Proposed Reform of the ACA

You will read a lot in the next few days about the “repeal” of the ACA. Whether you call it repeal or reform, the newly proposed American Health Care Act contains welcome relief for employers from the serious penalties and mind-numbing complexity of the current ACA.

There will be fireworks, but something will pass this year if Republicans get over their internal differences. The proposed law only needs simple majorities in the House and Senate to get through Congress, because it is designed not to further increase the deficit over the next ten years, which qualifies it as filibuster-proof budget reconciliation. Due to the restrictions of budget reconciliation, many substantive provisions of the ACA will remain on the books until that far distant future when 60 members of the Senate can find common ground, or until the filibuster rule is eliminated.

This is how the proposed American Health Care Act addresses employer concerns:

#1 Concern: ACA penalties in any month for not making offers to 95% of FTEs, or for not making affordable offers to even a single employee.

Ways and Means: No employer penalties, and the repeal of employer penalties is retroactive.

#2 Concern: Complicated ACA reporting on the infamous 1094/1095 forms.

Ways and Means: There will be simpler W-2 reporting. Because this is designed as filibuster-proof budget reconciliation, the current reporting requirements cannot be repealed by a simple majority. But there is a wink and a nod in the Ways and Means Bill, which says it’s reasonable to expect that the IRS won’t be enforcing the 1094/1095 reporting rules after the simpler W-2 method is in force. Ideally, the 1094/1095 reporting can be eliminated in a later law, but it will stay on the books until that happens.

Our guidance: finish up filing your 1094 forms for the 2016 year. All the work you did for the 1095 forms was required.

#3 Concern: Possible 40% Cadillac tax starting in 2020 on high cost plans

Ways and Means: Postpone Cadillac tax to 2025.

23 key changes:

There are 23 important changes described in the Ways and Means summary. The link is at the bottom of this article. Among them are:

  • Retroactive elimination of the individual insurance mandate;
  • Continuation of the rule that coverage cannot be denied for pre-existing conditions, with addition of a rule that insurers can charge up to 30% extra for people who stay uninsured until they decide they “need” insurance;
  • Kids still can stay on parents’ plans until 26;
  • Repeal of the .9% extra FICA tax on high income wages, effective 2018;
  • Repeal of the 3.8% tax on net investment income for high income persons, effective 2018;
  • Near doubling of HSA limits to the full amount of deductibles and out of pocket limits in a high deductible policy, effective 2018;
  • Lowering of penalty for HSA non-health withdrawals, effective 2018;
  • Removal of the $2,500 cap for Section 125 health flex accounts, and freeing up those accounts for non-prescription drugs, effective 2018;
  • Re-characterizing non-prescription drugs as eligible medical expenses, effective 2018;
  • Reducing the income level from 10% of AGI to 7.5% of AGI for purposes of the medical expense deduction, effective 2017 for those over age 65 and 2018 for those who are younger; and
  • Even the 10% tax on tanning salons is eliminated, effective 2018.

Federal credits for the uninsured.

The greatest controversy among the Republican majorities will be the provision of advancable federal credits to purchase state-approved, major medical health insurance and unsubsidized COBRA coverage. A person must not have access to other employer or government insurance, and be a citizen, national, or qualified resident alien. No one in jail is eligible.

The credits are income based, and phase out at the rate of $100 / $1,000 for income over $75,000 ($150,000 joint filers). They are also age based, and can range from $2,000 to $14,000 for a family.

For a single person at or below the income limits, the credits are:

-Under age 30: $2,000

-Between 30 and 39: $2,500

-Between 40 and 49: $3,000

-Between 50 and 59: $3,500

-Over age 60: $4,000

The credits are additive for a family, and capped at $14,000. They will adjust each year at CPI plus 1.

How can this be revenue neutral?

You might ask how is this revenue neutral for the next 10 years? Medicaid expansion will be slowed down, and there will be changes to the system of federal grants for the Medicaid program (giving states a fixed budget and more local authority). The other “saver” is that the credit system does not give as much aid to lower paid persons as the current ACA. Even more than before, companies which provide good insurance will be valued by employees.

A copy of the Ways and Means summary is at this link.

Extension of ACA Reporting Deadline: 2016

The IRS has granted an automatic extension for a portion of 2016 ACA reporting:

  •  The due date for giving the 1095-C to employees is automatically extended from January 31, 2017 to March 2, 2017. No application is needed for this extension.
  •  The due date for electronic filing of the 1094-C and bundled 1095-C forms with the government is not extended. It continues to be March 31, 2017 for electronic filers. A process for extending that filing is available by filing Form 8809. You can get up to two automatic 30 day extensions if you file before the due date.

Best news of all: “Good faith” errors in employer reporting of 2016 data will not be penalized. That “good faith” standard was supposed to apply only to 2015 reporting, and is a special relief.

The big question, of course, is whether the new Republican government eliminates the ACA employer and employee penalties and, if it does so, whether it does that retroactively to 2016. If those penalties are eliminated retroactively, there would obviously be no need for the reporting.

Stay tuned. Everyone in benefits will have their ear to the ground on this. For the time being, we recommend that we continue to proceed as if the law, with these extensions, stays in effect.

IRS Notice 2016-70 is at this link.

Postponement of ACA penalties for small employers who helped employees to buy health insurance policies

ACA rulings, effective in 2014, prohibit employers from helping employees to buy non-group health insurance. This surprised many small employers, who often do this rather than offering group insurance. The IRS announced that the 2014 and 2015 penalties will not apply if the practice is stopped no later than June 30, 2015. To qualify for 2014 relief, the employer must show that it employed fewer than 50 full-time equivalents in any period of 6 months or more in calendar year 2013. Relief for 2015 is conditioned on a similar showing for the 2014 calendar year.

Advice: Employers too large to fit this exception should evaluate IRS Form 8928 and claims for relief from IRC §4980D penalties. IRS Notice 2015-17

Government Moves to Prevent Health Policy Reimbursement
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US employers trying to contain health care costs just got more bad news. On November 6, 2014, in answers to “frequently asked questions,” the US Department of Labor (“DOL”) killed cost savings strategies that were especially helpful to small and mid-size businesses. Employers may not reimburse employees for the cost of individual health policies, even with aftertax dollars. The DOL opinion extends to all employers, including those which are too small – less than 50 full-time equivalents – for the “pay or play” penalties of the Affordable Care Act (“ACA”).

Does your health plan document and SPD show how you determine full-time status?

To avoid ACA tax penalties, large employers – 50 or more full-time equivalents in the previous calendar year – are allowed to determine if their employees are full-time either (i) on a monthly basis or (ii) on a “look-back” basis described in ACA regulations. Employers can use look-back or monthly method for IRS-designated classes of employees: hourly, salaried, employed in different states, or covered by a collective bargaining agreement. Typically, we see employers with variable hour work forces, such as restaurant owners, use the look-back method for hourly employees.

The main advantage of the “look-back” method is that coverage is not required for employees who do not regularly work 30 hours per week, but who occasionally do so. Under the look-back method, employees will not be considered full-time unless they average at least 130 hours per month during an entire look-back period, in which event they then are deemed full-time during a following “stability period,” regardless of hours in the stability period.

Look-back periods are selected by the employer in advance. They will typically be 12 months long and must end within 90 days preceding a stability period, which usually starts on the first day of a plan year and lasts for the longer of 6 months or the length of the look-back period.

The look-back method also requires initial measurement periods and initial stability periods for new hires while they transition to the look-back and stability periods used for ongoing employees. However, unless a new employee is part-time or variable hour, the monthly method is required under look-back for new hires until the employee has completed the standard measurement period applicable to ongoing employees. The look-back rules are complicated but are popular with large employers whose part-time, variable hour, and seasonal employees occasionally work full-time in busy months.

There is more involved than taxes. What if a part-time employee who worked more than 30 hours per week in a busy month (and is not offered coverage because the employer is using the look-back method) needs medical care? Are you ready for the lawyer who asks: “Why wasn’t my client and his family offered health insurance? He was working full-time that month.” The employer whose health plan does not specifically mention that the look-back method is being used, with actual details about the measurement periods and stability periods in use, is in a very weak position.

Advice: do not just rely on the booklet the insurance company provides. ERISA requires that you have a plan document and a summary plan description which describes the rules of your health plan.

Reminder about FMLA Notices

Regardless of employer size, remember that wage and hour laws require employers to give an ACA notice to new employees within 14 days of starting work. The notice describes ACA Exchanges and the availability of federal assistance to persons without access to other affordable insurance meeting ACA standards. There is a model form for employers without health plans and a model form for those with plans. Posting is not enough. Use first class mail or electronic communication that meets ERISA standards. If you forgot to do this for your existing workforce, give them copies, too. DOL Tech. Release 2013-02.

Updated COBRA Notices and Forms

The DOL has updated its model initial and election notices to point out that individual ACA policies are an alternative to COBRA, and that the loss of employer coverage triggers a special 60-day ACA enrollment period to  buy policies through an Exchange. They also point to a quirk in the rules that employees who elect COBRA cannot shift to an ACA policy until (i) the COBRA period is exhausted, or (ii) they are in an ACA open enrollment period or a special enrollment period due to an event like childbirth. This required disclosure not only leads most former employees to a less expensive solution than COBRA, it also leads to a good result for employers, especially those with self-insured or experience rated coverage, because COBRA beneficiaries often incur higher claims.

Note: The new notices and forms are on the DOL COBRA website.