Understanding the PPACA: Key Changes for Employers and Employees in 2013 and Beyond

1. PPACA: What’s in Store for 2013 and BeyondFriday, October 5 2012 Employment Law SummitPW SHRM Presented by Brian Neary Mark Holloway Lockton Companies, LLC

2. Health Reform Impact Timeline • Individual Mandate • Free-rider surcharge • Health Insurance Exchanges for Individual and Small Group Market • No annual dollar limits on essential health benefits • Waiting periods limited to 90 days • Automatic enrollment (deferred) • No preexisting condition restriction for any enrollee • No lifetime maximum dollar limits on essential health benefits • Children eligible to age 26 • No preexisting condition restriction for enrollees under age 19 • OTC medication not eligible for FSA or HRA reimbursement without a prescription Completed 2012 2011 2013 2018 • Health FSA benefits capped at $2,500 .Taxes on high wage earners • Elimination of deductibility of Medicare Part D subsidies • Excise tax on medical device manufacturers • Summary of Benefits Coverage • Medical Loss Ratio Refunds . W-2 Reporting of Health Coverage • Comparative Effectiveness Research Fees • HCR Preventive Care Benefits Cadillac Tax 2014

3. What’s New?

4. SCOTUS Decision • Supreme Court upheld the law and the individual mandate (5-4) • States will need to decide whether to expand Medicaid coverage • Now the dust has settled and regulators are turning the crank on critical issues for 2014 • How to determine who is a full-time employee (guidance issued last month) • Guidance still needed on many critical issues • And the clock is ticking • Practical issue: will the State exchanges be ready for 2014? filepath...

5. Summaries of Benefits and Coverage (SBCs) • Summary of Benefits Coverage • Plans must distribute “plain English” summary in a standard format of no more than four double-sided pages, 12-pt font • Up to a $1,000 fine, per violation, for failure to meet requirements • Applies with first open enrollment beginning on or after 9/23/2012 • New guidance allows electronic distribution for current enrollees if plan uses on-line enrollment • Good news! • Accelerated notice of midyear plan changes

6. Preventive Care Benefits (Non-GF Plans) • Wide variety of well-woman care, including contraception • Plan years beginning on or after August 1, 2012 • Obesity screening and counseling (if BMI > 30) • Plan years beginning on or after July 1, 2013 • About 30% of population qualifies as obese • Cover 12 – 26 weight management sessions for first year • But no requirement to cover surgery or drugs for weight loss

7. Cost Impact of “Pay or Play”

8. Employer “Play or Pay” (a.k.a. Free Rider Surcharge) QUICK REVIEW • Applies in 2014 • Applies to employers with at least 50 full-time equivalent employees in the “controlled group” • Controlled group = 80% common ownership

9. Employer “Play or Pay” • Offer… • Full-time employees (and their dependents)… • FTE = 30+ hours per week • Qualifying coverage… • “Minimal essential coverage” that satisfies a “minimum value” requirement • At an affordable cost • Not more than 9.5% of W-2 pay • …or risk penalties… Qualifying Coverage The Employer’s “Play or Pay” Puzzle Full-time employees & dependants Affordable Cost

10. Financial Impact of Law Will Vary

11. Employer “Play or Pay” EMPLOYER’S OTHER OPTIONS: • Drop all coverage for all companies in corporate family tree (controlled group) • PAY: $2,000 annual nondeductible penalty x (all FTEs – 30)

12. Employer “Play or Pay” EMPLOYER’S OTHER OPTIONS: • Controlled group offers coverage to all FTEs, but it’s not qualifying and/or affordable to some: • Pay $3,000 annual nondeductible penalty for each such FTE who obtains subsidized, Exchange-based coverage

13. Employer “Play or Pay” EMPLOYER’S OTHER OPTIONS: • Controlled group offers coverage to some but not substantially all FTEs: • Penalty not yet clear; IRS is considering this, but may be leaning toward assessing the $2,000 penalty x all FTEs • The “nuclear option”

14. Employer “Play or Pay” GOOD NEWS! • How to determine “FTEs” • Average employee’s hours over a “look back period” of up to 12 months • Would save the bacon of seasonal employers • Would help employers with fluctuating work hours • Would help, to some extent, “vulnerable” non-seasonal employers • Details still to be ironed out

15. Actuarial Modeling and Strategies for 2014

16. Actuarial Modeling by Industry GENERAL CONCLUSIONS: • Most employers can continue to offer coverage with minimal cost impact due to play-or-pay • Most employers could save a lot by terminating group coverage and allowing employees to find coverage in the insurance exchanges • Most employees begin to “lose” when shopping in the exchanges, once household income reaches 2x federal poverty level

17. Strategies to Mitigate Costs – The Art of Fine Tuning Wellness Surcharges Min. Essential Coverage Affordability Qualifying Coverage Controlled Group Input Dual Option Input Turnover Wages Avg Age

18. Strategies to Mitigate Costs • Restructure work force • Could raise eyebrows with DOL • Can it be done in your business? • Cost increase to job share • Offer all FTEs current plans plus a 60% plan that is affordable • Eliminates worry over penalties • Still a cost increase (may be more expensive than the Pay option depending on the # who enroll and the PEPY net cost) • Keeps lower paid “winners” from getting subsidized coverage in Exchange so is it the right thing to do? • Help mitigate effect of auto-enrollment

19. Strategies to Mitigate Costs (cont.) • Offer all FTEs current plans plus a “minimum essential plan” that costs less than the Exchange subsidized premium • Plan will have to be very “skinny” • Could still be cost increase to plan but less than penalty • How many Ees will buy this coverage? How many Ees will still go to Exchange? • Offer coverage to all or substantially all FTEs, but do not worry about making it affordable • Some employees for whom it is unaffordable will not seek subsidized coverage in an exchange • For those that do, it might be cheaper for the employer to pay the penalty than to subsidize the coverage

20. Predictions: 2014 and Beyond • Most employers will continue to provide medical coverage to their full-time employees • With possible exception of retail/restaurant/hospitality • But things could change if there is a weak job market coupled with robust state exchanges • State exchanges will be off to a rocky start in 2014 • Unclear if they will become robust in future years • Pre-65 retiree medical will be extinct soon after exchanges go on-line

21. Any Questions? • Brian Neary • Vice President • Lockton Companies, LLC • bneary@lockton.com • 202-414-2611 • www.lockton.com • Mark C. Holloway, • Senior Vice President • Lockton Benefit Group • mholloway@lockton.com • 816-960-9567 • www.lockton.com