To avoid elements of the Patient Protection and Affordable Care Act (PPACA) adversely affecting fully insured health plans, growing numbers of employers — especially smaller ones — are self-funding their plans.
“The problem is that everybody has been in a wait-and-see mode for two years, but now we’re starting to see the impact,” says Mark Haegele, director, sales and account management, at HealthLink. “I expect a lot of fully insured employers to make a change this year, mid-year. There are just so many compelling reasons to entertain it because self-funding policies still protect small employers and allow them to avoid many forthcoming taxes and rules.”
Smart Business spoke with Haegele about why the PPACA has prompted more employers to explore self-funding or partial self-funding.
How does medical loss ratio (MLR) reporting drive employers to self-funding?
MLR reporting requires insurance companies to spend 80 or 85 percent — depending on their size — of premiums received on health care claims. Plan administration, such as overhead, payroll, sales efforts, network contracting, etc., comes from the remaining 15 to 20 percent.
MLR gives insurance companies an incentive to squeeze administrative services to make more profit. Some insurance companies have changed staffing and service models. One company had service people out to help with claim issues and problems for different segments — health insurance groups with two to 40 members, and 40 to 100 members. They recently bundled the segments into one, cutting staff and decreasing field service.
What will community rating rules do to health care costs?
Effective Jan. 1, 2014, insurers must comply with community rating factors based on geography, age, family composition and tobacco use. This means all fully insured small employers in an area or industry will pay the same for premiums. The idea is to get everybody to an affordable and stable price point, but many fully insured groups will be hit with big increases.
Here’s an example: in Missouri and Illinois, groups of fewer than 50 employees will be underwritten based on community rating rather than the specific group’s risk. A small, healthy employee group in Chicago can expect a 173 percent increase in 2014, according to the American Action Forum Survey of Insurance Companies. At the same time, a small Chicago group with older, less healthy members could have its premium decrease by 21 percent.
Under self-funding, healthy small groups are able to maintain rate stability based on the health of their own population.
How will the insurance tax affect health premiums for fully insured employers?
Starting in 2014, insurance carriers will be assessed a tax, projected to be $8 billion to $12 billion. The federal government will use this money to subsidize poor uninsured. However, insurance is a cost-plus business, so carriers will pass this on to employers. It’s still unclear how much the fully insured’s premium will increase as the tax is shared across the industry; it depends on your insurance company’s market share.
How will minimum essential benefits make self-funding more attractive?
Fully-insured plans sold in the small group market — fewer than 50 employees for Missouri and Illinois — will be required to limit annual deductibles to $2,000 for single coverage and $4,000 for family coverage, as of Jan. 1, 2014. This places upward pressure on premiums. If your current deductible is greater than $2,000, in order to decrease it premiums will go up because the insurance company faces more risk.
Also, for the past five years, many small employers’ deductibles have increased, which keeps premiums down, but employers haven’t passed it on. For example, because most members don’t use their deductibles, the employer could give employees a $1,000 deductible and use self-funding to cover the gap for the remaining $4,000 when the insurance company requires a $5,000 deductible to keep premium increases low.
Small employers could consider a self-funded platform in order to maintain their current deductible and keep rates stabilized.
Mark Haegele is a director, sales and account management, at HealthLink. Reach him at (314) 753-2100 or firstname.lastname@example.org.
VIDEO: Watch our videos, “Saving Money Through Self-Funding Parts 1 & 2.”
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The Patient Protection and Affordable Care Act imposes two new Medicare taxes — one on wages and self-employment income and one on net investment income.
“As a result, executives subject to these new Medicare taxes will now incur a 3.8 percent Medicare tax on most of their taxable income,” says Mark Watson, partner, Houston Tax and Strategic Business Services, at Weaver.
Smart Business spoke with Watson about what this new tax means for executives.
How will the Medicare tax impact wages and self-employment income?
Beginning this year, an additional 0.9 percent Medicare tax is imposed on wages and self-employment income in excess of $250,000 for joint filers and $200,000 for single filers. So, the total Medicare tax on wages and self-employment income is now 3.8 percent, up from 2.9 percent.
If a couple files a joint return, the added tax is imposed on their combined wages and self-employment income. Employers must withhold this additional tax on wages paid to an employee in excess of $200,000 in a calendar year. This withholding applies even though the employee may not actually be liable for the additional tax because, for example, the employee’s wages with that of his or her spouse doesn’t exceed $250,000. Any excess withheld Medicare tax will be credited against the total tax liability shown on the employee’s income tax return.
The $250,000 and $200,000 threshold amounts aren’t indexed for inflation. So, over time, more executives will likely be subject to the additional Medicare tax.
How is net investment income affected?
Many executives also will be subject to a new Medicare tax on their unearned income in 2013. This new tax, commonly called the ‘net investment income tax,’ applies to individuals, estates and trusts when income exceeds $250,000 for joint filers, $200,000 for single filers and $11,950 for estates and trusts, and equals 3.8 percent of net investment income.
Net investment income equals investment income less properly allocable deductions. Investment income includes:
• Gross income from interest, dividends, annuities, royalties and rents.
• Gross income from a passive activity.
• Gross income from a trade or business of trading in financial instruments or commodities.
• Net gain from the sale of property.
• Gross income and net gain from the investment of working capital.
However, gain excluded from taxable income, such as gain on the sale of a personal residence and gain deferred through a like-kind exchange, isn’t included in investment income. Similarly, gain from the sale of certain property used in a non-passive trade or business isn’t included.
Properly allocable deductions include:
• Deductions allocable to rent and royalty income.
• Deductions allocable to income from a passive activity and to a trade or business of trading in financial instruments or commodities.
• Penalties imposed on early withdrawal of funds from a certificate of deposit.
• Investment interest expense.
• Investment adviser fees.
• State/local taxes on investment income.
In the case of an estate or trust, deductions also are available for distributions of net investment income to beneficiaries.
How can these taxes be minimized?
Executives subject to the net investment income tax and the maximum federal income tax rate — applying to joint filers with annual income in excess of $450,000 and to single filers with annual income in excess of $400,000 — will face a 43.4 percent federal tax rate on ordinary income and 23.8 percent federal tax rate on long-term capital gains and qualified dividends. Minimize taxable net investment income by:
• Documenting and claiming all allocable deductions.
• Making distributions from an estate or trust to beneficiaries with income below $250,000 or $200,000 who are not subject to the tax on net investment income.
• Investing through tax-sheltered investment vehicles such as 401(k) plans, Individual Retirement Accounts, annuities and life insurance policies.
As the 2014 date looms, a lot of news is spreading about having to offer affordable coverage to all employees by Jan. 1, 2014, or pay big fines.
“Employers, you may be asking yourself, ‘Hey, our plan year starts on July 1 every year. Does the employer mandate apply to us on Jan. 1, 2014, or does it start on July 1, 2014?’” says Tobias Kennedy, vice president at Montage Insurance Solutions.
Smart Business spoke with Kennedy about possible transitional relief for some employers.
How does the employer mandate work for plans that don’t start with the calendar year?
The good news is there has been special transitional relief for employers to avoid the unaffordable coverage fines and the ‘pay or play’ mandate until later in the year. Generally speaking, the employer shared responsibility mandate is effective on Jan. 1, 2014, but there are special transitional rules that might apply and, if they do, they delay the assessment of penalties until the first day of your first plan year that starts after Jan. 1, 2014.
In other words, if you are that employer with a July 1 plan date and you qualify for the special transitional relief, you don’t face penalties until July 1, 2014, and will not be fined for the January through June months — even if you are out of compliance.
So, how can you qualify for this special transitional relief?
Basically, the transition rules say that if you maintained a non-calendar plan as of Dec. 27, 2012, you might be eligible. There are two parts to eligibility. The first one is whether or not you had a plan in place on Dec. 27, 2012, which is easy enough to figure out.
The second part is based on whom your plan was offered to. If your plan was either offered to at least a third of your employees or covered at least a quarter of your employees, then you quality. For the purposes of figuring out if you offered it to one-third of your employees, you’d look at the number of people offered coverage at your most recent open enrollment season, and for the purposes of figuring out if it covered one-fourth of your people, you can pick any day between Oct. 31, 2012, and Dec. 27, 2012, and check on what percentage of your employees were enrolled.
You still have to correct any violations — unaffordable or under-accessible plans — by your anniversary date or you will be fined. But if you qualify, you have the full year to assess the situation and to make plans to come into compliance by your 2014 plan anniversary.
Which companies can’t get the transitional relief?
The federal government has specifically stated that companies who already have a calendar year plan can certainly change now to a different anniversary date, but they will not be eligible for this relief and those companies — ones who had a Jan. 1 anniversary as of this year or prior — will still be assessed the ‘shared responsibility’ fines as of Jan. 1, 2014.
Additionally, if your company does not qualify for this transitional relief because you either didn’t offer insurance or didn’t cover enough people, beginning Jan. 1, 2014, you will need to offer affordable coverage to at least 95 percent of your employees or be fined. In other words, even if you did have a plan in place but it covered so few people it doesn’t fit the transitional relief provision, you’ll need to either change the plan year date to Jan. 1., 2014, or consider offering coverage to your employees at the 2013 renewal to avoid any fines.
Is there anything else employers should know?
If your employees do not have a medical plan effective Jan. 1, 2014, they will be fined personally. At this plan year, it’s recommended that you sit down and audit your employee benefits program to make sure your employees are offered the coverage and the coverage is affordable, per the 9.5 percent rule that begins in 2014.
Next month we will further review these potential fines for ‘unaffordability’ and the details of that 9.5 percent rule so you know how to comply.
Tobias Kennedy is a vice president at Montage Insurance Solutions. Reach him at (818) 676-0044 or email@example.com.
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If you surveyed 100 people about the recent tax changes, 95 of them probably will mention the capital gains and income tax rate increases at a certain level, but those are the two changes that may have the least effect, says Bruce Friedman, CPA, director in assurance at SS&G.
“There were a couple of items that the publicity focused on, and therefore the general public focused on, which, based on my experience with taxes, aren’t necessarily going to be as big of an issue as some of the subtle items out there,” he says.
Smart Business spoke with Friedman about some overlooked tax changes that could really have an impact on your 2013 tax bill.
What has been emphasized that won’t necessarily have a large impact?
The higher tax bracket at certain income levels and the new capital gains rate will likely affect people less than they think.
A taxpayer calculates tax in two ways — on normal income tax rules and the alternative minimum tax (AMT) — and then pays whichever is higher. The higher tax bracket and increased capital gains rate both apply on the income tax side to those earning $400,000, or $450,000 if married and filing jointly. However, generally speaking, people whose incomes are between $150,000 and $600,000 likely already pay at the AMT rate, and these two changes, therefore, aren’t likely to raise their income taxes to more than AMT. Those who have closer to $1 million of income will be affected.
What should taxpayers know?
Certain phase-outs have been brought back — the phase-out of itemized deductions and the loss of personal exemptions if your income is more than $300,000 for those married and filing jointly. However, many people who itemize on their returns aren’t aware because it hasn’t been publicized. It’s not dollar for dollar, but you lose some.
Also not renewed was the payroll tax ‘holiday.’ In 2011, all employees had their Social Security tax withholding rate decreased from 6.2 to 4.2 percent, which was renewed through 2012. Nonrenewal means reductions to your regular paycheck.
Is the health care reform surtax a concern?
This year there are new surtaxes on wages and unearned income because of health care reform, where AMT has no impact.
For the wages portion, if you’re married, filing jointly and your adjusted gross income exceeds $250,000 ($200,000 if you’re single) you pay an added 0.9 percent on the excess. For a married couple making $300,000 annually, it’s an added $450 per year.
The bigger impact is the unearned income tax of 3.8 percent, which applies to interest, dividends, capital gains and passive net rental income for the same $250,000 and $200,000 of adjusted gross income. As the owner of a business that generates a Schedule K-1 tax form relative to a passive activity, this could be a concern because that K-1 may have taxable net rental income, which could be included in this calculation. A typical example is where the business pays rent to the business owner who owns the property; many owners set up separate rental activities because it was a method to get cash without paying payroll taxes.
Here’s how the unearned income surtax could work: A married, filing jointly couple has $200,000 of earned income and $100,000 of unearned income. They are only taxed on unearned income that put them over $250,000 — $50,000, but that’s an additional $1,900 in taxes per year.
What can be done to lessen the impact?
There’s not much to be done aside from perhaps adjusting your business’s rental income. Many business owners may have charged on the high side of rent, but now — especially with lower real estate values — it might be worth revisiting the rent the business is paying.
The key point is to know the true dollar amount of your 2013 taxes. For example, the person who has a taxable income of $425,000 might be thinking, ‘No change in rates, I’m good.’ But if that taxpayer has $200,000 of unearned income, it’s another $7,600 in taxes.
What’s the good news?
Some positive business-oriented things were continued, such as accelerated depreciation, which lets you write off up to $500,000 in assets, up to $2 million in expenditures, as well as extending the R&D credit that can offset against AMT.
Bruce Friedman, CPA, is director in assurance at SS&G. Reach him at (330) 668-9696 or BFriedman@SSandG.com.
Website: For detailed 2012-2013 tax planning tips, see our online WebTaxGuide.
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On Mar. 23, 2010, President Barack Obama signed the Patient Protection and Affordable Care Act of 2010 (PPACA) with the intention of providing comprehensive health care coverage to nearly all individuals. The law is being rolled out in phases and arguably the most significant aspect for employers is set for implementation on Jan. 1, 2014.
“We have found ourselves at the intersection of streets paved with good intentions and unintended consequences,” says Richard Leasia, shareholder at Littler Mendelson, P.C.
Effective Jan. 1, 2014, employers with 50 or more full-time or full-time equivalent employees will have to choose between providing affordable health insurance coverage to qualifying employees or paying a penalty. There is no per se requirement that all employers provide health insurance coverage and employers will need to evaluate the pros and cons of providing health insurance coverage or paying various penalties.
“Each business owner’s analysis should include not only the financial implications of one option over the other, but also issues of employee morale, competitiveness within the marketplace, tax implications and benefits, and potential internal compliance and monitoring requirements,” says Bill Norwalk, tax partner-in-charge at Sensiba San Filippo LLP.
Every company, regardless of size, will need to continue to decide whether and to what extent they will provide health insurance coverage for employees. While the PPACA mandate directly affects only those employers meeting the minimum threshold number of employees, small businesses, some of which are not legally required to provide health insurance coverage, may wish to do so as an incentive for employees, as a means of staying competitive within the market, and/or in order to take advantage of certain tax credits.
At a recent event hosted by Sensiba San Filippo, Littler Mendelson, ABD Insurance and Financial Services, and the Small Business Majority, panelists from each firm discussed the implications of health care reform
on small and medium-sized businesses.
Smart Business spoke with Leasia and Norwalk after the event to gather feedback and to have them answer questions about the basics of health care reform laws and what the laws will mean to businesses from a financial, tax, and legal perspective.
What are the legal implications?
Although the PPACA indicates in general terms what will be required on Jan. 1, 2014, many questions concerning the specific application of the law remain unanswered. A few of the open questions include:
1. When does an employee qualify as full-time or full-time equivalent?
2. What standard will be used when assessing whether the employer-provided health insurance coverage is ‘affordable’?
3. How do contractors affect the analysis?
4. What about seasonal employees?
5. What effect will the PPACA have on current city-specific mandated health care (e.g., San Francisco’s Health Care Security Ordinance)?
Unfortunately, answers to these questions will be dependent on yet-to-come regulations, but business owners should address them with their advisers.
What are the tax and financial implications?
Many business owners remain focused on 2014, but they should not lose sight of some very specific requirements that will be rolled out this year. These include, for example, an implementation of a $2,500 cap on employee contributions to health flexible spending accounts for plans beginning on or after Jan. 1, 2013; W-2 informational reporting for the 2012 calendar year was due for many employers by Jan. 31, 2013; additional notice requirements to employees; and beginning Jul. 31, 2013, there will be the imposition of certain temporary taxes for insured and self-insured group health insurance plans. Additionally, businesses should ensure that they are harnessing the full potential of the various tax credits currently available, including those available to small businesses that offer health insurance coverage to their employees. Now is the time to start planning with your tax adviser.
Throughout the coming year it will be imperative for businesses to examine their particular situation, learn how the PPACA affects their specific workforce, and prepare a plan for implementing the requirements that will go into effect in 2013, 2014 and beyond.
Richard Leasia is a shareholder with Littler Mendelson, P.C. Reach him at (408) 998-4150 or firstname.lastname@example.org. Bill Norwalk is tax partner-in-charge at Sensiba San Filippo LLP. Reach him at (925) 271-8700 or email@example.com.
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Health care reform is on the way, with most mandates starting in 2014, but it will be 20 or 30 years before we really know how the Patient Protection and Affordable Care Act (PPACA) will work, says William F. Hutter, president and CEO of Sequent.
“That creates much uncertainty for small and middle-market companies.
They don’t know what to do. And that uncertainty is bad for the economy and it is bad for business. When business owners can’t make decisions, it’s bad for all of us,” says Hutter.
Smart Business spoke with Hutter about some of the lesser-known aspects of the PPACA.
What are the minimum participation standards?
There are two standards for minimum participation:
• 80 percent of all eligible employees must take coverage from the employer.
• 70 percent of net eligible employees must take coverage from the employer.
Net eligible employees won’t include those who decide to get coverage from a spouse’s plan.
A really unique caveat about this is that if a company cannot maintain those participation requirements, technically no carrier has to write it coverage. That would force the company into a state health care exchange because it would be unable to provide a health insurance program for employees.
You could try to increase employee participation by improving the plan, but then the cost goes up and the company can’t afford it. Or the cost goes up and somebody can go to the state health care exchange and get a subsidized plan for less.
A lot of companies with between 75 and 150 employees are really going to be challenged. If they can’t meet minimum participation requirements and can’t afford to design a plan to compete with the exchange, they can give up and let everybody go to the exchange. But then they have to pay a $2,000, per employee, nondeductible penalty. For a company with 100 full-time equivalents (FTEs), that’s a $200,000 tax and they still don’t have a health plan.
How can companies that provide adequate health insurance still wind up paying penalties?
Say I run a company that has more than 50 FTEs and I’m offering a good health care plan. However, because of the subsidies that are offered, an individual opts out of my health care plan and instead seeks out insurance from a state exchange. A family of four can earn up to $80,000 and get a subsidy for buying on the exchange. I could still wind up paying a $3,000 penalty if I have an employee who opts out.
So companies will be weighing whether it costs more to provide health care or simply pay the penalty?
Correct. If that’s the case, how does that impact my company culture and how do I want to take care of my employees and their families? We don’t know how some of those questions are going to manifest. Or the fact that, as an employee, I get my health care out of an exchange, therefore I can go to work anywhere I want to. That begins to break down the loyalty factors between employees and companies.
What impact will the PPACA have on health insurance costs?
Based on the average cost of $440 per month for an individual, 75 percent is used for claims. That means the remaining 25 percent, or $110, goes for administration costs, profits, compensation, rents and other expenses related to the health care plan. The legislation says that 85 percent of every dollar must be used to pay claims. In order to maintain that same $110 a month, the cost for an individual goes up to $730; it’s just a reverse calculation. This can be attributed to the legislation and how it ultimately impacts the medical loss ratios.
William F. Hutter is president and CEO at Sequent. Reach him at (888) 456-3627 or firstname.lastname@example.org.
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President Barack Obama’s re-election means health care reform is certain, and businesses need to plan to meet Patient Protection and Affordable Care Act (PPACA) mandates, most of which will be effective on Jan. 1, 2014.
There are ways companies can structure themselves to avoid any type of penalty and maintain their employees’ benefits, says Stefan Thomas, an associate with Kegler, Brown, Hill & Ritter.
“Because of the ambiguity of the law, it’s a difficult subject matter for companies to understand. Some are opting in or opting out of insurance plans, some are self-insured and some are privately insured. It’s really specific and handled on a case-by-case basis.”
Smart Business spoke with Thomas about steps that companies should take in order to meet PPACA mandates.
What steps do companies need to take in order to be prepared for the PPACA requirements?
First,companies need to determine if the law will affect them. Depending on the size of the company, it might not. They would have to be an applicable large employer, which means having 50 or more employees, including full time, full-time equivalent and seasonal workers.
There are other things to consider, such as whether the seasonal exception is applicable or whether full-time-equivalent workers (2-to-1) or seasonal employees, defined as those who work four or more months, have caused them to become large employers.
If a company is subject to PPACA mandates, what is their logical next step?
The next thing for a company to do is to figure out whether or not they’re providing any insurance and, if they are, whether it’s adequate. If it’s not adequate, it needs to be, meaning that they’re paying a certain percentage of the premium, which should be 60 percent.
If they’re large and have insurance that meets the 60 percent threshold, then they don’t have to worry about anything. But if they fail to provide the adequate amount, they have to pay a tax penalty, which is based on a ratio and can be $2,000 or $3,000 per employee. On top of that, they have to determine whether an employee has opted into an exchange. However, if the employee hasn’t gone through the exchange, the company still might not be penalized.
Some businesses are trying to limit hours employees are working or they’re changing the way they are providing health insurance in order to avoid penalties.
Is there anything smaller companies need to know about the PPACA?
Small employers could be eligible for a tax credit if they have 25 or fewer employees, with salaries averaging $50,000 or less and they provide insurance. They also have to fill out tax form 990T to determine whether they qualify for credits.
Have all the regulations of the PPACA been determined now or are provisions still subject to change?
There is still quite a lot of ambiguity regarding the new law and that is just how it is going to be for the next few years. For example, it has recently been discovered that the Medicaid expansion is mandated.
If states fail to expand coverage to people up to 138 percent of poverty level, those states will not be able to receive full funding from the federal government. That is a big issue because Medicaid is one of the largest items in state budgets.
The health care reform law is evolving every day, so companies are advised to pay close attention to the regulations as they are rolled out. Consider dedicating staff to monitoring the act’s developments, otherwise your company could be missing tax credits or penalties that could be incurred because of lack of knowledge.
Stefan Thomas is an associate at Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5484 or email@example.com.
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The election is over and full implementation of the Patient Protection and Affordable Care Act (PPACA) is expected to proceed. What does this mean for employers? The health care decisions made during 2013 will determine the financial impact of this legislation, and employers that plan to continue to sponsor group health plans must prepare for upcoming deadlines.
“Pay or play” penalties provide some incentive for employers to continue coverage, as they will be at risk for significant penalties if they do not, says Chuck Whitford, Client Advisor at JRG Advisors, the management arm of ChamberChoice.
“The first step is to determine which, if any, penalties will apply by determining the number of employees that regularly work an average of 120 hours or more per month for each month of the preceding year,” says Whitford. “Penalties will apply only to employers with 50 or more full-time-equivalent employees during the preceding calendar year, with full time under PPACA defined as 30 hours per week.”
Smart Business spoke with Whitford about the changes that employers need to be aware of.
What is the goal of PPACA?
Ultimately, PPACA seeks to achieve and sustain the availability and affordability of employer-sponsored group health care benefits. Otherwise, full-time employees become eligible for a subsidy from the government to purchase insurance through an exchange.
A full-time employee becomes eligible for subsidy if his or her household income is less than four times the poverty level and one of the following is true: the employee is not eligible for a group health plan that meets minimum standards (thus failing the requirement that coverage must be available) or the monthly employee contribution for single coverage is greater than 9.5 percent of household income (thus failing the affordability requirement). In 2012, four times the federal poverty level was $44,680 for a single individual and $92,200 for a family of four.
At issue is the fact that many employers are not likely to know employees’ total household income, nor may employees be willing to share this information. To that end, employers will most likely use the wages paid to the employee as a basis for determining the affordability requirement.
For example, an employee earning $30,000 would be limited to a monthly contribution for single coverage of approximately $238. Any higher contribution would exceed the 9.5 percent level.
What are the penalties for employers that fail to either make the coverage available or fail to provide affordable coverage?
If one or more employees are eligible for your group health plan and they qualify for a subsidy on the exchange, your penalty is equal to $2,000 per year times the number of full-time employees, minus 30. For example, an employer with 100 full-time employees would pay a penalty of $140,000.
If, on the other hand, you make coverage available and an employee still qualifies for a subsidy on the exchange because the employee contribution is more than 9.5 percent of household income, your penalty is $3,000 per year for each full-time employee eligible for the exchange.
Has everything been settled?
Regulations on many issues remain outstanding. All of the uncertainty has left many employers reluctant to make any large-scale changes.
The regulatory agencies responsible for implementation and enforcement of health care reform (departments of Labor, Internal Revenue Service and Health and Human Services) will issue additional guidance to help determine how to comply with new provisions of the law.
ChamberChoice will continue to monitor the progress of PPACA and its implementation and keep you informed of important developments.
Chuck Whitford is a client advisor at JRG Advisors, the management arm of ChamberChoice. Reach him at (412) 456-7257 or firstname.lastname@example.org.
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As the Patient Protection and Affordable Care Act (PPACA) implementation unfolds, health lawyers continue to answer employers’ questions about its impact.
“The act has multiple potential penalties for failure to comply with its various requirements. The risk of not complying is a financial risk,” says Jules S. Henshell, of counsel at Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Henshell about what employers need to be aware of as they take their next steps under the PPACA.
What do employers most frequently ask?
The most frequent questions relate to the ‘pay or play’ penalties in the law. The majority of employers are currently providing health care coverage through group insurance plans. However, it’s too early to determine whether to provide coverage at levels required by the act or pay the penalties because future premium costs and the affordability of employer offerings through health exchanges are uncertain.
Employers also are concerned about reporting health care benefits on W-2 forms, whether they qualify for transitional relief, and the provisions against discrimination in favor of highly compensated individuals.
What’s important to know about W-2 reporting and IRS transitional relief?
In 2012, employers are required to report health care costs to the employer and employee on employee W-2 forms or face a $200 per-form penalty.
The IRS has provided transitional relief from reporting for employers that file fewer than 250 W-2 forms. Some employers question if they are entitled to relief from reporting when their company files fewer than 250 W-2 forms but is one of a number of related companies. The IRS’s informational Q&A suggests that it will not aggregate among related companies to calculate the threshold for reporting.
Whether the W-2 reporting currently applies or not, it’s a good idea to formalize the practice of tracking these health insurance costs to better enable retrieval of information in the future.
How do provisions about non-discrimination impact employers?
The PPACA prohibits discriminatory practices in favor of highly compensated individuals. Prohibited practices include providing benefits to highly compensated individuals that are not provided to other employees as well as affording greater choice, higher amounts, lower premiums, a higher employer subsidy or more favorable benefits. Many companies have used such practices to create competitive compensation packages for executives and management. Penalties include an excise tax or civil monetary penalty or civil action to compel provision of nondiscriminatory benefits.
The IRS, U.S. Department of Labor and U.S. Department of Health and Human Services (HHS) have stated that non-discrimination requirements will not be enforced until the first plan year after regulations are issued. And so far, they have not issued regulations.
Employer health plans with grandfather status are not impacted, but should be conscious of how their status could be jeopardized. Raising co-insurance, significantly raising co-pays and deductibles, lowering employer contributions, and adding or tightening annual limits on what the insurer pays will result in loss of grandfather status. Those without grandfather status need to review their compensation packages and practices in anticipation of future regulation and enforcement.
Do any significant PPACA cases remain?
The most active litigation challenging the PPACA in multiple jurisdictions target the requirement that new, non-grandfathered group insurance plans provide contraceptive coverage. The lawsuits focus on alleged violations of either the First Amendment right to free exercise of religion or the Religious Freedom Restoration Act.
Regulations have granted exceptions for certain religious employers and provided a one-year safe harbor for religiously affiliated institutions that wouldn’t otherwise qualify for exemption. HHS has stated it will provide further accommodations before the end of the safe harbor period.
Jules S. Henshell, of counsel, Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-3754 or email@example.com.
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With the election settled and a number of lawsuits decided, it’s clear the implementation of the Patient Protection Affordable Care Act (PPACA) is moving forward.
There could be numerous timing glitches with implementation through delayed issuance of regulations and enactment of the exchanges, but Matthew R. Huttlin, vice president, Employee Benefits Division at ECBM, says it is important that every organization continue with its planning.
“This law will continue to be modified and adjusted over the next few years and employers are going to need sound, detailed guidance to negotiate their way through the PPACA legislation,” he says.
Smart Business spoke with Huttlin about the decision of whether to continue your health care program or relinquish coverage to the exchanges.
What risks are employers facing from the PPACA and health care exchanges?
For employers with more than 50 full-time equivalent employees — considered ‘large’ employers under the law — a number of areas need to be reviewed in anticipation of the 2014 effective date of the government health exchanges. However, none is more important than the financial impact. Employers that do not provide adequate coverage or offer coverage that is considered unaffordable may face penalties. However, the calculation to determine whether any penalties will apply in 2014 is fairly straightforward.
Once you’ve assessed potential penalties, what’s the next step?
The more difficult question is whether an employer should continue its health care program or relinquish coverage to the government exchanges. The two primary areas of concern are financial and human resources. From a financial standpoint, a risk manager can run a detailed analysis to determine the cost impact of each option. The results depend heavily on the current cost of coverage, both for the employer and the employees, and the salary distribution of the full-time employees. The human resource impact is difficult to quantify, having to gauge the impact of each option on retention and recruitment.
Do employers that continue to offer health plans need to revisit their decision?
Employers that decide to maintain their programs should test these programs annually. Rates vary from year to year and from group to group based on the impact of the group’s claim losses in the determination of their rates. The impact of a group’s actual experience on their projected costs increases as the size of the group increases for insured programs. The projected rates for self-funded plans are typically based solely on the group’s claim losses. Whether self-funded or not, the greater a group’s claim losses impact their rates, the more important it is to control costs through utilization management, wellness, plan design, etc.
On the other side of the equation, PPACA penalties are expected, at a minimum, to be indexed for inflation. Also, the cost to obtain coverage from the exchanges — particularly for employees with salaries that exceed 400 percent of the federal poverty limit — is anticipated to increase, possibly at a rate greater than inflation.
How should employers that decide to eliminate their health insurance handle it?
This is a major undertaking for the HR personnel. Detailed communications with the employees explaining the organization’s decision and guidance will be required. This decision also will have a critical impact on administration. Businesses that choose this path should reach out to risk managers and consultants for assistance.
What is the risk of upcoming ‘Cadillac’ tax?
Looking further out, there is another ‘test’ looming under PPACA for 2018, commonly called the ‘Cadillac’ tax. Under this provision, if the combined cost for health care benefits exceeds the dollar threshold limits of $10,200 for single person plans and $27,500 for other plans, the PPACA will tax these rich benefits at a rate of 40 percent on the cost above this amount. According to a 2011 survey by Mercer, approximately 60 percent of employers with more than 500 employees believe their plans would trigger the tax unless they take action to avoid it. Employers will need to keep a close watch on costs as they progress toward this test.
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