ACA: Understanding the Defining a Path Forward

Each organization’s unique circumstances will determine

how it responds to the Affordable Care Act (ACA).

Employers need to answer questions about costs,

exposure to tax penalties, data systems and

workforce demographics.

ACA: Understanding the

Defining a Path Forward

Impact,

I

While often seen as a health care law, many employers are realizing that ACA is also a tax law that includes significant nu-ances and subtleties that can lead to implementation challenges. There is no single approach or strategy for compliance. The unique characteristics of each organization, including the na-ture and demographics of the workforce, not only affect the po-tential cost of the benefits but also the cost of implementation.

Since the law’s enactment, human resources (HR) depart-ments have carefully evaluated the costs associated with a va-riety of benefit scenarios in anticipation of their 2014 open en-rollment. While most companies have been wrestling with the new health care coverage requirements, they may not have a complete picture of the potential impact to their organizations.

ACA also establishes a myriad of reporting and compliance requirements for employers, and many are finding that the most significant challenge to the organization may be the changes re-quired to their technology, data architecture, policies and pro-cesses. The administration extended the mandate deadline to give them a chance to face those challenges.

With significant new regulations being issued and the open-ing of the state health insurance marketplace exchanges just months away, employers are challenged with answering ques-tions such as:

• What are the cost implications for benefit plans and how do our employee demographics influence them?

• What types of controls are in place to minimize our expo-sure to tax penalties?

• Is our data accurate and do our IT systems have the func-tional capability to address the management and regula-tory requirements?

• How have we addressed workforce issues around part-time employees, seasonal employees, independent con-tractors, union negotiations and collective bargaining agreements?

To assess the impact of ACA, employers need to clearly understand the links between ACA implementation and how they manage their data. To satisfy the ACA requirements, employers will require robust data in order to understand coverage they offer and the demographics of their workforce. Notices from the exchanges, IRS reporting requirements and other compliance exercises will generate additional demands on process and technology.

Employers are discovering that translating the interrelated technical requirements of ACA into a compliance strategy

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quires data, systems and knowledge from a variety of functions throughout the organization. In fact, a successful implementation requires a holistic ap-proach and an integrated strategy for implementation and ongoing compli-ance with a cross-functional team, in-cluding HR, payroll/human resource information system (HRIS), informa-tion technology (IT), tax, finance and legal.

Overview of the

Employer Mandate

Beginning in 2015, a large employ-er may be subject to an excise tax if at least one full-time employee (FTE) receives a premium tax credit for ex-change coverage and that employer (1) fails to offer coverage to FTEs and their dependents or (2) offers coverage to FTEs that does not meet the law’s affordability or minimum value stan-dards. A large employer is defined as a single legal entity or all entities in a controlled group of businesses with 50 or more full-time equivalent em-ployees. Under Internal Revenue Code Section 4980H(a), if the large

employ-er does not offemploy-er covemploy-erage to at least 95% of its FTEs and their dependents, the employer faces a tax of $2,000 times the total number of FTEs, minus 30. Under Code Section 4980H(b), if a large employer offers coverage to its FTEs and their dependents, but the employee-only coverage is unafford-able or does not provide minimum value, then the employer may face a tax of the lesser of (1) $3,000 times the number of FTEs who actually pur-chase coverage from the exchange and receive a premium tax credit or (2) $2,000 times the total number of FTEs. The excise taxes are nondeductible by the employer.

It is important to note that the Sec-tion 4980H(b) tax may be assessed to the employer only to the extent an em-ployee received a premium tax credit on the exchange. An employee may be eligible for a premium tax credit if his or her household income is between 100% and 400% of the federal poverty level (FPL) for the tax year. Regardless of the employee’s household income, an employee is not eligible for a pre-mium tax credit if (1) the employee is

eligible for Medicare, Medicaid or any other governmental plan or (2) the em-ployee received an offer of health care coverage from his or her employer that was affordable and of minimum value. The amount of the premium tax credit available depends on the household in-come. Families with household income between 100% and 200% of the FPL will be eligible for the largest premium tax credit.

key Definitions

An FTE is defined as an employee who works an average of 30 hours per week over the course of the month. IRS has provided certain safe harbors whereby employers may define a mea-surement period and monitor actual hours worked over that period to de-termine whether an employee is clas-sified as a full-time or part-time em-ployee. The employer may then rely on that designation for a defined stability period.

A plan is affordable to an employ-ee if the employemploy-ee’s cost for self-only coverage does not exceed 9.5% of the employee’s household income. IRS has provided safe harbors to test afford-ability based on W-2 wages, rate of pay and FPLs. Note that actual household income for an employee will often ex-ceed his or her W-2 wages or rate of pay due to other sources of income to the household.

An employer-provided health care plan meets the “minimum value” re-quirement if the plan pays for at least 60% of the cost of the benefits, based on a defined actuarial value test.

Organizational Impacts

Many variables affect an organiza-tion’s approach to ACA, including its

takeaways >>

•  Employers may need to enhance data systems to be able to determine who is a full-time employee based on hours worked, collect and retain all relevant data for reporting purposes.

•  An integrated implementation approach that includes HR, tax, finance and audit is required to implement a cost-efficient and strategic compliance strategy.

•  There may be opportunities to reduce costs by assessing actual household income with respect to premium affordability, rather than relying on the conservative IRS safe harbors which generally provide that affordability be assessed based on employee-only income. •  Employees will need more information to understand their new choices, including the

personal income tax ramifications of choosing between employer-sponsored plans and plans offered on the state exchanges.

•  Employers need to balance benefit structures and cost management while considering regulatory compliance and reporting.

structure, industry and workforce characteristics (e.g., full-time vs. part-full-time, fixed vs. variable hour, salary vs. hourly, seasonal, independent contractor, union participant).

In addition, employer cost and potential excise tax liabil-ity may be impacted by workforce demographic factors, such as employees’ potential eligibility for Medicaid, dependent coverage and employees’ household income compared to the FPLs.

Evaluating these factors and how they affect the employ-er’s compliance alternatives may not be straightforward. For example, many organizations are relying on IRS safe harbors because they provide a higher degree of certainty in terms of the employer health plan subsidies that are required to en-sure that coverage is affordable under ACA standards and, accordingly, that the employer will not be subject to a non-deductible excise tax. The challenge of using the safe harbors, however, is that they generally require “affordability” to be assessed based on income that is often less than actual house-hold income. Therefore, employers may be significantly in-creasing their cost of providing coverage. Employers need to analyze those potential increases in costs in comparison to potential excise taxes.

As discussed above, if an employee receives an offer of coverage from his or her employer that is affordable and of minimum value, that employee will not be eligible for a premium tax credit. Therefore, providing affordable cover-age under a safe harbor approach may fire wall certain low-income employees and their dependents from qualifying for subsidized coverage from the exchange. So “playing it safe” can be expensive and may not be best for the employer or the employees.

Compliance with ACA is heavily data-driven including critical data elements such as: Who is an FTE? Is the em-ployer-provided health care plan affordable? Does it meet the minimum value requirement? What portion of the work-force is eligible for the premium tax credit?

Systems are challenged to gather and report on these data elements to timely monitor and track employee eligibility and participation.

In addition, appealing premium tax credits to the vari-ous state exchanges and filing annual reports to IRS requires look-up access to hours tracked by calendar months along with coverage data for variable hour and FTEs plus depen-dents.

To successfully deliver the timely and accurate data

re-quired, companies will have to rely heavily on technology, systems and integrated end-to-end processes with effective controls to communicate and report. Data and technology will serve as the backbone to any integrated strategic ap-proach to ACA compliance. Given that, many organizations will consider potential system enhancements and various sourcing strategies to timely comply with ACA require-ments.

Carefully planned communications are also a critical component of a successful ACA strategic approach. Em-ployees will need more information to understand their new choices, particularly the ramifications of opting into exchange coverage. As exchanges open in October, amidst media coverage of alternatives and benefits available, em-ployers must provide employees with mandatory notices, required by the Department of Labor under the Fair Labor Standards Act, describing the availability of benefits. How-ever, to understand the financial ramifications, employees must understand the complexities of evaluating critical ele-ments such as how their full-time status may affect eligibil-ity, the affordability and minimum value of the benefits of-fered to them, their income as compared to FPLs and details of their personal tax situation. Developing and implement-ing a communications plan that provides employees with education and guidance on the personal tax and financial implications of the choices among health care alternatives may guide employees to the most affordable option, while also serving as a proactive measure to reduce the adminis-trative burden of appeals for employers.

learn more >>

Education

ACA university

Virtual conference for members

Visit www.ifepb.org/acau for more information.

From the Bookstore

Alson R. Martin. national Underwriter. 2013. Visit www.ifebp.org/books.asp?8949 for more details.

The New Health Care Reform Law: What Employers Need to Know—A Q&A Guide, Fourth Edition

James R. napoli and Paul M. Hamburger. Thompson Information Services. 2013.

affordable care act

TABLE

Checklist of Compliance Milestones

In

Key Compliance Milestones Questions and Considerations Yes Progress No Cost and coverage analysis: •  Evaluate alternative plan designs that satisfy affordable care requirements.  ☐ ☐ ☐

understand the costs •  Identify workforce mix to manage costs and excise taxes including strategies 

associated with offering around offering coverage, such as:

coverage and paying — Screening for premium tax credit eligibility, particularly for those

excise taxes. individuals earning 100% to 200% of the federal poverty level who may be eligible for the most generous tax credit

— Contribution options between safe harbors and 9.5% of household income — Alternative “look-back” periods.

  •   Develop cost analysis for alternative plan designs including direct and  indirect cost of both implementation and ongoing administration.

Eligibility, screening and tracking:  •  Identify member entities and evaluate workforce mix related to coverage   ☐ ☐ ☐

Manage processes and technology excise tax (Section 4980H(a)).

to drive the desired results. •  Evaluate processes to conduct workforce analytics including: — Screening for Medicaid or other government assistance eligibility — Screening for employees under the age of 26 who have coverage

under family plans.

  •   Identify data elements needed for management, financial and  regulatory reporting.

  •   Develop processes and controls to compile accurate and complete  reports for monitoring, oversight and reporting.

  •   Develop processes to monitor workforce mix related to ongoing compliance  with coverage excise tax provisions (Section 4980H(a)).

  •   Develop processes to monitor, track and report actual hours worked for variable hour employees.

  •   Develop processes and controls to identify, track and evaluate variable  hour employees who may need to be reclassified as full-time.

The ACA message to employees: •  Develop a detailed employee communication plan including  ☐ ☐ ☐

Manage communications and required and voluntary communications.

education to minimize employee •  Develop an education plan related to employee ACA implications

misunderstandings about the and alternatives, e.g., web-based education and tools, focus group session,

premium tax credit. targeted supervisor trainings.

•   Evaluate need for one-on-one counseling to provide education for employees  related to personal income tax ramifications, health care choices and changes. •   Identify resource to respond to employee questions related to employee 

personal tax and financial implications of benefit choices. •  Evaluate call center staffing and develop ACA scripts and training.

Technology and systems: •  Evaluate and implement changes to data architecture and systems required  ☐ ☐ ☐

Manage systems and tools for ongoing compliance and management, financial and regulatory reporting.

to enable compliance. •   Develop and implement modifications to employee and manager self-service  tools for required data changes and benefit choices.

•   Develop and implement required changes to data interface with applicable  vendors, e.g., payroll, health care administrator, time and attendance. •   Develop and implement tool to document and evaluate employee eligibility 

for premium tax credit.

•  Update systems to accurately collect all full-time employee and health plan data.

Reporting requirements: •  Update all plan documents to reflect changes including benefits,  ☐ ☐ ☐

Gather, collate and measurement and stability periods, etc.

retain data for annual •  Evaluate reporting requirements and develop time line to

IRS reporting, audit and/or manage all required filings.

defending IRS controversy. •   Identify data and develop work plan with time line to gather, compile, reconcile and file all required regulatory reports.

  •   Develop and implement processes and controls to compile information,   reconcile data and file reports.

  •   Develop and implement processes to gather, compile and retain documentation  necessary to support IRS audit or excise tax controversy.

Exchange notices and appeals: •  Map member entities and workforce demographics to identify and file   ☐ ☐ ☐

Manage various state exchange required state registrations.

notices and appeals. •   Develop and implement systems, processes and controls to evaluate data for potential exchange appeal and to track exchange notices and appeal status. •   Develop checklist of evidentiary data and reports necessary to support appeal.

Clearly, ACA includes significant change and layers of in-tricacy that can lead to challenges in implementing the law. It is critical for employers to develop their strategies with a bal-anced approach to benefit structures and cost management, along with regulatory compliance and reporting to optimize the benefits for both employers and employees.

ACA Readiness

The table provides a compliance checklist organizations can use to help assess their readiness for compliance with the many facets of ACA and validate their plan for implementa-tion.

The readiness checklist includes a high-level summary of some of the activities organizations may want to consider in preparing for the opening of the state health insurance mar-ketplace exchanges in 2013 and the enforcement of the 4980H taxes and employer reporting requirements in 2015. How-ever, each employer is unique. The checklist can be custom-ized based on such factors as brand, organization structure, employee demographics and workforce mix to develop a stra-tegic approach that satisfies the criteria each organization val-ues most.

As in all complex implementations, a formalized project management framework including a detailed multifunctional work plan is critical to success. A strong project manager and a cross-functional team including HR, payroll, HRIS, tax, IT, finance and legal should be appointed, with an end-to-end single process owner to coordinate cross-functional commu-nications to support strategic decisions and key activities.

ACA deadlines are fast approaching. To assess the impact of ACA, employers need to clearly understand the links be-tween the coverage they offer, the details of their workforce and the role of the state exchanges. They must evaluate the cost of benefits based on both an assessment of their em-ployee demographics plus the impact of new definitions of

FTE. Further, incoming exchange notices, IRS reporting

requirements and other ongoing compliance exercises may

require significant enhancements to processes and technol-ogy. Capabilities must be evaluated immediately. Finally, organizations should consider communications to mini-mize employee misunderstandings. All of these issues and more need to be evaluated to minimize disruptions to the business, the workforce and overall productivity.

Editor’s note: Benefits Magazine goes to press about four

weeks before distribution. Please be aware that federal agen-cies are continually releasing regulatory guidance regard-ing ACA. The latest guidance and updates are available at www.ifebp.org/acacentral.

Frances Marbury is a member of Ernst & Young LLP’s performance and reward practice. Based in New York, she advises clients on reengi-neering and improvement in the area of human resource processes. In addition,

Marbury practices in the areas of cost and risk management, as well as strategic alignment and service delivery. She previously owned and operated a firm providing benefit consulting to middle-market service providers and employers.

Rachael Walker _{is a manager with}

Ernst & Young LLP’s human capital practice in New York. She has more than five years of experience consult-ing with financial service industry clients on tax and regulatory matters affecting executive compensation and employee benefits. Walker supports clients with compliance and management of health care reform. She received a J.D. degree from Fordham University School of Law and an LL.M. degree in taxation from New York University School of Law.

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