As an employer, you want to do the right thing for your workers. For your company, that may include providing access to a company sponsored health insurance plan since it provides a valuable benefit to your employees and makes your company an attractive employer. Since the implementation of the Affordable Care Act (ACA), depending on your company size, it may also be financially punishing if you don’t.

Sometimes, No Good Deed Goes Unpunished

Let’s create a scenario for our company president, Bob.

Being a responsible employer and all around good guy, Bob recognizes the need to provide his employees with a company sponsored health insurance plan. Bob makes a call to his local health agent or even goes on-line to the healthcare.gov website to get some health insurance quotes for his company. After the tedious underwriting and application process, Bob analyzes each plans affordability and coverage and selects a plan for his employees that he wants to go with. Next is the enrollment process and communicating the plan rules and coverage information to each of his employees. Bob doesn’t know much about the rules of the ACA or ERISA.   Bob assumes his insurance carrier’ enrollment paperwork will communicate all the necessary details about health insurance plans. Bob thinks he is good to go.

Then one sunny day, Bob gets a letter from the US Department of Labor (DOL): It begins with “Dear Plan Administrator, our office has scheduled your company for an investigation. Please forward the following documents to our office.” Bob sees that the DOL wants him to provide a laundry list of items related to his company’s health and welfare benefit plans including:

• Plan documents
• Summary plan descriptions (SPDs)
• Summary of benefits and coverage (SBC)
• Contracts with all carriers
• Sample certificates of coverage under the Health Insurance Portability and Accountability Act (HIPAA)
• Copies of written procedures for enrollments
• Claims denials
• 5500 filings over the past four years
• A copy of the plans’ internal claims and appeals processes, etc.

Bob is overjoyed at getting this letter, so he promptly shares it with his HR staff (if he has one) and his health insurance broker. Bob’s team puts together the requested information but Bob has no clue that one of the major areas of interest to the DOL is whether the SPD and SBC contains the language required by ERISA and the ADA …after all, Bob assumes the insurance people handle all that stuff. That’s where Bob made a mistake. According to Tom Jacobs, (president of eflexgroup) writing in the NAPEO Insider magazine (June/July 2015).

“Most employers don’t realize that the plan documents, contracts, and SPDs provided by their health and welfare benefit carriers do not contain the requisite ERISA and ACA language. If they don’t, then your plans, and you, are out of compliance in the eyes of the DOL and IRS. Compliance penalties can be steep: $110 to $200 per participant per day, and additional penalties of up to $100 per day per participant by the IRS, including potential additional fines and civil liability. Most fines for non-compliance are not tax deductible.”

In the eyes of the DOL and IRS, Bob’s company is the plans sponsor and is therefore required to be ERISA and ACA compliant regarding employee communications. The insurance company is just Bob’s vendor. If the regulators decide to levy fines, Bob’s company will be on the hook.

Moral of the Story – Don’t Be That Guy – “Bob”

If Bob had joined a Professional Employer Organization (PEO) who also offered his company access to the PEO’s health insurance plan, then liability for DOL and IRS fines and penalties would be on the PEO, not on Bob’s company. However, if Bob had joined a PEO but elected to obtain his own insurance policy, the PEO should have reviewed and advised Bob regarding the HR best practices that would have avoided the non-compliance problems. Whether the PEO would be liable would depend on the language stipulations of the PEO/Client Customer Service Agreement (CSA). In either case joining a PEO could have saved Bob a mountain of grief.

PEO group health care plans to be treated as employer sponsored plans

The IRS released final regulations on the requirement that individuals purchase health insurance adheres to the minimum essential coverage standard known as the individual mandate. These rules provided definition to those Professional Employer Organizations – PEOs offering group health plan coverage to employees on behalf of a PEO client employer. Th individual mandate requirement is satisfied by maintaining coverage under an eligible employer-sponsored plan. These new regulations include an eligible employer-sponsored plan offered by a PEO on behalf of a PEO client employer.

Specifically, the definition of eligible employer-sponsored plan in the final regulations (Section 1.5000A-2(c)) provides that an eligible employer-sponsored plan includes, in addition to coverage offered by an employer, (i) group health insurance coverage offered on behalf of an employer to an employee and (ii) a self-insured group health plan under which coverage is offered by, or on behalf of, an employer to the employee.

Individual Mandate Satisfied for PEO worksite employees with PEO sponsored health plans

The final regulations explicitly states that organizations PEOs can offer coverage under an eligible employer-sponsored plan on behalf of an employer, yet not be viewed as the employer by reason of offering such coverage. This is an important win for PEOs who provide quality health insurance coverage to their client companies and their associated worksite employees. In addition ruling maintains the ability of PEOs to offer access to health insurance as a major plank of the PEO value proposition for their client companies.

Office of Federal Register Documents

The office of the federal register document for this is:
[4830-01-p]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9632]
RIN 1545-BL36

Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage

Page 20 of the document address plans offered by PEOs

4. Plans Offered on Behalf of Employers

The Treasury Department and the IRS received comments asking whether medical coverage offered to employees by an organization acting on behalf of an employer qualifies as an eligible employer-sponsored plan. For example, commentators asked whether a multiemployer plan or a single employer collectively-bargained plan is an eligible employer-sponsored plan for the employees covered by the collective bargaining arrangement and eligible to participate in the plan. In addition, commentators asked whether a plan offered to an employer’s employees by a third party, such as a professional employer organization or leasing company, is an eligible employer-sponsored plan for the employees eligible to participate in the plan. The final regulations are revised to provide that a plan offered by an employer to an employee includes a plan offered to an employee on behalf of an employer. No inference is intended from this treatment that the third party is the employer for this or any other provision of the Code or related laws.

The final regulations are expected to be published in the Federal Register on August 30, 2013.
Office of Federal Registery PDF File

Other resources on PEOs and the Individual Mandate

Benefits Pro article on PEOs meeting the definition of a MEC

National Law Review Article on PEOs and Employee Sponsored Plans

Even though ACA fines for large employers are delayed, the impacts for their staff is not.

High wage earners who work for a company that does not offer health insurance are the biggest losers under the new ACA regulations. Those people making more than 4 times the poverty rate or roughly $85,000 per year that do not have employer sponsored health insurance will be the ones who pay the freight under ACA. Why? In a nutshell, they make too much money to be eligible for a health insurance subsidy on the individual health care exchanges and in addition they do not get the favorable tax treatment for their health insurance payments that they get with an employer sponsored health plan. Of course they can get tax deductibility for medical expenses but only once the out of pocket expenses for the year exceed 7.5% percent of their total income and then for only the expenses above that amount. Very few people are in that unfortunate situation. So the bottom line is: No subsidy from the government, no tax deductibility for insurance premiums and forced to purchase health insurance at the prices on the individual market exchange.

Individual market health insurance exchange – what does it cost?

Everyone in the country seems to be using the

Kaiser website to get an estimate of their heath insurance premium costs (and subsidy) under the new ACA guidelines. However, the fine print there states that these are just “estimates” and that the actual cost of the plan(s) is yet to be determined. So what will the rates look like in the ACA individual marketplace? Who knows, but the answer will depend on several factors:

ACA Health Insurance Rates By State Location

Government Price Setting States

Some states like California are getting involved with rate setting for the insurance carriers and are digging deep in the claims costs and expenses for the insurance companies. While NBC News calls this model a “passive” state, this is just newspeak for government price setting. Of course this could be why Aetna and United (the nation’s largest insurance carrier) have exited the California insurance markets for individual polices.

Open Market Pricing States

Other states will let the insurance carriers set the rates available for the plans they offer on the exchange. This means that each insurance company will look at their claims costs and their market competition and price their plans accordingly.

Adverse Selection, the Elephant in the Room

What is adverse selection? In insurance terms this is a situation where only the sick people sign up for the insurance. As any insurance expert will tell you, insurance relies on having many healthy people paying in the system to cover the high costs for a few. As in many things the 80/20 rule may hold true. 20% of the plan members generate 80% of the expenses. The bottom line is that if healthy people do not sign up for insurance, the revenues for the insurance company will not be able to cover the claims costs. The result? Insurance companies will keep raising the cost of insurance to cover their claims costs. This often results in a death spiral for the insurance plan. As premium costs keep rising, more people leave the plan (or never sign up) so that there is not enough money to pay the claims. Insurance companies have good accountants and they usually see this coming. When it does, they just stop offering health insurance in that area. The adverse selection death spiral does not happen overnight and will most often be preceded with a period of rising premium costs as the insurance company tries to generate enough revenue from premiums to cover the rising tide of expenses from sick people.

Avoiding Adverse Selection

The lobbyists in the insurance industry recognized the risks of adverse selection when they crafted and promoted the ACA bill through the US Congress. That is why they insisted that the government establish tax penalties for individuals who do not purchase insurance. Aside from the constitutional affront to the rights of American citizens, there are many problems with these penalties, primarily that it is much cheaper to pay the penalty (that the IRS cannot force to be paid) than it will be to sign up for insurance. Since no one can be denied coverage based on their health condition many people will just wait until they are sick and then pony up for the insurance. Once they are well again, their insurance payment will get forgotten. We predict that the net result will be that many people will simply not sign up for health insurance or will sign up and pay for the insurance only when they need it. If that happens, adverse selection is almost guaranteed

Employer Mandate Delay

On July 2, 2013 the US Treasury Department announced the one year delay of the employer mandate. This is the provision in ACA that establishes a set of fines for employers with over 50 employees (full time equivalent – FTE) that do not offer health insurance coverage or fail to provide adequate and affordable coverage. So now employers have less motivation to provide health insurance to their staff than before. For 2014, there are no fines to employers for failing to offer health insurance. The net result will be that those employees will be forced to either pay the fine or sign up for health insurance on the individual exchange.

Who gets really hammered on health insurance costs under ACA?

High wage earners with no company sponsored health insurance plan will be the ones taking the biggest hit for insurance costs.

• Forced in to an insurance pool that is highly likely to experience adverse selection and the associated increasing premium costs.
• Ineligibility for government rate subsidies
• Ineligibility for
  
  ADAP premium tax credits
• Lack of pretax treatment for insurance premium payments

Considerations for Job Seekers and Employers

For high wage job seekers (over $85,000 per year), the availability of a company sponsored health plan should be a big part of the decision to accept the position. Even if the company has an employee paid insurance premium with a minor company contribution, the overall costs on an after tax basis should be a big part of the decision.

Considerations for Employers

High wage employers need to understand that there is no health insurance plan subsidy in the individual exchange for their employees and that favorable tax treatment for both their employees and their company is lost if they elect to NOT sponsor a company health plan. While they may not be getting fined yet (in 2014) they will be forcing their staff members in to a more expensive set of insurance products than probably could have gotten by establishing a group plan for their company. Simply paying the staff a few more dollars may not fully compensate them for the higher costs of the exchange and the loss of the favorable tax treatment. The best places to work will continue to make health insurance part of their overall compensation package.

Understanding the ACA “Large Employer” Threshold. Who is subject to the penalty, er tax.

Update for July 2, 2013. An announcement by the US Treasury Department has stated that the implementation of the “Employer Mandate” will be delayed one year until 1/1/2015. Originally the mandate was to be in force on 1/1/2014.

The ACA mandate for employers to provide health insurance only affects employers with over 50 employees. Some businesses owners may think that they will be under that 50 employee threshold when in reality they may not. The considerations for part time employees and the business aggregation rules may surprise many business owners who thought they were not affected. Per the ACA employees who work over 30 hours per week (130 hours per month) are considered full time employees. To determine whether you will be considered a large employer you need to add together 2 groups:

• The number of current full time employees
• Plus: The number of FTE (full time equivalent) employees

Determining the FTE Full Time Equivalent Numbers

The rational for calculating an FTE is to ensure that part time employees are included in the determination of the status as a “large employer”. Part time employees are included in the calculation on the basis of how much time they actually worked (or were paid). This means that even companies with a small full time staff and a large part time staff may very well be considered a large employer under PPACA. Restaurants and other hospitality based business with a large part time staff can expect to be impacted.

To determine the number of FTEs, add together the total number of hours in the month worked by all the non full time employees (up to a maximum of 120 hours per part time employee). Next divide this number by 120 (monthly rate of 30 hours times four weeks). Do this calculation for each month of the prior year and then compute the annual average by adding the numbers for all the prior 12 months and then divide by 12. The resulting number is the value for the full time equivalent employee count.

It is important to note that leased employees are included in the FTE calculation. If your company is currently using a PEO, your company still must include those leased employees in the FTE calculation. In addition, seasonal employees working less than 120 days during the prior year are excluded from the FTE calculation.

Changes in Calculating Full Time Equivalent Employee Count

In 2010 the IRS released guidelines that indicated the FTE calculation was done on the entire group (not just the part time staff) when determining the FTE count. This was documented here:
for use in calculating the FTE for the Small Business Health Care Tax Credit. It now appears the full time staff is not included in the FTE calculation but is added to the FTE count to determine the company’s total employee count. Per the IRS guidelines
here,
the statement is made that “an employer not in existence during an entire preceding calendar year will be an applicable large employer for the current calendar year if it is reasonably expected to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during the current calendar year.” Per the IRS guidance, the number of 1) full time and 2) FTE employees should be calculated each month and then averaged for the 12 months of the year. The “large employer” calculation and determination will be made once for each calendar or tax year.

Over 50 Employees? Now what?

For those employers who exceed the 50 employee count and are deemed to be a “large employer”, the rules for determining who is full time and who is part time (and thus entitled to health insurance coverage or the business must pay the penalty) are wholly different. Determining if your company is subject to the employer mandate of ACA is the first step. If it is, then new rules apply. For those businesses deemed a “large employer”, the IRS has rules used to make a full-time or part time status determination for each employee. The IRS regs now call for each part time employee to be tested to determine if they are actually a full time employee. Now the IRS is calling it being a “variable hour employee”. According to the IRS regs for Determining Full-Time Employees for Purposes of Shared Responsibility for Employers Regarding Health Coverage ( 4980H), “to determine whether new variable hour employees or seasonal employees are full-time employees, without being subject to a payment under  4980H for this period with respect to those employees. An employee is a variable hour employee if, based on the facts and circumstances at the date the employee begins providing services to the employer (the start date), it cannot be determined that the employee is reasonably expected to work on average at least 30 hours per week.” Under these rules, for an employer to simply declare that an employee is “part time” will not cut it. Now the employer must prove the employee is in fact a part time employee by meeting the requirements set for in the
IRS regulation for determining employee status. Once you have read the entire document you can either shoot yourself or call a PEO to help you ensure regulatory compliance.

Skirting ACA by establishing multiple smaller companies

Some business owners have opined that they would simply establish multiple smaller companies, each with less than 50 employees, and viola! No large employer status! This sounds great and some business owners may think they can pull this one off and stay under the 50 employee threshold. Despite what some people may think, the IRS is not stupid. They anticipated that one from a long way away. For many years the IRS has established the rules surrounding “control groups” and “affiliated service groups”. Essentially these are businesses under common ownership. There are complicated arrangements in partnerships and fractional ownership arrangements where the IRS has some detailed rules. Here are the basic types of control groups subject to the employer mandate under ACA.

• A. Parent-Subsidiary Group: When one or more businesses are connected through stock ownership with a common parent corporation (such as a chain); and 80% of the stock of each corporation (except the common parent) is owned by one or more corporations in the group, and Parent Corporation must own 80% of at least one other corporation.
• B. Brother-Sister Group: A group of two or more corporations, where five or fewer common owners own directly or indirectly a “controlling interest” of each group and have “effective control”. A common owner must be an individual, a trust, or an estate. Controlling interest: Generally means 80% or more of the stock of each corporation (but only if such common owner own stock in each corporation); and Effective control: Generally more than 50% of the stock of each corporation, but only to the extent such stock ownership is identical with respect to such corporation.
• C. Combined Group: A group consisting of three or more organizations that are organized as follows: Each organization is a member of either a parent-subsidiary or brother-sister group, and at least one corporation is the common parent of a parent-subsidiary, and is also a member of a brother-sister group.

If you want to try it, see this link. Once you read it this option should be banished from your mind. For most businesses the complication and expense of establishing separate ownership arrangements to avoid the 50 employee rule will not be worth the trouble.

ACA – Obamacare – It’s Really Happening

While business across the USA struggle to access the impact of the ACA laws on their company health plans and their employees, the traditional pool of people to help them figure it all out is going away. Many employers are now becoming aware of the reality that the November 2012 defeat of Mitt Romney all but guaranteed that the ACA is here to stay. Business owners who had deferred planning on their health insurance options are now under the gun to understand their options for themselves and their employees. The implementation schedule for the ACA is already underway and for business owners and managers, important compliance issues and decisions must be made.

Company Sponsored Health Plans Decisions – More Complex and More Significant
For small and mid-sized businesses the complexity of making decisions about how to handle their health insurance plans or whether to offer one at all, just got much more complicated. For every business there is a unique set of factors that will influence their health insurance plan decision.

• Meet the legal requirements or pay the fine – What is the best option?
• What tax credits are available if we continue are plan? (35% in 2013 and 50% in 2014)
• What plan design and combination of co-pay and deductible is legal, affordable and fits our employees?
• Should we kill our plan, pay the fine and let our staff go to the individual exchanges being promised? What happens to the employee pretax treatment for premiums if we do that?
• What about part time employees, should we reduce full time staff to avoid the fines?
• Should we offer different benefits for different employee groups like managers?
• How much should we pay towards the premium? For employee only? Family plans?
• What networks will be available for the carriers that fit our needs?

This is just a start on the complicated analysis required for business owners who want to maintain legal compliance with ACA and still provide and affordable plan for their staff. Get more detail on navigating the ACA.

Calling Your Agent for Guidance – A thing of the Past?

A part of the PPACA (Patient Protection Affordable Care Act) implementation was the requirement that insurance companies spend at least 85% of the total premium revenue back out as payments to medical service providers. This regulation demanded that commissions paid to health insurance agents be included as a part of the maximum 15% remainder for administrative expenses and company profit. It is ironic that most of the health insurance agents in the USA are actually independent agents and or not employees of the health insurance companies, yet their commissions are included in the max 15% requirement. These regulations have the affect of making the insurance company largely an actuarial entity without any financial room left for sales and marketing costs. The exchanges are meant to provide the method for individuals and businesses to shop for their health plans. The end result is that the commission compensation for agents is disappearing at the same time the complexity of business health insurance planning is greatly increasing. Many predict the net result will be that as many as 100,000 life and health agents will leave the industry. Some agencies may move to a fee for service model where business pay for flat fee in exchange for unbiased guidance. Insurance agents have long provided valuable services such as explaining the basics of health insurance, explaining and exploring options that best meet their needs, shopping various companies to find the best deal, handling the enrollment procedures, negotiating the best outcome.

Who Will Help Businesses Now?
The complexity of buying health insurance and placing benefit programs for employers, the administration of those plans, compliance with state and federal laws etc. is far more complicated than clicking a few buttons on an exchange website. For individuals new to insurance the individual exchanges may be adequate, but for companies, they will be challenged to get adequate advice, especially if the best option for an employer is to give employees a raise, pay the penalty and let the employees go to the individual marketplace. In fact for many employers, the decisions may be very complex depending on type of coverage, cost, wages, location and affordability for the entire group; and all groups are unique.

PEOs Add More Value for Their Clients

Somebody will still have to perform these activities for the business health insurance decision makers. Since agents may be fading away, the pay for service model (i.e. a consulting engagement to perform analysis and recommendation) by health advisor may be the marketplace solution. One challenge it presents is that many of the employer health decisions are not static. It is one thing to assess the options and implement the plan, however it is another thing to maintain it. Many activities for maintaining a group health plan require ongoing HR and payroll service actions. Since many pretax treatment options remain for employee premiums, the natural fit for payroll services and insurance premiums will remain and other items like life events and adds and drops will not go away. The service model currently offered by PEOs will become even more attractive as the complexity of regulatory compliance increases and the costs to sustain that compliance increase rises as well.

Getting Guidance and Ongoing Support – PEOs are Ready

Many are predicting that the availability of individual insurance though the government established exchanges will result in many employers simply paying the fines and letting their employees find their own insurance. This may or may not be a wise business and financial decision. Time will tell. For those companies who believe that a robust benefit plan is critical to their ability to attract and keep the best talent, PEOs will continue to offer an efficient delivery platform for small and midsized businesses.

The PEO value proposition for American businesses continues to grow. As compliance and regulations expand, PEOs nationwide stand as their partner to meet those challenges efficiently and professionally. The implementation of ACA provides yet another reason for small and midsized business to engage a Professional Employer Organization. PEOs are dedicated to the success of American businesses.

Affordable Care Act requires 2012 W2 information to include value of employer sponsored health coverage

Effective for federal W2s for the calendar year 2012 (issued in early 2013), companies and employees working with a Professional Employer Organization will notice that the value of employer sponsored health coverage is now included on the employees W2. The value of the coverage will be shown in W2 form Box 12 with code DD.

Value of Employer Sponsored Health Coverage Not Taxable

The IRS has been emphatic that the new values required to be reported are not taxable and that the sole purpose of the change was to make employees aware of the total cost of their employer sponsored plans. Many employees pay a payroll deduction for some of the cost of their health plans and amounts to be reported include both the employer and employee amounts.
ACA – IRS guide for employers – reporting group health insurance costs

PEOs Get Ready

The IRS provisions for the reporting requirement was deferred for small employers in 2012 due to concerns that many small employers would not have time to amend their systems to report these values in an accurate and timely fashion. For 2012 W2s (issued in 2013), employers who issued fewer than 250 W2s the prior year (2011) the reporting requirement is optional. This means that small businesses who use their own software or even those that use a third party payroll service are not required to report the value until issuing W2s for calendar year 2013. The “transition relief” period established by the IRS does not apply to most PEOs since in a true PEO relationship, the PEO is the employer of record (W2s issued under the EIN of the PEO) and will have issued over 250 W2s the prior year (2011). The net result is that for PEOs, the reporting requirement is effective now (for 2012 W2s). Small businesses who offer an employer sponsored health plan and are not currently using a PEO should review the IRS reporting guidance for employer sponsored health coverage.

ASO versus PEO
Businesses who are engaged with an Administrative Services Organization (ASO) and less than 250 employees will still be exempt from the reporting requirement for the tax year 2012, however it may be wise to get ready this year. Business who use an ASO to provide payroll and HR administrative services will need to work with their ASO operations department and insurance agents to make sure the are ready to meet the new reporting requirements.

What is included in the Reporting Requirements?

In general the requirement is for reporting for the total amounts paid for major medical insurance and for other specific situations. See the grid located here to get the IRS guidelines for what needs to be included.
Health insurance reporting requirements, what is in included.