The ACA and What Comes Next

1. The ACA and What Comes Next 2014 EPSHRM BENEFITS CONFERENCE

2. This presentation has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice.  Please consult your attorneys in connection with any fact-specific situation under federal, state, and/or local laws that may impose additional obligations on you and your company. Attorney Advertising

3. Agenda / • Shared Responsibility • Determining applicable large employer status • Determining full-time employees • Determining liability • The impact of final rules • What's Next • ERISA 510 • Scams • Halbig • Cadillac Tax • Exchanges • Closing Remarks

4. ACA Implementation /EMPLOYER MANDATE DELAY • Three ACA requirements were delayed: • The delay is over, for most employers compliance begins 1/1/15

5. ACA Implementation /EMPLOYER MANDATE ANALYSIS • Step 1 • Does This Apply to My Business? • Step 2 • To Whom Must I Offer Coverage? • Step 3 • Is My Coverage Affordable? • Does My Coverage Provide MV? • Step 4 • What is The Cost of Not Providing Coverage? • What are the Non-Economic Factors at Play?

6. Shared Responsibility /THE BASIC IDEA • Shared Responsibility provides that “Applicable Large Employers” with 50 or more Full-Time (including Full-Time Equivalent) employees are subject to a tax penalty if any Full-Time Employee receives a premium tax credit or cost-sharing reduction to purchase coverage through an Exchange • Full-Time employee is eligible for a cost sharing subsidy if: • An employer does not “Offer” Full-Time employees (and their dependents) the opportunity to enroll; or • An employer offers its Full-Time employees the opportunity to enroll but coverage is “Unaffordable” or does not provide “Minimum Value”

7. SHARED RESPONSIBILITY:Does This Apply to My Business?

8. Applicable Large Employer /QUALIFICATION CRITERIA • Applicable Large Employer (ALE)= • 50 or more full-time employees*or • Combination of full-time and part-time employees that equals 50 “full-time equivalent employees” • “Full-time equivalent employees” only relevant for purposes of determining ALE • Penalties are based only on full-time employees • ALE is determined based on actual hours worked by employees in the prior calendar year

9. Applicable Large Employer /TRANSITION RELIEF • For 2015 only: an employer with 50 to 99 full-time employees or equivalents does not need to comply with the Employer Mandate • To Qualify for Transitional Relief: • Cannot reduce the size of workforce or overall hours of service • Cannot eliminate or materially reduce any health coverage offered as of February 9, 2014

10. Applicable Large Employer /CALCULATING EMPLOYER STATUS • FTE: for each month in the prior year, an employer must total the number of hours worked by part-time employees and divide by 120. Then add to number of full-time employees. • The final regulations allow employers to round the to the nearest hundredth • Example: an employer with 30.544 full-time equivalents in a calendar month may round this figure to 30.54 • Timing: Employers are to make these calculations annually to determine if they are an ALE for the next year. • Example: If an employer has more than 50 full-time employees in 2014, it will be considered an ALE for 2015.

11. SHARED RESPONSIBILITY:Defining Full-Time Employees…

12. Full-Time Employees /HOURS OF SERVICE DEFINITION • “Full-Time Employee” means, with respect to any month, an employee who is employed on average at least 30 hours of service per week • Recent legislative movement to redefine full-time employee • Administration has said it will veto any bill increasing threshold • Unclear whether deadlock broken if Senate change control • “Hours of Service” includes: • Paid for performance of services, or entitled to payment even when no work is performed • Paid on account of time during which no duties are performed – vacation, sick, holiday, etc. • Special rules for FMLA, USSERA & Jury Duty

13. Full-Time Employees /CALCULATION METHODOLOGY • The final regulations provide two methods for calculating hours of service:

14. Calculation Methodology /LOOK BACK MEASUREMENT METHOD • STEP 1: If an employee is reasonably expected at his or her start date to be full-time, then an employer must offer coverage after three months of employment • Whether or not an employee is reasonably expected to be full-time depends on the surrounding facts and circumstances, including (but not limited to): • Whether the employee is replacing a full-time employee and • Whether the job was advertised as requiring 30 or more hours of service per week

15. Calculation Methodology /LOOK BACK MEASUREMENT METHOD • STEP 2: If unable to determine full-time status at Step 1, employers may select a period of time between three months and one year to use as a “measurement period.” • If the employer determines that an employee was employed on average at least 30 hours of service per week during the “measurement period,” then the employer must treat the employee as a “full-time” employee during a corresponding “stability period,” regardless of the number of hours of service the individual works over that time period • The duration of stability period would be at least the greater of six consecutive calendar months or the length of the standard measurement period • Generally, an employer must apply the same Look Back Period to all employees, but different periods may be used for certain categories of employees

16. Look Back Measurement Method /PRACTICE POINT • Whether an employee is “reasonably expected” to be full-time is a judgment call • Carefully document reasons for decision • Treat all similarly situated employees the same • Never a penalty for offering coverage • If unsure solicit comment from counsel Transition Relief / For stability periods that begin in 2015, even those that are twelve months, employers may use a transition measurement period that is six months

17. Look Back Measurement Method /PRACTICE POINT RE: SEASONAL EMPLOYEES Seasonal Employees • Employers may apply the look-back measurement method to seasonal employees in the same manner as variable hour employees • The final regulations clarify that, for these purposes, a seasonal employee is one in a position for which the customary annual employment is six months or less

18. Look Back Measurement Method /PRACTICE POINT RE: SEASONAL EMPLOYEES Rehired Employees and Breaks in Service • If an employee resumes providing service after a period during which the employee was not credited with any hours of service, then the employee may be treated as a new employee. The final regulations reduce this period of time from 26 weeks to 13 weeks • Additionally, if an employee is rehired after at least four consecutive weeks, then he or she may be treated as a new employee if that period exceeded the number of weeks of employment with the applicable large employer immediately preceding the break in service.

19. Look Back Measurement Method /PRACTICE POINT • If an unintended employee receives a subsidy • Employers may not take unfavorable employment action or retaliate against an employee or applicant who: • Provided information that the employee reasonably believed concerned a violation of ACA Title I to the employer, the federal government, or any state attorney general • Testified, assisted or participated in a proceeding concerning a Title I violation • Objects or refuses to participate in any activity the employee/applicant reasonably believes to violate Title I • Receives a credit under §36B of IRC or a cost sharing reduction under ACA §1402 • Only two ways for full-time employee to get subsidy

20. SHARED RESPONSIBILITY:What Are My Obligations as Employer?

21. The Employer Mandate /THE BASICS • ALE is treated as offering coverage to its full-time employees (and their dependents) for a month if it offers coverage to all but five percent, or if greater, five, of its full-time employees for that month. • You must offer 95% of your full-time employees coverage to avoid the offer prong of mandate • Even if an ALE offers full-time employees the opportunity to enroll in coverage, liability may still be imposed on the basis of such coverage being either unaffordable or not providing minimum value

22. The Employer Mandate /TRANSITION RELIEF • For 2015 only, the final regulations provide that applicable large employers only need to offer coverage to 70 percent of full-time employees instead of 95 percent. For 2016 and beyond, the 95 percent requirement will take full effect • Employers with plan years that do not start on January 1 may begin compliance with the employer mandate at the start of their plan years in 2015, rather than on January 1, 2015

23. The Employer Mandate /OFFER OF COVERAGE & DEPENDENT COVERAGE • The employer mandate requires applicable large employers to offer coverage to dependents of full-time employees • Dependents include children who have not reached the age of 26, but not spouses • The final regulations exclude both foster children and stepchildren from the definition of dependent for purposes of the employer mandate

24. The Employer Mandate /TRANSITION RELIEF

25. Plan Affordability / • A plan is considered affordable if the employee’s premium obligation for self-only coverage does not exceed 9.5 percent of the employee’s household modified adjusted gross household income • If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement

26. Plan Affordability / • Employers generally will not know employees’ household incomes. Therefore, the final regulations provide for three affordability safe harbors that are based on information available to employers:

27. Minimum Value / The Final Rule sets forth the following methodologies to determine the MV (total allowed costs of benefits provided is no less than 60 percent): • MV Calculator, which is available at http://cciio.cms.gov/resources/regulations/index.html/#pm; • Any safe harbor established by HHS and the IRS; • Certification by an actuary, which is only available if the plan contains non-standard features that are not suitable for the MV calculator or safe harbor checklists. If this options is used, the determination must be made by a member of the American Academy of Actuaries; or • Any plan in the small group market that meets any of the “metal levels” of coverage based on the MV Calculator

28. Calculating Penalties /FAILURE TO OFFER COVERAGE • For employers who offer coverage to less than 95 percent of full-time employees, the penalty will be calculated according to the following formula if at least one full-time employee receives a premium tax credit for getting coverage on an exchange: • Number of full-time employees the employer employed for the year • Up to 30 • $2,000 • PENALTY

29. Calculating Penalties /UNAFFORDABLE COVERAGE OR FAILS TO MEET MINIMUM VALUE • For employers who offer coverage to at least 95 percent of full-time employees but must pay a penalty on the basis of the coverage being unaffordable or not providing minimum value, the penalty will be calculated separately for each month according to the following formula if at least one full-time employee receives a premium tax credit for getting coverage on an exchange: • The penalty for any calendar month is capped at the penalty the employer would have paid had it not offered coverage • Number of full-time employees who received a premium tax credit for that month • 1/12 of $3,000 • PENALTY

30. What’s Next?

31. ERISA 510 / • The Employer’s obligation under the employer mandate applicable only to “Full-Time” employees • To reduce penalty exposure or number of employees eligible for plan, some employers may reduce employee hours. • Part-Time= No Offer, No Penalty???

32. Statutory Text / “It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan..., or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan.” 29 USC § 1140

33. Purpose of 510 / “These provisions were added by the Committee in the face of evidence that in some plans a worker’s pension rights or the expectation of those rights were interfered with by the use of economic sanctions or violent reprisals. Although the instances of these occurrences are relatively small in number...” S. Rep. No. 93-127, 93d Cong., 2d Sess. (1974). “[p]revent unscrupulous employers from discharging or harassing their employees in order to keep them from obtaining vested pension rights.” West v Butler, 621 F.2d 240, 245 (6th Cir. 1980).

34. 510 Claims / Issue: An employers workforce management efforts interfered with an employee’s attainment of a right to which such participant is or may become entitled. Risk is likely stratified based on employment: • Highest risk: current full-time reduced below 30 • Medium risk: on-going part-time employee capped at 28 hours • Lowest risk: new employee hired with a 28 hour cap

35. Employer Options / Manage communications around workforce management to avoid “specific intent” arguments • Avoid making public statements on your benefit strategy • Package all workforce management in legitimate business needs • Consider avoidance of “capping” or “cutting.” Recent delay may allow for more of a glide path to under 30 • To extent possible protect internal decision making documentation • Centralize communication: organization should have single voice Grandfather current 30 hour employees • Move to a new part-time strategy moving forward Revise employment agreements to reflect employee status • New hires and on-going part-time Legislative and regulatory solutions??? • Protect precedent

36. Scams / Employer Payment Plans • Employer reimburses employees for the premiums they pay to purchase their own plan on the open market. • These are group health plans. The IRS has said cannot be combined with open market coverage to satisfy market reforms • Subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under

37. Scams/ Drug Importation • Number of variations on these programs but they all involve the direct shipment of foreign prescriptions to employees. • The Food Drug and Cosmetic Act (“FDCA”) prohibits the interstate shipment (which includes importation) of unapproved new drugs. Unapproved new drugs are any drugs, including foreign-made versions of US approved drugs, that have not been manufactured in accordance with and pursuant to an FDA approval. • What is Legal in Canada, right??? • Recent enforcement against mail carriers (FedEx $820 Million law suit) • Ominous warnings to group health plans

38. Scams/ Incentive Schemes • Employers must offer their full-time employees an “effective opportunity to elect to enroll” in coverage. • There are a number of programs that are being marketed to employers that seek to offer full-time employees an incentive to decline the opportunity to enroll in coverage. • Usually come with literature for employer and employee. • Penalty the same as not offering coverage.

39. Scams/ Classification Schemes • The employer mandate only applies to full-time employees and does not extend to independent contractors or leased employees. • Simple just reclassify workforce as independent contractors • The employer mandate does not rely upon classifications, rather the long established IRS test for determining whether an employment relationship exists is controlling. • Some schemes come with new employment agreements or creation of shell companies do to employing. • Same penalty as not providing coverage.

40. House of Cards /How Big is Halbig Last month, federal appeals courts issued conflicting opinions on a key aspect of the ACA. The heart of the dispute centers on the statutory text of the ACA itself. According to the ACA, penalties under the employer mandate are triggered only if an employee receives a subsidy to purchase coverage “through an Exchange established by the State under section 1311” of the ACA.

41. House of Cards /How Big is Halbig If a state elected not to establish an exchange or was unable to establish an exchange, the Secretary of HHS was required to establish a “federal facilitated exchange” under section 1321 of the ACA. Thus, subsidies provided through federally facilitated exchanges would originate from an exchange established under section 1321 of the ACA not through an exchange established by the state under section 1311.

42. House of Cards /How Big is Halbig In 2012, the IRS asserted that “the statutory language … and other provisions” of the ACA “support the interpretation” that credits are available to taxpayers who obtain coverage through both state and federally facilitated exchanges. The plaintiffs in both cases argue that the IRS does not have the authority to administer subsidies in states that did not establish a state-run exchange because the exchanges were not “established by the State under 1311.”

43. House of Cards /How Big is Halbig The D.C. Circuit, in Halbig v. Burwell agreed with the appellants and vacated the IRS regulation. • The court focused heavily on the plain meaning of the statutory text and concluded “that the ACA unambiguously restricts the ... subsidy to insurance purchased on Exchanges established by the state.” The 4th Circuit, in King v. Burwell agreed with the IRS that the statutory language was not plain, but ambiguous. • Accordingly, the court upheld the subsidies “as a permissive exercise of the agency’s discretion.”

44. House of Cards /How Big is Halbig The Administration has sought en banc review of the Halbig decision by the entire D.C. Circuit. • If the full D.C. Circuit reverses the Halbig decision, the existing “circuit split” would be resolved. Rule of 4: Only four justices are required to grant cert. • In NFIB v. Sebelius four justices voted to overturn the individual mandate. If those same four justices voted to grant certiorari this line of cases would be heard.

45. House of Cards /How Big is Halbig Employer mandate penalties are triggered only if an employee receives a subsidy to purchase coverage through an exchange. Accordingly, if subsidies are unavailable, then no penalties could be triggered against an employer in the 36 states with a federally facilitated exchanges.

46. Cadillac Tax/Law of Unintended Consequences Beginning in 2018, employer-sponsored plans will be subject to a 40 percent non-deductible excise tax on the dollar amount of coverage that exceeds certain specified thresholds. • 2018 threshold for individual coverage is $10,200 and the threshold for family coverage is $27,500. • Adjusted upwards for early retirees and individuals in high-risk professions • Multiemployer plans will be treated as family coverage for purposes of the Cadillac tax.

47. Cadillac Tax/Law of Unintended Consequences As one of the Affordable Care Act’s principal “pay-fors,” the Cadillac tax is expected to raise $111 billion ($80 billion) over 10 years. Was designed to apply to “Cadillac health plans,” high-end health plans that provide the most generous level of benefits to employees. • Critics argue it was designed to end employer sponsored system. In practice, the Cadillac tax will affect far more modest plans and could be a significant burden on all employers Takeaway: While regulations implementing this provision are still a ways off, plans will need to take action in the near future to avoid penalties.

48. Cadillac Tax/How Does It Work? The Cadillac tax applies to the dollar amount that exceeds the specified threshold using the following formula: • “The aggregate cost of the applicable employer sponsored coverage of the employee for the month, over • An amount equal to 1/12 of the annual limitation for the calendar year in which the month occurs.” Example: If an employer offered individual coverage that cost $12,000 per employee, the excess amount for a month would be calculated by ($12,000 / 12 months) − ($10,200 / 12) = $150. Therefore, the employer would be taxed 40 percent of $150, or $60 per employee per month. Over a year, the Cadillac tax liability per employee would be $720.

49. Cadillac Tax/To Whom Does it Apply? The ACA states that each “coverage provider” is responsible for payment of the tax. • In the context of insured group health plans, the coverage provider is the health insurance issuer. • For self-insured plans, the entity that administers the plan is the covered provider responsible for payment of the tax. In most cases, TPA will be responsible. • In the case of multiemployer plans, the plan’s insurer or administrator will be responsible for paying the tax. While the penalties may technically apply to the health insurance issuer or TPA, it is likely that the cost of the penalties will be passed down to the employer.

50. Cadillac Tax/What Benefits Are Included in the Calculation? The Cadillac Tax applies to “applicable employer-sponsored coverage.” Applicable employer-sponsored coverage includes coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income or would be excludable if it were employer-provided coverage. • Major medical coverage and coverage provided under account-based plans (e.g., FSAs and HSAs) are likely includable in the calculations. • Unclear if other benefits such as wellness programs, EAPs, or on-site clinics will be includable. • Coverage for long-term care, stand-alone vision and dental, and non-coordinated benefits (e.g., hospital indemnity) are exempt.