Healthcare Reform: What Employers Need to Know September 18, 2013 First slide is simply function, name, title Kara M. Craig, Staff Counsel Advancing HR Strategies to Build Organizational Success © 2013 Washington Employers. All rights reserved

PPACA: Affordable Care Act (ACA) The goal of ACA is to improve the quality of healthcare and lower healthcare costs Biggest regulatory change since the FLSA was passed in 1938 Many requirements become mandatory in 2014 Large Employers have until 2015 to consider “Play or Pay” strategy The stated goals for the ACA are to improve the quality of healthcare and lower healthcare costs. It is the biggest regulatory change since the Fair Labor Standards Act was passed in 1938. And, although the argument about the law is ongoing, it is the law of the land. We want to share with you the number of requirements that become effective for your 2014 benefits plan year. One requirement delayed until 2015 is the employer responsibility provision, giving employers an additional year to consider their total rewards strategy and to make the changes each sees is necessary.

ACA Timeline March 23, 2010: Signed into law by President Obama June 28, 2012: Supreme Court ruled it was constitutional October 1, 2013: Healthcare Exchanges Operational January 1, 2014: Majority of provisions become effective January 1, 2015: Employer Mandate effective January 1, 2018: Beginning of Cadillac tax Still putting the pieces of a moving target together… implementation of portions of ACA delayed 19 times since 2010 and last minute guidance being issued daily PPACA = Patient Protection and Affordable Care Act Goal: Quality Affordable Health Care for All Americans March 23, 2010: Signed into law by President Obama June 28, 2012: Supreme Court ruled it was constitutional January 2014: Majority of provisions become effective January 2015: Employer Mandate effective January 2018: Beginning of Cadillac tax

What Is The ACA? GOALS: Broaden marketplace Establish standard health plan Guarantee coverage Allow for comparison shopping Free preventative care Federal subsidies to low income citizens The most significant government expansion and regulatory overhaul of the U.S. healthcare system since the passage of Medicare and Medicaid in 1965. The aim is to increase the rate of health insurance coverage for Americans and reducing the overall costs of health care. It provides a number of mechanisms—including mandates, subsidies, and tax credits—to employers and individuals to increase the coverage rate.

Key Provisions Essential Health Benefits: 10 benefits that must be included in every healthcare plan Minimum Value: Plan must pay at least 60% of costs Affordable Coverage; no more than 9.5% annual income Dependents covered to Age 26 No exclusions due to pre-existing conditions Guaranteed Coverage / Renewability Annual and Lifetime Coverage Caps Eliminated Essential Health Benefits: 10 benefits that must be included Minimum Value: Plan must pay at least 60% of costs Affordable Coverage Dependents Covered to Age 26 Guaranteed Issue: No exclusions due to pre-existing conditions Guaranteed Coverage / Renewability

Key Provisions Maximum 90-Day Waiting Period Health Insurance Exchanges Established Play or Pay: Large employers (more than 50 employees) must offer healthcare benefits to full-time employees Individual Mandate: Everyone must have health insurance Small Business Tax Credit Shared Responsibility Wellness Incentives Annual and Lifetime Coverage Caps Eliminated Maximum 90 Day Waiting Period Health Insurance Exchanges Established Play or Pay: Large employers (more than 50 employees) must offer healthcare benefits to full-time employees Individual Mandate: Everyone must have health insurance Shared Responsibility Wellness Incentives

Program Overview How the ACA’s Goals are Accomplished: Reform insurance markets Establish new state-based exchanges Impose Individual and Employer Mandates Impose new taxes/“shared responsibility” Reporting and disclosure requirements

Reform Insurance Market Subtitle Sample Advancing HR Strategies to Build Organizational Success © 2013, Washington Employers. All rights reserved

Reform Insurance Market Already Implemented Dependents can stay on parent’s coverage to age 26 Lifetime maximums eliminated for “essential health” benefits Premiums cannot be raised due to health condition change Children under age 19 cannot be denied coverage for pre-existing conditions

Reform Insurance Market What is coming? Qualified Health Plan – “QHP” 10 Essential Benefits Ambulatory patient services Emergency Services Hospitalization Maternity and newborn care Mental health and substance abuse disorders Prescription drugs Rehabilitative services and devices Laboratory Services Preventive, wellness and chronic disease management services Pediatric services, including oral and vision care

Reform Insurance Market What is coming Health Savings Account (HSA) and Flexible Spending Account (FSA) limits High deductible limits on small employers (less than 50 FTEs) $2,000 (individual) $4,000 (family) Elimination of annual limits on Essential Benefits Elimination of 90+ day enrollment waiting periods Full time defined as 30 or more hours per week (130 hrs/mo.) for ACA calculations Clear and understandable Summary of Benefit Coverage “SBC”

Establish New State-based Health Exchanges Subtitle Sample Advancing HR Strategies to Build Organizational Success © 2013, Washington Employers. All rights reserved

Health Exchange What is it? ONLINE one-stop marketplace to comparison shop and buy healthcare coverage Objective: Drive lower prices Each state will have one Operational by October 1, 2013 Self-sustaining by 2015 through individual assessments or user fees

Health Exchange Who can use the Exchange? 2014 – individuals and small employers (< 50 FTEs) 2016 – employers (less than 100 FTEs) 2017 – all employers

Health Exchange What is provided? Plans with at least 60% minimum actuarial value (plan’s share of total allowed costs of benefits provided under the plan must be at least 60 percent of such costs) 4 health plan levels in metal rankings: Bronze = 60% coverage of total allowed plan costs Silver = 70% coverage of total allowed plan costs Gold = 80% coverage of total allowed plan costs Platinum = 90% coverage of total allowed plan costs

Health Exchange Adequate and Affordable Those employed with “60%” health plan and “affordable” premium typically would not go to exchange Affordable – costs no more than 9.5% of household income Example: Single minimum wage earner makes $9.19 per hour. $9.19 x 130 hours (FT) = $1,194.70 per month. $1,194.70 x .095 = $113.50. “Affordable” if employee’s premium costs less than $113.50 per month. But see W-2

Health Exchange Washington State WA State: Washington Healthplanfinder Currently 7 insurers approved, offering 35 plans; awaiting federal certification of 8 additional plans Two sides to exchange: Individual and Employer (SHOP – Small Business Health Options Program) Open enrollment is 10/1/13 for 1/1/14 coverage

Health Exchange Individual Side Individual Subsidies available to low income (between 133% and 400%) of federal poverty level Must purchase coverage through exchange to receive 2013 Federal Poverty Level

Health Exchange Small Employer Side Small Business Health Options Program (SHOP) - one plan available at this time Kaiser Family Health Plan of NW Online assistance, call center, office of navigator or broker Can only buy for full-time employees, not part-time Small Business Tax Credit in 2014 Small Employer = Less than 25 FTEs Pay average wages less than $50,000 Pay at least 50% of premium Maximum 50% credit; 35% for tax-exempt small employers

Health Exchange Small Employer Side Full 50% credit given to employers with less than 11 FTEs and pays average wages less than $25,000 (excludes owner) Must enroll in exchange to qualify for tax credit Only available 2014 and 2015 Can carry the credit back or forward to other tax years Can claim a business expense deduction for the premiums in excess of the credit

Health Exchange Notices ACA states that all employers SHALL provide all their employees by Oct. 1 of each year, and all new employees at the time of hire, a written notice informing them of the following: Information about government-run health care exchanges, including services provided and how employees may contact an exchange to request assistance. If employer does not offer a “60%” plan, workers may be eligible for a premium tax credit if they purchase a qualified health plan through an exchange. Employees who purchase a plan through an exchange may lose their employer’s contribution. All or a portion of this contribution may be excluded from income for federal income tax purposes. The PPACA has a $100-a-day penalty for noncompliance; BUT, as of September 13, 2013 the DOL has said, “there is no fine or penalty under the law for failing to provide the notice.”

Mandates Subtitle Sample Advancing HR Strategies to Build Organizational Success © 2013, Washington Employers. All rights reserved

Mandates Individual Must buy at least “60%” minimum value coverage in or out of the exchange or pay penalty Exemptions: Religious grounds Native Americans Incarcerated Undocumented immigrants Gap in coverage for less than 3 months in a year Coverage costs more than 8% of income or below FPL

Mandates Employer Small Employer – NO MANDATE Large Employer must offer to 95% of its full-time employees (and their dependents) at least “60%” coverage AND it must be “affordable;” otherwise pay penalty. Large Employer = 50 or more Full-Time-Equivalents (FTEs) Full-time Employee = 30 hours or more per week Monthly Full-time Equivalent = 130 hours Part-time employees counted in fractional units to determine if large employer. Total hours worked divided by 120 hours.

Mandates Employer Seasonal (non-leased) employees counted if they work more than 120 days in calendar year; 6 month look-back. Headcount excludes: Leased (temp) employees Sole proprietor Independent contractors Partners in partnership 2% “S” Corporation shareholders Employees working outside the U.S.

Mandates Employer Measurement Periods Standard Measurement Period – to determine who is a full-time employee; up to 12 months; use for ongoing Initial Measurement Period: between 3–12 months; use for variable and seasonal employees Stability Period: at least 6 consecutive calendar months, same length as Standard Measurement Period Administrative Period: up to 90 days between measurement and stability period; use for eligibility determination, employee notification and enrollment Here are the definitions of each type of measurement period: Standard Measurement Period: up to 12 months; use for ongoing employees Initial Measurement Period: between 3 – 12 months; use for variable and seasonal employees Stability Period: at least six consecutive calendar months, same length as Standard Measurement Period Administrative Period: up to 90 days between measurement and stability period; use for eligibility determination, employee notification and enrollment Still with me? Let’s do a calculation next….

Mandates Employer Grandfathered Plans: Plan must have been in existence in 2010 Part of collective bargaining agreement Still required to make additional changes for 2014: Offer dependent coverage through age 26 Eliminate annual aggregate benefit limits Eliminate pre-existing condition limitations Waiting period no greater than 90 days May elect to comply with all ACA requirements Can lose grandfathered status Only about 10% of all healthcare plans in existence in 2010 are still grandfathered. How many in this room? How many don’t know? Next: The changes that would cause you to lose grandfathered status

Mandates Employer A Word about COBRA… All COBRA provisions (including notifications) remain intact Don’t assume COBRA will go away COBRA coverage may cost less than plans in the Exchange COBRA useful if more than 3 month gap that would incur an individual penalty COBRA is better option if annual deductible already met Dependent COBRA coverage up to 36 months, or age 29 after losing dependent eligibility at age 26 And just a few words about how this all affects COBRA: All provisions (including notifications) remain intact Don’t assume COBRA will go away COBRA coverage may cost less than in the Exchange COBRA useful if more than 3 month gap that would incur an individual penalty COBRA is better option if already met annual deductible – example: if employee is laid off in September Dependent COBRA coverage up to 36 months, or age 29 after losing dependent eligibility at age 26

New Taxes or “Shared Responsibility” Subtitle Sample Advancing HR Strategies to Build Organizational Success © 2013, Washington Employers. All rights reserved

New Taxes – Shared Responsibility Individual Individual Penalty per year, whichever is greater: 2014 - $95 per person or 1% of household income 2015 - $325 per person or 2% of household income 2016 & beyond - $695 per person or 2.5% of household income For each dependent under 18 penalty is half Paid as a federal tax liability on income tax return Individuals who fail to pay not subject to criminal penalties or prosecution, property liens or levies

New Taxes – Shared Responsibility Family Family Penalty per year, whichever is greater: 2014 - $285 per family or 1% of household income 2015 - $975 per family or 2% of household income 2016 & beyond - $2,085 per family or 2.5% of household income Family Penalty capped at 3 times Individual Penalty. Example: Married couple with 2 children under 18, a single parent with 4 children under 18 and larger families all subject to same flat dollar maximum amount The distinction is higher incomes pay higher penalties

New Taxes – Shared Responsibility Large Employer Large employer shared responsibility penalties and reporting requirements delayed until 2015 Must still comply with all other 2014 ACA provisions Large Employer Penalties if employer-offered coverage: Is not affordable; Is not offered to 95% or more of eligible employees; or Does not meet minimum value (at least 60% of healthcare costs covered or “bronze” plan) Delay for large employer shared responsibility penalties until 2015 Reporting requirement for whether healthcare coverage was offered also delayed until 2015 Per the IRS: Voluntary reporting in 2014 is encouraged Must still comply with all other 2014 ACA provisions: ideal for taking a strategic look at all your benefits

New Taxes – Shared Responsibility Large Employer Two Levels of “Play or Pay” Do Not Play at All Offer no health coverage Penalty Calculation: Number of FTEs – first 30 x $2,000 Example: Company has 70 employees and decides not to offer coverage. (70 – 30 = 40) 40 x $2,000 = $80,000 per year

New Taxes – Shared Responsibility Large Employer Second Level of “Play or Pay” Do Not Play by the Rules Offer less than “60%” coverage AND an employee goes to Exchange and receives subsidy Offer “60%” coverage, but plan is not “affordable” AND an employee goes to Exchange and receives subsidy Penalty Calculation: Number of FTEs receiving subsidy times $3,000

New Taxes – Shared Responsibility Large Employer “Adequate” AND “Affordable” Example: Company has 70 employees. It offers 60% minimum value coverage, but the employee-only premium cost is greater than 9.5% of W-2 income for 10 employees and all seek coverage through the exchange and receive a subsidy. 10 x $3,000 = $30,000 per year

New Taxes Insurers Cadillac Tax coming in 2018 – tax on rich benefit plans PCORI Fee (Patient-Centered Outcomes Research Institute) to fund research on improving health care delivery Reinsurance Program Fee to help stabilize individual market premiums (offset risk of high cost enrollees)

Reporting and Disclosure Subtitle Sample Advancing HR Strategies to Build Organizational Success © 2013, Washington Employers. All rights reserved

Reporting and Disclosure Employers So far…. Effective 2015 Tax Year Report cost of coverage under an employer-sponsored group health plan on an employee’s W-2 in Box 12. Amount is not taxed; reporting is for informational purposes only, to show employees the value of their health care benefits. Large Employers must identify FTEs covered and report cost of benefits on Section 6056 Form – guidance to be issued.

Summary of 2014 Key Provisions Subtitle Sample Advancing HR Strategies to Build Organizational Success © 2013, Washington Employers. All rights reserved

2014 Provisions Summary Essential Health Benefits: 10 benefits that must be included with no annual limits (still may have visit limits) Minimum Value: Plan must pay at least 60% of costs Affordable Coverage (no more than 9.5% of income) Dependents covered to age 26 Guaranteed issue, coverage and renewability: No exclusions due to pre-existing conditions High deductible plans for small employers cannot exceed $2,000/$4,000

2014 Provisions Summary Annual and Lifetime Coverage Caps Eliminated Maximum 90-Day Waiting Period Play or Pay: Large employers (more than 50 employees) must offer healthcare benefits to full-time employees Shared Responsibility Increase in small business tax credits (SHOP) Individual Mandate: Everyone must have health insurance Wellness Incentives

Employers: What To Do Now Subtitle Sample Advancing HR Strategies to Build Organizational Success © 2013, Washington Employers. All rights reserved

What To Do Now Employers Calculate FTEs for 2013 For under 50 FTEs – check out the exchange or continue as usual For under 25 FTEs – look into tax credit for 2014-2015 if using exchange For 50 FTEs and over If provide affordable health care, continue as usual. Adjust full-time definition and waiting periods by end of 2014

What To Do Now Employers If new rules result in cost increases for over 50 employers: Ask for “Play or Pay” analysis from broker Consider cost stabilization measures: Restrict part-timers to 29 hours per week or move part-timers (eg. 30 to 34 hours) to represent 5% of workforce. (Use safe harbor rule). Offer coverage only to “hard to replace” workforce. Remaining use exchange and you pay penalty. Offer more than one level of coverage, based on job categories. Example: 60% for part-time and variable workforce and 80% for full-time.

What To Do Now Employers Vary employer contribution levels by income level to avoid “unaffordable” penalty. Allow lower-income employees to receive subsidies from the exchange and pay penalty. Increase deductibles, modify plan reimbursement levels or increase employee contributions. Cut work hours below 30? Be aware ERISA (Sec. 510) makes it unlawful to interfere with employee entitlements under employee benefit plan.

What To Do Now Employers Stop providing health coverage and gross up salaries and pay penalty. Caution: Employer and employee will no longer receive tax exemption on benefit costs. Stop health coverage and pay penalties. Only 6% of employers surveyed in 2012 planned to drop coverage; 9% in retail/hospitality industry. (Mercer Survey of 1,203 employers) Caution: Employer and employee no longer will receive tax benefits. Fallout: Can you still compete in the labor market?

What To Expect Employees A more expensive price tag  More options for coverage  Consumer-driven health plans vs. HMOs Programs that promote health awareness and education  More incentive opportunities for exhibiting healthy behaviors  New eligibility rules  Personal responsibility!

What To Do Now Communication Once you make your decisions related to ACA compliance and healthcare, communicate with your employees: Model Exchange Notice Mandated Plan Documents Current Benefits Offerings 2014 Changes to Benefits Offerings Possible 2015 Changes (if known) WHY Changes Are Being Made Model Exchange Notice: Must distribute by October 1, 2013 (just over six weeks from now!) Model employee notice handout in your packet. Must issue to all employees Must issue to new hires within 14 days of hire Notice explains: - Existence of exchange (WA Healthplanfinder) - Description of services - Manner in which employee makes contact for help Clear and understandable Summary of Benefit Coverage “SBC” - Only 4 double sided pages, 12 point font or larger - Goal is to provide side by side comparison - Provided by insurance companies

Resources For More Information: Washington Healthplanfinder: wahbexchange.org Kaiser Family Foundation: kff.org U.S. Department of Health & Human Services: healthcare.gov For More Information: www.sba.gov/healthcare www.irs.gov/aca www.dol/ebsa/healthreform http://www.wahealthplanfinder.org

Questions? How to Reach Me: Kara M. Craig Staff Counsel Washington Employers Direct Line: (206) 664-7258 kcraig@wa-emp.com Here is my contact information if you want to reach me with questions, etc. I am very active on LinkedIn, so please feel free to connect with me! And I will be here after we are finished if you have a question.

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