1. 1 “Pay or Play” Penalties: Which Employees Put You at Risk? Kate Ball Area Assistant VP, Compliance Counsel Arthur J. Gallagher & Co. Feeling The Heat?

2. 2 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D 2 The intent of this presentation is to provide you with general information regarding the status of, and/or potential concerns related to, your organization’s current employee benefits environment. It does not necessarily fully address all of your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization’s general counsel or an attorney who specializes in this practice area, as appropriate.

3. 3 © 2015 Gallagher Benefit Services, Inc. 15GBS25279DAgenda Avoid Penalties by Correctly Identifying Full-Time Employees Counting Hours for Ongoing Employees Counting Hours for New Employees Special Rules Action Items 3

4. 4 © 2015 Gallagher Benefit Services, Inc. 15GBS25279DGlossary “EE”Employee “ER”Employer “ESR”Employer Shared Responsibility/Employer Mandate/Pay or Play “FT”Full-time “IAP”Initial Administrative Period “IMPInitial Measurement Period “ISP”Initial Stability Period “PT”Part-time “SAP”Standard Administrative Period “SMP”Standard Measurement Period “SSP”Standard Stability Period “VH” Variable Hour 4

5. 5 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Avoid Penalties by Correctly Identifying Full-Time Employees 5

6. 6 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Employer Shared Responsibility

7. 7 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Full-time (“FT”) employees who are not offered Employer Shared Responsibility (“ESR”) compliant coverage may trigger penalties for employers Employers may have their own classifications of employees – “Full-time employee” – “Part-time employee” – “Temporary employee” – “Project employee” 7 Full-Time Employees

8. 8 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D FT Employee s Trigger Penalties 8 ESR has a very specific definition of FT employee Employers need to know which employees are FT and which are non-FT under the ESR rules – Necessary for ESR compliance – Necessary for avoiding ESR “Sledgehammer” and “Ice Pick” penalties – Necessary for § 6056 reporting (Forms 1094-C and 1095-C) Full-Time Employees

9. 9 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D FT Employees Trigger Penalties 9 Under the ESR rules, FT employee is defined as an employee who is employed an average of 30 hours or more per week (130 hours per month) Two important questions – What kinds of activities must be included in employee hours? – How are hours averaged under ESR rules? Full-Time Employees

10. 10 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D FT Employe es Trigger Penalties 10 What kinds of activities must be included in employee hours? – Each paid hour of work – Each paid hour during which no work is performed Includes paid time off for military service, jury duty, vacation, holidays, sick days, incapacity (e.g., STD/LTD), layoff, and leave of absence (e.g., paid FMLA) – Note: Salaried employees may be credited with 8 hours for each day worked and/or 40 hours for each week worked Full-Time Employees

11. 11 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D FT Employ ees Trigger Penaltie s 11 How are hours averaged under ESR rules? – Employers must “count hours” using one of two permitted methods These methods are complex The rules must be followed precisely No other averaging methods are permitted – Counting hours is more challenging for employers with “variable hour” employees – Counting hours rules are different for “Ongoing Employees” vs. “New Employees” Full-Time Employees

12. 12 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Counting Hours for Ongoing Employees 12

13. 13 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Ongoing Employees Ongoing Employees have been employed for at least one Standard Measurement Period (“SMP”) Count hours worked by Ongoing Employee to determine FT status Two permitted methods of counting hours – “Monthly Measurement Method” – “Look-Back Method” 13

14. 14 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D May only use different methods of counting hours for the following categories of employees – Each group of collectively bargained employees covered by a separate collective bargaining agreement – Collectively bargained and non-collectively bargained employees – Salaried employees and hourly employees – Employees whose primary places of employment are in different states 14 Ongoing Employees

15. 15 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Monthly Measurement Method – An employee’s FT status for a given month determined after the month is over FT status = 130 hours/month – Only use for employees with fixed FT or non-FT status E.g., employees who are going to be FT every month or employees who are going to be PT every month Do not use for VH employees—may trigger penalties  By the time employer realizes employee hit FT hours for the month, the month is over and it is too late to offer coverage 15 Ongoing Employees

16. 16 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Ongoing Employees Dunder Mifflin is using the Monthly Measurement Method to count hours for all employees. Dwight, an hourly employee who has not been offered ESR-compliant coverage, works unpredictable hours. Dwight worked 150 hours in April 2015. Under the monthly measurement method, Dwight was a FT employee during April 2015. Dunder Mifflin could be subject to an ESR penalty for April 2015. – To avoid ESR penalties under the Monthly Measurement Method, Dunder Mifflin would have needed to offer Dwight ESR-compliant coverage starting April 1, 2015. – Because Dwight is a variable hour employee who has not been offered coverage, Dunder Mifflin should not use the Monthly Measurement Method for hourly employees. 16 Ongoing Employees

17. 17 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Ongoing Employees The Monthly Measurement Method may be easier to administer than the Look-Back Method But the Monthly Measurement Method should only be used for employees that cannot trigger ESR penalties – Employees eligible for ESR-compliant coverage Cannot trigger ESR penalties (even if FT) because offered ESR compliant coverage – Non-FT employees who never, ever work 130 hours in a month Cannot trigger ESR penalties because never FT for any month 17 Ongoing Employees

18. 18 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Ongoing Employees Duck Commander has two categories of employees. “TV personalities” work 70 hours per week and are offered ESR-compliant coverage. “Factory workers” work 20 hours per week and are not offered ESR- compliant coverage. According to Duck Commander policy, factory workers may never exceed 20 hours per week. Duck Commander can safely use the Monthly Measurement Method. – TV personalities will not trigger ESR penalties because they are offered ESR-compliant coverage. – Factory workers will not trigger ESR penalties because they never work FT hours. 18 Ongoing Employees

19. 19 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Ongoing Employees Look-Back Method – In order to avoid ESR penalties, should use for variable hour employees who are not offered ESR-compliant coverage – Allows employers to count employee hours for up to 12 months to determine FT status before offering ESR- compliant coverage – Rules are much more complicated than Monthly Measurement Method 19 Ongoing Employees

20. 20 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Look-Back Method for Ongoing Employees – Benefits eligibility for 12-month plan year (also known as the “Standard Stability Period” or “SSP”) determined by looking back to the 12-month “Look-Back Period” (also known as the “Standard Measurement Period” or “SMP”) – If employee worked FT hours in most recent SMP; offer coverage for SSP – May also have “Standard Administrative Period” of up to 90 days between SMP and SSP Use SAP to tally up hours, make offers of coverage, and give employees time to elect coverage Design SAP to overlap with annual open enrollment period 20 Ongoing Employees

21. 21 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Ongoing Employees Designing 12-Month Measurement and Stability Periods – Start with the ERISA plan year. This is the Stability Period. E.g., 1/1/15 to 12/31/15 – From the first day of the Stability Period, count backwards up to 90 days, this is the Administrative Period. Two months may be easier to administer E.g., 11/1/14 to 12/31/14 – From the first day of the Administrative Period, count backwards 12 months. This is the Measurement Period. E.g., 11/1/13 to 10/31/14 21 Ongoing Employees

22. 22 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D 2014 2015 2016 2017 11/1/13 – 10/31/14 SMP 11/1/14 – 10/31/15 SMP 11/1/2015 – 10/31/16 SMP 11/1/14 – 12/31/2014 SAP 1/1/2015 – 12/31/2015 SSP 1/1/2016 – 12/31/2016 SSP 1/1/2017 – 12/31/2017 SSP 11/1/15 – 12/31/15 SAP 11/1/16 – 12/31/16 SAP Employer subject to ESR starting 1/1/2015. Employer starts counting hours in Fall 2013 with 12 month SMP, 2 month SAP, and 12 month SSP Ongoing Employees

23. 23 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Counting Hours for New Employees 23

24. 24 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D New Empl oyees Upon hire, employer must classify New Employee as FT or non-FT based on employer’s “reasonable expectations” Critical question is whether employer reasonably expects the New Employee to average 30 hours or more per week during the first 12 months of employment – For this purpose, employer must assume that the New Employee will be employed for entire IMP Exception for seasonal employees 24 New Employees

25. 25 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D New Empl oyees Reasonable expectations may be based on criteria such as: – Whether the position was advertised, communicated, or documented as requiring hours that would average 30 or more hours per week during the first 12 months of employment – The type of employee is the New Employee replacing— a FT employee or non-FT employee – Whether employees in same/similar positions are classified as FT or non-FT 25 New Employees

26. 26 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D New Employe es When must I offer coverage to New FT Employees? – Upon hire (after any applicable waiting period) For first 12 months of employment, use Monthly Measurement Method to count New Employee hours – After 12 months of employment, employer may use Monthly Measurement Method or Look-Back Method New Employees

27. 27 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D New Employe es Who is a New “non-FT” Employee? – PT Upon hire, reasonably expected to average less than 30 hours per week/130 hours per month – Variable Hour Upon hire, cannot be reasonably determined if employee will average at least 30 hours per week/130 hours per month – Seasonal Period of employment is during the same part of the year each year; annual employment of 6 months or less New Employees

28. 28 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D New Empl oyees How do I count hours for New non-FT Employees? – Choice between Monthly Measurement Method and Look-Back Method Monthly Measurement Method  Not recommended for Variable Hour or Seasonal employees  Only recommended for true PT employees » Employees who never hit 130 hours/month Look-Back Method  Employer may count hours for up to 12 months to determine whether non-FT employee has hit FT status  The counting hours rules differ for New Employees vs. Ongoing Employees New Employees

29. 29 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D New Emp loye es Look-Back Method for Ongoing Non-FT Employees – Employer need not offer coverage upon hire – Hours may be tracked for up to 12 months after hire (known as the “Initial Measurement Period” or “IMP”) IMP begins on hire date, first day of month after hire date, or first day of pay period after hire date (or any date in between) – May also have an “Initial Administrative Period” (“IAP”) Up to 90 days, however... IMP + IAP cannot extend past last day of 1 st calendar month beginning on or after 1-year anniversary non-FT EE’s hire date 29 New Employees

30. 30 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D New Emp loye es Look-Back Method for Ongoing Non-FT Employees – If non-FT employee hits FT hours in IMP, employer offers coverage for 12-month ISP – ISP begins immediately after IAP 30 New Employees

31. 31 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D 2014 2015 2016 2017 11/1/13 – 10/31/14 SMP 11/1/14 – 10/31/15 SMP 11/1/15 – 10/31/16 SMP 11/1/14 – 12/31/14 SAP 1/1/15 – 12/31/15 SSP 1/1/16 – 12/31/16 SSP 1/1/17 – 12/31/17 SSP 11/1/15 – 12/31/15 SAP 11/1/16 – 12/31/16 SAP New Non-FT Employee DOH 5/20/15 6/1/2015 – 5/31/2016 IMP 6/1/2016 – 6/30/2016 IAP 7/1/2016 – 6/30/2017 ISP New Employees

32. 32 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Transition from New Employee to Ongoing Employee – New non-FT Employee tracked in IMP – Employee is concurrently tracked as an Ongoing Employee in SMP when next SMP starts after DOH This results in some overlap between the IMP/ISP and the SMP/SSP – When ISP ends, employer determines whether employee is eligible for coverage going forward based on results of SMP If employee’s status in ISP is favorable to employee, employee stays in ISP until it expires If employee’s status in SMP is favorable to employee, ISP ends early and employee moves to SSP early New Employees

33. 33 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D 201420152016 2017 11/1/13 – 10/31/14 SMP 11/1/14 – 10/31/15 SMP 11/1/15 – 10/31/16 SMP 11/1/14 – 12/31/14 SAP 1/1/15 – 12/31/15 SSP 1/1/16 – 12/31/16 SSP 1/1/17 – 12/31/17 SSP 11/1/15 – 12/31/15 SAP 11/1/16 – 12/31/16 SAP New Non-FT Employee DOH 5/20/15 and hours tracked in IMP 6/1/15 – 5/31/16 IMP 6/1/16 – 6/30/16 IAP 7/1/16 – 6/30/17 ISP Also tracked in SMP that begins after DOH Employee moves to SSP either here or here New Employees

34. 34 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Special Rules 34

35. 35 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Temporary Employees No special treatment under ESR rules, must offer coverage if FT – As with any New Employee, classify as FT or non-FT upon hire Is employee reasonably expected to average 30 hours/week during the IMP?  May not take into account the possibility that employee will terminate employment before IMP is over – If FT, offer coverage after applicable waiting period – If non-FT, may count hours in IMP and if employee averages 30 hours/week (130 hours/month), offer coverage

36. 36 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Special Unpaid Leave Paid leave counts as hours worked When using the Look-Back Method, employees on “Special Unpaid Leave” must also be credited with hours worked – Unpaid leave for FMLA, military duty, and jury duty Two methods for crediting employee hours during Special Unpaid Leave – Exclude period of Special Unpaid Leave when calculating hours worked during measurement period – Calculate average hours worked during measurement period (excluding period of Special Unpaid Leave), and apply that average to period of Special Unpaid Leave

37. 37 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Terminated & Rehired If less than 13 weeks passes between an employee’s termination and rehire: – Rehired employee is treated as a continuing employee, not as a New Employee – The MP and SP employee was in before the termination continues MP: Employee credited with zero hours time period during which he or she was not employed by employer SP: If, before termination of employment, employee was in a SP with FT status, coverage must be reactivated by first of the month after rehire

38. 38 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Terminat ed and Rehired Employe es If 13 weeks or more passes between the termination and rehire: – Employee is treated as a New Employee FT: Employer may impose new waiting period before offering coverage Non-FT: Employer may impose new IMP before offering coverage Terminated & Rehired

39. 39 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Termin ated and Rehire d Emplo yees Jim is a Dunder Mifflin variable hour employee who tested as FT in the most recent SMP. Jim enrolled in coverage for the SSP. Due to cutbacks, Dunder Mifflin terminates Jim’s employment. But business picks up and Jim is rehired four weeks later. Jim should be treated as a continuing employee and his status during the SSP (and the coverage he elected) should be reactivated by the first of the month after rehire. Terminated & Rehired

40. 40 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D What if an employee has an “employment break period” where no hours of service are worked? – If employment break period is 13 weeks without an hour of service (or shorter if Rule of Parity is applied), then the rehire rules may be applied – Employer may treat the employee as terminated and rehired when employee returns to work During the employment break period, employee is treated as a continuing employee (any applicable MP and SP continue) – Special rules apply for educational organizations Employment Break Periods

41. 41 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Michael is a Dunder Mifflin variable hour employee who tested as FT in the most recent SMP. Michael enrolled in coverage for the SSP. After burning his foot on a George Foreman Grill, Michael takes twelve weeks of unpaid FMLA leave, followed by an additional two weeks of unpaid non-FMLA leave. This is a fourteen week employment break period. – Dunder Mifflin is required to continue Michael’s coverage during the SSP, so as long as Michael pays his premium contributions, he remains covered during the employment break period. – However, when Michael returns to work, Dunder Mifflin may treat him as a New non-FT (variable hour) employee. Dunder Mifflin may terminate Michael’s coverage and impose a new IMP before offering him coverage again. Employment Break Periods

42. 42 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Other Special Rules Special rules for changes in employment status (e.g., PT to FT) Special rules for breaks in service lasting longer than the initial employment period (“Rule of Parity”) Special rules for educational organizations Special rules for “on call” hours And many, many more! Other Special Rules

43. 43 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Action Items 43

44. 44 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D 44 Establish Standard Measurement, Administrative, and Stability Periods for Ongoing Employees Establish Initial Measurement, Administrative, and Stability Periods for New Employees If compliance with ESR requires changes to the plan’s eligibility terms: – Make necessary changes to plan document/SPD/leave policies Issue SMMs to plan participants – Coordinate with carrier/TPA/stop-loss Action Items

45. 45 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D 45 If you have variable hour or seasonal employees, consider engaging a vendor to count hours – Vendors who offer § 6055 and § 6056 reporting services usually offer counting hours services as an add-on To avoid ESR penalties, offer coverage to employees with FT status by the employer’s ESR effective date “Counting Hours Toolkit” at ajghealthcarereform.com Action Items

46. 46 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Questions? 46

47. 47 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D 47 The intent of this presentation is to provide you with general information regarding the status of, and/or potential concerns related to, your organization’s current employee benefits environment. It does not necessarily fully address all of your organization’s specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization’s general counsel or an attorney who specializes in this practice area, as appropriate.

48. 48 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D Thank You Kate Ball Area Assistant Vice President, Compliance Counsel Arthur J. Gallagher & Co. kate_ball@ajg.com

49. 49 © 2015 Gallagher Benefit Services, Inc. 15GBS25279D