Affordable Care Act Reporting 201: Choosing a Pay or Play Strategy
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Find more educational content at www.acafluent.com We will give you guidelines to use when choosing a pay-or-play strategy. We’ll explain what the different strategies mean, what choices you have, and what to consider as you make these changes. These choices include: what the (coverage) penalties are, whether you may be vulnerable, and what offering quality and affordable insurance means (including the three safe harbors).
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Affordable Care Act Reporting 201: Choosing a Pay or Play Strategy
- 1. Presented by Nolan Sinclair, Customer Care Representative Choosing a Pay-or-Play Strategy
- 2. Integrity Data’s leadership in human capital management since 1996 More than 8,000 organizations worldwide use our technology to improve businesses processes 2 Engaged by Microsoft to author payroll and human resources upgrades to the ERP system known as Microsoft Dynamics® GP We have been immersed in ACA compliance software since 2012 © Integrity Data 2016. All rights reserved.
- 3. Affordable Care Act Reporting 201 Choosing a Pay-or-Play Strategy
- 4. ELIGIBILITY DETERMINATION PAY-OR-PLAY STRATEGY RECORDKEEPING FOR REQUIRED IRS REPORTING The three pillars of preparation for employer ACA compliance
- 5. You have choices for Tax Year 2016 You need collaboration ASAP Discuss and seek counsel for ACA compliance requirements now – not at year-end • Put processes in place to address questions as they arise • Identify which measures require blessings from senior management • Get those blessings and guidance – pronto! © Integrity Data 2016. All rights reserved.5 ‘PAY’ Offer no health plan = Accept full risk of the bigger penalty ‘PLAY’ with table stakes Offer non-compliant coverage (MEC only) or non-affordable coverage = Accept full risk of the lesser penalty and minimized risk of the bigger penalty ‘PLAY’ fully Offer compliant coverage that is affordable = Accept managed risk of both penalties
- 6. Things to consider when determining PAY or PLAY strategy • What are the coverage penalties? • Are you particularly vulnerable to the ACA coverage penalties? • Offering quality insurance • Offering affordable insurance; what are the safe harbors? 6
- 7. ACA coverage penalties for Tax Year 2016 The sledgehammer Penalty for no offer of coverage $180 a month, times all eligible employees minus 30 The tack hammer Penalty for non-compliant coverage $270 a month, times the number of eligible employees who got a subsidy on an exchange © Integrity Data 2016. All rights reserved. 7
- 8. For Tax Year 2016, the employer penalty for every month that an eligible employee was not offered coverage: $2,160, divided by 12, times the total number of FTEs minus 30 (the number of exemptions) The multiplier, before taxes: $180 a month The sledgehammer ACA penalty for offering no coverage © Integrity Data 2016. All rights reserved. Also called “the A penalty” because it’s detailed in Section 4980H(a) of the Internal Revenue Code 8
- 9. The tack hammer ACA penalty for offering noncompliant coverage For Tax Year 2016, the employer penalty for every month that an eligible employee did not get coverage deemed affordable OR which did not meet the minimum value standard: $3,240, divided by 12, times the number of full-time employees who got a subsidy on an exchange that month Not to exceed the sledgehammer calculation The multiplier, before taxes: $270 a month © Integrity Data 2016. All rights reserved. Also called “the B penalty” because it’s detailed in Section 4980H(b) of the Internal Revenue Code 9
- 10. Which employers are most ACA-vulnerable? Hourly workers Lower-wage workers Part-time workers with varying schedules Seasonal hires Frequent turnover 10 By industry Hospitality Restaurants Hotels Motels Casinos Resorts Employment agencies Staffing companies Temp-help services Nursing care Rehabilitation facilities Senior living centers Retail Colleges, universities, schools Religious organizations Municipalities Security services Food processing Trucking Construction Agribusiness Nonprofits © Integrity Data 2016. All rights reserved. Alabama Florida Georgia Idaho Kansas Maine Mississippi Missouri North Carolina Nebraska By workforce By state Oklahoma South Dakota South Carolina Tennessee Texas Utah Virginia Wisconsin Wyoming
- 11. Offer quality insurance Consult with a knowledgeable insurance broker to sort through options for a qualified plan that meets the Minimum Value standard 11 Offering insurance that provides Minimum Value and is affordable reduces the risk of coverage penalties
- 12. Offer affordable insurance ‘Affordability’ requirements can be monitored by use of one of three safe harbors: – W-2 Wages safe harbor – Rate-of-Pay safe harbor – Federal Poverty Line (FPL) safe harbor • Just one safe harbor per plan. Employers with multiple plans can apply different safe harbors to different plans – they need not be identical • Safe harbor can only be changed when plan is renewed • Safe harbors are optional but establishing one will go a long way in avoiding potential penalties ‘Affordable’ is based on the least-cost plan offered and may not be the actual plan selected by the employee 12
- 13. W-2 safe harbor • Based on W2 Box 1 wages. • No correlation between actual employer cost of providing coverage and what the employee can be expected to contribute for their coverage • Used where compensation is based commissions, tips, piecework or steady workforce • Major drawback is that if employee compensation goes down then the employer would be forced to absorb more of the cost 13 Aug Sep Oct Nov Box 1 Wages $5,790 $6,125 $10,420 $5,250 Employee Maximum Cost $559.31 $591.68 $1,006.57 $507.15
- 14. Rate-of-Pay safe harbor • Most commonly used • Based on the lowest hourly rate of the individual employee on the plan start date, or if in subsequent months that hourly rate goes down, for that month, the lower rate is used • Calculation = lowest hourly rate x 130 x 9.66% 14
- 15. Federal Poverty Line FPL safe harbor • Most affordable safe harbor • Based on mainland federal poverty line multiplied by 9.66% then divided by 12 to get monthly costs • CY2016: $11,770 X .0966 / 12 = $94.75 • For non-calendar year plans, calculation established on plan start date remains constant through the entire plan year • Reported on IRS Form 1095-C, line 14, as a 1A – qualifying offer 15
- 16. Steps toward ACA compliance – when you have a ‘Play’ strategy 1. Identify measurement method – monthly or look-back 2. Identify safe harbor to use for affordability testing 3. Ensure you are tracking hours of service correctly 4. Ensure you have offered – on a timely basis – eligible employees the opportunity to enroll in coverage 16 If your company’s management has chosen to work within the guidelines for offering coverage to those employees eligible for coverage, then:
- 17. 17 A destination Not the journey itself © Integrity Data 2016. All rights reserved.
- 18. Q&A 18
- 19. Learn more! Educational resources www.acafluent.com © Integrity Data 2016. All rights reserved.19 Videos in Integrity Data’s ACA Reporting 101 series • Does your business have to comply with the ACA? Are you an ALE (Using Santa Claus as an example) • How do I comply with the ACA? And when? • What is a 1095-C? • Why comply? What are the penalties for employers? • Is the IRS ready? Downloadable e-book on “Affordable Care Act: Employer Essentials for IRS Reporting” Downloadable ACA checklist for 2016 Blogs • Manage ACA compliance for Tax Year 2016: Know the IRS penalty risks • 1095-C reporting: How to use affordability safe harbors • Employer need-to-knows for finding ACA compliance strategy
- 20. Thank you for your time. To get on the fast and sure track to ACA compliance, please contact us: sales@integrity-data.com 888.786.6162 Integrity Data’s publications and presentations are designed to make employers aware of IRS reporting requirements under the Affordable Care Act, best practices for compliance with those requirements, and the consequences of noncompliance. This material is intended to provide accurate information as of the date posted. It is provided with the understanding that neither Integrity Data, nor the authors and presenters, are rendering legal or accounting advice. With respect to your organization’s decision making for Affordable Care Act compliance, review the information presented with legal counsel specializing in employment law.
Editor's Notes
- Introduction of Gary Please enter any questions relevant to the topic in your chat window. We will address questions at the end. As a reminder, a copy of the slide deck and recording will be sent to you in the next 48 hours.
- And now a quick introduction about Integrity Data – We’ve been a leader in human capital management since 1996, celebrating our 20 year anniversary this Fall. More than 8,000 organizations worldwide use our technology to improve business processes. We were engaged by Microsoft to author payroll and human resources upgrades to the ERP system known as Microsoft Dynamics GP. And we’ve been immersed in ACA compliance software since 2012.
- The Affordable Care Act is a massive piece of legislation – even trying to make sense of the just the employer responsibilities under the ACA can get confusing. Our goal in this webinar is to give you some helpful guidelines when choosing a Pay-or-Play strategy.
- To put this into context: being prepared for employer Affordable Care Act compliance requires preparation – we’ve organized preparation into these three pillars: Eligibility Determination - which we talked about Last week. Deciding on a Pay-or-Play Strategy which will be discussed today Recordkeeping for the Required IRS Reporting Remember: all steps toward compliance are interrelated. Choices you make for one affect another. And this cycle never ends. It is a continuous process year after year. Now, let’s dive into the pay-or-play strategy
- Let’s start with: What are the Pay-or-Play strategies? ‘PAY’ – means to offer no health plan = you then accept full risk of the bigger penalty ‘PLAY’ with table stakes – means to offer coverage BUT it is non-compliant coverage (Minimal Essential Coverage only) or non-affordable coverage = you then accept full risk of the lesser penalty and minimized risk of the bigger penalty ‘PLAY’ fully – means to offer compliant coverage that is affordable = you then accept managed risk of both penalties Before making a decision on what strategy to choose, connect with other departments – and professional advisers – about choices and strategies for ACA compliance. This compliance burden should not fall solely on the shoulders of the person who drew the short straw. Choices about measurement methods, measurement periods and the qualify of coverage must be made collaboratively and with respective guidance from an insurance broker or someone knowledgeable with the ACA. Make sure whomever you choose is up-to-date on the ACA. Seek out this resource as soon as possible. Now let’s dive into some guidelines/ things to consider when making this strategy decision:
- We’ll talk about: What are the coverage penalties? Are you particularly vulnerable to the ACA coverage penalties? Offering quality insurance Offering affordable insurance – what are the safe harbors?
- First, what penalties do you need to consider when making this decision. There are 2 types of penalties around the ACA requirements for employers: There is a non-filing penalty which kicks in if you don’t comply with the yearly IRS filing requirements around ACA. This is not the penalty we are talking about here because you need to file regardless of whether you choose a PAY or PLAY strategy. Then there are the coverage penalties which kick-in when you don’t (fully) comply with the actual employer mandate of having to offer health coverage at the right time to the right employee (for more on penalties, watch our 101 videos – check out resources at the end of this webinar) – these are the ones we are talking about here. So let’s learn more about these coverage penalties. The bigger penalty for not offering coverage is referred to as the sledgehammer and the lesser penalty of not offering compliant coverage or unaffordable coverage is referred to as the tack hammer.
- An employer who chooses to PAY aka offers no health plan accepts full risk of the ACA sledgehammer penalty. The trigger for this penalty is the IRS finding, through its data crunching, that an employee who was eligible for an employer-sponsored plan did not get an offer of health insurance from his or her employer – so, to meet the individual mandate, sought coverage on an exchange and got a subsidy or tax credit for that coverage. Here’s how the multiplier works for the sledgehammer penalty: If you have an employee that was eligible for coverage in a certain month and your 1095-C reporting for that tax year shows that no offer of coverage was made to that employee in that month, then the penalty you’re facing is $180 multiplied by all your ACA-defined full-time employees – that’s for that month and all months afterward in that tax year where you did not offer coverage . So for example, if you have 100 full-time employees and you offered them no health plan in 2016, your penalty would be $126,000 if one of those employees got subsidized coverage on the exchange in March of 2016. Remember, the $180 multiplier you see on this bottom line is per-employee and per-month after applying the exemption
- An employer who chooses to PLAY whether fully or with table stakes aka offers a health plan that does not meet ACA standards – either for quality or affordability – is at risk of the ACA tack hammer penalty. The back story on the reference to a lighter hammer is that architects of the Affordable Care Act did not want an employer who made an effort to offer health insurance to be hit with a higher penalty than an employer who offered no health insurance. So the sledgehammer goes away and the hit comes from a tack hammer when, through its data crunching, the IRS finds that the employee who got subsidized coverage on an exchange worked at a place where an employer-sponsored plan was offered – but that plan just happened to be an ACA noncompliant plan. Either did not include minimum value or was not affordable. A tack hammer penalty can go up to, but not exceed, the sledgehammer penalty. Notice there is no exemptions.
- To help you make a decision on whether to PAY or PLAY, another thing to consider is whether you are particularly vulnerable to the ACA coverage penalties. Organizations that do not have stable workforces or higher-paid employees with consistent hours have the greatest risk of being hit by these coverage penalties. If you are in one of the industries listed here, or your company’s workforce meets the descriptions given, it’s important to be aware of – and proactive in managing the risk of the penalties we just reviewed. If you are in a state that has not adopted expansion of Medicaid your risk of ACA penalties goes up as well. As of this recording, South Dakota, Virginia and Wyoming are discussing Medicaid adoption. The 16 other states listed have decided not to adopt Medicaid – which is a coverage safety net for employers of lower-wage workers who are not offering health insurance or not offering ACA-compliant insurance. An employee going onto the exchange and qualifying for Medicaid is not considered having received a tax credit therefore it does not trigger a potential penalty. For States that did not expand Medicaid, the only relief the individual has in obtaining affordable coverage through an exchange is to receive a tax credit – that will trigger a penalty event for the employer.
- As you decide on your strategy and manage your risk of ACA coverage penalties, make sure the health insurance you offer provides minimum value. One of the issues that the ACA created is that a federal law defining what minimum value standards are could bump up against the State’s right to dictate what insurance coverage is offered in their state. This is why is it important to make sure you have a knowledgeable insurance broker who can weed through this potential conflict.
- Next, another thing to consider as you decide on your strategy and manage your risk of ACA coverage penalties, is to make sure the health insurance you offer is affordable. When enacted, the ACA provided that employers had to provide ‘affordable’ health coverage where the employee’s cost of self only coverage would not exceed 9.50% (now 9.66%) of their modified adjusted gross income as reported to the IRS on their personal tax returns. Yes, this means that the employer is required to provide access to affordable coverage that is tied to the individual employee’s personal tax returns. Realizing that employers have no access to individual employee’s tax returns, the IRS established safe harbors that can be used by employers with compensation information the employer does know: how much is the employee being paid. Although ‘optional’, not using a safe harbor may subject the employer to an potentially penalty risk which they have no control over. Selecting a safe harbor puts penalty risk management at the control of the employer. Three safe harbors are available to choose from. W-2 safe harbor Rate of Pay safe harbor Federal Poverty Line safe harbor Important to note is that affordability is tested only on the employee’s cost for self-only coverage on the least cost plan they were offered. The least cost plan the employee was offered may not be the plan they selected. All reporting and affordability calculations are based on the least cost plan offered. At this time there are no affordability standards for spouse and dependent coverage. The IRS does have the power to define affordability standards for spouse and dependent coverage at a future date. Safe harbors establish ceilings – “not to exceed”. Our experience is that in most cases, the employee’s cost for their self-only coverage falls below the maximum allowed by the safe harbor being selected. We’ll quickly cover the 3 different safe harbors:
- First, the W-2 safe harbor. For calendar year 2016 the employee contribution for their self-only coverage may not exceed 9.66% of the employees Box-1 wages as reported on their W-2s. As an example, if an employee’s W2 box 1 wages are $100,000 the employer can require the employee to contribute up to $9,660 for the least cost plan offered. The above table illustrates how this safe harbor can fluctuate based on monthly compensation. - There is no correlation between the employer’s actual cost for offering the coverage and what the employee contribution is. In this case, even if the employer’s total cost of providing the employee coverage was $6,500 during the year , the employer could still require the employee to contribute $9,660. This safe harbor is best used when compensation is not based on hourly pay rate but is based on commissions, tips, piecework, etc. Drawback of this safe harbor is that if compensation for an eligible employee decreases during the stability period, the employer must still offer affordable coverage based on their actual compensation. For example, a $10 an hour employee in a stability period has their hours cut to 10 per month. The employer would be required to provide health coverage not to exceed $9.66 for that month. Remember, safe harbors establish ceilings. Reality is that in most cases, the actual employee’s contribution for their self-only coverage will fall below the ceiling.
- Next the rate-of-pay safe harbor This is the most commonly used safe harbor, especially for employers who have hourly workers with varying schedules. It cannot be used when compensation is based on commissions, tips, piecework, etc. This safe harbor shields the employer from absorbing more of the cost of health coverage when employees compensation may fluctuate between months. It is based on the lowest hourly rate at the start of the plan year and remains constant, except when the hourly rate may fall in a subsequent month and for that month the lower rate is used. As an example calculation: Lowest hourly rate $15 => Calculation: $15 X 130 X .0966 = $188.37 - Assumption is that if an employee worked 130 hours per month in their testing period, the employer should reasonably expect them to work 130 hours in the corresponding stability period - The affordability percentage established at the start of the plan year remains in effect the entire plan year. Non-calendar year plans can only change the affordability percentage and rate when the plan is renewed. - Can be used for salaried employees – you can take annual salary and divide by 2080 to get hourly rate. - If employee receives a raise within the plan year, the affect of this raise will not come into play until the plan year is renewed.
- Lastly the Federal Poverty Line (FPL) safe harbor This is considered the most affordable coverage an employer can provide an employee. It is based on mainland federal poverty line multiplied by 9.66% then divided by 12 to get monthly costs So for CY2016: $11,770 X .0966 / 12 = $94.75 For non-calendar year plans, calculation established on plan start date remains constant through the entire plan year Reported on IRS Form 1095-C, line 14, as a 1A – qualifying offer. If this safe harbor is used in conjunction with offering minimum value to the employee and at least minimum essential coverage to spouse and dependents it become a qualifying offer. There are some advantages to employers with a qualifying offer: The employer does not need to provide financial information on line 15 on how much employee contributes. The employer does not need to identify which employees took coverage and which employees where offered coverage and declined. Line 16 on the IRS Form 1095C is blank If a qualifying offer was extended to an employee for all 12 months of the calendar year they may be provided a alternative method of informing the employee of this offer. In reality this has limited appeal as the employer must still submit a 1095-C to the IRS
- Now, if you have chosen a PLAY strategy, then here are some steps to take to make sure you are on the right path to ACA compliance Identify measurement method – monthly or look-back (we have a webinar on this in the 201 series – determining employee eligibility - find it on our educational resources page!) Identify safe harbor to use for affordability testing Ensure you are tracking hours of service correctly(we have a webinar on this as well in the 201 series – guidelines for classifying an employee as fill time - find it on our educational resources page!) Ensure you have offered – on a timely basis – eligible employees the opportunity to enroll in coverage. With the ACA, the concept of ‘open enrollment’ has gone away for the employer. Each month new hires may become eligible as their initial measurement period test complete and determinations of eligibility are made. If you follow these steps you will meet the employer shared responsibilities as mandated in the Affordable Care Act. The key take away here is following these steps will go far in minimizing risk of shared responsibility penalties. It is about documenting a trail towards final determination of eligibility and what, if any, the employee is entitled to.
- Whether you choose to pay or play, be aware that recordkeeping for the IRS reporting is the same. In order to determine where a penalty may be assessed, the IRS needs to know the status of each employee by month. In the 1095- C example above the employer decided to “Play” and offered MEC coverage that provided minimum value and was affordable. If this same employer had decided to “Pay” they would still submit a 1095C where the difference would be a 1H in each of the months, zeros is line 15 across the months, and blanks in line 16. This informs the IRS that an eligible employee was not offered coverage and there were no special circumstances that shielded the employer from a penalty.
- Is there a real benefit in using the Pay strategy? Not really. This webinar was called “Choosing Pay or Play strategy” In reality a better name might be “risk management” The Affordable care act is truly designed to side with the person offering qualified coverage that is both minimal essential coverage and affordable. There isn’t really a good reason What do I do if my company received an exchange notice? Exchange notice means that an employee went to an exchange to receive coverage or a tax credit. If you are trying to appeal the notice the best advice would be to talk to a legal council to help write your appeal. Many of the exchange notices that I have seen are valid- meaning an appeal wont really help because proper coverage was not offered.
- Obviously this webinar covers only part of the ACA complexity – there is so much more to learn – make sure to visit acafluent.com for more educational resources. Watch our 101 educational videos that cover whether you have to comply, how to comply, and penalty details. Each video from the 201 educational series will be available for on-demand viewing. Download our eBook, “Employer Essentials for IRS Reporting” and our printable infographic, “ACA checklist for 2016 reporting.” Quickly link to IRS resources from our site and hear it straight from the source. Access our blog feed as it continually updates with new hot topics.
- Thank you for joining us. We hope you found this presentation informative. And do let us know how else we can help you.