Affordable Care Act Review

Affordable Care Act Review

Healthcare.gov Debacle Part Deux?

Posted in Affordable Care Act, Exchanges, Insurers and Brokers

Testifying before a Congressional subcommittee this morning, a GAO executive described a just-published analysis of the disastrous 2013 rollout of www.healthcare.gov.  CMS management had unrealistic expectations and failed to implement prudent cost and project management controls, according to the GAO study, resulting in huge cost overruns, delays, re-work and dysfunction.  “As a result, CMS launched Helathcare.gov without verification that it met performance requirements.”  Management deficiencies continued even after CMS replaced the lead contractor early in 2014.

Ominously, the GAO warns that, “Unless CMS improves contract management and adheres to a structured governance process, significant risks remain that upcoming open enrollment periods could encounter challenges.”  Open enrollment is set to begin November 15, 2014 – just 15 weeks from now.  Yet, GAO reports that, “as of June 2014, the financial management module was still under development,” and was “scheduled to be implemented in increments from June through December 2014.”  This part of Healthcare.gov, “tracks eligibility and enrollment transactions and subsidy payments to insurance plans, integrates with CMS’ existing financial management system, provides financial accounting and outlook for the entire program, and supports the reconciliation calculation and validation with IRS.”

Insurers evaluating 2015 Exchange participation should watch this closely.

Administering the Look-Back Measurement Method

Posted in Affordable Care Act, Coverage Mandates, Government Employers, Private Employers, Taxes

We have been warning that employers will need months of advance planning and an automated process to use the ACA’s “look-back measurement method” to identify the full-time employees who will be entitled to an offer of coverage.  In a future article, we’ll report our impressions of several software options.  Here, we’ll make it as simple as we can and yet you’ll be dizzy before we’re done.  All references are to the IRS Employer Shared Responsibility Cost Final Rules, 26 CFR 54.4980H-3(d) (79 Federal Register pp. 8586 – 8594, Feb. 12, 2014).  Among other short-cuts, we’ll ignore special rules that apply only to school employees; we’ll ignore the option to insert an “administrative period” between a measurement period and its associated stability period; and, we’ll discuss another day how to determine whether a returning employee is a “new hire,” and how to count hours of “special unpaid leave” if she is not.

There is nothing like this in the ACA.  The statute says almost nothing about how to count “hours of service” to determine full-time status. But unless employers cut part-time hours way back, month-by-month eligibility determinations could be nearly impossible to administer.  Fear that employers would do just that might explain why the IRS created this option.  First, four important ground rules: 

  1. Do not use this to count your “full-time employees” to determine your status as an “Applicable Large Employer.”  Though some of the same terms are used, they mean different things in the different contexts.
  2. Don’t use this for new hires you expect to work full-time.  If you use it to delay their coverage offers, you may incur both fines and taxes.
  3. Eligibility of full-time employees and their dependents is an ACA mandate; excluding others is not.  Given the administrative burden of full-time tracking, open eligibility might make sense for many employers.
  4. You may have different measurement and stability periods for these different employee groups:  union-represented and non-union; different unions; salaried and hourly employees; employees whose primary workplaces are in different states.

There are different measurement and stability rules for “ongoing” and newly-hired employees.  We’ll ease into this by starting with “ongoing” employees – i.e., those who have worked at least one entire “standard measurement period.”  Again, keep in mind that our summaries and examples are simplified for this blog format.

Calculate each employee’s average weekly “hours of service” during a pre-designated “standard measurement period,” then treat that employee as full-time during the entire, associated, “stability” period if the average was 30 or more; otherwise, not.

The “standard measurement period” must be between 3 and 12 months.  Its associated “stability period” must be the longer of six months or the length of the “standard measurement period.”

Example:  ABC Corp. has a 12-month standard measurement period beginning October 15, 2014 and a calendar year stability period.  Jethro began working for ABC September 1, 2013.  His weekly average hours of service for the measurement period ending October 14, 2015 are 31.3.  He is full-time eligible for the entire 2016 stability period, even if his 2016 hours fall below 30 per week.

The rules for new hires are more complex.  Each employee who has not worked at least one entire “standard measurement period” must be assigned his or her own “individual measurement period” and an associated “stability period.”  The length of each must be the same for all employees within the same group (as with the standard periods).  The measurement period must be between 3 and 12 months; the stability period must be the longer of six months or the length of the measurement period and must be the same length as the stability period for ongoing employees.  For those measured as full-time, if the longest periods are selected, coverage cannot be delayed beyond the last day of the first calendar month beginning on or after the first anniversary of the employee’s start date.   Such employees must be treated as eligible for the entire, associated stability period.

For new hires measured under 30 weekly “hours of service” during the initial measurement period, ineligibility for the entire associated stability period is lawful, except that their stability period cannot last more than one month longer than the initial measurement period and must not exceed the remainder of the overlapping standard measurement period.

If the new hire is promoted to a full-time job during the initial measurement period, then coverage may not be delayed past the earlier of the first day of the fourth full calendar month following that promotion or the start of the associated stability period, if the employee was measured full-time during the initial measurement period.

If the stability period associated with the initial measurement period ends before the start of the stability period associated with the overlapping standard measurement period, then the employee’s status during the former stability period continues until the latter stability period starts.

Example:  DEF Corp., which uses a 12-month initial measurement period, hires Butch part-time on May 10, 2015, but then promotes him to a full-time job on September 15, 2015.  Butch is entitled to a coverage offer that can be effective not later than January 1, 2016.

Another example:  GHI Corp. uses a 12-month initial measurement period (running from the hire date) and a 12-month standard measurement period starting each October 15, associated with a calendar year stability period.  Callie is hired April 1, 2015 and measured to be full-time during her 12-month initial measurement period, so that she is deemed full-time for the stability period April 1, 2016 through March 30, 2017.  But, during the standard measurement period October 15, 2015 through October 14, 2016, she is measured less than full-time.  So, from April 1, 2017 through December 31, 2017, GHI Corp. is permitted not to offer her coverage.

Have you had enough, or are you thirsty for more?  We ask because there really is so very much more.  Employer mandate enforcement for most large employers starts in about 21 weeks.   By now, you should know whether and by what method you will track hours of service for purposes of 2015 and 2016 eligibility.  Unless a third party benefit administrator or payroll processor will handle this reliably, you also should be shopping for software.

Employee Misclassification Pitfalls

Posted in Business Organizations, Employee Leasing, Independent Contractors

As we have discussed in prior posts, many employers are looking at ways to restructure their workforces due to the ACA.  In addition to ACA issues, a worker who has been misclassified can have negative consequences on the employer’s employee benefits.  The following are just a few of the consequences in a retirement plan:

  • If misclassified, the worker may be entitled to participate in the company retirement plan going back to the date he or she would have been eligible.
    • If the plan is a 401(k) plan, the employer must contribute matching and non-elective employer contributions, just as paid to other plan participants, 50% of the average deferral percentage amount for the employee’s group, and investment earnings on incorrectly omitted plan assets.  The government essentially wants the employer to put the worker in the position he or she would have been if properly classified.
    • If the plan is a defined benefit pension, the employer must make plan contributions sufficient to fund the participant’s accrued benefit in accordance with the plan’s terms.
  • In addition to the cost involved, the plan may be deemed to have violated the minimum participation standards under ERISA.
  • Employers who mistakenly include those employees who are not eligible because they are independent contractors risk the plan’s disqualification for violation of the “exclusive benefit rule” under the IRC.

As with retirement plans, the failure to include a worker qualified to participate in a welfare benefit plan due to misclassification may expose the employer to liability for damages for benefits wrongfully denied and breach of fiduciary duty under ERISA.  Again, this could lead to the welfare plan being disqualified.  Disqualification of a welfare benefit plan under the IRC typically results in the need for employer contributions and, in some circumstances, plan benefits being includible in all participating employees’ income.

On the other hand, inclusion of a worker who is not eligible may result in a company having to reimburse its insurance or reinsurance carrier for benefits paid by the carrier from its general funds.

In addition to the problems in retirement and welfare plans, employee misclassification in a company’s cafeteria plan can cause substantial problems.  The inclusion of just one employee who is not a bona fide employee may disqualify the entire cafeteria plan.  That would result in any and all benefits received by participants from the cafeteria plan becoming includible in income in the plan year in which they are paid.

 

 

Draft IRS ACA Forms Now Online

Posted in Affordable Care Act, Coverage Mandates, Exchanges, Government Employers, Insurers and Brokers, Private Employers, Taxes

On July 24, 2014, the IRS posted preliminary, unofficial drafts of forms that the ACA compels employers, plan administrators and employees to file, inter alia, to certify coverages offered and provided to employees in 2015.  They are Form 1094-B (“Transmittal of Health Coverage Information Returns”), Form 1094-C (“Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns”), Form 1095-A (“Health Insurance Marketplace Statement”), Form 1095-B (“Health Coverage”), Form 1095-C (“Employer-Provided Health Insurance Offer and Coverage”), Form 8962 (“Premium Tax Credit”) and Form 8965 (“Health Coverage Exemptions”).

Insurers and self-insured plans will file Form 1095-B and provide copies to all enrollees, using the 1094-B transmittal Form.  Large employers will file Form 1095-C, using transmittal Form 1095-B, with copies to all employees.  Form 1095-A is a notice from the ACA Exchange to those who enrolled in coverage through the Exchange.  Subsidized Exchange purchasers will file Form 8962. Individual mandate exemptions are claimed on Form 8965.

The IRS release suggests that further mandate enforcement delays are not under consideration.  Though the official forms and instructions for their use will not be available for months, this early look should help employers and their benefit administration partners assess the significant administrative burdens to come.

Update:  Answering several questions, yes, it is true that draft Form 1040 (see line 61) and draft Form 1040-A (see line 38) incorporate the individual mandate.

Check Subsidy Certifications Closely and Appeal All Errors

Posted in Affordable Care Act, Exchanges, Private Employers

As we explained a year ago, then again on January 14, 2014 and March 18, 2014, HHS is doing very little in 2014 and 2015 to verify the accuracy of information given by healthcare.gov subsidy applicants.  Failure to appeal subsidy certification errors will invite unwarranted employer mandate tax assessments.

The magnitude of this problem was demonstrated by a July 23, 2014 report of the Government Accountability Office (“GAO”), regarding -

undercover testing in which [GAO] obtained health care coverage, the Marketplace application and enrollment processes, including opportunities for potential enrollment fraud, during the [ACA’s] first open enrollment period, which ran from October 2013 to April 2014….

Translation: GAO ran a sting operation to see whether purchaser fraud would be detected.  The GAO created eighteen fictitious identities.  Twelve of the identities were used to test whether non-citizens could purchase coverage.  The other six were used to test whether assisters would encourage applicants to misstate income in order to qualify for subsidies.  Oh darn, you guessed it.

Although no assisters encouraged income misrepresentations, 11 of the 12 applicants using false citizenship information obtained subsidized coverage.  The online application process initially blocked 6 of the fake citizenship applications, but GAO was able to phone the call center and successfully complete the application process.  The report states that -

“According to CMS, its document processing contractor is not required to authenticate documentation; the contractor told us it does not seek to detect fraud and accepts documents as authentic unless there are obvious alterations.”

The GAO does caution that the results cannot be generalized to the overall applicant or enrollment population, but the results are illustrative of the real possibility for fraud. 

Once again:  Don’t assume that the subsidy certifications reported to you were correct.  Don’t even assume that they pertain to your actual employees.  Examine each closely.  Appeal all errors.

Courts Split in Round 2 of the Healthcare.gov Subsidy Smack-down

Posted in Affordable Care Act, Exchanges, Taxes

Do you recall any of the appellate opinions preceding the Supreme Court’s June 2012 affirmance of the ACA’s individual mandate?  Come June 2016, you’re no more likely to remember the two decisions that dominated the news last night.  To be sure, the issue – whether www.healthcare.gov purchasers are eligible for subsidies – is a big deal.  But we’re a long way from a final answer.  Here’s our explanation and forecast.

First, some consequences of a successful challenge to healthcare.gov subsidies are clear.  If only ACA Exchanges “established by the State” – the ACA’s precise language – may subsidize purchasers, then these things are true in the 36 states not running their own Exchanges in 2014:

  • Healthcare.gov awarded subsidies unlawfully this year and will do so again for 2015, creating a ball of confusion perhaps too big to unwind;
  • Applicants for whom unsubsidized insurance is “unaffordable” (above 8% of household income) should be exempted from the individual mandate if they don’t buy insurance;
  • No employer mandate taxes should be assessed for 2015 or subsequent years.

Whether these challengers should win is less clear.  For our non-lawyer readers, here’s an oversimplified analogy that we hope will help.  Suppose  that  you are on a team assigned to build a new prototype vehicle to match an owners’ manual written in the form of an epic poem, one line of which specifies an automatic transmission, but one stanza of which, when discussing brake wear, commends the practice of downshifting while descending long hills.  Do you install an automatic, a manual, or some hybrid transmission?  The IRS says in these cases, “Leave it to us, and hybrid is the obvious choice.”  The pro-subsidy judicial answer is, “Better you than us, and by the way, great choice.”  The anti-subsidy judicial answer is, “When the manual says ‘automatic,’ you have no choice.”

The anti-subsidy Halbig (D.C. Cir. July 22, 2014) and pro-subsidy King (4th Cir. July 22, 2014) decisions were made by three-judge panels of large appeals courts.  The entire (“en banc”) court may rehear either case, or both.  So, what now seems to be a significant circuit split might be reconciled before the Supreme Court weighs in.  This matters because circuit splits raise the odds of Supreme Court review.  We consider en banc reversal of the Halbig panel opinion more likely than en banc reversal of the King opinion.

Between now and any Supreme Court opinion, lots of water will go under the ACA bridge.  We’ll have at least one Congressional election, maybe two.  Celebrants on both sides should wait a while to whack their piñatas.

Immediate updateNews is breaking that the Administration will seek en banc review of the Halbig panel decision and Senator Reid seemingly confirms that he ”nuked” a judicial filibuster to add to the D.C. Circuit the votes needed to reverse that decision.  As we said, this is a long way from over.

What’s the Minimum “Minimum Essential Coverage”?

Posted in Affordable Care Act, Coverage Mandates, Private Employers, Taxes

Beginning January 1, 2015, “Applicable Large Employers” will be exposed to non-deductible tax liability for each month that they fail to offer affordable, qualifying coverage.  Avoidance measures include:

  • File for and obtain “transitional relief” in early 2016 based on certification that, among other things, fewer than 100 full-time employees and equivalents were employed, thus avoiding Internal Revenue Code § 4980H(a) and § 4980H(b) taxation for 2015;
  • Offer at least “Minimum Essential Coverage” (“MEC”) to at least 70% of full-time employees and their dependents, thus avoiding the “sledgehammer” tax under § 4980H(a) (about $174 monthly for each full-time employee in excess of the first 30);
  • Offer at least MEC that also provides at least Minimum Actuarial Value (“MAV”) coverage and that is “affordable” – (i.e., self-only coverage that costs the employee no more than 9.5% of household Modified Adjusted Gross Income), thus also avoiding § 4980H(b) taxation (about $265 monthly per employee who instead buys a subsidized Exchange policy for that reason).

But suppose that you’re too large for transitional relief yet too cash-strapped to provide full value, affordable coverage.  What’s the rock bottom for “Minimum Essential Coverage”?  We and our broker friends are being asked that with increasing frequency and urgency.  As is typical for a blog, our short answer necessarily must ignore many complexities that may matter to particular readers.  And, we must narrow our analysis to private employer plans.  Here goes.

A MEC plan is “a group health plan or group health insurance coverage offered by an employer to the employee which is . . . offered in the small or large group market within a State.”  So says Code § 5000A(f)(2).  Code § 5000A(f)(3) pares that back by excluding “excepted benefits” – e.g., certain accident insurance and health event indemnity insurance.  Roughly translated, this means that MEC must be either –

  • an employer-sponsored, self-funded, ERISA employee welfare benefit plan providing what the Code deems “medical care” beyond ”excepted benefits” or,
  • an employer-sponsored, fully-insured group health plan that provides such medical care and that also meets all requirements of applicable state insurance law.

Careful:  a plan might be MEC (thus avoiding § 4980H(a) taxation) and yet fall short of ACA coverage mandates, exposing the employer to PHS Act civil money penalties of up to $100 per day per affected individual.  For that reason, we must also determine which ACA mandates apply.  Too, we’ll assume that the plan will be new, so that the applicable mandates are those for non-grandfathered plans.

Here, self-insurance has a small advantage.  Applicable ACA mandates (again, described too simply) are: no pre-existing condition exclusion, no health status discrimination, no discrimination against licensed providers, cost-sharing cap compliance, maximum waiting period compliance, clinical trial coverage compliance, no annual or lifetime limit, no rescission except for fraud, preventive services without cost sharing, adult child coverage to age 26, SBC and appeals process compliance.  A fully-insured plan must add  guaranteed issue, guaranteed renewal and MLR compliance, plus all coverages mandated by state insurance laws.

But notice the 800-pound gorilla that’s not in this room – Essential Health Benefits (“EHB”).  EHB are mandated only for individual and small group, non-grandfathered, fully-insured plans.  ACA § 1302 and HHS rules define EHB to include, among many other coverages, emergency services and hospitalization – big cost drivers.  Thus, a consensus has developed that an MEC plan need cover only preventive services without cost sharing, including related, generic prescription drugs.  If the MEC plan is fully-insured, coverages mandated by applicable state insurance laws would have to be added.

Employers sat up and took notice after the Wall Street Journal ran its “skinny med” story in May 2013.  But when the Administration delayed employer mandate enforcement, many interested employers moved along to more pressing concerns.  So, we’re back to the beginning a year later.

If you are considering rock-bottom MEC to avoid § 4980H(a) taxation, be aware that you’ll remain exposed to § 4980H(b) taxation for every full-time employee who instead buys a subsidized Exchange policy, because the IRS won’t see MAV in such skinny plans.  For that reason, we think that skinny med plans make more sense as “buy down” alternatives for your employees who don’t want to spend what you would have to charge them even for “affordable” MEC / MAV coverage.

New Questions for Employer Mandate Analysis

Posted in Affordable Care Act, Coverage Mandates, Taxes

The American Bar Association’s tax and employee benefit practice leaders periodically query IRS representatives about new or changing rules, to confirm that lawyers are reading the rules the same way that IRS reads them.  IRS responses to those queries are not official enforcement positions and do not have the force of law.  So, if an answer were to contradict a published IRS rule or the underlying statute, lawyers reasonably might advise clients to follow the published rule or statute. The ABA recently published a May 2014 Q & A exchange that casts doubt on what had been common understandings of the IRS Employer Shared Responsibility Cost Final Rules.  A full analysis would exceed the space available for this post.  Here are five noteworthy IRS answers, in short form:

  1. For determining “Applicable Large Employer” status, the 120-hours of service per month standard used to convert part-time hours to full-time equivalency also must be used to identify full-time employees, rather than the 130-hour standard;
  2. An employee hired to work full-time hours cannot be treated as a variable hour or part-time employee even if, by contract or by operation of law (e.g., a short time remaining on a visa), the employee’s tenure will be so short that he or she cannot average 130 hours per month over the course of the relevant measurement period;
  3. The stability periods associated with standard measurement periods and initial measurement periods must be the same for the same employee groups.  Though the rules do not expressly require the measurement periods to be identical, it works out that way, except for new hires formally subjected to a 12-month measurement period and a 12-month stability period;
  4. Each hour of “on-call” pay, even if lawfully paid below minimum wage (because it is not ”worked”), must be credited as a full “hour of service”;
  5. For each employee category, an employer may use the monthly measurement method or the measurement – stability method to determine the full-time status of a newly hired variable hour employee; it may not use the monthly measurement method initially, then switch to the measurement – stability method later in the year.

We shared the IRS view on points 4 and 5, and had guessed right on points 2 and 3.  Point 1 seems to us to be questionable and potentially determinative of some employers’ 2015 “bubble” status.  If you are using a software solution to determine Applicable Large Employer status, or to calculate full-time employee eligibility, you might do well to research its relevant design and how it might affect you, if inconsistent with one or more of these IRS answers.

Temp-to-Perm Staffing: Still a Solution?

Posted in Affordable Care Act, Business Organizations, Employee Leasing, Independent Contractors, Taxes

“Applicable Large Employers” are exposed, beginning January 1, 2015, to significant new taxes if they fail to offer “minimum essential coverage” to at least 70% of their full-time employees and their dependents.  Employers also must permit full-time employee coverage to become effective within a “90-day” maximum waiting period.  Unlawfully delaying coverage exposes the employer both to the new taxes and to fines of up to $100 per day per affected individual.  Puzzlingly, the enforcement agencies’ (DOL, HHS, IRS) rules on each subject fail to address their potential disruption of temp-to-perm staffing arrangements.  When callers ask for specific guidance, our contact information is taken.  We are reminded of Lewis Grizzard’s joke that the 1988 Atlanta Braves and Michael Jackson had one thing in common: they both wore one glove, for no apparent purpose.

Many employers obtain all new hourly workers from a leasing company that is their W-2 employer for, say, 90 days, at which time the customer moves some to its own payroll.  Is the employee’s first day on the new payroll Day 1 of the maximum waiting period under the customer’s group health plan, or must that plan count the employee’s 90 days with the leasing company?

The rules tell us little more than that an employer’s ACA obligations extend to every person who is its “common law employee.”  The IRS uses a 20-factor “right to control” test to determine whether a common law employment relationship exists.  No one factor determines the result, but if an employer can tell a worker what to do, when to do it and how to do it, then, generally speaking, the worker is that employer’s common law employee.  And an employee may have multiple, joint, common law employers.  If high penalties and lack of clear guidance compel leasing firms and their customers to adopt the most risk-averse rule interpretations, they might shorten the lease term to coincide with the one month “orientation period” of the maximum waiting period rules.  Some leasing firms might not be able to survive in that environment.   Some employers might not find truncated lease terms worthwhile.

If such disruption is to be minimized, leasing firms, their customers and their lawyers need clearer enforcement guidance, and we need it soon.  We’re asking our Congressional representatives to help us get the guidance that we need.  If this matters to you, please consider doing the same.

Mississippi Health Insurance Exchange Update

Posted in Affordable Care Act, Exchanges

One, Mississippi,” the state-run health insurance exchange for small employers, recently released enrollment information through the Mississippi Insurance Department.  In a prior article, we described the relatively simple enrollment process.  The State spent not quite $10 million, less than half its federal grant, on the IT build-out and, apparently, it works.  As of early June 2014, 103 employers had enrolled, identifying 274 eligible employees.  The first eleven employers registered were law firms.

Some parts of www.healthcare.gov, the individual exchange operated by HHS, also work now. As of early June 2014, about 65,000 Mississippians had enrolled and selected a plan. About 80% of them had made at least one premium payment.  Federal subsidies were awarded to about 94% of the applicants.  The average monthly premium for selected plans was $438 and the monthly subsidy $415, making the average monthly premium just $23.

Most applicants selected a “Silver” level – i.e., 70% value – plan.  The average Silver plan monthly premium was $434 and the average subsidy was $419, making the average monthly premium just $15.  About 96% of those who selected a Silver plan were awarded a subsidy.

The Mississippi Insurance Department is in the rate review process for policies to be sold through www.healthcare.gov beginning in November 2014.  Network adequacy standards have been adopted and published at 19 Miss. Admn. Code, Part 3, Chapter 14.