Again this year, we turn our focus to the many changes in healthcare reform. The Obama administration and the IRS have made multiple modifications to the ACA implementation and rules. In this update, we discuss the employer mandate delay, the impact of temporary employees on determining large employer status, the Patient-Centered Outcomes Research Institute (PCORI) fee and transitional reinsurance fee, disclosures and reporting requirements, and health reimbursement arrangement (HRA) availability.
Employer mandate delay
We begin with the most publicized change: the deferral of the employer mandate. Last summer, large employers (those with more than 50 full-time or “full-time equivalent” employees) were given an additional year (until 2015) to comply with the ACA requirement to offer affordable health coverage that provides a minimum level of coverage to at least 95 percent of full-time employees or pay a penalty. Then, in February, employers with between 50 and 99 full-time or full-time equivalent employees were given yet another year (until 2016) before the pay-or-play provisions apply. Also, the percentage of full-time employees to which coverage must be offered was relaxed for 2015. Transition rules governing how these delays will impact employers have been released in the form of final regulations. So, what does this mean to you?
- If the initial deferral to 2015 applies, employers can use a six-month measurement period instead of the full year in 2014 to determine the number of full-time or full-time equivalent employees.
- Large employers who average between 50 and 99 full-time or full-time equivalent employees, to qualify for the extended delay until 2016, must certify in writing that:
- Between Feb. 9, 2014, and Dec. 31, 2015, they did not reduce workforce size for other than bona fide business reasons and did not materially alter group health coverage already in place prior to Feb. 9, 2014.
- The requirement to offer coverage to at least 95 percent of full-time or full-time equivalent employees (and their dependents) is being phased in over two years. To avoid the penalty in 2015, employers need to cover at least 70 percent. In 2016 and beyond, coverage application increases to 95 percent.
- Dependent coverage requirement will not apply in 2015 if employers are arranging to offer such coverage in 2016.
- Employers can use three safe harbors to determine coverage affordability to employees:
- Wages paid
- Employee’s hourly rate
- Federal poverty level
Clarification on counting hours of certain types of employees (including occupation) is also provided in the final regulations.
- Volunteer hours to a government or tax-exempt entity will not count toward full-time employment (e.g., firefighters, emergency responders).
- Teachers and other educational employees will not be treated as part-time employees if only because schools are closed part of the year.
- Seasonal employees employed for less than six months will generally not be considered full time.
- Student service hours as part of a work-study program sponsored through the federal or state government will not be counted toward full-time status.
- Adjunct faculty is allowed 2-and-one-quarter hours of service per week for each hour of teaching or classroom time.
The large employer shared responsibility payment (employer mandate) is assessed based on offering minimum essential value healthcare coverage to at least 95 percent of total employees (70 percent in 2015). Even though it is not in effect until 2015, now is the time to review types and classes of employees. Total employees include common-law employees who may currently be treated as independent contractors or staffing agency individuals. Final regulations issued in February provide us with some guidance as to how these individuals impact the penalty calculation.
Workers through a temporary staffing agency intended for short-term assignments will be presumed employees of said temporary staffing agency. As a result, the agency will be responsible for offering appropriate coverage and determining whether it is subject to the employer mandate penalties. Employers utilizing temporary employees through a staffing agency should expect to pay higher rates as these additional costs are absorbed.
While not specified in the final regulations, if individual workers have other than temporary, short-term assignments with an employer, the implication is that those individuals are deemed employees of the employer and not the temporary staffing agency. Consequently, they must be included in the monthly employee count and offered appropriate healthcare coverage.
Classification of these employees can have a significant impact on whether the 70 percent (2015) or 95 percent (2016) thresholds are met. If, in a later year, the IRS recharacterizes certain temporary employees that were not originally included in total headcount, employer mandate penalties (based on total number of employees) could be assessed on the year under audit as well as any applicable preceding years.
We believe the IRS will be aggressively targeting companies and employers that use common-law employees to confirm the appropriate payroll taxes and ACA penalties are assessed and collected. The percentage tests will be calculated on a monthly basis so it is important to begin this analysis soon.
Transitional reinsurance fee
Between 2014 and 2016, the ACA requires all health insurance issuers (including self-insured employers) and third-party administrators to contribute toward a transitional reinsurance program to help stabilize premiums for individual health coverage. The fee, estimated for 2014 to be approximately $63 per covered life, will be tax deductible. It will be assessed on a calendar-year basis, regardless of the plan year. As an example, a self-insured employer with 1,000 covered lives will pay a $63,000 transitional reinsurance fee for 2014.
Beginning in 2014, certain health insurance issuers in the individual and small employer markets will become subject to new restrictions on how they price health insurance as well as the conditions under which they will provide the insurance. Since these additional restrictions could cause some insurers to cover higher-risk populations which could adversely affect their financial situation, the ACA included a provision for “temporary reinsurance payments.”
This fee applies to plans that provide major medical coverage, but not to stand-alone vision and dental plans. Insurance companies will be responsible for paying the fee for fully insured plans and are expected to pass this cost along in the form of increased premiums. Self-insured plans will pay the fee with plan assets.
Fees are collected through the Department of Health and Human Services (HHS). Employers, through their insurance carrier, submit the number of covered lives to HHS and are invoiced accordingly. Annual membership counts are based on the first nine months of the benefit year. If timely, the fee can be paid in two installments:
- If the enrollment count for the 2014 benefit year is submitted by Nov. 15, 2014, a reinsurance contribution payment of $52.50 (allocated to reinsurance payments and administrative expenses) per covered life would be invoiced in December 2014 and payable in January 2015.
- Another reinsurance contribution payment of $10.50 (allocated to the Treasury) per covered life would be invoiced in the fourth quarter of 2015 and payable late in that quarter.
As a reminder, the annual PCORI fee is due July 31. Payment is calculated and submitted using the federal excise tax Form 720. For plan years ending on or after Oct. 1, 2013, and before Oct. 1, 2014, the fee is $2 per covered life. For plan years ending in any fiscal year beginning on or after Oct. 1, 2014, the fee is indexed for medical inflation. This, too, is a tax-deductible expense for self-insured employers.
Healthcare information reporting
The IRS has indicated information reporting and implementation of the ACA is a key focus area for 2014. Guidance for several provisions is expected during the course of this year, including:
- Information reporting by the exchanges
- Minimum value of eligible employer-sponsored plans
- Employer-shared responsibility provisions
- Health insurance providers’ fee
- Insurer and employer reporting
Health reimbursement arrangements
A change has been made in how the employer reimbursement of employee insurance policy premiums is taxed. Since 1961, the IRS has allowed employers to reimburse or pay for employee individual health insurance premiums, providing a tax-free exclusion from income to the employee. With the ACA’s exchange marketplace taking effect Oct. 1, 2013, some employers have considered dropping existing health coverage and subsidizing the cost of their employees’ purchase of health coverage on the exchanges through the use of a “stand-alone” HRA.
The Department of Labor and the IRS have concluded HRAs cannot be integrated with individual health insurance coverage because they violate the ACA prohibition on annual dollar limits including the requirement to provide first-dollar preventive care. In the agency guidance issued in the fall of 2013 was an extension of the definition of stand-alone HRA to include “employer payment plans” such as individual coverage reimbursement programs of this type, concluding that these types of arrangements violate ACA market reform rules unless the reimbursements are made on an after-tax basis. Consequently, employer reimbursement for employee individual health coverage, effective Jan. 1, 2014, can no longer be made on a pre-tax basis. The employer may also become subject to a $100 per day, per employee excise tax penalty by using these types of arrangements.
As you can see, healthcare is constantly changing, with three separate government agencies issuing guidance on a regular basis. We will continue to inform you of developments in this highly complex area.
For more information on this topic, or to learn how Baker Tilly tax specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.