January 2013 – Client Deck

January 2013

21/2013

1. Market Trends Resulting From Healthcare Reform

Mike Suttman / Erick Schmidt – McGohan Brabender

2. Employer Mandate aka Pay or Play Rules

Paul Routh, Esq. - Weprin, Folkerth & Routh LLC

3. Impact Of Penalties To An Employer

Grant Reed – McGohan Brabender

4. What Options Should An Employer Consider

Grant Reed – McGohan Brabender

5. Summary CommentsMike Suttman / Erick Schmidt – McGohan Brabender

Agenda and Presenters

Macro Market Trends:

1. Modifications of workforce

2. Growth of self-insurance

3. Options considered by employers

31/2013

1. Modification of Workforce – Redefine Employee Status

1. Offshore Employees2. Replacing Full-Time Employees With Part-Time Employees

Small Employers - Attempt to remain <50 employeeso Offshore – Do not counto Part-Time – Fractionalize Part-Time Employees

Large Employers - Employees to Penalty Free Classo Offshoreo Part-Time

41/2013

Note: Anti-Abuse RulesLeased Employees – Still count for employer size and penalty

assessment

2. Growth of Self Insurance

o Higher fees, assessments, taxes, etc. to fully-insured premiums

$20 - $30 PMPM

o Community rating Was 7:1 to 9:1 Must be 3:1

51/2013

Employer Mandates of Pay or Play Rules

o Government Issued 144 Pages of Proposed Regulations Plus Q&As – December 28, 2012

o Rules Are Effective Plan Years Beginning On Or After January 1, 2014

6

January 1, 2014

Employer Mandates of Pay or Play Rules continued

71/2013

Large Employers 

50 or More Full Time Employees

Full Time Employee = 30 Hours Per Week

Look to Previous Calendar Year

Fractionalize Part Time Employees

Control Group Rules Apply

Small EmployersNo Penalties

81/2013

*5% Safe Harbor

Coverage is Affordable if Employee’s Cost of Single Coverage <9.5% of Wages (Form W-2 Box 1) Safe Harbor 9.5% of FPL for Single = Approximately $90 Per Month

Employer Mandates of Pay or Play Rules continued

Two Types of Subsidies Under Exchange – Both Based on Income

1. Premium Subsidy2. Cost Sharing Subsidy

Employee Not Eligible for Subsidy if Offered Quality Affordable Coverage

91/2013

Employer Mandates of Pay or Play Rules continued

Penalty Amounts

1. Offer No Coverage = Number of Full-Time Employees – 30 x $2,000 Annual or $166.67 Per Month.

2. Offer Coverage Not Quality and/or Not Affordable = FTE Who Goes to Exchange and Gets Subsidy x $3,000 Annual or Not To Exceed $250.00 Per Month.

101/2013

Penalty only applies to full-time employees = 30 hours per week

Employer Mandates of Pay or Play Rules continued

How to Determine Full-Time Status for Penalty Purpose

1. Measurement Period – 3 to 12 months2. Administrative Period – Up to 90 Days3. Stability Period – Longer of 6 Months or Measurement Period

New Hires

Ongoing Employees

Need to Keep Records

111/2013

Employer Mandates of Pay or Play Rules continued

Reports

1. Form W-2 for Health Coverage – 250 or more Form W-2s issued previous calendar year – Effective for 2012 Form W-2s.

Fees

1. Patient-Centered Outcomes Research Fee = $1 First Year Then $2 Afterward. October 1, 2012 through October 1, 2019 – Reported on IRS Form 720

2. Reinsurance Fund - $63.00 Per Person – First Year

121/2013

Pay or Play Cost Comparison for ABC Company Overview

131/2013

Understanding the Pay or Play Mandate: On J anuary 1, 2014, large employers (i.e. those with at least 50 full-time employees), will be subject to a penalty if (1) the employer fails to offer a group health plan or (2) the group health plan that the employer offers is not considered "affordable" or does not provide "quality" coverage. When determining if the employer has at least 50 full-time employees the part time employees are fractionalized and converted into full-time equivalent employees. Full-time employees will be defined as those working 30 hours or more during a defined Measurement Period.

Scenario 1 - Large Employer Does Not Offer a Group Health PlanIf a large group employer fails to offer a group health plan to full-time employees and at least one employee purchases subsidized coverage, there will be an annual penalty of $2,000 per full-time employee. Under this scenario the penalty is calculated by taking the total number of full-time employees less 30 (the number 30 is constant) times $2,000. Our records indicate that you have 173 full-time employees. Suppose that you also had 40 part-time employees (those working less than 30 hours per week) and you elect to notoffer coverage. Your penalty would be calculated by taking 173 - 30 = 143 times $2,000. As a result your total penalty then for not offering coverage would be $286,000. Note, there is no penalty for not offering coverage to the part-time employees.

Scenario 2 - Large Employer offers a group Health Plan BUT the plan is either not "Affordable" and/or does not provide "Quality" coverageThe large employer's group health plan is considered "affordable" if the employee's share of the premiums for single coverage does not exceed 9.5% of the employee's Form W-2 wages. The large employer's group health plan is considered to provide "quality" coverage if the plan covers at least 60% of all plan eligible expenses. Statedanother way, the large employer's group health plan satisfies this requirement as long as the employees are not required to pay more than 40% of the plan's eligible expensesin the form of deductibles, copayments, etc.

If the large employer's group health plan is not "affordable" and/or the plan does not provide "quality" coverage the annual penalty for the large employer will be the lesser of:A) The number of full time employees that (i) actually go through the health care exchange and (ii) receive a government subsidy x $3,000; orB) The number of full time employees minus 30 X $2,000.

Assume you offer a group health plan that provides "quality" coverage but the coverage is not "affordable" for 25 full time employees (i.e. the cost of single coverage exceeds9.5% of their Form W-2 wages). Also assume that 20 of those full time employees go through the public health care exchange for their coverage and they receive agovernment subsidy. Your penalty under this scenario would be the lesser of:A) 20 (i.e. the number of full time employees that actually went to the exchange and received a government subsidy) X $3,000 = $60,000. Note that you are not penalized forthe 5 employees that did not go to the exchange to receive their coverage.B) 173 (i.e. the total number of full time employees) - 30 X $2,000 = $286,000.

The penalty is the lesser of these two amounts. Therefore, the annual penalty under the Pay or Play Rules in this example would be $60,000,

The government has developed both a checklist and calculator employers can use to determine if their group health plans offer "quality" coverage. Our analysis indicatesthat your group health plan does, in fact, provide "quality" coverage.

The chart that follows is designed to lead you through the impact of this 2014 mandate. Below we list the assumptions that we have used in assembling this comparison.

Your current gross cost of coverage in 2013 is $1,350,000. Your employees contribute $337,500 toward the cost of that coverage.You have 150 full-time employees enrolled in your coverage and 23 who currently waive the coverage. Full-time is considered 30 or more hours per week.We have found that your current plan(s) pay 80.0% of the cost of the benefits. If you make an H.S.A. or H.R.A. contribution this has been included in the value.We have assumed that your Federal Income Tax rate is 35.0% and that your FICA payroll tax rate is 7.65%Our records indicate that your employee contribution for single coverage is $100 per month. This means that for the coverage to be not affordable, an employee must have annual wages of less than $12,632. For this illustration we have assumed that 5.0% of your employees will have not affordable coverage.

Final regulations are just beginning to be reported. As these regulations are released we will monitor them and let you know if there are any material changes that result due to these final regulations.

141/2013

Pay or Play Comparison for ABC CompanyFor Policy Year Starting in 2014

Options Considered by Employers: What does the solution look like?

** Optimal solution will allow an employee to pursue the option that is best for themselves and the employer – stay on Employer’s Plan or go to Health Care Exchange.

Create a Leash for Future Years or Connection to Employeeso Penaltieso In definition of full-time (ex. 30 20)

151/2013