Employer ACA Readiness Checkup

In a webinar entitled, “Health Plans – Plan Sponsor Readiness Check-Up for 2015,” Summer Conley, an Employee Retirement Income Security Act (ERISA) attorney specializing in health and welfare benefits at Drinker Biddle & Reath in Los Angeles, noted that employers face two potential penalties for 2015. There is a “no coverage” penalty for employers with more than 50 full-time equivalent (FTE) employees that do not offer minimum essential coverage to substantially all FTEs—triggered if one employee goes to a federal or state health plan exchange and qualifies for a subsidy. The penalty is $2,000 per FTE, minus the first 30 FTEs.

There is also an “insufficient coverage” penalty. Conley explained that employers must offer a minimum value to employees in their health plans; a health plan meets this standard if it is designed to pay at least 60% of the total cost of medical services for a standard population. In addition, at least one option offered to an employee must not exceed 9.5% of the employee’s household income. The insufficient coverage penalty is $3,000 for each of the employer’s employees who receives a subsidy on a public health insurance exchange. Conley conceded that plan sponsors are unable to know what an employee’s household income is; the IRS has offered several safe harbors for determining this affordability standard.   

These are the general employer mandate rules, but the IRS has provided transitional relief for 2015, Conley noted. Employers with 50 to 99 FTEs are not subject to penalties in 2015. Also, the requirement that employers offer coverage to at least 95% of FTEs has been modified to 70% of FTEs for 2015. She warned that this modification may provide relief for the “no coverage” penalty, but employers still may incur an “insufficient coverage” penalty. Also, in 2015 employers subject to the “no coverage penalty” can subtract 80 FTEs instead of 30 when calculating the penalty amount. The transitional relief also provides that if a plan sponsor did not cover eligible dependent children in 2013 and 2014, but it is taking steps to extend coverage, there will be no penalty for failure to offer coverage in 2015. The transitional relief is effective January 1, 2015, but for employers on a non-calendar year plan year, transitional relief is available the first day of the plan year before January 1, 2015.

Conley reminded employers that the ACA defines an FTE as an employee that works on average 30 hours a week or 130 hours a month. Employers may use a monthly or set “look-back” period for determining who is an FTE, and they may use different measurement periods for different groups of employees. There are special rules for counting hours for breaks in service or leaves of absence, but generally employers should count hours for which employees are entitled to pay, she noted.

Margaret Wickett-Altier, ERISA attorney specializing in health and welfare benefits at Drinker Biddle & Reath in Chicago, said one issue she has seen concerns controlled groups. The employer mandate applies to a controlled group, but the failure to offer coverage by one entity in the controlled group results in a penalty only for that entity. The companies within a controlled group may have different measurement periods, and the IRS has offered transition relief for employees moving from one measurement period to another in a transaction between entities. Wickett-Altier noted that the “qualified separate line of business” rules that allow some companies in a controlled group to perform retirement plan testing separately are not available for ACA requirements.

Wickett-Altier said another issues arises for employers who contract employees through staffing firms. Who is the common law employer of the employee contracted through a staffing firm? Is the employee an FTE or a variable-hour employee? The issues may be addressed in the contract between the employer and staffing agency. She noted that there is a safe harbor rule that permits the staffing agency to offer health coverage to a temporary employee on behalf of its client employer.

How to handle seasonal employees is another area for which employers have questions, according to Wickett-Altier. Seasonal employees are employees for which their customary annual employment is six months or less, and who are also usually hired around the same time each year. She said they are generally treated as variable hour employees; employers may use a longer measurement period of up to 12 months to initially determine if these employees are FTEs, and the initial offer of coverage may be delayed until 13 months after employment.

Employers should also carefully consider independent contractors, Wickett-Altier warned. “Misclassification of these employees could result in significant tax consequences. The employer could fail the 95% coverage test and pay $2,000 per FTE (minus 30).” She said there is a common law test to determine if an individual is a contractor or employee. It includes about 20 factors, including degree of control the individual has over his work, the individual’s opportunity for profit or loss, the employer’s right to discharge the worker, whether the individual is essential to business, whether he sets his own hours, how the individual is paid, and whether he is performing services for more than one company. “At the end of the day, the employment agreement is not the determination of whether the individual is an employee,” Wickett-Altier said.

Steps to Take Now

Robert Jensen, an ERISA attorney specializing in health and welfare benefits at Drinker Biddle & Reath in Philadelphia, said, if they haven’t already, employers should be doing a document review now to determine if their current definitions of FTE, eligible employee and waiting period comply with the ACA. They should also ensure summary plan descriptions (SPDs), benefits booklets and other participant communications materials include compliant definitions. Jensen added that these documents should also address what happens if an employee goes on a leave of absence. Also, the IRS has expanded the rules for mid-year coverage changes, so employers need to amend their cafeteria plans to the new rules, as applicable.

Jensen noted that plan sponsors must eliminate stand-alone health reimbursement arrangements (HRAs) as a plan type if they are not excepted benefits. These plans do not comply with ACA limits and cannot be used anymore.

Concerning operational considerations, Jensen said employers need to develop an approach to identifying FTEs, and it is a good idea to put it in writing as an internal policy. “This will help, if you’re audited, to show compliance.”

He warned plan sponsors to be mindful of potential issues if they intend to reduce employees’ hours in order to limit the number eligible for health care coverage. ERISA Section 510 prohibits employers from interfering with employees’ right to participate in group health plans. (See “Court Moves Forward Interference of Health Benefits Suit.”)

For ease of administration, FTE determination and reporting requirements, employers should consider connecting their timekeeping tools, payroll administration system and benefits administration system, according to Jensen.

Other considerations mentioned by Jensen include:

• Whether part-time coverage should be continued;
• Whether to continue to cover spouses or charge a surcharge for spousal coverage;
• Whether to maintain a plan's grandfathered status (Jensen said employers should compare the value of continuing to maintain grandfathered status or having the flexibility of changing plan design);
• Whether to use or create a private exchange; and
• Whether to provide coverage through a public exchange in 2016 in beyond. 

Jensen said small employers (which most states define as employers with 50 or fewer employees) are eligible to offer coverage through a public exchange in 2014, and in 2017, states may allow larger plans to do so.

Finally, Jensen noted that “2018 seems like a long time away, but it’s time to start planning for the excise, or 'Cadillac' tax.” The Cadillac tax is a 40% tax assessed on the value of all affected health care programs a participant elects that exceed certain dollar cost thresholds in 2018 ($10,200 single / $27,500 family) and beyond. He said plan costs could be approaching these limits in the near future, so it is not too early to evaluate group health plan costs in order to avoid the tax. (See “Impending Excise Tax Driving Change for Health Benefits.”)

Reporting required by the ACA includes forms submitted to the IRS and employees about coverage offered to employees, noted Gabriel Marinaro, an ERISA attorney specializing in health and welfare benefits at Drinker Biddle & Reath in Chicago. Internal Revenue Code Section 6055 and 6056 reporting was voluntary for 2014, but it is required for 2015. The IRS has released draft forms and instructions for this reporting (see “IRS Releases Draft Instructions for Employer ACA Reporting”). Marinaro said once Drinker Biddle started filling out forms for clients, it recognized there is a need for additional guidance. Employers should get with their benefits counsel now to determine what they need to do and where there are holes for which they need additional guidance, he said. Also, employers’ third-party administrators (TPAs) and payroll providers need to start now encoding their systems to support the reporting requirements.

Marinaro noted that each employer member of a controlled group will need to report to the IRS and its employees, and if an FTE works for multiple members of a controlled group, the FTE will get separate forms from each. The forms are due February 28, 2016, or March 31, 2016, if filed electronically.

Sponsors of self-insured health plans are required to obtain a health plan identifier number no later than November 5, 2014. This requirement is delayed to November 5, 2015, for small plans with annual receipts of $5 million or less, Marinaro noted. Self-insured plan sponsors should use the total claims paid by the employer for a full fiscal year to determine whether their plans are small plans for this purpose. Sponsors of flexible spending accounts (FSAs) and health savings accounts (HSAs) do not need this identifier number, but some HRAs will need one.

In addition, according to Marinaro, most self-insured health plans must submit enrollment information for the Transitional Reinsurance Fee to the Department of Health and Human Services (HHS) by November 15, 2014. The Transitional Reinsurance Fee was established to stabilize premiums by getting contributions from health carriers and self-insured plans, he explained. The fees will be required each year through 2016. Marinaro recommends plan sponsors consult with their TPAs to figure out if they need to enroll.