Health Care Reform University

Understanding Recent Guidance Clarifying the Health Insurance Exchanges, Premium Tax Credit, Definition of Full-time Employee and the Employer Shared Responsibility Provision

Ford Darger, AVP, Benefits Compliance, CounselSuzanne Spradley, Senior Vice President, Senior Counsel

This material was created by NFP (National Financial Partners Corp.), its subsidiaries, or affiliates for distribution by their

registered representatives, investment advisor representatives, and/or agents. This material was created to

provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax of other professional advice. The services of an appropriate

professional should be sought regarding your individual situation. Neither NFP nor its subsidiaries or affiliates offer tax

or legal advice.

Health Care Reform University Past Calls

PPACA’s Status in 2012: The Effect of the Supreme Court Decision and National Elections on PPACA’s Implementation

Examining PPACA’s Impact on Employers and Employees in 2013 and 2014

Nondiscriminatory Plan Designs Before and After Health Care Reform

What You Can Expect Today …

Overview of Health Insurance Exchanges Function of an Exchange Status of State Exchanges SHOP Exchanges

Premium Tax Credits and Cost-Sharing Subsidies Eligibility Amount of Tax Credits

Employer Mandate Penalty Interplay of tax credits and penalty Example of penalty calculation

Recent guidance on Full-Time Employees

What is a Health Insurance Exchange (HIX)?

Exchanges are state or federally-run entities that create an alternative market for buying health insurance with standardized plans, marketing, applications, etc.

HIX

Beginning in 2014, Exchanges will serve primarily individuals and small businesses (up to 50 or 100 employees initially at the state’s discretion).

States are expected to establish Exchanges, which can be a government agency, a quasi-government agency or a non-profit organization.

Exchange Functions

Web Portal1. Provide selection tool for consumers to review health plan options2. Provide system for gathering enrollee satisfaction data3. Assign a rating to each QHP

Eligibility and Enrollment1. Integrate state’s eligibility system with federal data hub for citizenship, income verification, and premium tax credit / subsidy qualification2. Enable entry of employee data and defined contribution levels3. Present plan costs based on plan selected and employer contributions

Plan Management1. Validate qualified health plan based on DOI authorization2. Record health plan “metallic” level3. Publish data concerning claims payment policies, financial information, number of claims denied, rating practices, enrollee rights, etc.

Exchange Functions cont.

Financial Management

1. Provide automated billing aggregation2. Provide online payment process for ACH, credit cards, etc.3. Provide system for delinquent payments, including late notifications

Customer Service

1. Provide process for paper-based and in-person enrollment in addition to online2. Operate toll-free hotline for customer support3. Provide multilingual hotline for certain languages

What Do Exchanges Mean for Consumers?

The bottom line for most consumers remains unclear because it's still early – how much will health plans sold through the exchanges cost? That's impossible to know until the exchanges are operational. Cost of plans will, in part, depend on health of insureds participating in the exchange.

We do know that the exchanges will provide a range of plans with varying levels of benefits, based on the "actuarial value" of the benefits.

Think of “actuarial value” as plan’s coverage of health care services for the average insured.

Exchanges must provide consumer-assistance tools (toll-free call center, website with comparative information, calculator to determine cost of plans with premium tax credits).

Actuarial Values of Qualified Health Plans

Bronze Silver Gold Platinum0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Employee CostPlan Coverage

Exchange Implementation Timeline

3/23/2010

PPACA signed into law

2011 HHS

announces additional grants to

states

1/2013 State

exchange certification

10/2013 Open

enrollment for

Exchanges

1/2014 Exchanges

are operational

for individuals and small employers

1/2015 Exchanges

must be financially

self-sufficient

2016 Exchanges

must be open to

groups 1 to 100

employees

2017 Exchanges may offer access to

large group employers

The Time is Near …

States planning to operate a state-based exchange or a state-federal partnership exchange must submit a declaration letter signed by the Governor and an application to Health and Human Services (‘HHS’) by November 16, 2012.

Given these fast approaching deadlines and that most states’ legislative sessions have come to a close, states face serious challenges to making the necessary policy and implementation decisions.

HHS recognizes the challenges facing states in creating these marketplaces on a short timeline, and is offering an alternative.

Thus, states can:

elect to build a fully state-based exchange; enter into a state-federal partnership exchange; or default into a federally-facilitated exchange.

State Options

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All aspects of the exchange are operated by the state(within federal guidelines)

State can:1. operate plan management functions

2. operate consumer assistance functions

3. or both

All aspects of the exchange are operated by the federal government

State Action Toward Exchanges

Source: Kaiser Family Foundation

Health Benefit Exchange Status

To date, 15 states plus the District of Columbia have enacted legislation to establish state-based exchanges.

As of July 30, 2012, three states (Arkansas, Delaware, and Illinois) are planning to pursue a state-federal partnership exchange.

This option may become an increasingly viable strategy for states that have delayed establishing an exchange. States with small populations, such as Montana and Wyoming, are considering the partnership model due to economies of scale.

To date, seven states have declared that they will not create a state-based exchange:

Louisiana’s Governor made the announcement in 2011 and in April, Maine’s Governor sent a letter to HHS stating it would not pursue a state based exchange.

In June 2012, NH’s Governor signed a law prohibiting the state from participating in or enabling a state-based exchange.

The Governors of Texas, Florida, South Carolina, and Alaska made their decisions public soon after the Supreme Court’s ruling on the ACA.

16 states continue are evaluating the policy options related to a state-based exchange in the absence of legislation.

The remaining states have no significant activity to report.

Federally Facilitated Exchange

Federal guidance released in May 2012 indicates a clearinghouse model — certifying any health plan that meets all certification standards as a qualified health plan (‘QHP’).

The federal government will retain primary responsibility for operating these exchanges, but will seek to coordinate with states on:

plan certification; plan oversight functions; consumer assistance and outreach; and streamlining eligibility determinations.

Over time, states may transition into a state-federal partnership model.

Small Business Health Options Program (SHOP) Exchange

States have flexibility to decide whether:

to limit the size of a qualified small-employer to 50 employees before 2016; to include large employers beginning in 2017; and to merge the individual and SHOP markets into a combined risk pool.

Examples:

Maryland passed legislation specifying that the definition of a small employer would be limited to those with an average of 50 or fewer employees until 2016. Also decided not to merge the small group and individual markets into a combined risk pool.

Vermont passed legislation that merges the individual and small group health insurance markets and requires all plans in those markets to be sold through the exchange.

Utah’s small-business exchange, established prior to federal health reform, allows employers with 50 or fewer employees to participate in a defined contribution arrangement.

QHPs offered in SHOP Exchange

SHOP exchange must certify that each qualified health plan (QHP) meets minimum federal requirements, such as:

Plans must provide coverage for essential benefits; Plans must charge the same premium rate for a plan regardless of whether

it is offered through the SHOP exchange, directly to consumers, or through agents;

Plans must report quality and outcome measures and enrollee satisfaction; and

Plans must comply with marketing practices that do not discourage enrollment of people with significant health needs.

SHOP Exchange Open Enrollment

SHOP exchanges must conduct initial, annual, and special open enrollment periods for each employer.

Enrollment in QHPs by SHOP exchanges will be done on a rolling basis based on each employer’s plan year rather than a single open enrollment period for all employers and employees participating in the exchange.

Ongoing questions concerning required notices and documents (e.g., Medicare Part D, CHIP notice, SPDs).

Cafeteria Plans are generally not permitted through the Exchange:

Exception for Exchange-eligible employers. Employees may pay for employer-sponsored group coverage in exchange with pre-tax dollars.

For large employers, individuals who qualify for premium tax credits may find buying unsubsidized pre-tax coverage outside the exchange is a better financial decision.

SHOP Exchange Alternatives

SHOP exchanges must establish employer options:

Exchanges must allow employers to choose one of the “metallic” levels of coverage and then have their employees choose from among all the health plans offered by the exchange at that level;

(ex. any silver plan (BCBS silver plan, Wellpoint silver plan, United silver plan, Aetna silver plan, etc.)

Exchanges may allow employees to enroll in any QHP at any level offered by the exchange, with the employer contribution being applied to the plan selected; or

(ex. defined contribution)

Exchanges may allow an employer to select a single health plan for its employees.

(ex. BCBS silver plan)

Key Exchange Function

Eligibility and Enrollment

1. Integrate state’s eligibility system with federal data hub for citizenship, income verification, and premium tax credit / subsidy qualification2. Enable entry of employee data and defined contribution levels3. Present plan costs based on plan selected and employer contributions

Premium Tax Credit Life Cycle

Exchange determines

eligibility for premium tax

credit and cost-sharing

reductions.

Exchanges coordinate

enrollment in a QHP and the premium tax credit / cost-

sharing reductions

Exchange makes advance

payments of the premium tax credit to the

insurer of the QHP

Out-of-pocket premiums required to purchase

coverage are thus reduced

The advance payment would be reconciled against the amount of the

actual premium tax credit on tax return

Premium Tax Credit Eligibility

Who is eligible for the Premium Tax Credit?

Taxpayers with modified adjusted gross income between 100% and 400% of federal poverty level (FPL);

Who are not eligible for qualifying minimum essential coverage because employer’s coverage; and

And who are not be claimed as a dependent by another taxpayer and, if married, must file a joint return.

Neither NFP nor its subsidiaries or affiliates offer tax or legal advice

Premium Tax Credit Eligibility Qualifying Minimum Essential Coverage

Who is eligible for the Premium Tax Credit?

When does a person not have minimum essential coverage? It is unaffordable (employee contributions exceed 9.5% of the

employee's household income) or It fails to provide minimum value (the plan's share of the total allowed

costs of benefits is less than 60% of those costs) or It is unavailable

Neither NFP nor its subsidiaries or affiliates offer tax or legal advice

Premium Tax Credit Amount

Household Income = the sum of the total of modified adjusted gross income (‘MAGI’) for all members of the household required to file tax returns (including qualifying relatives who are unrelated), excluding income of dependents not required to file returns.

The household must spend a certain percentage of income on insurance (See table).

The premium tax credit will equal the lesser of: The actual premium of the QHP in which he/she enrolls OR The excess of the premium for the silver plan over the applicable

percentage of the taxpayer’s household income.

Table for Premium Tax Credit

Household income as % of FPL

Initial Percentage Final Percentage

Less than 133% of FPL 2.0 2.0

133% to 150% 3.0 4.0

150% to 200% 4.0 6.3

200% to 250% 6.3 8.05

250% to 300% 8.05 9.5

300% to 400% 9.5 9.5

Premium Tax Credit Example

John Smith is single and has no dependents

Smith earns $16,755 in 2012 (150% of FPL)

The Silver Plan costs $2,000 in EE premiums for the year

Smith must pay 4% of his income on insurance: $16,755 x .04 = $670.20

The Tax Credit for John Smith will be $1,329.80 for the year $2,000 - $670.20 = $1,329.80

Exchange Coordination of Credit, Advance Payment of Credit, and Subsequent Reduction of Out-of-pocket Premiums

Exchanges coordinate enrollment in a QHP and the premium tax credit / cost-sharing reductions.

Exchange makes advance payments of the premium tax credit to the insurer of the QHP (instead of the individual).

Out-of-pocket premiums required to purchase coverage are thus reduced.

Reconciliation

The amount of tax credit advanced payments is determined at the beginning of the year based on the employee’s projected household income.

Amount of advanced payments is reconciled against the employee’s actual household income during tax time in April of the following year:

If taxpayer’s credit amount exceeds the amount of advance payments, he/she may receive the excess as income tax refund.

If the taxpayer’s advance payments exceed credit amount, then taxpayer must return the excess amount to IRS (but there is a graduated cap on tax liability ranging from $600 to $2500 depending on income).

If taxpayer’s household income exceeds 400%, the entire advance payments must be returned.

Health Reform Subsidy Calculator

Employees’ Tax Credits / Employer Penalties

The number of employees receiving a tax credit directly affects …

The amount the employer will owe under the employer mandate

Premium Tax Credits Affect Employer Penalty

Employer offers

insufficient coverage or no

coverage

Employee goes to Exchange to

purchase insurance

Employee qualifies for and receives Premium Tax

Credit

Employer pays penalty based on employee

receiving Premium Tax

Credit

Government uses revenue

to pay for health reform

Employer Mandate Penalties

Start Here

Does the employer have at least 50 full-time equivalent

employees (FTE)?

Penalties do not apply to

small employers.

No

Yes# of employees working

30+ hours / week

(total part-time hours 120) FTE

Employer Mandate Penalties

The penalty =$2000 annually x

# of full-time workers (- 30)

Did at least one employee receive a

premium tax credit/subsidy in the Exchange?

Does the employer

offer coverage to its workers?

Yes

No Yes

Yes

The employer must pay a penalty

Employer Mandate

Does ER plan pay for 60% of covered health care expenses?

Employees will qualify for a premium tax credit in the Exchange

Does the employer

offer affordable

coverage to its workers?

Employees will qualify for premium tax credit in the Exchange. The

employer must pay a penalty

No

No

Yes

Yes

Yes

The penalty = $3000 x # of employees

receiving premium tax credit (capped at total

from above)No Penalty

Employer-sponsored coverage is affordable if the employee’s cost is less than 9.5% of an employee’s household income. Employers don’t have access to household income data.

Under a safe harbor test: Looks at employee’s W-2 wages from his/her job with employer

only (not family income). Looks at employee’s single coverage cost under the employer’s

lowest cost plan. So if cost of your cheapest single coverage plan is less than 9.5%

of employee’s income, the employee has access to affordable coverage.

Affordability Test for Employer Mandate

Employer Mandate Penalty Example

Amazon employs 4500 employees (EEs):

500 full-time EEs (30+ hours/week) and 4000 part-time EEs. All full-time employees are offered coverage. The coverage is unaffordable for 200 / 500 employees

(e.g., employee contribution is > 9.5% of W2 wages). 75 / 200 employees waive employer-sponsored coverage and buy insurance in the

Exchange. 50 / 75 qualify for premium tax credit.

(e.g., incomes are < 400% of FPL)

Annual penalty = 50 x $3000 = $15,000 (not tax deductible)

Penalty Cap = $2000 x [500 – 30 = 470] = $940,000

Full-time Employee Guidance

IRS released Notice 2012-58 on August 31, 2012:

Introduces safe harbor employers can use to determine which employees will be determined full-time for purposes of the employer mandate;

While providing guidance for how to treat a workforce with variable hours or seasonal, it can be a very complex process;

IRS recognized administrative difficulty in making full-time determinations monthly, so introduced the following safe harbors.

Basic Rules and Terminology

To help your understanding, we will be using simpler descriptive terms The Notice uses different terms which we will introduce at the end

Rules Snapshot Period

Can be anywhere from 3-12 months (employer’s discretion) Admin Period

Cannot be more than 90 days Coverage Period

Must be at least 6 months, but no shorter than Snapshot Period

Ongoing Employee Example

Employer has 10-month Snapshot periodEmployer has 2-month Admin PeriodEmployer has 12-month Coverage Period

Coverage Period #3

‘12 ‘13 ‘14 ‘15

Snapshot Period #1 Coverage Period #1 Snapshot Period #3

Snapshot Period #2 Coverage Period #2

Admin Period #1

Admin Period #2

Admin Period #3

‘16

Ongoing Employee Specific Example

#1 John Smith is an ongoing employee Works average of 30+ hours/week during Snapshot Period #1 (Jan. 1, 2012 – Oct. 1, 2012); Enrolls in coverage during Admin Period #1; Maintains insurance coverage during Coverage Period #1 (Jan. 1, 2013 – Dec. 31, 2013).

#2 John Smith drops to part-time in April 2013 and beyond He loses FT status during Snapshot Period #2 (Jan. 1, 2013 – Oct. 1, 2013); Not eligible for coverage during Coverage Period #2 (Jan. 1., 2014 – Dec. 31., 2014) but

maintains eligibility while part-time throughout Coverage Period #1.

Coverage Period #3

‘12 ‘13 ‘14 ‘15

Snapshot Period #1 Coverage Period #1 Snapshot Period #3

Snapshot Period #2 Coverage Period #2

Admin Period #1 Admin Period #2 Admin Period #3

‘16

Actual terms used by the IRS guidance

Snapshot Period = Measurement Period Admin Period = Administrative Period Coverage Period = Stability Period

Further Complexities

Many Additional Complexities Different requirements for new employees versus ongoing employees Snapshot and Admin Periods combined cannot extend beyond 13 months

plus days to the end of the month for new employees Employers can have different periods based on various employee

classifications Union/non-union Salaried/hourly Different entities Different states

This issue is more complex than we are able to explain in this webinar. If you should have any questions, please reach out to your advisor who

can forward the specific question to our team.

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Please contact your Advisor with Questions

This material was created by NFP (National Financial Partners Corp.), its subsidiaries, or affiliates for distribution by their registered representatives, investment advisor representatives, and/or agents. This material was created to

provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The services

of an appropriate professional should be sought regarding your individual situation. Neither NFP nor its subsidiaries or affiliates offer tax or legal advice.