ACA Update Notice ISFIS Conference June 16, 2016

Agenda 1.403(b) plans 2.Review of ACA employer mandates 3.Types of rewards 4.Types of plans 5.Impact on: Income tax under the tax code “Affordability” under the Affordable Care Act IPERS covered wages 6.Compliance Issues 7.Plan design suggestions

403(b) Plan

EXAMPLE 1: If Ted waives all major medical coverage, the school district makes a $150/month contribution to Ted’s 403(b) plan. EXAMPLE 2: The school district lets Ted choose between Coverage A and Coverage B. If Ted chooses Coverage B (which has a smaller premium) the school district makes a $150/month contribution to Ted’s 403(b) plan. Neither example is permitted under the Tax Code. The next slide shows how to do this properly.

403(b) Plan EXAMPLE 3: Same as above except that the reward is $150/month in cash rather than a deposit to Ted’s 403(b) plan. Ted voluntarily deposits the $150/month into his 403(b) account. This is permitted if the school district has a “cash out” option in its cafeteria plan document. Ted must have an effective option to keep the cash. Income tax, ACA and IPERS implications will depend on whether this is an “opt out” plan or a “rewards/flex credit” plan.

REVIEW OF ACA EMPLOYER MANDATES

ACA Mandates Review To avoid the §4980H(a) penalty: Offer “Minimum Essential Coverage” To full time employees and their dependents To avoid the §4980H(b) penalty: The available Self-only coverage must be: Affordable Provide Minimum Value (pays 60% of medical expenses)

Affordability What is “affordable” Employee’s contribution for self-only coverage; Must be less than 9.66% (for 2016) of the employee’s household income Using 9.5% of W-2 Compensation is a “safe harbor” Example: Employee’s W-2 Compensation: $2,000/month Employee’s contribution for coverage:$200/month $200 ÷ $2,000 = 10.0% NOT AFFORDABLE

Affordability If not “affordable” AND the Employee: Waives coverage; and Receives subsidized coverage on the Public Marketplace The school district will pay a $3,240 (2016 index) penalty for THAT EMPLOYEE

Affordability The Employee’s share of Cost of Coverage is reported on Form 1095-C Line 15

Affordability IRS Notice (Issued December 16, 2015) Provides guidance on what is entered on Line 15 when: the employee can opt-out of coverage and receive cash or some other reward; or The employee can choose between coverages and receive cash or some other reward for taking less expensive coverage

Types of Rewards The type of reward provided impacts the treatment Cash Pre-tax benefits Major Medical Insurance Premiums Group Dental, Vision or Group Term Life Insurance Premiums Health Flexible Spending Account Dependent Care Account Deposits to a Health Savings Account (if otherwise eligible) Health-Only benefits Major Medical Insurance Premiums Group Dental or Vision Insurance Premiums Health Flexible Spending Account

Opt Out Plan

What is an “Opt-Out” plan? The employee receives a reward for waiving coverage The employee can “opt out” (waive all coverage) And receive cash, pre-tax benefits or health-only benefits

Opt Out Plan Anytime Cash Is a Reward (Whether or not the employee actually receives cash) Reward amount IS ADDED to Line 15 Cost of Coverage Reward amount IS IPERS covered wages (unless dual coverage exception on the next slide applies) If they take the CASH: Reward amount IS subject to: Federal & State income tax and FICA and Medicare taxes

Special IPERS Exception for Dual Coverage NOT IPERS covered wages if: The employee can only waive coverage if the employee submits proof of other coverage. IAC (6)

Opt Out Plan Pre-Tax Benefits Only (No Cash Out) Reward amount IS ADDED to Line 15 Cost of Coverage Reward amount IS NOT IPERS covered wages Reward amount IS NOT subject to income taxes or employment taxes

Opt Out Plan Health-Benefits Only (No Cash Out) Reward amount IS NOT added to Line 15 Cost of Coverage Reward amount IS NOT IPERS covered wages Reward amount IS NOT subject to income taxes or employment taxes

Opt Out Plan EXAMPLE #1 Ted must contribute $200 per month to purchase self-only coverage. If he waives coverage, he receives $150 cash Line 15 Contribution for Coverage for Ted is $350 ($200 + $150) Covered IPERS wages for Ted is increased $150 (unless Dual Coverage exception applies) Income and employment taxes: If Ted elects coverage – no income tax If Ted elects cash – taxable compensation is increased by $150

Opt Out Plan EXAMPLE #2 (no cash out option) Ted must contribute $200 per month to purchase self-only coverage. If Ted waives coverage, Ted receives $150 which Ted can use for Pre-Tax Benefits only Line 15 Contribution for Coverage for Ted is $350 ($200 + $150) Covered IPERS wages for Ted is NOT increased Ted’s income and employment taxes are NOT increased

Opt Out Plan EXAMPLE #3 (Health-Only Benefits option) Ted must contribute $200 per month to purchase self-only coverage. If he waives coverage, he receives $150 which Ted can use for Health-Only Benefits Line 15 Contribution for Coverage for Ted remains $200 ($200 + $0) Covered IPERS wages for Ted are NOT increased Ted’s income and employment taxes are NOT increased

Rewards/Flex Credit Plan

What is a “Rewards/Flex Credit” plan? The Employee receives a reward for taking less costly coverage.

Rewards/Flex Credit Plan A “rewards” plan and a “Flex Credit” plan are the same thing. Rewards plan example: If Ted chooses Benefit Package A, Ted gets no reward. If Ted chooses Benefit Package B, Ted gets a $150 reward Flex Credit plan example: Ted gets $150 of flex credits Benefit Package A costs $150 flex credits Benefit Package B costs $0 flex credits. Ted can use his remaining $150 flex credits as a reward.

Rewards/Flex Credit Plan The difference between an Opt Out plan reward and a Rewards/Flex Credit Plan reward is: An Opt Out plan reward may INCREASE the Line 15 Employee Contribution to Cost A Rewards/Flex Credit plan reward may DECREASE the Line 15 Employee Contribution to Cost

Rewards/Flex Credit Plan Again, Anytime Cash Is a Reward: (Whether or not the employee actually receives cash) Reward does NOT reduce Line 15 Cost of Coverage Reward amount IS IPERS covered wages If they take the CASH: Reward amount IS subject to: Federal & State income tax and FICA and Medicare taxes

Rewards/Flex Credit Plan Pre-Tax Benefits Only (No Cash Out) Reward amount does NOT reduce Line 15 Cost of Coverage Reward amount IS NOT IPERS covered wages Reward amount IS NOT subject to income taxes or employment taxes

Rewards/Flex Credit Plan Health-Benefits Only (No Cash Out) Reward amount REDUCES Line 15 Cost of Coverage Reward amount IS NOT IPERS covered wages Reward amount IS NOT subject to income taxes or employment taxes

Rewards/Flex Credit Plan EXAMPLE #1 Ted must contribute $200 per month to purchase self-only coverage. If Ted takes Coverage B instead of Coverage A Ted receives $150 cash Line 15 Contribution for Coverage for Ted REMAINS $200 Covered IPERS wages for Ted is INCREASED by $150 Income and employment taxes: If Ted elects Coverage A – no income tax If Ted elects Coverage B – taxable compensation is increased by $150

Rewards/Flex Credit Plan EXAMPLE #2 (No cash out option) Ted must contribute $200 per month to purchase self-only coverage. If Ted takes Coverage B instead of Coverage A Ted receives $150 which Ted can use for Pre-Tax Benefits only Line 15 Contribution for Coverage for Ted REMAINS $200 Covered IPERS wages for Ted is NOT increased Ted’s income and employment taxes are NOT increased

Rewards/Flex Credit Plan EXAMPLE #3 (Health-Only Benefits Option) Ted must contribute $200 per month to purchase self-only coverage. If he takes Coverage B instead of Coverage A Ted receives $150 which Ted can only use for Health- Only Benefits Line 15 Contribution for Coverage for Ted IS REDUCED to $50 ($200 - $50) Covered IPERS wages for Ted are NOT increased Ted’s income and employment taxes are NOT increased

Compliance Issues

Special Rule for Health FSAs Employer Contributions to a Health FSA account are limited to: The greater of: $500, or 100% of Ted’s salary deferral for Health FSA benefits Amounts over which an employee has a cash election are considered EMPLOYEE contributions and are subject to the $2,550 (for 2016) employee contribution limit

Discrimination Issues Not all employees need to receive the same benefit amounts. Example: Administrative Staff receive $500 Reward Non-administrative staff receive $350 Reward Employees covered under a collective bargaining agreement may be considered separately.

Discrimination Issues At least 50% of non-union employees must receive benefits greater or equal to the largest benefits received by any Highly Compensated Employee May be less than 50% in come cases Highly Compensated means any of the following: Compensation higher than $120,000/year An officer A more than 5% owner A spouse or dependent of any of the above For most school districts, only the Superintendent will be Highly Compensated.

IPERS Rules IPERS limits the amount of employer contributions made for Highly Compensated Employees that may be considered covered wages IAC (5)

Document Issues As an ERISA plan, the language in your plan document and Summary Plan Description must always authorize and reflect what you are doing in practice.

Effective Dates The rules for Opt Out plans that were “in place” on December 16, 2015 are effective after final regulations are issued. It is possible that a distinction may be drawn between “unconditional” plans and plans that condition opt out payments on proof of other coverage. It is anticipated that final regulations will be issued soon (within a few months). The rules for Rewards/Flex Credit plans are effective for plan years beginning on or after January 1, 2017 if the plan had been “in place” on December 16, Special IRS guidance on what it means to be “in place” on December 16, 2015 The rules are effective immediately for new plans.

New IPERS Annual Certification Effective January 1, 2017, employers must annually certify to IPERS, on a form approved by IPERS, that their Section 125 plans meet all IRC requirements.

Planning Options

Problem: To preserve affordability, the ability to elect cash or other benefits must be limited. Effect: Because of these restrictions, some employees may forfeit benefit dollars they cannot use. Solution: Use part of the Reward to satisfy affordability by restricting its use to “medical only” benefits. The remainder of the Reward can be used for cash or other benefits.

Planning Options Opt Out Example: New Plan Design – If Ted Opts Out of coverage he gets $75/month in cash and a “medical only” benefit amount of $75/month ACA Affordability Analysis- Ted’s contribution for coverage: $100/month Cash Ted received or could have received: $75/month Cost of Ted’s Coverage: $175/month $175 ÷ $2,000 = 8.75% AFFORDABLE

Planning Options Reward/Flex Credit Example: New Plan Design – If Ted elects Benefit Package B, he gets $75/month in cash (or other benefits) and $75/month limited to “medical only” benefits ACA Affordability Analysis- Ted’s contribution for coverage:$250/month Contribution received for Ted: $75/month Cost of Ted’s Coverage:$175/month $175 ÷ $2,000 = 8.75% AFFORDABLE

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