Special Health Care Reform Edition of BIZGrowth Strategies Newsletter

COMPENSATION

S T R A T E G I E S

IS A PRIVATE

our businessis growing yours

BIZGROWTH

THE SHARED RESPONSIBILITY PENALTY’S EFFECT ON WORKER CLASSIFICATION

THE RIGHTCHOICE? Health Care Reform’s

IMPACT ON

Ready for the ACA?

S P E C I A L HEALTH CARE REFORM E D I T I O N

EXCHANGECHANGE

MANAGEMENT

A LESSON IN

IS YOURPAYROLLSYSTEM?

I S SUE 5 8 • W IN T E R 2014

Company

In This Issue…

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@cbz CBIZ BIZ Tips Videos

Employee Benefits ......................2Private Exchanges: Are They Right for Your Company?

Human Resources ......................4The Impact of Health Care Reform on Compensation

Tax & Accounting ....................... 5Looming Shared Responsibility Penalty Magnifies Worker Classification Issues

Payroll .......................................6Is Your Payroll System Ready for the ACA?

Management & Performance ......7A Lesson in Managing Change

CBIZ in the News

For complete articles: www.cbiz.com/in_the_news.asp

The New York TimesInsurance on the person who makes the business runNovember 29, 2013

NBC NewsObama admin. knew millions could not keep their health insuranceOctober 29, 2013

Associated Press3 things every small business owner must do now to prepare for the Affordable Care ActSeptember 25, 2013

Employee Benefits

PRIVATE EXCHANGES: Are They

2 | BIZGROWTH STRATEGIES SPECIAL HEALTH CARE REFORM EDITION CBIZ, INC.

We have more ways to purchase our benefit programs than ever before. We are able to choose between a government-run marketplace, a private exchange or the traditional

procurement process. Private exchanges have become the early leader… at least in the media. And, the strong interest by employers in the private exchange solution may leave you wondering if it is the right solution for your organization. The good news is that a skilled benefits advisor can guide you through the maze of these options, helping you find the option best suited for your company.

A private exchange is a non-government entity run platform that offers companies and their employees the vehicle to customize their benefit portfolios to meet their personal needs. The first step in evaluating a private exchange is to determine if a defined contribution model fits your corporate culture. In a defined contribution model, a set dollar amount is set aside for each employee to use to purchase their benefits. As the employer, you select the carriers and products to offer within your exchange. The employee then enrolls online

for your

and spends their allotted amount of money on the benefits they find best meet their needs.

What is the upside? For the employer, the financial view is easy to forecast. It’s simple to calculate what your cost will be based on the set-per-employee dollar amount. In addition, the format allows you to offer a broader array of choices to your employees. You no longer have to try to please all employees with one or two medical options, for example. Within the private exchange you could potentially offer five to eight medical product offerings. In addition, it is much easier for you to offer more ancillary product offerings with less administrative burden. Your employees can choose a high deductible health plan and have enough money left to buy the additional life insurance or dental coverage they may desire. The level of employee satisfaction increases due to the greater choice in customizing their own benefit portfolio.

The private exchanges are a convenient way to manage your benefits program and not worry about your compliance with the Affordable Care Act. A professional benefits advisor can ensure that

DISCLAIMER: This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. To the extent anything herein could be construed as tax advice, such advice is not intended to be used and cannot be used to avoid penalties under the Internal Revenue Code or to promote, market or recommend to another person any tax-related matter. This information is general in nature and may be affected by changes in law or in the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.

BONNIE EVELYNCBIZ Benefits & Insurance Services, Inc.Boca Raton, FL • [email protected]

the programs you offer meet and comply with the requirements under the new legislation.

As it stands today, the private exchange path offers greater choice of carriers and products than the State or Federal Marketplaces. In addition, the information about these offerings is easily obtainable. Employee assistance is offered through a call center to answer any questions they may have about their choices. It is important that network information is at your employees’ fingertips to make a wise choice. The narrowing of networks to reduce premium cost has definitely taken a prominent role within the government and private exchanges. It is critical to make sure your employees are armed with all data points to make the best decision.

Be sure to work with a skilled advisor to ensure you choose the optimal solution for you, your organization and your employees.

CBIZ, INC. SPECIAL HEALTH CARE REFORM EDITION BIZGROWTH STRATEGIES | 3

Federal Poverty Level Chart for 2013 (Excludes HI and AK)

Persons in household

100% 138% 150% 200% 300% 400%

1 $11,490 $15,856 $17,235 $22,980 $34,470 $45,960

2 $15,510 $21,404 $23,265 $31,020 $46,530 $62,040

3 $19,530 $26,951 $29,295 $39,060 $58,590 $78,120

4 $23,550 $32,499 $35,325 $47,100 $70,650 $94,200

5 $27,570 $38,047 $41,355 $55,140 $82,710 $110,280

6 $31,590 $43,594 $47,385 $63,180 $94,770 $126,360

7 $35,610 $49,142 $53,415 $71,220 $106,830 $142,440

8 $39,630 $54,689 $59,445 $79,260 $118,890 $158,520

on the one that directly impacts compensation. Specifically, in 2014, many employees will receive pay increases that they would be better off forgoing. How can this be? After all, more compensation is better than less compensation… right? Wrong!

The federal government now offers subsidies on health insurance based on the number of household members and income. The subsidies are on tiers, making it entirely possible that a pay increase that crosses one of the subsidy thresholds will actually cause a reduction in federal subsidies that will not be offset by the additional compensation. Adding complication to this issue is the fact that the subsidies are based on household income, so if one of your employees has a spouse who works, you may not have all of the information necessary to evaluate their subsidy level. The chart on this page lists the threshold amounts that may create this issue.

2. The employer mandate may impact the mix of total rewards at an organization.The ACA mandates coverage or penalties for low-

paid employees, many of whom were not previously covered by health insurance. Economics 101 illustrates how increases to the minimum wage result in companies seeking creative alternatives to more labor and thus higher unemployment. While the ACA does not directly increase the federal minimum wage, it does directly increase the cost of labor, which has the same impact.

3. The individual mandate increases cost of living – particularly for lower paid employees.As indicated above, the delayed employer mandate

is effectively an increase in the minimum wage. However, the individual mandate (which has not been delayed) increases the cost of living. When individuals

Human Resources


As of the time that this article goes to press, the Patient Protection and Affordable Care Act (PPACA), also known as ACA or Obamacare,

is in disarray. Beginning on October 1 this year, the insurance exchanges went live. About the same time, the word “glitch” became part of the everyday American lexicon. Many who have been able to navigate the enrollment website www.healthcare.gov have reported sticker shock, and very few appear to have signed up.

The good news is that employers received a short-term reprieve on the employer mandate via blog post. As many are aware, the employer mandate (requirement that employers with more than 50 employees provide minimum coverage that is “affordable”* to employees) has been delayed by a year. This delay makes the topic of the impact of PPACA on compensation decisions particularly timely.

The ACA will, in all likelihood, impact compensation in the following ways:

1. Increasing employees’ pay could reduce their purchasing power.Freakonomics by Steven D. Levitt and Stephen

J. Dubner provides economic analysis and insight into unintended consequences among seemingly unrelated topics. While there are myriad unintended consequences associated with the ACA, let’s focus (Continued on page 8)

THE IMPACTof Health Care ReformON COMPENSATION

* For brevity, getting into specific definitions and formulas associated with PPACA is outside the scope of this article.

Whether a worker is classified as an employee or as an independent contractor makes a big difference for Federal income and employment

tax purposes. A company must withhold income taxes and payroll taxes (FICA and Medicare), pay the employer’s share of FICA taxes on the wages plus FUTA tax, and often provide an employee with fringe benefits it makes available to other employees. The business simply sends an independent contractor a Form 1099-MISC showing how much he was paid for the year. With the employer health care shared responsibility penalty coming in 2015, the distinction between employee and independent contractor is more important than ever.

Originally set to start in 2014, the Affordable Care Act (ACA) imposes a nondeductible excise tax (the “shared responsibility payment”) on large employers who do not offer minimum essential health coverage at an affordable rate through an employer-sponsored plan, providing minimum value to 95% or more of their full-time employees. A full-time employee is one who on average works 30 or more hours per week. In July, the IRS delayed implementation of the employer reporting requirements and the shared responsibility payment until 2015.

Generally, a large employer is one who employed an average of at least 50 full-time employees and full-time equivalent employees during the preceding calendar year. Workers who are properly classified as independent contractors will not count toward the 50-employee threshold that triggers the shared responsibility payment requirement imposed on


large employers. In addition, these independent contractors will not factor into the calculation of either of the excise taxes. The excise taxes are calculated based upon the number of full-time employees. As a result, employers may be tempted to reclassify workers currently classified as employees to independent contractors or, when adding workers, to hire independent contractors rather than employees. The consequences of misclassifying employees as independent contractors have always been severe – additional payroll taxes, interest and steep penalties. The shared responsibility excise tax makes the consequences even more costly.

The IRS and the states are well aware of these issues and are aggressively investigating worker classification issues. In an attempt to increase compliance in this area, the IRS in late 2011 launched an amnesty program – the Voluntary Classification Settlement Program (VCSP). The VCSP allows employers to voluntarily reclassify workers in exchange for a reduced payment to cover back taxes. Refer to our Tax Alert, IRS Expands Relief Program for Employers with Misclassified Workers, for more information on the VCSP.

So, how does a business determine who is an employee and who is an independent contractor? Unfortunately, the answer to this question is complex and there is no “black and white” answer. Historically, the IRS had developed a list of 20 factors based on “common law” rules to make its classifications. Because the common law factors change over time, however, the IRS now focuses on three main categories to determine the degree of control an employer exercises over a worker:

Behavioral Control looks at facts showing whether the business has the right to direct or control how the worker performs the specific tasks they were hired to do. Factors considered include instructions given, training received and/or other means of behavioral control.

Financial Control looks at whether the business has a right to direct or control factors such as significant investment, unreimbursed expenses, services available to the relevant market, method of payment and opportunity for profit or loss.

Relationship of the Parties looks at evidence to determine how the parties involved perceive their

Tax & Accounting

Looming SHARED RESPONSIBILITY PENALTYMagnifies WORKER CLASSIFICATION Issues

(Continued on page 8)

Beginning in 2015, the Affordable Care Act (ACA) employer shared responsibility provision requires large employers (50 or more employees) to offer

minimal essential coverage to full-time employees and dependents (excluding spouses) and offer coverage that is deemed affordable and of minimum value (60%) in order to avoid a penalty. The provision places a significant burden on payroll, timekeeping and employee status tracking.

Employers must prepare a new process to include employee counts, employment status and health plan cost – all of which continue to compound the payroll operations process. Employers will need a combination of information to analyze and make decisions about status as an applicable large employer, the offer of health coverage and their risk for penalty.

The employer shared responsibility requires the employer to calculate the number of full-time employees (including seasonal) and full-time equivalents for each calendar month for the preceding calendar year by adding the number of total employees and dividing the sum by 12 (for fractional results, round down). The result is the average number of full-time employees. If this total count is less than 50, the employer is not subject to the employer shared provision for the current calendar year. If the total count is greater than 50, the employer is subject to the employer shared responsibility provisions for the current calendar year. A seasonal worker exception may apply if the total number of employees exceeds 50 for 120 days or less during the year.

The penalties are assessed if the employer employs a credit employee. A credit employee is one who receives a premium tax credit or cost sharing assistance when purchasing coverage through the Marketplace. Calculated monthly, penalties are of two “so called” types:

1. No Coverage Penalty: If the employer does not offer minimal essential coverage to at least 95% of its full-time employees and has at least one credit employee, the penalty is $166.67 per month per full-time employee (less the first 30).

2. Inadequate or Unaffordable Penalty: If the employer offers minimal coverage that is unaffordable (i.e., employee’s premium exceeds 9.5% of household income) or coverage does not meet minimum value and the employer has at least one credit employee,

the penalty is the lesser of $250 per month for each credit employee or the “No Coverage” calculation previously described.

Payroll, HRIS and timekeeping systems are valuable sources of information for employers to perform essential calculations in order to determine their status as an applicable large employer. However, other information will be needed to determine who must be offered coverage to avoid employer shared responsibility penalties.

Oftentimes, employees are hired with variable work schedules, making it difficult to track hours. The law permits use of a tracking period (known as a measurement period) to look back to determine those employees’ status as full-time or not. Additional information will need to be included in determining variable employees’ status during the measurement period, such as unpaid leave hours. Based on hours worked during a measurement period, an individual is deemed full-time or not during a corresponding “stability period” of at least the same duration.

Payroll systems also will be essential in determining plan affordability. Wages reported in Box 12, Code DD of the Form W-2 will be compared with payroll deductions for health plan premiums to aid in determining whether the employer’s health plan is affordable.

Employers should review data results in the coming months to make decisions and determinations about the offering of health coverage. Many house this required information in various internal locations, including payroll, benefit and HRIS systems and spreadsheets. By utilizing multiple sources of data to achieve the desired reporting results, an employer may experience inefficient manual processes and difficulty defining employee status. Employers may opt for a centralized solution that maintains all pertinent data in one location internally or outsource the task to relieve the administration burden.

Payroll operations for large employers (over 200) must also consider the delayed ACA requirement of automatic health benefit plan enrollment to include opt-out provisions. Small employers should be mindful of the evolving Small Business Health Care Tax Credit.

The employer shared responsibility provision presents challenges in decision making, compliance, determining status and how to avoid potential penalties. The increased complexity and additional burdens on a payroll operation of any size employer should be a priority as final regulations are released and 2015 approaches.

Payroll

DAISY HERNDON CBIZ Payroll, Inc. • Roanoke, VA540.853.8077 • [email protected]


Is YourPayroll System

Ready for the ACA?

There are two types of change: intentional and imposed. For those who make the decisions, intentional change often solves problems and

provides new opportunities. It is paced, anticipated and a conscious decision. For those required to implement the change, it is imposed; it is a decision without choice, it creates problems, disrupts routines and often feels dramatic. For those crafting the Affordable Care Act (ACA), it was clearly intentional. However, for those responsible for implementing and complying, it is an imposed change.

It is important to understand that change is situational; it is the new boss, the new role or, in this case, the new law. Change is external. Transition, on the other hand, is the psychological process people go through to come to terms with the new situation. Transition is internal. During transition, conflict increases, there is high emotional stress and low stability, and control becomes a major issue.

Much like the stages of grief when we lose a loved one, there are four stages we all go through during transition: denial, resistance, exploration and commitment. Employers would be well-advised to understand these stages as they will apply to the adoption of the ACA.

TRANSITION CURVE

Employees in the denial stage are clinging to the past. “Things are fine just the way they are” and “this can’t be happening” are typical responses. Those in the resistance stage will complain, blame and potentially doubt their abilities. In both denial and resistance, the focus is on the past. As employees move to the exploration stage, they exhibit more energy. They start to see possibilities with a “let’s try this” attitude. In the

commitment stage, employees are focused and they understand the vision. In exploration and commitment, the focus is on the future. You will no doubt have employees in all stages at any given time, especially as it relates to understanding and navigating the impacts of the ACA. Those in denial are saying this law will never come to fruition whereas those in exploration will embrace the ACA and look at ways it can benefit themselves and their families.

It is important to understand and even appreciate the losses individuals feel during transitions. This should allow you to change your leadership style with them and help them get through the stages of transition more efficiently. These losses may fall into any of the following categories: security, confidence, relationships, sense of direction or engagement. All will have an impact on productivity.

There are strategies that you can employ as leaders to help your employees navigate this transition. For those in denial, you should approach them with information. This is so important with the ACA because changes are constant with the law, so share as much as you know as soon as you know. For those in resistance, listen, acknowledge their feelings and respond empathetically. Don’t try to talk people out of their feelings. During exploration, it is best to provide needed education and information. Finally, for those who have made it to commitment, you should validate, reward and recognize that commitment.

Your goal as a leader should be to recognize where your employees are within these stages so you can provide the right leadership. This will require you to understand where you are as it relates to implementing the ACA. Do you understand the impact of the law on you, your organization and your employees? If not, you are likely in denial or resistance. It is okay to be in any one of these stages and to progress through them. You just need to ensure you and your employees don’t get stuck in the denial, resistance or exploration stages. Again, it is important to remember that change is situational, so your leadership needs to be flexible enough to adapt to those situations.

Management & Performance

CRAIG PETERSONCBIZ Benefits & Insurance Services, Inc.Leawood, KS • [email protected]


A Lesson in

Denial Commitment

Resistance Exploration

Focus on Self

Focus on Environment

Past Future

MANAGING CHANGE

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Human Resources (Continued from page 4)

RON PRICECBIZ MHM, LLC • Minneapolis, MN612.339.7811 • [email protected]


relationship. This includes intent of parties/written contracts, employee benefits, discharge or termination, permanency and regular business activity.

A business must analyze all three factors, weighing any individual category or factor based on the facts and circumstances basis. Court cases on the issue have resulted in different outcomes, providing little guidance. Ultimately, there is no litmus test for exactly how many of these factors must be satisfied, nor are these factors uniformly applied. The key to successfully classifying workers correctly is to factually document and support your position.

Using independent contractors can be an effective way to control costs by reducing payroll taxes, benefits costs and the shared responsibility excise tax. Misclassifying employees as independent contractors, however, can be disastrous. Contact a tax professional to discuss whether your workers are classified properly.

EDWARD R. RATAJCBIZ Human Capital Services • St. Louis, MO314.692.5884 • [email protected]

Tax & Accounting (Continued from page 5)

are forced to buy health insurance (whether they want to or not), they have less income available for the necessities of life.

Many are predicting that industries with a large number of low-wage workers will move many of their employees to the state exchanges for health insurance. As they shift the cost of insurance to employees, they may find that they need to increase base pay in order to be market competitive. It is hard to predict the ultimate direction of the ACA, but in the short term it is reasonable to expect that employers who offer health coverage to their employees will be able to pay less in compensation than those who don’t.

Be sure to reach out to an experienced compensation professional in order to keep up with trends and best practices as organizations experiment with different mixes of pay considerations.

Special

Health Care

Reform Edition

News & Politics

Special Health Care Reform Edition of BIZGrowth Strategies Newsletter