:
–Other employees in the same position of employment with the
temporary staffing firm, as part of their continuing employment, retain
the right to reject temporary placements that the temporary staffing
firm offers the employee;
–The employees typically have periods during which no offer of
temporary placement is made;
–The employees typically are offered temporary placements for
differing periods of time; and
–The employees typically are offered temporary placements that do
not extend beyond 13 weeks
Changes in Employment Status • General rule: An employee must be treated as a continuing employee,
rather than a new hire, unless the employee has had a period of at
least 13 weeks during which no hours of service were credited
• For an employee of an educational organization, substitute 26 weeks
for 13 weeks
• Rule of Parity: the employee may be treated as a new hire if the
employee is not credited with any hours of service during a period that
is both at least four consecutive weeks’ duration and longer than the
employee’s immediately preceding period of employment
Special Unpaid Leave
• For purposes of applying the look-back measurement method, the final
regulations provide an averaging method for special unpaid leave
• Under the averaging method, special unpaid leave is treated as paid
time
• Special unpaid leave is unpaid leave subject to:
–The Family and Medical Leave Act;
–The USERRA; or
–Jury duty
• Special unpaid leave rules don’t apply to the monthly measurement
method
Employment Break Periods • Employment break periods of employees of educational institutions are
not treated as a period during which zero hours of service are credited
when applying the look-back measurement method under a averaging
method
• An “employment break period” is a period of at least four consecutive
weeks (disregarding special unpaid leave), during which an employee
is not credited with hours of service
• In no case, however, can the employer exclude (or credit) more than
501 hours of service during employment break periods in a calendar
year (however no such limit applies for special unpaid leave)
Special Staffing/PEO Rule • An offer of coverage made by a staffing firm on behalf of a client
organization under a plan maintained by the staffing firm, is treated as
an offer of coverage made by the client employer for purposes, if
• The fee the client employer would pay to the staffing firm for an
employee enrolled in health coverage under the plan is higher than the
fee the client employer would pay to the staffing firm for the same
employee if the employee did not enroll in health coverage under the
plan
• While welcome, this rule does not itself address determination of
common law employee status
Employer Disaggregation
• Assessable Payments are determined separately with respect to each
“applicable large employer member”
• Thus—
–One member of a controlled group might choose to offer affordable
coverage that provides minimum value across-the-board, thereby
incurring no penalty
–Another might offer no coverage and elect to pay the Code
§ 4980H(a) Liability
–Another might make an offer of coverage that may not be affordable
in each case, thereby incurring Code § 4980H(b) Liability
Dependent Coverage
• An applicable large employer may be liable for an assessable payment
if the employer “fails to offer its full-time employees (and their
dependents) the opportunity to enroll in minimum essential
coverage . . ..” (Emphasis added)
• For Code § 4980H(b) Liability, dependent coverage is required
–Dependent means a biological or adopted child who is under 26
years of age, but it does not include a stepchild or a foster child
–Spousal coverage is not required
• The final regulations provide a transition rule for the 2015 plan year for
employers that did not previously cover dependents but are taking
steps to do so
Prior Transition Rules • Non-calendar year plans
–Pre-2015 eligibility rule
–Significant percentage (all employees)
–Significant percentage (full-time employees)
• Shorter measurement period for stability period starting in 2015
• Shorter measurement period for determining ALE status for 2015
• Offer of coverage in January 2015
• Coverage of dependents
• Mid-year cafeteria plan elections
New Transition Rules • Compliance delayed to 2016 for employers with fewer than 100 full-time
employees, provided
–Employer employs on average at least 50 full-time employees
(including full-time equivalents) but fewer than 100 full-time
employees (including full-time equivalents) on business days during
2014
–Employer does not reduce the size of its workforce or the overall
hours of service of its employees in order to qualify (other than for
bona fide business reasons); and
New Transition Rules (cont’d) –Employer does not eliminate or materially reduce the health
coverage, if any, it offered as of February 9, 2014
• 95% coverage requirement for 4980H(a) penalty reduced to 70% for
the 2015 plan year
Waiting Period Final Rule
• For plan years beginning on or after January 1, 2014, all group health
plans (irrespective of size) and group health insurance issuer must not
apply any waiting period that exceeds 90 days
• Waiting period means “the period that must pass before coverage for
an employee or dependent who is otherwise eligible to enroll under the
terms of a group health plan can become effective”
• A plan can require that an individual “satisfy a reasonable and bona
fide employment-based orientation period” prior to receiving an offer of
coverage
• Ninety days refers to calendar days — not three months or a quarter
• Plans that require completion of cumulative hours of service may do so
provided the hours-of-service requirement does not exceed 1,200 hours
Waiting Period Final Rule (cont'd)
• If the plan conditions eligibility on a specified number of hours of
service, and it cannot be determined that an employee is reasonably
expected to regularly work that number of hours
–The plan may have up to 12 months to measure whether the
employee meets the eligibility criteria
– In that case, coverage must begin no later than 13 months from the
employee’s start date, plus, if the start date was not the first day of
the month, the time remaining until the first day of the next month
–Essentially, this rule coordinates with the Code section 4980H look-
back measurement method
Plan Level Reporting • Under IRC Section 6055, information must be reported to the IRS by
health plans that provide health coverage that meets the “minimum
essential coverage” criteria
• Applies to self-insured plans and insurers
• Plans must also furnish a statement to plan participants or retirees
• Reporting must be done on IRS Form 1095-B on or before February 28
(or March 31 if filed electronically) of the year following the calendar
year in which they provided minimum essential coverage
• No exception is made for non-calendar year plans
Employer Reporting • Section 6056 requires large employers, defined as those with more
than 50 full-time employee equivalents, to report information to the IRS
• Employers must provide this information to each full-time employee
identified on the report by January 31, of the succeeding year
• Reporting must be done on IRS Form 1094-C (transmittal) and 1095-C
(employee statement) on or before February 28 (or March 31 if filed
electronically) of the year following the calendar year in which they
provided minimum essential coverage
Questions & Answers
Alden J. Bianchi | Member
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
One Financial Center | Boston, MA 02111
Phone: 617.348.3057 | Fax: 617.542.2241
E-mail: [email protected]
Disclaimer
Any US tax advice contained herein is not intended or written to be used, and
cannot be used, for the purpose of avoiding penalties that may be imposed
under the Internal Revenue Code or applicable state or local tax law provisions.
These slides are for educational purposes only and are not intended, and
should not be relied upon, as tax or legal advice.
Recipients of this document should seek advice based on their particular
circumstances from an independent tax advisor or legal counsel.
Common Law Employee Definitions (cont’d)
13-Factor Test: National Mutual Insurance Co. v. Darden
The hiring party’s right to control the manner and means by which the
particular result is to be accomplished; the skill required; the source of the
instrumentalities and tools; the location of the work; the duration of the
relationship between the parties; whether the hiring party has the right to
assign additional projects to the hired party; the extent to which the hired
party may decide when and how long to work; the method of payment; the
role of the hired party in hiring and paying assistants; whether the work is
part of the hiring party’s regular business; whether the hiring party is in
business; the provision of employee benefits; and the tax treatment of the
hired party
Common Law Employee Definitions (cont’d)
IRS Training Guidelines
• Behavioral control, e.g., Instructions the business gives the worker;
training the business gives the worker
• Financial control, e.g., The extent to which the worker has unreimbursed
business expenses; the extent of the worker’s investment; the extent to
which the worker can realize a profit or incur a loss.
• Legal control, e.g., written contracts describing the relationship the parties
intended to create; whether the business provides the worker with
employee-type benefits, such as insurance, a pension plan, vacation pay,
or sick pay
Common Law Employee Definitions (cont’d)
Treas. Regs. §31.3401(c)-1(b)
Generally the relationship of employer and employee exists when the person
for whom services are performed has the right to control and direct the
individual who performs the services, not only as to the result to be
accomplished by the work but also as to the details and means by which that
result is accomplished. . . In this connection, it is not necessary that the
employer actually director control the manner in which the services are
performed; it is sufficient if he has the right to do so. . . .
Common Law Employee Definitions – Limitations
• Why are you asking?
– To distinguish a common law employee from and independent contractor?
– To determine from among two putative employers which is the common law employer of a
individual who is clearly someone’s employee (and not an independent contractor)?
• For tax and benefits purposes, there historically has been no such thing as “co-
employment” or “joint employment”
• Historically, for employment tax purposes, in three-party staffing arrangements that
contemplated the issuance of a W-2 and not a 1099, the potential for abuse was limited
• Code §4980H presents a similar regulatory profile
Staffing Industry vs. PEOs
• Historic treatment of workers places with client organizations:
– Staffing firms are the common law employer of workers placed by staffing firms
– Client organizations are the common law employer of workers placed by PEOs (although at least
one recent federal appeals court has held otherwise)
• Rationale: staffing firms traditionally recruited, trained, and generally retained the right to
control workers' place with client organizations
• These positions have not been challenged by the regulators to our knowledge
• IRS Notice 2002-21: PEO retirement plans are multiple employer plans—therefore
(despite that the notice nowhere mentions common law employer status), the client
organization is the common law employer
• March 1, 2006 DOL Information Letter: PEO welfare plan is a MEWA
Temporary Staffing Firm vs. Staffing Firm
• Neither term has independent legal significance
• From the preamble to the final Code § 4980H regulations, it appears that the term
“temporary staffing firm” means a firm that places variable hour employees in short-term,
high turnover assignments—i.e., positions with low job stability
• A “staffing firm” is presumably any staffing firm that is does not place temporary workers,
i.e., long-term assignments, temp-to-perm, placement services, and pay-rolling
• PEOs and similar arrangements are quite different from temporary staffing firms in two
key respects—PEOs generally do not recruit the employees, and the employees are
characterized by high job stability
The MEWA Conundrum
• If the client organization, and not the staffing firm, is the common law employer, then
– Any tax-qualified retirement (e.g., 401(k)) plan maintained by the staffing firm is a multiple
employer plan, and
– Any group health plan maintained by the staffing firm is a multiple employer welfare arrangement
(MEWA)
• MEWAs must file an Form M-1 annually with the Department of Labor (this is a public
filing, which is available on the DOL's website)
• A self-funded MEWA is subject to state law (and in most states is an unlicensed
insurance company)
• A fully-insured MEWA could not cover small groups in most states
Common Law Employer/Employee
Temporary Staffing
Firm
Staffing Firm PEO
Industry View Temporary staffing firm
is the common law
employer
Staffing firm is the
common law employer
Client organization is
the common law
employer
(Apparent) IRS View
under Code § 4980h
Final Regulations
Temporary staffing firm
is the common law
employer
Client organization is
the common law
employer
Client organization is
the common law
employer
Comment(s) A GHP of the TSF is a
single employer plan
A GHP of the Staffing
Firm is what?
A GHP of the PEO is a
Multiple Employer
Welfare Plan
The “Offer of Coverage” Safe Harbor
• Treas. Reg. §54.4980H-4(b)(2) (Offer of coverage on behalf of another entity)
• An offer of coverage made to an employee by a staffing firm under its group health plan
is treated as being made by the client organization in certain instances
• The rule applies in cases “in which the staffing firm is not the common law employer”
• The offer qualifies for safe harbor treatment only if “if the fee the client employer would
pay to the staffing firm for an employee enrolled in health coverage under the plan is
higher than the fee the client employer would pay the staffing firm for the same employee
if that employee did not enroll in health coverage under the plan”
• There is no requirement that the fee be a particular amount or be administered in a
particular way
Drafting Best Practices—4980H Safe Harbor
• Include the following provisions in staffing agreements:
– Reservation of rights: a recitation that the staffing firm reserves the right to control and direct the
individual who performs the services
– Intent the parties: a recitation that the parties intend that the employee be the common law
employee of the staffing firm and not the client organization
– Contingent safe harbor: state that, if in the event of audit, investigation, or claim, the client
organization and not the staffing firm is determined to be the common law employer, then the
parties intend to rely on the Treas. Reg. §54.4980H-4(b)(2) safe harbor
Drafting Best Practices—Indemnity Provisions
• Demands for broad indemnity provisions in staffing contracts are becoming more
common, and may be justified where directed at things within the control staffing firm,
which include
– What offers of coverage the staffing firm undertakes to make minimum essential coverage,
minimum value, etc., and
– What events will trigger liability
– But events within the control of the client organization should not trigger liability on the part of the
staffing firm, e.g., the client organization’s failure to offer coverage
Questions and Answers
Edward A. Lenz
Senior Counsel
American Staffing Association
277 S. Washington St., Suite 200
Alexandria, VA 22314-3675
Direct: (703) 253-2035
Alden J. Bianchi
Member
Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C.
One Financial Center
Boston, MA 02111
Direct: (617) 348-3057