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2. Presented by:
Joy Napier-Joyce (Baltimore)
Kathleen Reilly Barrow (Omaha/Rapid City)
February 12, 2013
Analyzing Employer Obligations under the Shared Responsibility Rules of Health Care Reform

3. About the Firm
Represents management exclusively in every aspect of employment, benefits, labor, immigration law and related litigation
Over 750 attorneys in 52 locations nationwide
Current caseload of over 6,500 litigations and approximately 415 class actions
Founding member of L&E Global

4. Disclaimer
This presentation provides general information regarding its subject and explicitly may not be construed as providing any individualized advice concerning particular circumstances. Persons needing advice concerning particular circumstances must consult counsel concerning those circumstances. Indeed, health care reform law is highly complicated and it supplements and amends an existing expansive and interconnected body of statutory and case law and regulations (e.g., ERISA, IRC, PHS, COBRA, HIPAA, etc.). The solutions to any given business’s health care reform compliance and design issues depend on too many varied factors to list, including but not limited to, the size of the employer (which depends on complex business ownership and employee counting rules), whether the employer has a fully-insured or self-funded group health plan, whether its employees work full time or part time, the importance of group health coverage to the employer’s recruitment and retention goals, whether the employer has a collectively-bargained workforce, whether the employer has leased employees, the cost of the current group health coverage and extent to which employees must pay that cost, where the employer/employees are located, whether the employer is a religious organization, what the current plan covers and whether that coverage meets minimum requirements, and many other factors. IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.)

5. Your Presenters Today Kathleen Barrow, Partner (Omaha/Rapid City)
Over 20-years experience in ERISA employee benefit, executive compensation and employment-related tax matters
Practice focuses on employer and plan defense of IRS and DOL audits of plans, payroll and compensation systems
Over 10-years experience litigating employee plan and compensation-related tax issues before the United States Tax Court, US District Courts and Courts of Appeal
Joy Napier-Joyce, Partner (Baltimore)
Substantial experience counseling clients in a broad array of employee plan compliance matters, including welfare benefit plans, cafeteria plans, COBRA and HIPAA
Represents clients before the IRS and DOL in EPCRS applications, private letter ruling requests and letters of determinations
Provides analysis, advice and counsel on tax and securities issues arising from equity-based compensation

6. What We Will Cover
Today we will lay a foundation by discussing the concepts of shared responsibility; how to determine whether an employer is an “Applicable Large Employer”; and how to ascertain whether coverage offered meets the requirements necessary to avoid any potential penalties
Next month, we will discuss, in depth, how the two potential penalties are calculated and assessed if an “Applicable Large Employer” fails to provide the type of coverage described today and a Full-Time employee is certified to receive a premium tax credit or cost sharing reduction when accessing coverage through a state exchange

7. Shared Responsibility – The Individual’s Role
“Shared responsibility” means the obligation to reform, improve and make available quality, affordable health insurance coverage to individuals is “shared” among Federal and State governments, employers, insurers and individuals
Individuals must acquire and maintain “minimum essential coverage” for each month, qualify for an exemption, or pay a penalty through their individual tax returns
The obligation to have coverage applies to all individuals, including children and seniors unless an exemption applies
An adult who claims a child as a dependent will be responsible for the penalty payment for a child who does not have minimum essential coverage

8. Shared Responsibility – The Individual’s Role
An individual will be treated as having minimum essential coverage for a month if they have such coverage for one day during that month
An individual may have one “short gap” in coverage of up to 3 months a year and not pay a penalty
An individual whose income is so low they have no tax return filing obligation has an automatic exemption from the responsibility to maintain minimum essential coverage

9. Shared Responsibility – The Employer’s Role
“Applicable Large Employers” are required to offer to “substantially all” of their Full-Time employees and their dependents minimum essential coverage that is affordable, and provides minimum value in order to avoid any potential penalties
The decision to provide compliant coverage, or pay the penalties, is often referred to as “Play or Pay”
The rules are generally effective 1/1/14; Non-calendar year plans of Applicable Large Employers must comply as of the first day of the plan year commencing in 2014

10. Shared Responsibility – The Employer’s Role
Note: The plan year must be determined as of December 27, 2012 — meaning an employer may not transition to a fiscal year plan year now to defer compliance
To be eligible, employers with fiscal year plans must show that, as of 12/27/2012, they have offered group health coverage to at least one-quarter to one-third of their employees; and
That there is no calendar year plan also in existence in the workplace that might cover the employees
Employers with fiscal year plans will still have to report all of 2014 information for Section purposes (i.e., that portion of 2013 plan year falling into 2014)—but may “count” full- time employees using current year data, rather than “look back”
2013 is an important year to determine whether an employer is an Applicable Large Employer and whether it will Play or Pay

11. Who is an Employer?
All employers that employ at least 50 Full-Time or an equivalent combination of Full-Time and Part-Time employees are subject to the Employer Shared Responsibility provision – including, for-profit, non-profit, and governmental entities
Common law standard applies as to who qualifies as an employer or employee
Comments are requested on safe harbors or transition relief for new employers—due to the fact there is no past history upon which to base 50-employee “bright line”

12. Who is a Common Law Employee?—Look to the Federal Tax Analysis
Three primary factors—
Behavioral controls
Who controls the timing, job functions, place and manner and means of the work?
Financial controls
Who controls what is charged; when the worker is paid; what expenses are reimbursed; and what tools and supplies are purchased?
Type of Relationship
Is the relationship exclusive and long-term?
Is the worker “key” to the product or service the employer provides to clients?

13. Leased Employees
Proposed regulations do not include leased (or temporary) employees under Code section 414(n) as “employees” of the recipient company for purposes of counting how many Full-Time Equivalent employees an employer employs—but
A person who is a leased or temporary employee may still be an employee for purposes of common law; and
Federal tax guidance allows for an employee to be “co- employed” by two different employer entities in some circumstances

14. Temporary Employees and Structuring
Proposed Regulations expressly warn against employers trying to avoid having 50 Full-time and FTE employees via structuring hours worked by employees with Temporary Employment Agency or employee leasing company
Proposed Regulations point to Rev. Rul —which applies the “common law” analysis to the determination whether a worker acquired from the Temporary Employment Agency is an employee of the service recipient company or the Agency
Potential liability exists under Code section 6672(a) equal to 100% of penalty amount avoided in the event structuring is deemed “willful intent to evade”

15. Other Considerations
Sole proprietors, partners and 2% S corporation shareholders are not considered employees
Disregard work performed outside of the United States
Employees living and working abroad are not taken into account
Whether predecessor employees are deemed the employees of a successor employer is decided based upon the wage attribution rules under section (a)(1)-(1)(b)—which focus upon whether employee is hired by successor employer
Note: State law may provide basis for liability of successor employer for penalty incurred by predecessor employer

16. Which Employers Might Incur A Penalty?
“Applicable Large Employers” who
Fail to offer substantially all of their Full-Time employees and their dependents the opportunity to enroll in minimum essential coverage under an “eligible employer-sponsored plan” AND have a Full-Time employee who is certified to receive a premium tax credit or cost sharing reduction (“No Offer Penalty”); or
Offer its Full-Time employees and their dependents the chance to enroll in minimum essential coverage and one or more Full-Time employees is certified to receive a premium tax credit or cost-sharing reduction because
Coverage is not affordable (employee’s individual premium exceeds 9.5% of the household income for the taxable year); or
The Plan does not provide minimum value (as defined by the Code - an actuarial calculation that looks at whether the Plan’s cost of benefits is at least 60% of the entire cost of benefits) (i.e., the “Inadequate Coverage” Penalty)

17. “Applicable Large Employer”
Only employers with 50 or more Full-Time or Full-Time Equivalent employees in the prior year are potentially subject to the penalties – “look-back”
A Full-Time employee is an individual who is expected to work at least 30 hours per week or 130 hours per month
Hours of all other, Part-Time employees must be counted to determine how many “Full-Time Equivalent employees” exist
While we consider Part-Time employees for purposes of determining whether an employer is “Large”, Part-Time employees do not need to be offered coverage
Calculation of “Full-Time Equivalent” = The aggregate hours of service in a month of all employees who work an average of less than 30 hours per week (up to 120), divided by 120 hours. The result is the number of Full- Time Equivalent employees for that month

18. “Applicable Large Employer”
Example:
For a calendar month, all employees who were not employed an average of at least 30 hours per week have a total of 1,260 hours
1,260 / 120 = 10.5 Full-Time Equivalent employees for the month

19. “Applicable Large Employer”
Average the number of employees across the months in the year to determine if the 50 employee threshold is met. Specifically, take 12 months of Full-Time employees (30 hours per week or more) + 12 months of the number of Full-Time Equivalent employees = the number of employees used to determine whether an employer is an “Applicable Large Employer”— any remaining fractional employees are disregarded in the 12 month final calculation
Transition rule exists for 2013 under which the determination can be based on any consecutive 6-month period in instead of the whole calendar year

20. Controlled and Affiliated Service Groups
All members of controlled and affiliated service groups are considered when determining whether an entity is an “Applicable Large Employer”
Code section 414
Employees of a controlled group of corporations (Code section 414(b))
Parent/subsidiary—80% ownership of stock or voting rights
Brother/sister—5 or fewer persons, trusts or estates own or are entitled to vote more than 50% of the shares of stock
Employees of partnerships or proprietorships under common control % of the decision-making power rests with the same individuals (

21. Controlled and Affiliated Service Groups
Affiliated service groups (Code section 414(m))—
A service organization and another organization that regularly performs services for (or for 3rd parties with) the first organization and is a shareholder or partner in the first organization and
Another organization that provides services to the first organization (or its affiliate as described above) and 10% or more of the ownership interest is held by highly compensated employees
Management Groups

22. Controlled and Affiliated Service Groups
If the combined total equals at least 50 Full-Time employees or Full-Time Equivalent employees, each separate employer in the group is subject to the Employer Shared Responsibility provisions.
For penalty purposes, the “first 30” exclusion also takes into account the Controlled or Affiliated Group.
The decision to Play or Pay, however, is determined separately for each member

23. Getting Into Counting Employees
Joy Napier-Joyce
Jackson Lewis Baltimore Office

24. Counting Hours – Hourly Employees
For hourly employees, count actual hours
Hours of Service include hours for which the employee was paid, but did not work (vacation, holidays, leave)
Increased importance of proper recordkeeping

25. Counting Hours for Non-Hourly Employees
Different crediting methods may be used for employees that maintain hourly time records (i.e., non-exempt employees) - Teachers subject to averaging method
Do not need to use the same method of calculation for all non-hourly employees
Can use different methods for different classifications as long as the classifications are reasonably and consistently applied
May change method used for each calendar year
The days-worked and weeks-worked equivalencies are not permitted if the result substantially understates the employee’s hours of service (i.e., those employees with a shorter work week with longer days)

26. Seasonal Employees
“Applicable Large Employer” definition is avoided if all employees in excess of 50 were employed 120 days or fewer during the calendar year; and
The employees were “seasonal” as defined by the Secretary of Labor under 29 CFR (s)(1); or
The employees were agricultural or retail employees working only during the holiday seasons
Proposed regulations state that a good faith, reasonable interpretation of “seasonal” will be accepted until further guidance—not limited to agricultural or retail workers

27. Special Classes
Educational employers – only required to take into account 501 hours of service where no services are performed (much like break in service rules for retirement plans)
Averaging method for employment break period
“Reasonable”

28. What is Required to Avoid Penalties?
Coverage must be offered to “substantially all” Full-Time employees and their dependents;
Coverage must be “Affordable” for the employee; and
Coverage must provide “Minimum Value”

29. Substantially All Full-Time Employees
The regulations provide some flexibility by allowing an employer to meet this requirement if it offers minimum essential coverage to at least 95% of its Full-Time employees and their dependents
Recognizes a margin of error – coverage will be considered to have been offered to substantially all Full-Time employees if it is offered to all but 5% or, if greater, 5 of its Full-Time employees
Applies regardless of whether failure to offer coverage was inadvertent
General substantiation and recordkeeping requirements apply to show coverage was offered

30. Dependent Coverage
Defined to mean an employee’s child (as defined in Code section 152(f)(1)) who is under age 26
Code section 152(f)(1) defines child as a son, daughter, stepson, stepdaughter, eligible foster child, and legally adopted child or an individual who is placed with the employee for legal adoption by the employee
Employers may rely on an employee’s representations regarding age and identity of children
No spousal coverage required

31. Dependent Coverage Transition Relief
If an employer offered employee only coverage, and takes steps during its plan year that begins in 2014 to offer dependent coverage, it will not be liable for any assessable penalty in solely because it failed to offer dependent coverage for that year
Recognizes that expanding coverage to dependents requires substantial revisions to plans and procedures

32. Minimum Essential Coverage
Does not include any coverage that consists of “Excepted Benefits”, which includes
Coverage only for accident and/or disability income; stand-alone dental or vision, coverage only for a specific disease or illness, hospital indemnity or other fixed indemnity insurance, or Medicare supplemental coverage.

33. Affordability
The employee’s portion of the premium for individual coverage only must be no more than 9.5% of “household income”
Affordability test applies to lowest-cost option available to the employee that meets the minimum value requirement
Does not determine if an employee is eligible for a premium tax credit
Approved Safe Harbors to determine affordability

34. Affordability
Safe harbors are optional and an employer can choose to use one or more for all of its employees or any reasonable category of employees if it does so on a uniform and consistent basis
W-2 – Affordable if the employee’s portion of the premium is no more than 9.5% of Box 1, W-2 wages determined at year- end (including wages reported by third-party payor for employer)
Can be used prospectively at the beginning of the plan year to set the employee contribution at a level that would not exceed 9.5% of W-2 wages for each employee for the year
Does not include pre-tax deferrals to 401(k) plan, 125 plan, etc.
May vary based on leaves of absences/fluctuations in hours

35. Affordability
If employee is not Full-Time for entire year, W-2 wages can be adjusted to reflect just the period when the employee was offered coverage and compared to the employee’s premium for the same period
Rate of pay – Affordable if the employee’s portion of the premium is no more than 9.5% of monthly pay or hourly rate of pay times 130 hours
Predictable and can be applied prospectively
Can only be used if the employer does not reduce the hourly or monthly wages of the employees during the year
Does not vary based on leaves of absence or fluctuations in hours

36. Affordability
Federal Poverty Line – Affordable if the employee’s portion of the premium is no more than 9.5% of the most recent federal poverty line for a single individual as of the first day of the plan year
Challenges for certain industries – expect to see groups providing comments on regulations

37. Minimum Value
The Plan must pay for at least 60% of the total allowed costs for benefits covered under the plan without regard to employee premium contributions
Based on an actuarial standard that looks at the anticipated costs of a hypothetical “standard” population
IRS and HHS will provide a “minimum value calculator” that looks at certain plan information, i.e. deductibles and co-pays, to determine whether the plan provides minimum value

38. Cafeteria Plan Changes
The regulations provide a transition rule for Section 125/cafeteria plans allowing an employee to make a mid- year status change in 2013 to either elect or drop coverage. Cafeteria plans must be amended by 12/31/14 to reflect the rule

39. What Do Employers Do Now?
Determine whether they are an Applicable Large Employer
If less than 50 Full-Time employees on average, calculate Full- Time Equivalent employees for Consider whether to average over a 6-month period vs. a 12-month period
Evaluate the coverage currently provided
Is it offered to substantially all Full-Time employees and their dependents?
Is it “affordable”?
Does it provide “minimum value”?

40. What Do Employers Do Now?
If coverage does not meet these criteria, consider costs/ changes necessary to make it to comply
Consider what penalties may apply (to be discussed next month)
Decide whether to Play or Pay, taking into account factors such as company culture, employee morale, union organizing efforts, and costs involved (including nondeductibility of penalty/excise tax)

41.
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