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The Affordable Care Act – Developments and Implications for Public Sector Employers and Employees. Sw / wc Summer leadership conference ALEXANDRIA, MN July 18-19, 2013. Introduction. The 2,000-page Patient Protection and Affordable Care Act (ACA) was passed on March 23, 2010

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The affordable care act developments and implications for public sector employers and employees

The Affordable Care Act – Developments and Implications for Public Sector Employers and Employees

Sw/wc Summer leadership conference

ALEXANDRIA, MN July 18-19, 2013

Introduction for Public Sector

  • The 2,000-page Patient Protection and Affordable Care Act (ACA) was passed on March 23, 2010

  • 20,000 pages of regulations have been issued to date

  • Much guidance is in proposed form, and many key issues have not yet been addressed

  • Rollout has experienced serious problems

  • Goal of this presentation to understand impact of the ACA on public employers

Concerns of public employers
Concerns of Public Employers for Public Sector

  • States, cities, counties and school districts make extensive use of the part-time workforce

  • In 2014, they must offer health coverage to all employees who work an average of 30 or more hours per week

  • There is a significant gap between past practice and the new federal requirements

  • There is a significant, unknown and unfunded liability

  • There are complex new administrative, payroll and recordkeeping requirements

Concerns of unions
Concerns of Unions for Public Sector

  • The unintended consequences of the ACA are severe.

  • Perverse incentives are already creating nightmare scenarios.

  • The law creates an incentive for employers to keep employees’ work hours below 30 hours a week.

  • You pledged that if we liked the health plans we have now, we could keep them.

  • Right now, unless you and the Obama Administration enact an equitable fix, the ACA will shatter not only our hard-earned health benefits, but destroy the foundation of the 40 hour work week that is the backbone of the American middle class.

    Letter from James P. Hoffa, International Brotherhood of Teamsters, and other union leaders to Pelosi and Reed (on or about July 12, 2013).

Local governments reeling
Local Governments “Reeling” for Public Sector

  • Phillipsburg, Kan.: "School administrators . . . are alarmed and confounded."

  • Dearborn, Mich.: Cutting hours for 700 workers down to 28 hours a week.

  • Indiana: Ft. Wayne school district cutting hours for 3/4th of its part-time aides.

  • Omaha, Neb.: School district cutting hours for 281 part-time employees to avoid $2.5 million in new costs, which will result in pay cuts of up to $3,300.

  • Long Beach, Calif.: Cutting hours for 200 part-time workers to save $2 million

  • Salt Lake City: School district cutting hours for 1,000 to 29 hours per week to save $14 million.

  • State of Virginia: Cutting hours for 7,000 government workers to 29 hours a week.

  • Kern County, Calif.: Cutting hours for 800 workers to avoid costs of $8 million a year.

  • Allegheny County, Pa.: Community college cutting hours for 400 adjunct faculty and other employees so it wouldn't have to pay $6 million in costs.

    See Merline, John. “Local Governments Reeling under Obamacare Costs.” Investors Business Daily 19 Jun 2013.

Delay in employer penalties
Delay in Employer Penalties for Public Sector

  • On July 2, 2013, the Treasury Department announced a one-year delay (until 2015) of the employer responsibility portions of the ACA (“pay or play”)

  • Related reporting obligations delayed

  • Applicable large employers will not have to expand coverage in 2014

  • Minnesota’s health care exchange will not be delayed, and subsidies will be available for Eligible Employees

  • Other provisions of the ACA will continue on track, including the requirement to pay PCORI and reinsurance taxes

Patient centered outcomes research institute pcori fees
Patient-Centered Outcomes Research Institute (PCORI) Fees for Public Sector

  • Effective January 1, 2012, there is a temporary annual “fee” (payable through 2019) on group health plans.

  • The fee for 2012 calendar year plans is equal to $1 times the average number of covered lives per year, including spouses and dependents

  • Fee increases to $2 per covered life in 2013 and is indexed thereafter through 2018

  • The fee is payable by employers with calendar year plans on Form 720 by July 31 of the following year; most fiscal year plans will not owe the fee until July 31, 2014

  • Most School Districts will not owe until 2014

Pcori tax update veba hra and fsa
PCORI Tax Update: VEBA, HRA AND FSA for Public Sector

  • Timing. Calendar-year plans owe first return July 31, 2013. Most non-calendar year plans owe first return July 31, 2014.

  • Amount. $1 per covered member in year 1, $2 in year 2. Will fluctuate over time. Payable until 2019.

  • General Rule. If an employee is enrolled in Service Cooperative coverage, no PCORI fees are payable on VEBA, HRAs or FSAs.

  • Exceptions.

    • Retirees not enrolled in employer coverage.

    • Employers with fully-insured health plans.

    • HRAs “In Lieu” of Coverage.

    • “Standalone” VEBA, HRAs or FSAs

    • Mismatched plan years

Reinsurance assessment
Reinsurance Assessment for Public Sector

  • Proposed rule issued December 6, 2012

  • Risk adjustment payments will be required by insurers and plan sponsors of self-funded group health plans

  • Service Cooperatives will facilitate employer payments, but employers will pay

  • Amount is estimated to be $63 per covered life per year in 2014.

  • Payment is required over three years

  • Does not apply to VEBA, HRAs and FSAs, that are “integrated” (undefined) with group health plans; rules similar to PCORI may apply

Veba and hra contributions in 2014
VEBA and HRA contributions in 2014 for Public Sector

  • DOL FAQs issued in January 2013 state that regulations will be issued which prohibit use of HRAs to fund individual policies of insurance

  • In 2014, contributions to VEBA and HRA will be prohibited for employees unless they are enrolled in employer-sponsored group health coverage

  • Restriction does not apply to retiree HRAs

  • Amounts accumulated in HRAs before 2014 may be spent down – a soft landing

  • Uncertainties with PEIP: If employer does not sponsor coverage, HRA or VEBA contributions may trigger penalties under ACA

Same sex marriage and benefits
Same-Sex Marriage and Benefits for Public Sector

  • Defense of Marriage Act (DOMA) found unconstitutional in United States v. Windsor

  • Minnesota legalized same-sex marriage effective August 1, 2013

  • Same-sex spouses in Minnesota will be entitled to coverage in public employer group health plans, whether insured or self-insured

  • Same-sex spouses in Minnesota will be treated the same as opposite-sex spouses for all other benefits in public employer plans

  • Benefits provided to same-sex spouses in Minnesota will receive favorable tax treatment on both the state and federal level

Cost of coverage on the minnesota exchange mnsure for a family of four
Cost of Coverage on the Minnesota Exchange ( for Public Sector MNSure) for a Family of Four

Delay is not repeal action items for public employers
Delay is not Repeal: Action Items for Public Employers for Public Sector

1. Make someone responsible

2. Determine applicable large employer status

3. Identify all common law employees

  • Identify all full-time employees

  • Establish measurement, administrative and stability periods for ongoing, variable hour and seasonal employees

  • Estimate potential exposure

  • Implement mitigation strategies as necessary

  • Maintain comprehensive records to defend against lawsuits, IRS audits and demands for penalties

Applicable large employers
Applicable Large Employers for Public Sector

  • An “applicable large employer” is an employer who employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year

  • For this purpose,

    • A full-time employee with respect to any month is an employee who is employed on average at least 30 hours of service per week.

    • The number of full-time equivalent employees is determined by dividing the aggregate number of hours of service of employees who are not full-time employees for the month by 120.

    • Special rules allow employers to exclude seasonal employees if an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a calendar year.

Penalty scheme for large employers
Penalty Scheme for Large Employers for Public Sector

  • The $2,000 penalty (bad)

    • When an applicable large employer fails to offer minimum essential coverage to at least 95% of all full-time employees and at least one full time employee receives a premium tax credit or cost-sharing reduction from an exchange, a monthly assessable payment is determined as follows:

      1/12 of $2,000 X (# Full Time Employees - 30)

  • The $3,000 penalty (maybe not so bad)

    • When an applicable large employer offers minimum essential coverage that is not “affordable” for some employees or does not provide “minimum creditable coverage,” a monthly assessable payment is determined as follows:

      1/12 of $3,000 X # Full Time Employees who enroll on exchange and receive tax credits or cost-sharing reductions

Example school district a in 2014
Example: School District A in 2014 for Public Sector

  • School District A provides group health coverage for 100 of its full-time employees, which it currently defines as employees who work 32 hours per week.

  • School District A has 15 employees who work at least 30 hours per week but less than 32 hours. They must be offered coverage.

  • Option 1: Offer coverage to the 15 employees

    • Average cost to employer: $6,000 per employee

    • Cost to provide coverage:* $90,000 per year

    • Total cost (115 FTEs x $6,000): $690,000 per year

      * This assumes that all 15 accept the offer

More options
More Options. . . for Public Sector

  • Option 2: Decline coverage to the 15 employees

    • Assessable payment: $2,000 x (115 full-time employees - 30) = $170,000

    • Cost of coverage for 100: $600,000 (100 x $6,000)

    • Total Cost: $770,000. $80k more than Option 1.

  • Option 3: Terminate Plan

    • Assessable payment: $170,000.

    • Employees may want to be paid the difference

    • Collective bargaining agreements may prohibit

    • Local communities may not support decision

Options continued
Options continued. . . for Public Sector

  • Option 4: Reduce hours

    • Start with those at 30 and make minimum reduction that can be managed

    • Rather than hire new temporary employees, start by allocating lost hours to employees below or above 30 hours

    • Start planning NOW for hours counted in 2015; decisions should be made early to avoid hardship later

    • Remote risk of litigation under ACA nondiscrimination rules and (for private employers) Section 510 of ERISA

Options continued1
Options continued. . . for Public Sector

  • Option 5: Reduce Employer Contributions

    • Reduce employer contribution by $90,000 (or some lesser amount)

    • Coverage may not be “affordable” for some employees

    • Employees at lower end of pay scale may drop out and obtain coverage on the exchange

    • Subsidies and tax credits on the exchange may result in better benefit package for lower paid employees

    • $3,000 penalty may be less than original contribution

Affordability penalties
Affordability Penalties for Public Sector

  • To avoid the $3,000 penalty for employees that enroll on the exchange and receive a tax credit, applicable large employers must provide coverage that is (1) “affordable” and (2) provides “minimum value.”

  • To be affordable, the employee’s share of premiums for self-only coverage may not exceed 9.5% of “household income.”

    • IRS published “safe harbor” guidance allowing employers to use W-2 pay; new rules expand on this concept

  • “Minimum value” means coverage under a plan where at least 60% of the cost for claims is paid by the plan, and not more than 40% by employee

New employees
New Employees Employees

  • If an employee is reasonably expected at his or her start date to work full-time, an employer must offer coverage no later than the end of the 90-day waiting period.

  • If it cannot be determined on the start date whether the employee is reasonably expected to work on average at least 30 hours per week (a “variable hour employee”),

    • The employer may use a measurement period of between 3 and 12 months and an administrative period of up to 90 days.

    • The measurement period and the administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date (at most 13 months plus a partial month).

    • The stability period for such employees must be the same length as the stability period for ongoing employees.

Collective bargaining reopeners
Collective Bargaining Reopeners Employees

  • “Final regulations have not been issued under many provisions of the Patient Protection and Affordable Care Act (ACA). This creates considerable uncertainty regarding the Employer’s financial obligations. This agreement may be reopened and all material terms of compensation, hours, and fringe benefits (include health benefits) may be subject to negotiation and change as reasonably necessary to comply with the ACA and to address any increase in cost that the ACA may require.”

  • Some state laws prohibit reopening collective bargaining agreements (e.g., Minn. Stat. Sec. 179A.20).

Cadillac tax
Cadillac Tax Employees

  • Effective 2018

  • Employers will pay 40% excise tax on plan costs in excess of statutory thresholds

  • Thresholds are $10,200 for single coverage and $27,500 for family

  • Thresholds are indexed for inflation beginning in 2020 but the index used is lower than health care inflation

  • Plans will be forced to reduce benefits

  • Consider in collective bargaining

Notice pursuant to treasury department circular 230 and disclaimer
Notice Pursuant to Treasury Department Circular 230, and Disclaimer

To comply with certain Internal Revenue Service ("IRS") rules, we must inform you that any U.S. federal tax advice contained in this presentation, including handouts or verbal explanation, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the IRS. Under IRS rules governing tax advice, a taxpayer may rely on professional advice to avoid federal tax penalties only if that advice is provided in a tax opinion that conforms with extensive federal requirements. We understand that you do not intend to use or refer to anything contained in this presentation to promote, market, or recommend any particular entity, investment plan, or arrangement.

DISCLAIMER: This presentation is intended for general information purposes only. It does not create an attorney-client relationship and should not be construed as legal advice or legal opinions on any specific facts or circumstances.