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HEALTHCARE REFORM: TAX AND LEGAL IMPLICATIONS

HEALTHCARE REFORM: TAX AND LEGAL IMPLICATIONS. Presented by: Seale Pylate pylates@phelps.com. EMPLOYER’S ESSSENTIAL ELEMENTS OF REFORM. All = Grandfathered and New Plans New = New Plans only. All = Grandfathered and New Plans New = New Plans only.

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HEALTHCARE REFORM: TAX AND LEGAL IMPLICATIONS

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  1. HEALTHCARE REFORM:TAX AND LEGAL IMPLICATIONS Presented by: Seale Pylate pylates@phelps.com

  2. EMPLOYER’S ESSSENTIAL ELEMENTS OF REFORM

  3. All = Grandfathered and New PlansNew = New Plans only

  4. All = Grandfathered and New PlansNew = New Plans only

  5. All = Grandfathered and New PlansNew = New Plans only

  6. LITIGATION UPDATE • Filed by 21 states • Primary basis for challenges: • Constitutionality of individual mandate; • Constitutionality of employer mandate; • Medicaid issue

  7. LITIGATION UPDATE • Supreme Court rejected first appeal • Baldwin v. Sebelius (11/8/10) • Standing issue • Expedited hearing for second appeal denied • Four cases decided (Michigan, Virginia, West Virginia, and Florida) • Split decisions • Effects of Florida decision

  8. GRANDFATHERING • Maintaining grandfathered plan status • Notice requirement • Maintaining records • Timing of loss of status • Upon effective date of change • No delay • Addressing grandfathering in a merger or acquisition • Is your plan grandfathered? • Is the seller’s plan grandfathered? • How long is too long to continue to maintain the seller’s plan?

  9. GRANDFATHERING • Bona fide employee reason for change • Issuer exits market • Issuer no longer offers the product to the employer • Coverage becomes impractical due to low participation • Elimination from a multiemployer plan as part of the collective bargaining process • Multiple benefit packages covering many employees are available

  10. MANDATED COVERAGE

  11. INDIVIDUAL MANDATE • Effective Date: January 1, 2014 • Individuals maintain minimum essential coverage or pay tax • Limited exemptions • Religious • Illegal aliens • Prisoners • Very low-income individuals • Hardship recipients • Small breaks in coverage • Members of Indian tribes

  12. INDIVIDUAL MANDATE • Minimum Essential Coverage • Medicare Part A • Medicaid • CHIPs • TRICARE • VA • Employer-sponsored coverage, new or grandfathered • Individual coverage • Exchange

  13. INDIVIDUAL MANDATE CONSEQUENCES FOR FAILURE TO MAINTAIN COVERAGE • Greater of $ amount or % of income • $95 or 1% of income in 2014 • $325 or 2.0% of income in 2015 • $695 or 2.5% of income in 2016 • After 2015, $ amount indexed for inflation • $ amount • assessed for taxpayer, spouse and each dependent not covered (max 3 X’s) • In 2014, family of 4 pays greater of 1% of income or $285 • Penalty ½ if dependent under age 18 • % of income assessed on income over filing threshold • In 2010, threshold $8,375 (individual) • In 2010, $16,750 (married filing jointly)

  14. EMPLOYER MANDATE • Effective: January 1, 2014 • LARGE EMPLOYERS must offer minimum essential coverage or be subject to tax • Must be offered to full time employees and dependents • Full time = 30 hours • Two separate bases for penalties: • Failure to maintain any coverage • Failure to maintain minimum essential coverage that is affordable

  15. EMPLOYER MANDATE • Large employer: • 50 or more full-time employees • 30+ hours per week is considered full time • Number of employees includes full-time equivalents for purposes of minimum threshold • Determined on a controlled group basis • Minimum essential coverage: • No required benefits • Full time = at least 30 hours • Satisfy by reimbursement of exchange premiums

  16. EMPLOYER MANDATE No Coverage Offered: $2,000 X (Full-Time - 30) • Tax is based upon number of full-time employees; full-time equivalents are excluded • Exclude first 30 full-time employees in calculating the tax • Penalty is non-deductible

  17. EMPLOYER MANDATE - EXAMPLE 1 EMPLOYER OFFERS NO COVERAGE:  46 employees working 30 + hours per week  10 employees working 25 hours per week  Large employer  At least one employee receives a subsidy  16 employees (46-30) X $2,000 = $32,000  $52,000 tax adjusted penalty ($32,000/.61)

  18. EMPLOYER MANDATE Coverage Offered Not Affordable: $2,000 X (Full-Time - 30)  $3,000 X Full-Time receiving Federal assistance • Lesser of two amounts; • Federal assistance provided when premium costs exceed 9.5% of AGI; • Penalty is non-deductible

  19. EMPLOYER MANDATE - EXAMPLE 2 EMPLOYER COVERAGE NOT AFFORDABLE:  250 employees  35 employees eligible for Federal subsidy  Large employer  Penalty (lesser): 220 employees X $2,000 = $440,000 35 employees X $3,000 = $105,000  $172,000 tax adjusted penalty ($105,000/.61)

  20. HEALTHCARE EXCHANGE • Effective Date: January 1, 2014 • Established by states • Regional or statewide coverage available • Small employers and individual coverage • 100 or fewer employees • Intended to permit consumer comparison of policies • Essential benefits • Same as essential benefits under annual and lifetime limits • Required for plans offered under the Exchange

  21. HEALTHCARE EXCHANGE • Bronze-level coverage (minimum coverage) (60% of actuarial value) • Silver-level coverage (70% of actuarial value) • Gold-level coverage (80% of actuarial value) • Platinum-level coverage (90% of actuarial value) • Young-invincibles coverage (limited eligibility)

  22. EMPLOYER-SPONSORED COVERAGE W-2 REPORTING • Effective Date: Coverage provided after December 31, 2011 • New IRS Form W-2 reporting obligation • Employer Sponsored Coverage: • Three alternative methods of calculation • COBRA premium values • Premiums charged for employee’s coverage • Modified COBRA premiums • Includes employer and employee contributions • Covers medical, dental, vision • Excludes flex spending contributions, single disease, fixed indemnity coverage, and on-site medical clinics

  23. EMPLOYER-SPONSORED COVERAGE W-2 REPORTING • Effective Date: Coverage provided after December 31, 2011 • New guidance delaying reporting for small employers • Fewer than 250 W-2s per year (this is the electronic reporting threshold) • No reporting obligation until further notice • Terminated employees who request the Form W-2 early • Calculate the cost on a calendar year basis without regard to whether employer uses a fiscal year

  24. EMPLOYER-SPONSORED COVERAGE WELLNESS PROGRAMS • Effective Date: Currently set for 2014 • Two types of wellness programs • Programs that do not require an individual to meet a standard (for example, require meeting attendance) • Programs that do require a standard (for example, meeting blood pressure or cholesterol goals) • Limited to 20% premium reductions • Reasonably designed to promote health (not a subterfuge) • Annual qualification • Reasonable alternative standards for those who cannot meet the standard • Notice of the reasonable alternative

  25. EMPLOYER-SPONSORED COVERAGE WELLNESS PROGRAMS • Effective Date: Currently set for 2014 • DOL has indicated that it will increase the limit from 20% to 30% before 2014 • The total amount may be more than the limit if the additional reduction is due to a program that doesn’t require a participant to meet a “standard”

  26. EMPLOYER-SPONSORED COVERAGE CODE SECTION 105(h) • Effective Date: Delayed until further notice for fully-insured plans; now for self-insured plans • What is Code Section 105(h)? • Tax section of the Internal Revenue Code • Applies a tax on discriminatory benefits • Prohibits discrimination on the basis of eligibility and benefits • Numerical testing as well as a benefit classification • To which plans does Code Section 105(h) apply? • Historically only applied to self-insured plans • Fully-insured plans subject to 105(h) after healthcare reform

  27. EMPLOYER-SPONSORED COVERAGE CODE SECTION 105(h) • Effective Date: Delayed until further notice for fully-insured plans; now for self-insured plans • What are the differences in the application to self-insured and fully-insured? • Penalties • Types of plans covered (dental, vision, accident & disability, long-term care, specific disease or illness, and hospital fixed indemnity) • What is the test? • Benefits 70% (with exclusions) • Benefits 80% or more of those who are eligible if 70% are eligible • Reasonable classification

  28. EMPLOYER-SPONSORED COVERAGE CODE SECTION 105(h) • Effective Date: Delayed until further notice for fully-insured plans; now for self-insured plans • What are the penalties for failure to comply? • For self-insured plans, including the benefit in income • For fully-insured plans, a $100 per day per affected participant excise tax • Potential liability for a claim for benefits under ERISA • Subject to self-reporting • How do self-insured plans address 105(h) issues? • Comply with the test • Treat premiums as after-tax contributions

  29. PRACTICAL CONSIDERATIONS • Amended Plan Documents and Service Agreements • Review your new plan document • Was it properly amended? • Carefully review definitions • Review your service agreement • Does it require your service provider to comply with the PPACA in general? • Does it set forth any new duties that you expect your service provider to perform? • Look at limitations on liability and indemnity

  30. PRACTICAL CONSIDERATIONS • Employee Notices • Review your notices to ensure that they conform to your document • Review employee handbooks and all other employee communications • Review your authorization documents

  31. QUESTIONS • Questions?

  32. REPORTING, TAXES AND REVENUE RAISERSAFFECTING EMPLOYERS

  33. HIGH COST EMPLOYER COVERAGE (CADILLAC PLANS) • Effective for tax years beginning after 2017 • Excise Tax: 40% of “excess benefits” • Calculated as the value of employer-sponsored coverage over dollar limit • Imposed on health care providers • Insurer (fully-insured plan); • Employer/administrator (self-insured plan); • Employer (HSA or MSA contributions)

  34. HIGH COST EMPLOYER COVERAGE (CADILLAC PLANS) DETERMINING APPLICABLE DOLLAR LIMIT: • Beginning thresholds (in 2010): • $27,500 other than self-only • $10,200 self-only; • Single formula adjustment for period between 2010 and 2018 to reflect medical inflation • EXAMPLE: • Cost of self-only coverage increases by 80% between 2010 and 2018 • Adjustment percentage under formula is 135% (100 + (80-55)) • In 2018, threshold is $13,770 for self-only ($10,200 X 135%)

  35. HIGH COST EMPLOYER COVERAGE (CADILLAC PLANS) Determining Value of of Employer-Sponsored Coverage: • COBRA premium valuation • Aggregate the value of employer-sponsored coverage, including medical, drugs, FSA and HSA, on site clinics, EAPs • Premiums included whether paid by employer or employee (whether paid before or after tax) • Separate dental/vision benefits, disability, long-term care, secondary benefits and fixed indemnity coverage may be excluded

  36. HIGH COST EMPLOYER COVERAGE (CADILLAC PLANS) - EXAMPLE  Coverage in 2018  $13,770 threshold for self-only ($1,148 per month)  $14,500 value of employer-sponsored coverage ($1,208 per month)  $60 excess coverage ($1,208 – $1,148 = $60)  9 months of coverage during 2018 $60 monthly excess X 9 months X 40% = $216 excise tax

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