Presented on January 31, 2013 at the APMA ANNUAL FORUM, In Monterey, CA

by Ed McClements, CLU, ChFC

I am not an attorney I am not a CPA I am giving you my educated guess to future plan

costs, regulations and potential employer behaviors under the Affordable Care Act as I currently understand it

Please seek competent legal and tax accounting advice from your own trusted advisors!

Our Focus TODAY is on Strategy … The Employer Play or Pay Rules

that start 1/1/2014

And Most Importantly – How Can You Work with and Around them

Probably your very first glimpse of what this is TRULY going to cost your business

My goal is not just to inform you of the rules, but to increase your understanding of the implications

If you have less than 50 total employees, DON’T WORRY ABOUT IT ( but insurance will be more expensive esp. for young/healthy groups)

If you have over 50 total employees and have a health plan currently, it is probably NOT going to explode in cost

If you have over 50 employees, and NO current health plan, there is STILL NO NEED TO PANIC. We can show you how to avoid IRS audits and penalties AND have costs lower than you probably thought possible

Nationally, +16,000 new IRS agents

If allocated on a share of population

basis, we get almost 2,000 additional

agents looking over the shoulders of

California employers

W-2 Medical Cost reporting rules

▪ Go into effect for employers with 250+

employees in Jan. 2013 (for 2012 W-2s)

▪ Delayed until further notice for

employers with < 250 employees

Section 6056 of the Internal Revenue Code was

added by Sec. 1514(a) of the ACA.

It requires all employers to provide informational

returns to the IRS and covered employees

beginning in 2015 (for 2014)

Info Required: ▪ Employer EIN

▪ Information on Benefits (certification of meeting minimum value)

▪ Info on amount of premium paid by employer

▪ Every employee and their incomes and covered months

See IRS Notice 2012-33 for details

Source: CHCF 2011 Employer

Health Benefit Survey

9%

68%

Source: CHCF 2011 Employer

Health Benefit Survey

1% to 9% of employers not offering benefits

No, not intentionally

But large blocks of uninsured workers are the target of the ACA

Our industry provides coverage for roughly 1 out of 10 workers

Are you a LARGE Employer?

What is the POTENTIAL total size of your Play or Pay penalty?

Will ANY of your employees

actually use the EXCHANGE to

get Federal Assistance?

Euphemistically called “Employer Shared Responsibility” (IRC § 4980H)

Starting 1/1/2014, the ACA requires large employers (defined as having

50+ full-time equivalent workers in 2013) to either Play (offer affordable

health coverage to their workforce) or Pay a penalty to the federal gov’t

§ 4980H(a) If NO COVERAGE is offered (to 5% or more of your full time

workers) – the penalty is $166.67 per mo. ($2,000/year) for ALL full-time

workers (the employer is not charged a penalty for the first 30 workers)

§ 4980H(b) If coverage IS offered but is deemed unaffordable or falls

short of minimum essential benefits, then certain low income employees

can potentially expose the employer to penalties of up to $250 per

employee per mo. ($3,000 per year)

Groups of employers are treated as one employer

if applicable under IRC § 414 (b) (c) (m) or (o)

It’s a NON-Deductible Business Expense Federal Corporate Tax Rate is 35%

California Corporate Tax Rate is 8.84%

Combined Tax Rate is 43.84%

The implication is that for every $1.00 of non-deductible

expenses a business has, it must make $1.78 (and the

$.78 goes in corporate taxes and then the $1.00 can be

paid to the IRS as the penalty)

Therefore the REAL penalty for not providing coverage is:

$296.77 per employee per month,

$3,561.25 per employee per full year

Play or Pay Rules only impact employers with

50 or more full-time equivalent workers

Note: 50 or more FTEs (in avg. month)

in the 2013 CALENDAR YEAR determines status for 2014

Full-time employees are those working 30 or

more hours per week

Part Time employees (i.e., those working less

than 30 hours per week) are counted as fractions of

a full-time employee, on a monthly basis, by taking

their total number of monthly hours worked divided

by 120 hrs. (some sources say 130 hrs.)

You can EXCLUDE seasonal employees (if they

work for less than 120 days during the year and

excluding them leaves less than 50

remaining FTE workers)

A company has 35 full-time employees (30+ hours). In

addition, the company has 20 part-time employees who

all work 24 hours per week (96 hours per month).

These 20 part-time employees’ hours would be treated

as equivalent to 16 full-time employees, based on the

following calculation:

20 employees X 96 hours/120 = 1920/120 = 16

16 + 35 = 51 Full Time Equivalent Workers

Therefore this is a LARGE Employer under ACA rules

Part-time workers count as “fractional employees” in

determining Large Employer status, but DO NOT COUNT

in the calculation of the Employer’s penalty

Large Employer Play or Pay

penalties occur ONLY when a

Full-Time Worker gets covered via

an Exchange AND receives the

(federal subsidy) premium credit.

Employee

category

How is this category of employee

used to determine large employer?

Does this employee category give

rise to Play or Pay Penalties?

Full-time

(30+ hrs/wk)

Each counted as one employee,

based on a 30-hour or

more work week

Yes, if no (or insufficient) coverage is

provided and person qualifies for

exchange premium credit

Part-time

(<30 hrs/wk)

Pro-rated (calculated by taking the hours

worked by part-time employees in a

month divided by 120)

Not counted

Seasonal

(<120 days/yr.)

Not counted, if the group is under

50 FTE otherwise

Yes, in months of F/T & no coverage

(or insufficient) coverage is provided

and person qualifies for exchange

premium credit

Temporary Agency

Generally, counted as working

for the temporary agency (except

for those workers who are

independent contractors)

Not counted

Waiting Periods cannot exceed 90 days Regulations indicate a strict adherence to

that limit

Since hire dates are not always on the first

of the month and since many months have

over 30 days, experts are recommending

first of the month following 60 days

Safe Harbor Rules for determining VARIABLE HOUR and SEASONAL EMPLOYEE eligibility

Employer can define details and can create different rules for different

classes of employees

Measurement Period (Look-Back) can be set at 3 to 12 mo.

Stability Period (Look-Forward) cannot be shorter than the

Measurement Period

Administrative Period up to 90 days between Measurement / Stability

Total Measurement + Admin. cannot exceed 13 months

New Hire vs. On Going rules (similar but not identical)

In general, employer gets to use the Measurement period to

determine employee status (does this worker avg. 30hrs/wk?) then

that status is locked in during Stability Period

Count on PAYROLL SOFTWARE to be developed

IRS Notice 2012-58 describes this but more

guidance is needed!

Automatic Enrollment is required if the employer has over 200 Full Time employees (employees can then opt-out)

Thankfully, DOL announced early last year this portion of the ACA needs more coordinated work between government agencies so it will not be ready (or enforced) in 2014

Health Insurance Premium Subsidies given by the Federal Government to individuals with incomes over 133% and up to 400% of the federal poverty level

Estimated to help 25 million low income folks pay for health care

2012 Federal Poverty Levels Size of family 100% of FPL 133% 400%

1 $11,170 $14,856 $44,680

2 $15,130 $20,123 $60,520

3 $19,090 $25,390 $76,360

4 $23,050 $30,657 $92,200

5 $27,010 $35,923 $108,040

6 $30,970 $41,190 $123,880

7 $34,930 $46,457 $139,720

8 $38,890 $51,724 $155,560

Single Coverage Family of 4 Coverage

FPL % Income % of

Income Pay Per Yr. Pay Per Mo. Income

% of Income

Pay Per Yr. Pay Per Mo.

134% $14,968 3.00% $449 $37.42 $30,887 3.00% $927 $77.22

150% $16,755 4.00% $670 $55.85 $34,575 4.00% $1,383 $115.25

200% $22,340 6.30% $1,407 $117.29 $46,100 6.30% $2,904 $242.03

250% $27,925 8.05% $2,248 $187.33 $57,625 8.05% $4,639 $386.57

300% $33,510 9.50% $3,183 $265.29 $69,150 9.50% $6,569 $547.44

350% $39,095 9.50% $3,714 $309.50 $80,675 9.50% $7,664 $638.68

400% $44,680 9.50% $4,245 $353.72 $92,200 9.50% $8,759 $729.92

24

Even WITH the subsidy, Employees PAY THIS

Health Care Reform has NO penalties for large employers

when all employees have income levels greater than

400% of the Fed Poverty Level

Exchanges are government run internet-based health insurance “shopping malls” meant to assist individuals and small businesses in finding the best possible coverage

Open for business by October 2013 (for coverage starting on January 1, 2014

26

Only U.S. Citizens and Legal Immigrants can access the Exchanges and therefore

qualify for Federal Subsidies

$674 Million

State Run State + Fed Run Fed Forced Undecided

The “Lawful Presence” requirements will keep many low-income uninsured

workers away from the exchanges, and therefore those workers (who avoid the

exchange) would seem to pose no Play or Pay penalty back to the employer.

But COULD it lead to a “breadcrumb trail” to your doorstep for ICE to follow?

In the Individual and Small Group Markets: Bronze, Silver, Gold & Platinum Benefits (details are yet to be determined, but virtually nothing will be excluded from even the Bronze Level)

Concept is that each level will be ACTUARIALLY VALUED to cover 60% / 70% / 80% / 90% of expected expenses for the entire population

CMS has released the Actuarial Value Calculator (Ind. + Small Group)*

CMS has NOT released the Minimum Value Calculator (Large Group)*

Expectation is that annual out-of-pocket costs (including deductibles and co-pays) cannot exceed: $6,500 for single coverage $13,000 for family coverage

NO Annual Benefit Caps allowed UABT is working on getting Waiver Extensions

* See IRS Notice 2021-31 and HHS Actuarial Value Bulletin for details

29

The SURPRISE is that the AV Calculator REQUIRES BRONZE plans to have

HIGH DEDUCTIBLES

Applies to Small Group and Individual Markets

Unlimited Benefits for: Ambulatory patient services Emergency services Hospitalization Maternity and newborn care Mental health and substance abuse Prescription drugs Rehabilitative care and Habilitative care (such as learning disabilities) Laboratory services Preventive and wellness services Pediatric services, including oral and vision care

30

In California: Based on Kaiser $30 HMO but the

deductibles, copays & out of pocket

maximums could be MUCH HIGHER!

Large Employers (50+) are required to have a plan that meets

at least a MINIMUM VALUE of 60% based on coverage of 4

core benefit areas (NOT ALL ESSENTIAL BENEFITS ABOVE)

When this plan design is plugged

into the CMS Actuarial

Value Calculator, the result is a value of

98%

Rates are for 2013, Ventura County

Rates are for 2013, Ventura County

This plan is the closest thing I can find to a BRONZE plan in the current

marketplace. According to the Actuarial Value Calculator, this would score

a value of 60.5%, almost a perfect BRONZE value score.

Unless you have an high avg. age

workforce, the Bronze Level

coverage will be LESS EXPENSIVE

than paying employer

“Play or Pay” penalties

According to recent guidance, the employer must allow the

employee to add dependent child coverage, but can require

the employee to pay for those children. Curiously – there is no

requirement employers allow employees to cover spouses.

As long as an employer offers

at least Bronze Level coverage,

the employer can require

full-time employees to contribute

up to 9.5% of their income to

participate in the plan But beware – Employee contributions

could drive up waivers and

therefore your risk of audit

Starting in 2014 there’s a penalty for not having health insurance

The penalty is non-deductible excise tax that is the HIGHER of…

Flat $ penalties are capped at three persons per family

(300% of above figures)

Percentage caps at average cost of the Bronze Level

benefit program

39

2014 $95/person or 1% of income 2015 $325/person or 2% of income 2016 $695/person or 2.5% of income

40

Until individual penalties are

DRAMATICALLY increased,

many healthy Americans will

wait until they get sick before

buying coverage But there is already discussion

about instituting a Medicare – type

“open enrollment window”

Limit the size of your workforce to less than

50 Full-Time Equivalent Workers

Move everyone (or close to it) to Part Time (<30 hrs)

Pay all employees at least 400% of Fed Poverty Level

Offer a Bronze (or better) Health Plan and base

employee contributions on SALARY, < 9.5%

But if W-2, Box 12 is EMPTY, isn’t an IRS

AUDIT likely?

Create a Partially SELF FUNDED Bronze Level type

plan if employees are in good health

Implement low-cost “wellness plans” NOW to access

general info on employee health

Make sure all your full time employees participate in

a plan by not requiring employee contributions (for

self coverage)

If you want to offer good

benefits at a reasonable cost

– GET A FEASIBILITY

STUDY FOR A PARTIALLY

SELF FUNDED PLAN

as soon as possible

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

$100,000 SAVINGS

CLAIMS

PREMIUM

Partially Self Funded Plans can cost no more than

traditional plans, but if your claims are low with a

PSF plan, you get to KEEP THE SAVINGS

Potential Savings for most groups is

>40% Traditional Plan PSF Plan

If you are concerned about the

added risk of a Partially Self

Funded Plan – GET YOUR

EMPLOYEES TESTED NOW

(invest in Wellness Programs &

Health Risk Assessments)

Normal 58%

Elevated 36%

Moderate Hypertension

3%

Severe Hypertension

3%

Blood Pressure - Management Group

0

50

100

150

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31

Blood Glucose Level - Management Group

SCORE

Participants

Consumer Operated and Oriented Plans CO-OPs are like credit unions in the world of health

insurance The Affordable Care Act authorized $3.4 Billion for the

Dept. of HHS to use to help identify, facilitate and approve CO-OPs throughout the nation

24 CO-OPs already under constructions in other states Barkley spearheaded an effort to create HACIA SALUD - a

Calif. CO-OP that focuses on the needs of the low-income Latino workforce (www.haciasalud.org)

We submitted our first application on March 30th and a much improved second version on Dec. 30th

BUT the Fiscal Cliff deal cancelled the funding that was still available

March - Determine if your current broker has the expertise needed

April – Evaluate payroll records to determine likely enrollment counts for 2014

June - Discuss strategy with top management August – Perform Health Risk Assessment of

employees September - Get proposals for a customized plan

design (partially self funded if healthy) October – Enroll those employees expected to be

employed on Jan 1 2014

November & December will be crazy

SEEK IMMEDIATE PROFESSIONAL GUIDANCE! Strategic decisions need to be

made about your hiring practices and your health plan’s eligibility and contribution rules AND great recordkeeping will be

essential in case of IRS Audit

Stay INFORMED – Because the details

in the pending regulations could

have a huge impact on employer

strategy

Ed McClements emcclements@barkleyins.com

Barkley Insurance & Risk Management

721 South A Street Oxnard, CA 93030

(805) 483 – 1995 Dept. of Ins. # 0B75139

www.barkleyins.com