QUESTIONS AND ANSWERS ABOUT THE AFFORDABLE CARE ACT
April 2, 2014
John E. Rich, Jr.
McLane, Graf, Raulerson & Middleton
900 Elm Street, P.O. Box 326
Manchester, NH 03105-0326
1. Which federal law provides for better health coverage and imposes more burdens on employers, the “Patient Protection and Affordable Care Act,” the “Affordable Care Act,” the “Health Care and Education Reconciliation Act of 2010″ or Obamacare?
They are all the same law or in the case of Obamacare, the nickname for the law.
2. Are all individuals living in the United States required in 2014 to have health care under the so called “individual shared responsibility provision”?
Yes. All U.S. citizens living in the United States are subject to the individual shared responsibility provision as are all permanent residents and all foreign nationals who are in the United States long enough during a calendar year to qualify as resident aliens for tax purposes. There are certain very narrow exceptions. Foreign nationals who live in the United States for a short enough period that they do not become resident aliens for federal income tax purposes are not subject to the individual shared responsibility payment even though they may have to file a U.S. income tax return.
3. Are US citizens living abroad subject to the individual shared responsibility provision?
Yes. However, U.S. citizens who are not physically present in the United States for at least 330 full days within a 12-month period are treated as having minimum essential coverage for that 12-month period. In addition, U.S. citizens who are bona fide residents of a foreign country (or countries) for an entire taxable year are treated as having minimum essential coverage for that year. In general, these are individuals who qualify for a foreign earned income exclusion under section 911 of the Internal Revenue Code. Individuals may qualify for this rule even if they cannot use the exclusion for all of their foreign earned income because, for example, they are employees of the United States. Individuals that qualify for this rule need take no further action to comply with the individual shared responsibility provision during the months when they qualify.
U.S. citizens who meet neither the physical presence nor residency requirements will need to maintain minimum essential coverage, qualify for an exemption or make a shared responsibility payment for each month of the year. For this purpose, minimum essential coverage includes a group health plan provided by an overseas employer. One exemption that may be particularly relevant to U.S. citizens living abroad for a small part of a year is the exemption for a short coverage gap. This exemption provides that no shared responsibility payment will be due for a once-per-year gap in coverage that lasts less than three months.
4. Will I have to report something on my 2014 individual federal income tax return to show that I had coverage or an exemption?
Yes. The individual shared responsibility provision goes into effect in 2014. You will not have to account for coverage or exemptions or to make any payments until you file your 2014 federal income tax return in 2015. Information will be made available by the IRS about how the income tax return will take account of coverage and exemptions. Insurers will be required to provide everyone that they cover each year with information that will help them demonstrate they had coverage beginning with the 2015 tax year.
5. I am confused about the all the requirements of the Affordable Care Act. It seems like the government keeps changing the rules and the deadlines. I can’t keep up with what is and what is not required. Do all employers have to offer coverage? When do they have to offer coverage and do they have to offer it to all employees? Help!
You are not alone. There are numerous changes that already in place following the passage of the Act in 2010. If you offer a fully insured plan many of these were added to your policy (to the extent required) and you only found out about them in connection with the impact on cost.
The government has modified the statutory rules in some instances and extended various deadlines. The final regulations issued of February 12, 2014, clarify that all large employers (generally 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) who do not offer coverage that complies with the Act will pay the Employer Shared Responsibility penalty or tax starting in either 2015 or 2016. Smaller employers do not have to offer coverage and will not be penalized if they fail to offer coverage. There are numerous ACA rules that apply to all employers.
6. What are the penalties for non-compliance with the Affordable Care Act? Who enforces the penalties?
Unless there is a specific penalty applicable, such as for individuals who do not have coverage or for large employers who do not comply with the Employer Shared responsibility provisions, the general rule is that a failure to comply with the ACA results in an excise tax equal to $100 for each day in the noncompliance period with respect to each individual to whom such failure relates. In the case of employer-wide non-compliance, the penalty amounts can add up quickly. This penalty is set forth in Tax Code Section 4980D. The IRS enforces Tax Code penalties.
7. I heard that my company will need to start reporting more information about our health care plan to the IRS and our employees. When do we have to do this new reporting and why do we have to report information to our employees since we tell them during open enrollment about the health plan?
Employers who employ more than 50 full-time employees will be required to report health plan coverage information annually to the government and employees. IRS Notice 2013-45 issued July 10, 2013, delayed these reporting requirements one year. The first reporting will now be due to employees by January 31, 2016 and to the IRS by February 28, 2016 (or 3/31/2016 if filed electronically ) for coverage provided in 2015, regardless of plan year. IRS final regulations issued March 5, 2014 provide details on the information reporting requirements under IRC Section 6055 for insurers and self-insured employers about minimum essential coverage (MEC) and information reporting requirements under IRC Section 6056 for large employers.
8. I hate to ask since there are more than enough new rules now, but are there any areas where the government agencies have not issued rules under the Affordable care Act that I should know about?
Yes. The nondiscrimination rules and the rules for automatic enrollment for very large plans have not yet been issued.
The ACA extends the nondiscrimination rules of Tax Code Section 105(h) previously applicable only to self-insured health plans to fully-insured group health plans. Section 105(h) states that a plan is non-discriminatory only if (1) the plan does not discriminate in favor of highly-compensated individuals as to eligibility to participate, and (2) benefits provided do not discriminate in favor of highly-compensated participants. IRS Notice 2011-1 indicated that enforcement of the nondiscrimination rules would be postponed until final regulations are issued.
Employers with more than 200 full-time employees must automatically enroll new full time employees in their group health plan after the expiration of any waiting period and continue enrollment of existing full-time employees. Enforcement of the automatic enrollment provisions will not be required until regulations are issued.
9. We are a small employer that has numerous employees who live far away from our office and who work at home. We heard that some insurance plans don’t include all the doctors and hospitals in NH. We heard that if we use a plan like that we may be able to save on our premium. Is it legal to offer a plan that does not include certain hospitals and providers?
The Exchange uses the Anthem NH Pathways Network. This what is known as a “narrow network” covering only 16 of 26 hospitals and a limited number of providers. These types of networks have been around for several years in NH and other states. Insurers have also used tiered networks where certain providers are network providers and other providers are accessible for employees but at a higher cost.
The New Hampshire Insurance statutes contain a rule known as the “network adequacy rule” at RSA 420‐J:7 that states, “A health carrier shall maintain a network that is sufficient in numbers, types, and geographic location of providers to ensure that all services to covered persons will be accessible without unreasonable delay.” There are extensive regulations that have been used traditionally to look retrospectively whether or not a network is adequate. Among the criteria are standards measured in distance or travel time for patients to see providers. These regulations were issued years ago prior to emergence of other types of health care delivery mechanism such as walk-in clinics. The Insurance Department is reviewing these rules.
10. We have an employee who is fixated with the Affordable Care Act. He has asked numerous questions during our open enrollment meetings and comes to HR all the time pointing out how he does not think we are in compliance with the Affordable Care Act. I can’t tell you how many times I have called our broker and ERISA lawyer to get answers to his questions. He works in our Engineering Department and is the weakest performer in the Department. Our president just told the senior team that Engineering has to lay off 2 employees and this employee will be one of those. Do you see any problems with letting him go?
You need to speak to your attorney in order to evaluate the risks in letting him go since he could be entitled to Affordable Care Act whistleblower protection.
In addition to health insurance reforms, Section 1558 of Title I of the Affordable Care Act also protects employees from retaliation for: (a) reporting violations of the various reforms found in Title I; and (b) receiving a premium tax credit or a cost sharing reduction for enrolling in a qualified health plan. Employees who believe they have been retaliated against in violation of Title I of the Act may file a complaint with OSHA. If the evidence supports an employee’s complaint of retaliation, OSHA will issue an order requiring the employer to, as appropriate, put the employee back to work, pay lost wages, restore benefits, and other possible relief. The exact requirements will depend on the facts of the case. If the evidence does not support the employee’s complaint, OSHA will dismiss the complaint.
After OSHA issues a decision, the employer and/or the employee may request a full hearing before an administrative law judge of the Department of Labor. The administrative law judge’s decision may be appealed to the Department’s Administrative Review Board. The employee may also file a complaint in federal court if the agency does not issue a final decision within certain time limits. Details on this provision can be found in OSHA’s regulations, at 29 CFR 1984.114.
11. We are a small employer who is not subject to the affordable Care Act rules for large employers. We require employees to work 20 hours a week for coverage. Because we hire temporary employees, we have an 18 month waiting period before we offer our temporary employees coverage. That is permitted right?
It is not permitted. The general rule is that group health plans, including self-funded group health plans, and health insurance issuers offering coverage in the group or individual markets may not impose a waiting period that exceeds 90 days. Waiting periods can be no longer than 90 days from the date of employment, if the employee is expected to be employed on a full-time basis. A waiting period is defined as the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective. Eligible for coverage means having met the plan’s substantive eligibility conditions (such as eligible job classification or achieving job-related licensure requirements) specified in the plan.
The waiting period for employees whose hours are uncertain or for part-time employees who are “variable rate employees” can be after the measurement period to determine if employee meets eligibility under Code Section 4980H as long as coverage begins no later than 13 months after start date plus until first day of next calendar month. Final regulations on waiting periods were issued on February 24, 2014. So even if you are not a large employer for ACA purposes, you cannot have a waiting period longer than 13 months plus until the first day of the calendar month.
The final regulations allow an employer to treat an employee who is terminated and who is then rehired as a new employee who must meet the plan’s eligibility criteria and waiting period anew as long as reasonable under the circumstances. This means that an employer cannot terminate and rehired so as to avoid the 90 day rule.
12. What are the Employer Shared Responsibility provisions?
For 2015 and after, large employers employing at least 50 full-time employees or a combination of full-time and part-time employees that is equivalent to 50 full-time employees) will be subject to the Employer Shared Responsibility provisions under section 4980H of the Internal Revenue Code. As defined by the statute, a full-time employee is an individual employed on average at least 30 hours of service per week. An employer that meets the 50 full-time employee threshold is referred to as an applicable large employer.
Under the Employer Shared Responsibility provisions, if these employers do not offer affordable health coverage that provides a minimum level of coverage to their full-time employees (and their dependents), the employer may be subject to an Employer Shared Responsibility payment if at least one of its full-time employees receives a premium tax credit for purchasing individual coverage on one of the new Affordable Insurance Exchanges, also called a Health Insurance Marketplace (Marketplace).
13. When do the Employer Shared Responsibility provisions go into effect?
The Employer Shared Responsibility provisions generally are not effective until Jan. 1, 2015, meaning that no Employer Shared Responsibility payments will be assessed for 2014. Employers will use information about the number of employees they employ and their hours of service during 2014 to determine whether they employ enough employees to be an applicable large employer for 2015.
In the case of plans that are not on calendar year, the final regulations address how these employers will come into compliance. Large employers are not required to comply with the shared responsibility requirement until the beginning of the 2015 plan year (i.e., the plan year starting in 2015), rather than on January 1, 2015 if the employer satisfied certain conditions on February 9, 2014, the day before the final regulations were issued. Among the conditions are that the employee eligibility terms on February 9, 2014 must be the same in 2015 and coverage must generally be offered to full-time employees on the first day of the 2015 plan year and it must be affordable and provide minimum value. In addition, the employer must have maintained a non-calendar year plan as of December 27, 2012.
14. I heard that there were other transition rules for 2015 and 2016 impacting when large employers needed to provide coverage or be subject to the Shared Responsibility provisions?
Although the legislation provides that the employer penalties are applicable starting January 1, 2014, the Treasury Department indicated in the final regulations that the penalty provisions will not be enforced until the 2015 and 2016 years, depending on the size of the larger employer.
The final regulations included special transition rules for the 2015 calendar year. For example, large Employers of between 50 and 100 FTEs in 2014, will not pay a penalty in 2015 if the larger employer a) maintains its workforce and aggregate hours of employee service by not reducing workforce size or overall hours from February 14, 2014 through December 31, 2014, (b) maintains previously offered health coverage by continuing the employer contribution toward the cost of employee-only coverage that either (1) is at least 95 percent of the dollar amount of the contribution toward such coverage that the employer was offering on February 9, 2014, or (2) is the same (or a higher) percentage of the cost of coverage that the employer was offering to contribute toward coverage on February 9, 2014 and (c) provides certification of eligibility for the transition relief to the IRS.
The final regulations also provide that all large employers will not pay a penalty in 2015 if the employer covers 70% of full-time employees instead of the required 95% for 2016 and following years. There is also transition relief available for 2015 for employers that do not currently offer dependent coverage, or do not cover all the required categories of children, such as adopted children. In such cases, the penalty will not apply if an employer takes steps during the 2015 plan year toward offering dependent coverage in 2016.
15. Which employers are not subject to the Large Employer Shared Responsibility provisions for any years?
For a calendar year, employers who employ fewer than 50 full-time employees (including full-time equivalents) in the prior calendar year are not subject to the Employer Shared Responsibility provisions. There is also a limited exception for employers with certain seasonal workers, and 2015 transition relief for employers with fewer than 100 full-time employees (including full-time equivalents).
16. How many employees must an employer have to be subject to the Employer Shared Responsibility provisions?
To be subject to the Employer Shared Responsibility provisions for a calendar year, an employer must have employed during the previous calendar year at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50. For example, an employer that employs 40 full-time employees (that is, employees employed 30 or more hours per week on average) and 20 employees employed 15 hours per week on average has the equivalent of 50 full-time employees, and would be an applicable large employer.
Seasonal workers are taken into account in determining the number of full-time employees. However, if an employer’s workforce exceeds 50 full-time employees (including full-time equivalents) for 120 days or fewer during a calendar year, and the employees in excess of 50 who were employed during that period of no more than 120 days were seasonal workers, the employer is not considered an applicable large employer. Seasonal workers are workers who perform labor or services on a seasonal basis as defined by the Secretary of Labor, and retail workers employed exclusively during holiday seasons. For this purpose, employers may apply a reasonable, good faith interpretation of the term “seasonal worker.” The final regulations define a seasonal employee as an employee who is hired into a position for which the customary annual employment is 6 months or less.
Employers will determine each year, based on their current number of employees, whether they will be considered an applicable large employer for the next year. For example, if an employer has at least 50 full-time employees (including full-time equivalents) for 2014, it will be considered an applicable large employer for 2015. Note that because employers will be performing this calculation for the first time to determine their status for 2015, there is a transition rule intended to make this first calculation easier.
Employers average their number of employees across the months in the year to see whether they will be an applicable large employer for the next year. This averaging can take account of fluctuations that many employers may experience in their work force across the year. The final regulations provide additional information about how to determine the average number of employees for a year, including information about how to take account of salaried employees who may not clock their hours.
17. For purposes of the Employer Shared Responsibility provisions, what is an hour of service?
Generally, an hour of service means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which an employee is paid, or entitled to payment, for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.
Under the final regulations, an hour of service does not include any hour of service performed as a bona fide volunteer, as part of a Federal Work-Study Program (or a substantially similar program of a State or political subdivision thereof) or to the extent the compensation for services performed constitutes income from sources without the United States.
In addition, until further guidance is issued, a religious order is permitted, for purposes of determining if an employee is a full-time employee for the Employer Shared Responsibility provisions, to not count as an hour of service any work performed by an individual who is subject to a vow of poverty as a member of that order when the work is in the performance of tasks usually required (and to the extent usually required) of an active member of the order.
18. Are there special rules for hours of service that are particularly challenging to identify or track or for whom the general rules for determining hours of service may present special difficulties?
Yes. The Treasury and the IRS continue to consider additional rules for the determination of hours of service for certain categories of employees whose hours of service are particularly challenging to identify or track or for whom the general rules for determining hours of service may present special difficulties (including adjunct faculty, commissioned salespeople and airline employees) and certain categories of work hours associated with some positions of employment, including layover hours (for example for airline employees) and on-call hours. For this purpose, until further guidance is issued, employers are required to use a reasonable method of crediting hours of service that is consistent with section 4980H.
The preamble to the final regulations includes examples of methods of crediting these hours that are reasonable and that are not reasonable. For example, in the case of adjunct faculty members, the IRS has indicated that one (but not the only) method that is reasonable for this purpose would credit an adjunct faculty member of an institution of higher education with (a) 2¼ hours of service (representing a combination of teaching or classroom time and time performing related tasks such as class preparation and grading of examinations or papers) per week for each hour of teaching or classroom time (in other words, in addition to crediting an hour of service for each hour teaching in the classroom, this method would credit an additional 11⁄4 hours for activities such as class preparation and grading) and, (b) an hour of service per week for each additional hour outside of the classroom the faculty member spends performing duties he or she is required to perform (such as required office hours or required attendance at faculty meetings).
19. How does an employer identify its full-time employees for purposes of the Employer Shared Responsibility provisions?
An employer’s number of full-time employees matters both for purposes of whether the Employer Shared Responsibility provisions apply to an employer and whether an Employer Shared Responsibility payment is owed by an employer (and the amount of that payment). An employer identifies its full-time employees based on each employee’s hours of service. For purposes of the Employer Shared Responsibility provisions, an employee is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week. Under the final regulations, for purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week.
The final regulations provide two measurement methods for determining whether an employee has sufficient hours of service to be a full-time employee. One method is the monthly measurement method under which an employer determines each employee’s status as a full-time employee by counting the employee’s hours of service for each month.
The other method is the look-back measurement method under which an employer may determine the status of an employee as a full-time employee during a future period (referred to as the stability period), based upon the hours of service of the employee in a prior period (referred to as the measurement period). The look-back measurement method for identifying full-time employees is available only for purposes of determining and computing liability for an Employer Shared Responsibility payment, and not for purposes of determining if the employer is an applicable large employer. The final regulations describe approaches that can be used for various circumstances, such as for employees who work variable hour schedules, seasonal employees, and employees of educational organizations.
These methods prescribe minimum standards for the identification of full-time employee status. Employers always may make additional employees eligible for coverage, or otherwise offer coverage more expansively than required.
20. Our company here in New Hampshire is owned by a large company in France. Because we are so profitable, France leaves us alone and we run largely independently. We have around 25 employees for ACA purposes. We heard that earlier this year the French company purchased another company in California with 45 employees that operates a business in a different industry than ours. Since we are run independently from France and the California company, the other employees don’t count and we still are not subject to the Employer Shared Responsibility provisions, right?
Actually no. You will be subject to the Employer Shared Responsibility provisions starting in 2015. If two or more companies have a common owner or are otherwise related, they are combined for purposes of determining whether they employ enough employees to be subject to the Employer Shared Responsibility provisions. Section 4980H includes a longstanding provision that also applies for other tax and employee benefit purposes, under which companies that have a common owner or are otherwise related generally are combined and treated as a single employer, and so would be combined for purposes of determining whether or not they collectively employ at least 50 full-time employees (including full-time equivalents).
If the combined total meets the threshold, then each separate company is subject to the Employer Shared Responsibility provisions, even those companies that individually do not employ enough employees to meet the threshold.
21. Same facts as Question #11. We heard that the California company is not very profitable and has a “cheap” insurance plan that only covers single employees. We have a great plan and the employer pays 100% of the single cost and 85% of all other coverage. What else do I need to know about how the ACA will impact us?
There is some good news and bad news. The rules for combining related employers do not apply for purposes of determining whether a particular company owes an Employer Shared Responsibility payment or the amount of any payment. That is determined separately for each related company. So it is possible that California may owe a penalty when NH clearly would not due to the very generous plan.
However, you are also going to need to pay close attention to the new non-discrimination rules. If these discrimination rules operate on a combined basis like the discrimination rules for 401(k) plans, then subject to certain exceptions, your plan could be viewed to be discriminatory because it is so generous to your highly compensated employees compared to the employees in California.
22. What are the penalties if large employers do not comply with the ACA Shared Responsibility provisions?
First, keep in mind that the ACA requires employers to offers to its full-time employees (and their dependents) but not spouses, the opportunity to enroll in coverage that is both affordable and of minimum value. There are transition rules discussed above.
If an ACA large employer does not offer coverage to 95% of full-time employees (and dependents), the employer would pay $2,000 multiplied by the number of full-time employees, if at least one full-time employee obtains subsidized health coverage in an Exchange. No penalty would be payable with respect to employees who have not completed an employer’s waiting period of up to 90 days. Employers will also be permitted to subtract the first 30 full-time employees from the payment calculation when determining the employer’s number of full-time employees.
If an ACA large employer chooses to offer coverage but that coverage is not affordable or of minimum value and has at least one full-time employee (working more than 30 hoursweek) who receives subsidized health coverage in an Exchange, the employer would pay the lesser of (i) $3,000 multiplied by the number of full-time employees who receive subsidized coverage in an Exchange or (ii) $2,000 multiplied by the number of full-time employees.
23. How does an employer know whether the coverage it offers is affordable?
If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee. Because employers generally will not know their employees’ household incomes, employers can take advantage of one or more of the three affordability safe harbors set forth in the final regulations that are based on information the employer will have available, such as the employee’s Form W-2 wages or the employee’s rate of pay. If an employer meets the requirements of any of these safe harbors, the offer of coverage will be deemed affordable for purposes of the Employer Shared Responsibility provisions regardless of whether it was affordable to the employee for purposes of the premium tax credit.
The three affordability safe harbors are (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor. These safe harbors are all optional. An employer may use one or more of the safe harbors only if the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that provides minimum value for the self-only coverage offered to the employee. An employer may choose to use one or more of the safe harbors for all of its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost self-only option available to the employee that also meets the minimum value requirement.
The Form W-2 wages safe harbor generally is based on the amount of wages paid to the employee that are reported in Box 1 of that employee’s Form W-2. The rate of pay safe harbor generally is based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee, if the rate of pay is decreased (but not if the rate of pay is increased). The federal poverty line safe harbor generally treats coverage as affordable if the employee contribution for the year does not exceed 9.5% of the federal poverty line for a single individual for the applicable calendar year.
24. How does an employer know whether the coverage it offers provides minimum value?
A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan. The Department of Health and Human Services (HHS) and the IRS have produced a minimum value calculator. By entering certain information about the plan, such as deductibles and co-pays, into the calculator employers can get a determination as to whether the plan provides minimum value. Additionally, on May 3, 2013, Treasury and the IRS issued proposed regulations regarding the other methods available to determine minimum value
25. Are companies with employees working outside the United States subject to the Employer Shared Responsibility provisions?
For purposes of determining whether an employer is an applicable large employer, an employer generally takes into account only work performed in the United States. For example, if a foreign employer has a large workforce worldwide, but fewer than 50 full-time employees (including full-time equivalents) in New Hampshire and the United States, the foreign employer generally would not be subject to the Employer Shared Responsibility provisions.
A company that employs U.S. citizens working abroad generally would be subject to the Employer Shared Responsibility provisions only if the company had at least 50 full-time employees (including full-time equivalents), determined by taking into account work performed in the United States. Thus, employees working only abroad, whether or not U.S. citizens, generally will not be taken into account for purposes of determining whether an employer is applicable large employer or for purposes of determining whether the employer owes an Employer Shared Responsibility payment or the amount of any such payment.