EMPLOYER SHARED RESPONSIBILITY:

EMPLOYER SHARED RESPONSIBILITY: PLAY OR PAY DISCUSSION GUIDE

WHY THE MATH

DOESN’T WORK

TO DROP

The Aff ordable Care Act (ACA) is ushering in a new paradigm as it relates to health coverage. As of 2014, each U.S. citizen

is to maintain minimum essential health coverage or pay a tax penalty. This is called Individual Shared Responsibility,

sometimes referred to as the Individual Mandate.

U.S. CITIZENS CAN OBTAIN HEALTH COVERAGE ON THEIR OWN, THROUGH THE GOVERNMENT

OR BY WAY OF THEIR EMPLOYER:

EVERYONE IS REQUIRED TO

MAINTAIN HEALTH COVERAGE

Government

Medicare _{Military/Indian}Others Medicaid/ CHIP Individual Public Marketplace Individual Exchange Private Carrier NEW Employer

(Private and Public)

Large Employer Size: 50 or more Private Carrier/ Self-Fund Private Carrier/ Self-Fund Public SHOP Small Business Health Insurance Options Program NEW ESR Small Employer Size: Under 50

Minimum essential coverage is generally purchased on one’s own, provided by the

government or provided by an employer. That’s where you come in, and why employers

play such a vital role. About 60 percent of people who have health coverage today

receive it from their employer. And, according to a White House fact sheet, more than

96 percent of companies with at least 50 employees already off er health insurance to

their employees.

With that kind of volume, it’s easy to see why the American economy, and the very success of the Aff ordable Care Act (ACA), hinges on large employers continuing to do what a majority do now — off ering health coverage to their employees. Legislators crafting the ACA

recognized this as well, incorporating into the law the Employer Shared Responsibility provision. In eff ect, employers will share in the cost of the nation having access to minimum value, aff ordable health coverage — either directly (play) or through taxes (pay).

While the so-called “Play or Pay” provision doesn’t compel employers to off er coverage, it certainly contains incentives to do so. Estimates vary widely on just what the impact of the ACA will have on employer-sponsored coverage. But, let’s face it. No one likes paying something for nothing, and with tax penalties, that’s exactly what it means.

EMPLOYERS PLAY A VITAL ROLE

IN THE AFFORDABLE CARE ACT

Employer Shared Responsibility (ESR) is a provision within the ACA that states applicable

large employers, defi ned as employers with 50 (100 in 2015) or more full-time and

full-time equivalent employees, may be penalized if any full-time employee receives a

premium tax credit or cost-sharing reduction when purchasing health coverage through

the Marketplace.

TO AVOID POTENTIAL PENALTIES, APPLICABLE LARGE EMPLOYERS

WILL NEED TO:

› Provide an off er of minimum essential coverage to full-time employees and their

dependents (children up to age 26);

› Off er health coverage that meets the minimum value requirement of 60 percent

› Off er health coverage that is aff ordable relative to an employee’s annual household income

(See information about these key concepts beginning on page 6.)

EMPLOYER SHARED

RESPONSIBILITY

THE DECISION TREE BELOW WALKS YOU THROUGH THE QUESTIONS EMPLOYERS NEED TO

CONSIDER REGARDING EMPLOYER SHARED RESPONSIBILITY.

1 _{While applicable large employers that offer coverage to at least 95% (70% in 2015) of their full-time employees (and their dependents) avoid the No Coverage Penalty, such employers are still subject to} the Inadequate Coverage Penalty for full-time employees who receive federally subsidized Marketplace coverage, including those not offered coverage (e.g., the other 5% (30% in 2015)).

2 _{These are annual potential penalties that accrue monthly and are subject to inflation adjustments.}

Am I an applicable large employer?

YES NO Not subject to employer shared responsibility requirements

NO

No penalty

Does plan provide minimum value AND affordable coverage to full-time employees?

YES NO Inadequate Coverage Penalty: _{$3,000 x total full-time employees} receiving a premium tax credit/cost sharing reduction.2

Penalty cannot exceed $2,000 x the total number of full-time employees -30 (80 in 2015).2

Does at least one full-time employee receive a premium tax credit/cost-sharing reduction?

Do I offer health coverage to at least 95%

of full-time employees

YES NO

No Coverage Penalty:

$2,000 x Total number of full-time employees -30 (80 in 2015).2

Does at least one full-time employee receive a premium tax credit/cost-sharing reduction?

NO

YES

KEY CONCEPTS OF EMPLOYER

SHARED RESPONSIBILITY

Determining applicable large employer status

One of the fi rst things employers need to do is determine if they are an applicable large employer, which is defi ned as an organization with 50 (100 in 2015) or more full-time and full-time equivalent employees during the prior calendar year.

The ACA provides a formula for determining applicable large employer status. (See graphic.) If your business operates with seasonal and part-time employees or is part of a controlled or affi liated service group, you may be unwittingly considered a large employer under the ACA.

Refer to the Wellmark information brief titled, “Determining Applicable Large Employer Status” for additional details.

Employer Size

Calculation:

Full-time Employees

Full-time Equivalent Employees

(Non-full-time hours/120)

Off er of coverage

An employer must provide full-time employees and their dependents an off er of coverage and an eff ective opportunity to enroll in the coverage at least once each plan year, or an eff ective opportunity to decline to enroll if the coverage off ered does not provide minimum value or is unaff ordable based on the Federal Poverty Line safe harbor. Whether an employee has an eff ective opportunity is determined based on all the relevant facts and circumstances, including adequacy of notice of the availability of the off er of coverage, the period of time during which acceptance of the off er of coverage may be made and any other conditions on the off er. Relief in the fi nal rules provides that:

› An eff ective opportunity to decline is not required (nor its proof) for an off er of coverage

that provides minimum value and is either: off ered at no cost to the employee; or at a cost, for any calendar month, of no more than the Federal Poverty Line safe harbor calculation.

› An employee’s election of coverage from a prior year that continues for the next plan

year, unless the employee affi rmatively elects to opt out of the plan, constitutes an off er of coverage.

Generally accepted substantiation and recordkeeping requirements apply for demonstrating an off er of coverage was made, including a safe harbor method for electronic media.

Minimum essential coverage

Minimum essential coverage is defi ned as coverage under certain government-sponsored plans; employer-government-sponsored plans, with respect to any employee; plans in the individual market; grandfathered health plans; and any other health benefi ts coverage, such as a state health benefi ts risk pool, as recognized by the Secretary of the Department of Health and Human Services (HHS). Minimum essential coverage does not include coverage consisting of excepted benefi ts, such as dental-only coverage.

Minimum Value

Under the ACA, a health plan must off er minimum value, which is defi ned as satisfying a 60 percent actuarial value test — this means that a plan would pay for at least 60 percent of medical expenses on average for a standard population. The IRS and HHS

Applicable large

employers have a

shared responsibility

to off er minimum

essential coverage

that meets minimum

value and aff ordability

requirements to its

full-time employees

(and their dependents)

or face potential

penalties.

Aff ordability

The aff ordability test looks at each employee uniquely, rather than the total population. Coverage is considered aff ordable if the employee’s premium contribution for self-only coverage is less than 9.5 percent of his or her household income. Annual household income is the modifi ed adjusted gross income of the employee and any family members of the household who are required to fi le a federal income tax return. Because employers likely will not know an employee’s household income, there are three optional safe harbors for determining aff ordability: W-2, Rate of Pay, and Federal Poverty Line. Using the W-2 safe harbor, the lowest cost, self-only premium cannot exceed 9.5 percent of an employee’s W-2 wages. Under the Rate of Pay safe harbor, the lowest cost, self-only premium cannot exceed 9.5 percent of the employee’s computed monthly rate of pay. With the Federal Poverty Line safe harbor, the employee’s lowest cost, self-only premium cannot exceed 9.5 percent of the federal poverty line for a single individual. If it does, the plan is not aff ordable and the employer has failed its responsibility to off er aff ordable coverage to that employee.

Penalties

Applicable large employers that do not off er coverage, or off er coverage that

does not meet minimum value or aff ordability requirements, face two potential penalties:

› The No Coverage Penalty

– If an applicable large employer does not off er coverage and one or more full-time employee receives a premium tax credit or cost-sharing reduction for coverage purchased through the Marketplace, a penalty may be assessed.

– The penalty for not off ering coverage is $2,000 per full-time employee within the organization, minus the fi rst 30 (80 in 2015), even if just one employee receives a premium tax credit or cost-sharing reduction.

› The Inadequate Coverage Penalty

– If an applicable large employer off ers coverage, but it does not meet the minimum value or aff ordability requirements, the potential penalty will be assessed on the number of full-time employees receiving a premium tax credit or cost-sharing reduction when purchasing coverage through the Marketplace.

– The penalty for inadequate coverage is $3,000 per full-time employee receiving a premium tax credit or cost sharing reduction, not to exceed the No Coverage penalty. Both penalties are paid annually, however, they accrue monthly for any applicable month that a full-time employee receives a premium tax credit or cost-sharing subsidy, and are subject to infl ation adjustments.

Refer to the Wellmark information brief titled, “Penalties” for additional details.

For employers that off er

multiple plan options,

the aff ordability test

can be performed on

the lowest cost,

single-only plan that also

meets minimum value.

Refer to the Wellmark information brief titled, “Aff ordability” for additional details.

MANAGE EXPENSES

THROUGH: PROVIDE CHOICES TO EMPLOYEES KEEP THE PLAN YOU

HAVE BUT: DROP HEALTH BENEFITS AND: PROMOTE

ENGAGEMENT IN MODIFY ELIGIBILITY:_{› Restructure}

With every day that goes by, the nation’s employers move a step closer to making the decision: Do I play or pay?

As employers weigh their options, it is becoming evident that the continuum of “play or pay” spans a much broader array of choices and implications than ever before.

Infl uencing employer responses are the business considerations of company culture, recruitment, retention, productivity and employee morale. The greater emphasis an employer places on these things, along with the fi nancial health and stability of the company, the closer to “play” a business leans. Conversely, a diminishing emphasis on these things — or a tighter budget — moves an employer towards “pay.”

Which option you choose, depends on what is best for your organization. This determination is based on

analyzing costs and benefi ts, plus reviewing salaries and workforce needs.

THE PLAY OR PAY

CONTINUUM

THE PLAY OR PAY

DECISION

Health insurance advisers predict that when employers

master the new math and consequences of the ACA, most

will opt to keep providing coverage. Even so, employer

decisions are driven not only by the cost of the premiums

but also by the cost of coordinating the coverage.

If employers drop coverage, however, they’ll be subject to paying the fi nes. They’ll lose the tax write-off that comes with providing insurance, and an employee who doesn’t qualify for subsidies could end up paying more because his or her premiums won’t be sheltered from taxes. It means workers will expect more money to cover the dropped benefi t, and it could very well alienate employees.

Even so, some employers assert that the play or pay mandate will raise their costs and force them to make workforce cutbacks. As a result, some employers are considering eliminating health care coverage altogether and paying the penalty on their full-time employees. While abandoning coverage may hold a certain appeal, there are reasons why employers should look carefully at all of their options and calculate the outcome.

PAY

PLAY

CONSIDER THIS EXAMPLE: An employer with 500 employees offers health coverage and contributes an average of $7,000

on behalf of each employee for a total annual cost of $3.5M. After an assumed 35 percent tax break, the employer’s net

cost for providing benefits is $2.275M. If the employer drops coverage, what could be done with the money?

Employer Responses Employer

Cost / (Benefit) Employee Benefit Results

Baseline $2,275,000 $7,000 $2.275M is net cost to employer after 35% tax benefit on $3.5M

A. Employer pockets it — Employer keeps the money

and does nothing to help employees with the cost of health coverage.

($1,335,000) $0 Q. Why does the employer keep so little?

A. Employer pays 35% corporate tax rate, and sets aside $940,0002 _to cover the potential tax penalty.3

B. Employer spends same amount — Employer spends

same tax-effected amount of $2.275M, giving employees a stipend in the form of a salary enhancement (which is deductible by the employer) to offset the cost of purchasing health coverage on their own.

$2,275,000 $2,9521 _{Q. Why do employees receive less than half of the original amount?}

A. The employer sets aside $940,0002 _{to cover the potential tax penalty;} and with the money left to apportion among the 500 employees, withholds employer FICA tax and employee federal income and FICA taxes from the amount.3

C. Employees receive same amount — Employer

eliminates certain administrative hassles that come with offering health coverage, but provides each employee the same average annual allotment of $7,000 in the form of a salary enhancement (which is deductible by the employer).

$4,106,1761 _{$7,000 Q. Why does the employer pay so much more to give each employee}

$7,000 in salary rather than the equivalent amount in health coverage?

A. The employer gives each employee $7,000 and grosses up the amount

to cover withholdings for employee federal income and FICA taxes, and employer FICA tax.3 _{Additionally, the employer sets aside $940,000}2 to cover the potential tax penalty.

1 _{Example assumes 15% federal income tax withholding and 7.65% FICA tax, and that all wages paid are under the FICA wage base. Example does not take into account state income tax or other withholdings.} 2 _{Penalty amounts are subject to inflation adjustments, and the No Coverage penalty calculation does not take into account the one-year transition relief for 2015 (i.e., $2,000 x the number of full-time}

employees in excess of 30 (for 2016 and future years) rather than 80 (for 2015)).

DOES THE MATH WORK

TO DROP COVERAGE?

PLAYING MAKES THE

MOST “CENT$”

For employers tempted to drop coverage to avoid the extra hassles and regulatory

burden, it’s important to understand that a number of new responsibilities still apply

and a number of advantages enjoyed today would be forfeited.

Most employers have already decided to continue off ering coverage to their employees

— and for good reason. Inherently, employers know that if they were to drop coverage,

there are a host of implications.

Financial

Of course, there are the fi nancial implications:

› Loss of tax advantages: Employers that eliminate health care coverage will miss out on tax

breaks, and so will their employees. As you know, employer contributions for health care coverage are not considered taxable income to the employee and are deductible by the employer. After employers forfeit this tax benefi t and set money aside for potential non-deductible tax penalties, the money that can be saved by no longer off ering coverage is only a fraction of what is spent today on health benefi ts.

› Replacement of employee compensation: Employees may demand additional

compensation to cover the cost of health care they must now purchase with their own, after-tax dollars.

› Loss of effi ciency: Employers also understand the incremental costs for loss of effi ciency.

Good benefi ts, care management and wellness programs can potentially keep employees from utilizing other time-loss programs (such as disability and workers compensation).

› No Coverage penalty: Employers who don’t off er coverage starting in 2015 will face the

harshest of two Employer Shared Responsibility penalties ($2,000 for each full-time employee, minus the fi rst 30 (80 in 2015), if even just one of their full-time employees receives subsidized coverage from the Marketplace. This is $940,000 for a group with 500 full-time employees and is non-tax deductible to the employer.

Brand

The impact to an employer’s brand is of no small consequence:

› Employee recruitment: Employers that opt not to offer health care coverage could be

doing long-term damage to their employment brand, making it difficult to attract top talent in the future. Even worse, they could lose current employees to organizations that do provide coverage.

› Employee retention: The damage to the brand could be even greater for employers that

once offered coverage, but elect to eliminate it in favor of paying penalties. It could also tarnish the brand and disrupt business another way; employees who are left to the Marketplaces could feel undervalued or abandoned by their employers.

Administrative

And, there are the administrative considerations:

› Mistakes happen: For some, answering the question of what constitutes a full-time employee

can be tricky. Employers that believe they won’t face penalties for dropping or not offering coverage because they have fewer than 50 (100 in 2015) employees may have incorrectly calculated their numbers. If it happens, the results could be costly. Be certain you know how to count full-time and full-time equivalent employees and your obligations. Refer to the Wellmark brief titled, “Determining Full-time Employee Status” for additional information.

› Reporting burdens remain: Employers that don’t offer health care coverage will still face

federal reporting requirements, in part so the penalty amount can be determined. In addition, employees who are not offered coverage are more likely to go to the Marketplace for coverage. The Marketplace will require a variety of employee data from employers, particularly for employees who may be eligible for subsidized coverage. Employers could also receive a payment demand from the IRS, even if it doesn’t actually owe a penalty — so employers will need good records to refute such claims. This means employers will have to deal with a significant number of inquiries from employees, the Marketplace, and the IRS resulting in staff time, effort and cost.

› Employee protections: As with most laws, the ACA protects employees from discrimination

and retaliation. Employers pay a penalty if an employee receives a tax credit or cost-sharing subsidy through the Marketplace, potentially costing his or her employer significant sums of

ADDITIONAL

RESOURCES

Employer Sales Toolkit on

Wellmark.com

› Download and print

copies of the Employer Shared Responsibility (ESR) information briefs

› Read an online employer

guide containing an ESR FAQ on various health care reform (HCR) topics

WeKnowReform.com

In-depth health care reform information for employers. Access the secure employer section to gain valuable information on health care reform topics.