may 23, 2013 healthcare reform implications for employers

May 23, 2013

Healthcare Reform Implications

for Employers

© 2013 Crowe Horwath LLP 2Audit | Tax | Advisory | Risk | Performance

The Unique Alternative to the Big Four®

The Law The Patient Protection and Affordable Care Act of 2010 (PPACA) was signed

March 23, 2010 Amended by the Health Care and Education Reconciliation Act of 2010

(Reconciliation) signed March 30, 2010 Jointly referred to as the “Healthcare Reform Law” Phases in over several years Delayed effective dates a possibility but strong likelihood that current provisions

are here to stay



Agenda for Today Overview of Healthcare Reform Law

What is it intended to do? Who is affected?

Immediate Reforms What happens now and through 2014? How can employers prioritize?

Perspective from Market Data Employer Implications

Managing costs and remaining competitive Impact on compensation and overall employee benefits program

Wrap-up and Q&A



Healthcare Reform Goals Expand coverage to all Americans

Require coverage for those employed Provide subsidies for those who are not

Reform delivery and insurance systems Reduce costs



Coverage – Reducing the Uninsured Insurance Exchanges provided by States Insurance Market Reforms Individual Mandates Employer Mandates – “Play or Pay”



Polling Question What do you think most of your employees who currently waive coverage will do

to comply with the mandatory coverage mandate? Elect coverage under your employer plan. Elect coverage under a spouse’s plan. Elect coverage under and exchange plan Not elect coverage / pay the penalty.



Delivery – How Care is to be Provided Create payment and system incentives that are intended to improve efficiency

and quality of care Transition from a volume-based system to an outcome-based system



Financing – Who pays for it? Savings from current health system Excise taxes Employer penalties Insurance company penalties Individual tax increases



Near-Term Requirements Earliest changes began for plan years beginning on or after September 23, 2010

(six months after President Obama signed PPACA) Most calendar year plans first affected with plan year beginning January 1, 2011 Significant provisions become effective in 2014 and beyond



Post-Election Expectations State governments will struggle with implementation decisions

Some will establish their own exchanges while others will rely on the Federal government

Some will expand Medicaid programs More judicial challenges will receive press

Ability to access “pay or play” penalties against employers in states that do not operate their own state exchange

Application of preventive care mandate concerning contraceptives



Transition Period Understanding “Grandfathered Health Plan” (GHP) Nothing in the Act requires an individual to terminate current coverage

“If you like your coverage, you can keep it.” Grandfathered plan is:

Any group health plan or Individual health insurance coverage in which an individual was enrolled on the date of

enactment Family members may enroll, if such enrollment was permitted under the terms in

effect as of March 23, 2010 New employees and their families may enroll



Current Provisions – No Lifetime / Annual Limit GHP’s prohibited from imposing lifetime dollar limits on “essential health benefits” GHP’s may not impose “unreasonable” annual dollar limits

Unreasonable term eliminated in 2014



Current Provisions– Pre-existing Exclusion Effective immediately, no pre-existing conditions exclusions for children under

age 19 Otherwise effective for all other individuals as of January 1, 2014



Current Provisions – Preventive Coverage New GHP’s must provide first dollar coverage for:

Evidence-based preventive services (rated A or B by the US Preventive Services Task Force)

Recommended immunizations Preventive care for infants, children and adolescents Preventive care and screenings for women

Not applicable for grandfathered plans



Phase Two Impact – 2012 - 2013 Form W-2 reporting must include the aggregate cost of employer provided group

health coverage Excludes coverage through an Archer MSA, an HSA or employee salary

reductions to a FSA Determined under COBRA-like rules Delayed for employers that file fewer than 250 Forms W-2 in the preceding tax

year



Phase 4 – 2013 Changes Flexible Spending Account Limit

Caps the maximum health flexible spending account salary deferral at $2,500 Indexed for years beginning in 2014 Excludes true employer matching or other employer contributions to an FSA

Employer Notice Regarding Exchange Originally set for March 1, 2013. Now delayed where DOL expects the new deadline

will be late summer or fall of 2013, near open enrollment period for Exchanges. Notice will inform employees about enrolling in Exchanges, affordability and lack

of employer subsidy



2013 – Additional Changes Increase itemized deductions for unreimbursed medical expenses to 10%

(currently 7.5%) Increase payroll tax on earnings over $200,000 ($250,000 for joint filers) and tax

unearned income (such as investment income) Impose 2.3% excise tax on medical devices Self-insured plans pay tax of $2 per covered member per year



Polling Question What is your biggest challenge to implement?

Communicating employees Determining employee / employer premiums split Administrative requirement (i.e. W-2 reporting)



Phase 5 – 2014 Individual mandate to obtain coverage

Penalty phases in up to greater of $695 or 2.5% of income by 2016 Employers not required to offer coverage

If employer with 50 or more employees does not provide health coverage, then employer pays $2,000 assessment per employee (first 30 employees exempt)

Employers that do provide health coverage may still pay assessment if employee opts-out and buys through Exchange ($3,000 per employee opting out)

Employers must provide free choice vouchers to certain employees Assessments are not tax deductible



2014 – Insurance Exchanges The Exchange would be offered to individuals and small groups (up to 50 or 100

employees) New plans must comply with one of four benefit categories “Essential benefits” must be offered Insurance exchanges represent a way for individuals to obtain health coverage in

addition to employer plans and individual policies Challenging for employers to understand employees’ options for health coverage

while still remaining competitive for quality employees at an affordable cost



Final Phase – 2018 High Cost (“Cadillac”) Plan Tax 40% excise tax would be imposed on insurers of employer sponsored health

plans with aggregate values that exceed $10,200 for individual coverage and $27,500 for family coverage



High Priorities for Employers National Federation of Independent Business reports that half of small employers

view healthcare costs as their “most critical problem” Monitor, update and communicate Consider changes in context of overall compensation and benefits structure



Observations and Planning Ideas Upward pressure on plan costs and premiums

Consider premium cost split between employer and employees Industry surveys Analysis of local labor market Depending on eligibility for subsidy, it may be important to keep employees on employer

plan vs. having them opt for an Exchange plan Tax increases on upper-income filers (3.8% on unearned income and .9% on

wages) beginning 2013 Obligation to offer coverage that meets minimum standards or pay a penalty

(2014) Evaluation of overall plan design and whether to offer plan Upward pressure on plan administration and compliance costs

Excise tax on high-cost plans (2018) Downward pressure on value of plan coverage



Case for Comprehensive Benefits Review Impact of health insurance costs felt by other plans

Qualified retirement plans Deferred compensation Executive benefits Ancillary and voluntary benefits

Opportunity for a fresh look at compensation and benefits program Employers must balance costs and overall benefits provided to remain

competitive



Market Data The source of data on the following slides is the 2012 Annual Survey “Employer

Health Benefits” published by The Henry J. Kaiser Foundation and Health Research and Educational Trust



Healthcare Costs Continue to increase in spite of reform (and to some extent because of it) Average single premium in 2012 ($5,615) is 3% higher than in 2011 ($5,429) Average family premium in 2012 ($15,745) is 4% higher than in 2011 ($15,073) Average family premium in 2012 is 30% higher than it was in 2007 The rate increase is similar in insured and self-insured plans Employers need a plan in view of increasing costs irrespective of PPACA



Offering Healthcare Towers Watson just reported that 88% of employers affirmed their commitment to

offer healthcare benefits for the foreseeable future 38% of surveyed employers are considering or plan to reduce dependent

coverage 55% plan to increase the employee cost-share Nearly 60% offering retiree benefits will drop them when the exchanges become

operational



2013 Additional Payroll Tax The Act imposes an additional .9% (for a total of 2.35%) Medicare tax on the

wages and self-employment income of certain high-income taxpayers The additional tax is applicable to wages in excess of:

$200,000 – single filers $250,000 – married filing jointly or surviving spouse $125,000 – married filing separately



2014 Employer Responsibility The Act adds a new “shared responsibility” requirement that “applicable large

employers” must pay a non-deductible excise tax penalty if any of their full-time employees are certified as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee

This requirement has been referred to as a “free rider surcharge” because it is imposed only when the federal government subsidizes coverage for employees of an employer



Definitions “Applicable large employer” Means an employer that employed an average of at least 50 FTEs during the

preceding calendar year An employer is not an applicable large employer if its workforce exceeds 50

FTEs for 120 days or less during the calendar year and the employees that cause the employer’s workforce to exceed 50 FTEs are “seasonal workers”

Regs. issued 12/28/12 are complex for employees who are seasonal or have variable hours

Determined on a controlled group basis IRS Notice 2012-58 FTE means an employee who is employed on average at least 30 hours of

service per week



2014 Penalty for not offering coverage For any month in which:

An applicable large employer fails to offer its FTEs and their dependents the opportunity to enroll in minimum essential coverage, and

At least one FTE enrolls in health coverage purchased through a state exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid

The penalty is the product of the number of the employer’s FTEs (excluding the first 30 employees) multiplied by one-twelfth (1/12) of $2,000 (or $166.67 per month)

Determination is made without regard to the number of the employer’s FTEs who are receiving a premium tax credit or cost-sharing reduction

After 2014, this $2,000 amount will be indexed



Penalty for not offering coverage Where an applicable large employer offers its FTEs and their dependents the

opportunity to enroll in minimum essential coverage, the employer is still subject to the excise tax penalty if At least one of its FTEs enrolls in health insurance coverage purchased through a state

exchange with respect to which a premium tax credit or cost-sharing reduction is allowed or paid to the employee or employees, and

The coverage is “unaffordable” or the plan’s share of the total allowed cost of benefits is less than 60%. This is the “bronze plan” standard sometimes referred to as actuarial value.

Prior to healthcare reform, the National average actuarial value was around 83% meaning some employers have room to scale down benefits if needed (higher deductibles, co-pays, etc.)



Unaffordable Definition Employer-provided coverage is “unaffordable” if the single premium required to

be paid by the employee (regardless of whether he/she has family coverage) exceeds 9.5% of the employee's household income

To demonstrate that coverage is unaffordable, the employee must obtain an affordability waiver from the exchange

Note that current National average of employees’ household income spent on healthcare coverage is around 4.5% so many employers have room to raise prices if necessary (varies widely on demographics of workforce – i.e. fast food vs. professional services)



Penalty where coverage is unaffordable Product of the number of employees who receive a premium tax credit or cost-

sharing reduction for health insurance purchased through an exchange multiplied by one-twelfth (1/12) of $3,000 (or $250 per month)

Penalty in any month is capped at an amount equal to the number of FTEs during the month (regardless of how many employees are receiving a premium tax credit or cost-sharing reduction) in excess of 30, multiplied by one-twelfth (1/12) of $2,000

Penalty imposed on an employer offering coverage can never exceed the penalty imposed on an employer not offering coverage

Individual tax credits generally are available to individuals earning less than 400% of the Federal poverty line



Polling Question What are your expectations for employees considering coverage through

exchange? Expect few if any employees to qualify for a subsidy Are worried that many will leave for exchange plan Have not yet considered, but plan to analyze



Results of Willis Survey More than ½ of employers believe that other similar employers will pass more of

the cost of dependent coverage to employees 1/3 believe that similar employers will reduce coverage to lowest-cost package

that will avoid “pay or play” penalty Majority believe wellness programs will expand in scope 2/3 believe employers expect to increase employee contributions



Defined Contribution Approach Two employers are planning a radical change in the way they provide health

benefits Give employees a fixed sum of money and allow them to choose their medical

coverage and insurer from an online marketplace Sears and Darden Restaurants say the change isn't designed to make workers

pay a higher share of health-coverage costs Instead they say it is supposed to put more control over health benefits in the

hands of employees The approach will be closely watched. If it takes hold widely, it might parallel the

transition from company provided pensions to 401(k) retirement-savings plans controlled by workers and funded partly by employer contributions

For employees, the concern will be that they could end up more directly exposed to the upward march of health costs



Key Financial Considerations for Employers Scope of potential additions to group plan – how many of your current employees

are ineligible or waive coverage? Income of workforce – if you have relatively few employees under 400% of

Federal poverty line, not many will qualify for State exchange subsidy and there may be room to increase employee cost sharing

Actuarial values of current plan designs and employer subsidization levels – if plan is relatively rich, you may look at scaling back benefit levels or increasing deductibles and co-pays if needed to remain competitive



Final Thoughts PPACA does little to control health care costs in the short run Most of the increased costs will be imposed on employees Attempts to constrain the cost of labor may or may not impact other benefits For the first time, employers will be competing with state exchanges for choices

that employees have in obtaining coverage Defined contribution healthcare is something to keep an eye on Determining the cost sharing split between employer and employee has added

significance



Utilizing Your Broker as a Resource Understand general Pay or Play Rule Concepts

Confirm your plan Offers Minimum Essential Coverage (MEC) Provides Minimum Value (MV) Is affordable and offered to all full-time employees

Review economic and strategic considerations

Focus on the gray areas

Perform high level analysis now

Be prepared to communicate with employees

Record keeping is an essential component



Questions



Contact Information

Dave Horvath, CPA

Crowe Horwath LLP

One Mid-America Plaza

Suite 700

Oakbrook Terrace, IL 60181

630-586-5117

[email protected]

may 23, 2013 healthcare reform implications for employers

Documents