T HE K INNEY F IRM MARK J. KINNEY (952) Health Care Law Developments and the Impact on Public Employers South Central Service Cooperative April 2, 2013

2 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Introduction The 2,000-page Patient Protection and Affordable Care Act (ACA) was passed on March 23, ,000 pages of regulations have been issued to date 828 pages were issued in one day this March Much is in proposed form and much will change Many key issues have not been addressed

3 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Effective Dates for Schools IF you offered coverage to at least one third or more of your employees during the last open enrollment period THEN the “pay or play” rules described in this presentation do not apply until the first day of your plan year beginning in 2014 HOWEVER you must begin measuring hours of service no later than July 1, 2013 if your plan year begins on July 1, 2014 BEST PRACTICE requires that you begin measuring hours of service before July 1, 2013 so you have time to conduct open enrollment during an administrative period RECOMMENDATION is to begin measuring hours of service in April 2013

4 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Who Must be Offered Coverage? To avoid penalties, applicable large employers (generally, with 50 or more full-time employees or FTE equivalents) must offer coverage to: –At least 95% of all common law employees who: work at an average of 30 hours per week during the academic year –This may include: Substitute teachers Paraprofessionals Clerical and administrative personnel Bus drivers/cooks/custodians

5 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Measuring Hours of Service to Determine Full-Time Employees A full-time employee means persons who work an average of 30 hours per week Hour of service includes: –Each hour for which the employee is paid, or entitled to payment; and –Each hour for which the employee is paid, or entitled to payment, for vacation, holiday, sick time, disability, jury duty, military duty, or leave of absence (up to 160 continuous hours) Three possible methods for non-hourly workers: –Actual hours worked (if they can be measured) and non-worked hours for which he or she is paid, or entitled to payment –Days-Worked Equivalency – Credit 8 hours of service per day for each day for which the employee would be credited with at least one hour of service –Weeks-Worked Equivalency – Credit 40 hours of service per week for each week for which the employee would be credited with at least one hour of service

6 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Special Rule for Educational Institutions/Miscellaneous Applicable employment period is the academic year For purposes of determining average hours, the measurement period must exclude summer break In the alternative, the educational organization may credit hours during the break period equal to hours worked during the academic year (but not more than 501 hours need be credited) IRS and HHS is considering customized guidance across a wide range of professions, ranging from pilots to commissioned salespersons

7 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Penalty Scheme for Large Employers The $2,000 penalty for failure to offer coverage to full-time employees –When an applicable large employer fails to offer minimum essential coverage to at least 95% of all full-time employees and at least one full time employee receives a premium tax credit or cost-sharing reduction from an exchange, a monthly assessable payment is determined as follows: 1/12 of $2,000 X (# Full Time Employees - 30) The $3,000 penalty –When an applicable large employer offers minimum essential coverage that is not “affordable” for some employees or does not provide “minimum creditable coverage,” a monthly assessable payment is determined as follows: 1/12 of $3,000 X # Full Time Employees who enroll on exchange and receive tax credits or cost-sharing reductions

8 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Example: School District A in 2014 School District A provides group health coverage for 100 of its full-time employees, which it currently defines as employees who work 32 hours per week. School District A employees 15 employees who work at least 30 hours per week but less than 32 hours. They must be offered coverage. Option 1: Offer coverage to the 15 employees –Average cost to employer: $6,000 per employee –Cost to provide coverage: $90,000 per year –Total cost (115 FTEs x $6,000): $690,000 per year

9 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Failure to Cover All Full-Time Employees, Cont. Option 2: Decline coverage to the 15 employees –Assessable payment: $2,000 x (115 FTEs - 30) = $170,000 –Cost of coverage for 100: $600,000 (100 x $6,000) –Total Cost: $770,000 Option 3: Provide no coverage –Assessable payment: $170,000. –May not be an option under collective bargaining agreements. –Many will not be eligible for subsidies on the Exchange.

10 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Option 4: Manage Hours

11 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Option 4: Manage Hours (Cont.)

12 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Impact of of Employer Contributions

13 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Impact of Employer Contributions (2)

14 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Safe Harbor Rules: Determining Full- Time Status of Ongoing Employees Step 3: Provide coverage during a “stability period” regardless of actual hours At least 6 months in durationNot shorter than look-back period Step 2: Determine who is a full-time employee during the look-back period Average at least 30 hours of service per week Step 1: Determine Standard Measuring Period (look-back period) Not less than 3 monthsNot more than 12 months

15 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Administrative Period Employers may separate the Standard Measurement Period and the Stability Period by an Administrative period Purpose of the Administrative Period is to allow time to identify who is eligible and conduct enrollment Administrative Period may be up to 90 days The Administrative Period should fall within the end of a Stability Period to avoid any loss of coverage

16 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 New Employees If an employee is reasonably expected at his or her start date to work full-time, an employer must offer coverage no later than the end of the 90-day waiting period. If it cannot be determined on the start date whether the employee is reasonably expected to work on average at least 30 hours per week (a “variable hour employee”), –The employer may use a measurement period of between 3 and 12 months and an administrative period of up to 90 days. –The measurement period and the administrative period combined may not extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s start date (at most 13 months plus a partial month). –The stability period for such employees must be the same length as the stability period for ongoing employees.

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18 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Contract and Collective Bargaining Issues Minn. Stat. Sec. 179A.20, Subd. 3, provides as follows: “A contract between a school board and an exclusive representative of teachers shall contain the teachers' compensation including fringe benefits for the entire two-year term and shall not contain a wage reopening clause or any other provision for the renegotiation of the teachers' compensation.” No collective bargaining agreement should be finalized in 2013 before the employer’s liability for all employees is clear Contracts with other staff may include reopening clauses

19 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Possible Reopener Language (other than for Teachers contracts) Final regulations have not been issued under many provisions of the Patient Protection and Affordable Care Act (ACA). This creates considerable uncertainty regarding the Employer’s financial obligations. This agreement may be reopened and all material terms of compensation, hours, and fringe benefits (include health benefits) may be subject to negotiation and change as reasonably necessary to comply with the ACA and to address any increase in cost that the ACA may require.

20 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Cost of Coverage on the Exchange for a Family of Four Federal poverty level for a family of four in 2013: $23,550 FPL %Household IncomePremium %Monthly Cost 133% $31, %$ % $35, %$ % $47, %$ % $58, %$ % $70, %$ % $94, %$ Over 400%: No cap on premiums; rules prohibit pre-tax contributions

21 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Effect on Employees of Plan Termination

22 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Modified Adjusted Gross Income (MAGI) Wages, Salary Interest Dividends Alimony and Separate Maintenance Payments Life Insurance and Endowment Contracts Estate or Trust Interest Income Interest on State and Local Bonds (tax exempt interest) Prizes or Awards Reimbursement of Moving Expenses Unemployment Compensation

23 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Partially included in MAGI Social Security and Tier 1 Railroad Retirement Benefits Annuities Pension benefits Partnership Gross Income (less deductions) Earned Income of U.S. Citizens Living Abroad Retirement contributions Business (Including Property, Rental, or Royalties) Income (less deductions)

24 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Excluded from MAGI Income from Discharge of Indebtedness Gifts and Inheritance Death Benefits Cafeteria Plans Certain Fringe Benefits Contributions to Defined Contribution Plans

25 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Nondiscrimination Rules The ACA subjects non-grandfathered fully-insured plans to nondiscrimination rules under Section 105(h) of the Internal Revenue Code This means that employers must make identical contributions towards health insurance coverage for all non-collectively bargained employees Penalty is excise tax on employer of $100 per day Would have been effective for plan years beginning after September 23, 2010 IRS guidance issued in December, 2010 delayed effective date until further notice

26 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Cadillac Tax Effective 2018 Employers will pay 40% excise tax on plan costs in excess of statutory thresholds Thresholds are $10,200 for single coverage and $27,500 for family Thresholds are indexed for inflation beginning in 2020 but the index used is lower than health care inflation Plans will be forced to reduce benefits Consider in collective bargaining

27 C OPYRIGHT © 2013 MARK KINNEY A PRIL 2, 2013 Notice Pursuant to Treasury Department Circular 230, and Disclaimer To comply with certain Internal Revenue Service ("IRS") rules, we must inform you that any U.S. federal tax advice contained in this presentation, including handouts or verbal explanation, is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the IRS. Under IRS rules governing tax advice, a taxpayer may rely on professional advice to avoid federal tax penalties only if that advice is provided in a tax opinion that conforms with extensive federal requirements. We understand that you do not intend to use or refer to anything contained in this presentation to promote, market, or recommend any particular entity, investment plan, or arrangement. DISCLAIMER: This presentation is intended for general information purposes only. It does not create an attorney-client relationship and should not be construed as legal advice or legal opinions on any specific facts or circumstances.