MCC: Although the Patient Protection and Affordable Care Act (the "Affordable Care Act") has been in effect for several years now, some commentators have suggested that 2015 is a significant year in the implementation of the Affordable Care Act. Are there important 2015 events that employers need to be aware of?
Bruder: The 2015 calendar year will be potentially significant for employers with respect to compliance with the Affordable Care Act. Over the past several years and since the inception date of the Affordable Care Act, the primary focus of employers has been on ensuring that their group health insurance arrangements satisfy the applicable regulatory requirements of the legislation. Starting in 2015, certain employers and substantially all individuals will be subject to penalties for a failure to maintain health insurance coverage that meets the requirements of the Affordable Care Act.
The “shared responsibility” provisions of the Affordable Care Act become the focus of the compliance issues to be addressed in 2015. In general terms, these provisions have two components: (i) the individual requirements (the so-called Employee Mandate) under which certain individuals must maintain qualified health insurance or pay a specified penalty to the federal government; and (ii) the employer requirements (sometimes referred to as the “Employer Mandate”) under which certain employers must provide health insurance coverage to their eligible employees that is both affordable and provides minimum value (as these terms are defined within the Affordable Care Act) or pay a penalty to the federal government, the amount of which depends upon a number of factors. All employers who meet the definition of a “large employer” are subject to the employer shared responsibility provisions of the Affordable Care Act, including for-profit and not-for-profit organizations and certain government entities.
MCC: Are all employers subject to comply with these requirements in 2015? Is there any temporary relief available to any employers that sponsor group health insurance plans?
Bruder: 2015 is a “transition year” for Affordable Care Act compliance, due to actions of the federal government that occurred in 2014. Under the applicable provisions of the Affordable Care Act as originally drafted, all “large employers” were required to offer health insurance coverage that was both “affordable” as well as provided “minimal value” to at least 95 percent of its eligible employees; large employers that sponsored group health insurance arrangements that failed to meet such requirements, and large employers that opted to forego offering health insurance to their full-time employees, were subject to certain penalties for plan years commencing on or after January 1, 2015.
During the 2014 calendar year, the federal government determined that a transition year was required to assist certain employers in meeting their respective responsibilities under the Affordable Care Act. In accordance with current guidance, an employer that maintains on average at least 100 full-time employees (including full-time equivalents) will still be required to satisfy the above requirements under the Affordable Care Act.
Similarly, an employer that maintains on average less than 50 full-time employees (including full-time equivalents) generally will be exempt from the provisions of the Affordable Care Act concerning affordability and minimum value.
However, certain employers who maintain on average at least 50 full-time employees but no more than 100 full-time employees (including full-time equivalents) may be afforded an additional year in which to plan for compliance with these provisions of the Affordable Care Act. Specifically, the guidance issued by the federal government exempts these “large employers” from compliance with both the affordability requirements of the Affordable Care Act as well as the minimal value requirements, if such an employer certifies that (i) from February 9, 2014, through December 31, 2014, the employer did not reduce its workforce to meet these average employee requirements (although reductions in workforce for legitimate business reasons is still permissible); and (ii) for the period from February 9, 2014, through December 31, 2015, the employer did not eliminate or otherwise materially reduce its group health insurance coverage. In accordance with applicable guidance, an employer will not be deemed to have materially reduced its group health insurance coverage so long as the employer contribution remains at least 95 percent of the employer contribution amount prior to February 9, 2014, there has been no reduction in the group of employees (including dependents) who would be otherwise eligible for coverage, and any changes in the benefits and coverage provided under the group health insurance arrangement meets the minimum value requirements.
MCC: Can an employer simply allocate its employees to different related entities to qualify for transitional relief?
Bruder: An employer, of course, remains free to allocate employees to different entities for legitimate business reasons. However, such a reallocation of employees likely will not result in the employer being eligible to qualify for the transitional relief. As previously noted, an employer that makes material changes to reduce its employee population as in effect prior to February 9, 2014, will not be afforded an opportunity to receive the benefit of this transitional relief. So, for example, an employer that maintains on average 115 full-time employees (including full-time equivalents) and that transfers 25 full-time employees to another entity (so as to maintain less than 100 full-time employees on average) will not be eligible for the transitional relief.
As importantly, however, the federal government repeatedly has noted that the controlled group rules as reflected in the Internal Revenue Code are applicable in determining the number of full-time employees (including full-time equivalents) that are maintained by a particular employer. These controlled group rules are not new – they generally apply for many purposes under the Internal Revenue Code, including certain employee benefits-related testing issues (such as coverage and discrimination testing). However, these controlled group rules take on additional importance with respect to the Affordable Care Act, and the federal government has indicated that compliance with these rules will be a focus of any audit.
In general terms, a controlled group exists in the following arrangements: (i) a “parent-subsidiary” relationship, where the parent entity owns a “controlling interest” in a subsidiary entity; (ii) a “brother-sister” relationship under which five or fewer individuals (including entities and certain trusts) own a controlling interest in an entity and another entity and have “effective control” of each such entity; or (iii) a combination of these relationships. For controlled group purposes, a “controlling interest” means an ownership interest of 80 percent or more of the voting of the entity, or an 80 percent interest in its profits. In determining whether a “brother-sister” relationship exists, “effective control” means that the five or fewer owners of the entity (maintaining a controlling interest”) also have at least a 50 percent interest in the voting and/or profits of such entity, taking into account only the identical ownership in each entity maintained by such owners.
In addition to these relationships, an “affiliated service group” may exist between entities, which will result in all of the employees of such entities being deemed to be employed by a single employer (in the same manner as a controlled group). In very broad terms, an “affiliated service group” exists where certain entities are deemed to be related due to the services arrangement between such entities (such as where an entity provides management services exclusively to a related entity).
The determination as to whether a controlled group or an affiliated service group exists is fact specific and, given the application of certain ownership attribution rules as provided in the Internal Revenue Code, can be difficult to ascertain. However, it is of critical importance for purposes of the Affordable Care Act, as such a determination may impact whether an employer is subject to the penalty provisions of its shared responsibility requirements.
MCC: If an employer fails to plan for these 2015 compliance issues, who is subject to a penalty: the employer, the employee or both parties?
Bruder: Both the employer and the employee are subject to potential penalty under the shared responsibility provisions of the Affordable Care Act. A large employer (for Affordable Care Act purposes) that fails to offer group health insurance coverage to its eligible employees is subject to a potential annual penalty of $2,000 per individual (subject to certain reductions). An employer that offers group health insurance coverage to its eligible employees that is either not “affordable” or that does not meet the minimum value requirements is subject to a potential annual penalty of up to $3,000 per individual (subject to certain reductions). In addition, an employee who did not maintain the requisite health insurance coverage in 2014 could be subject to a maximum penalty of up to the greater of $285 or 1 percent of his or her household income. For 2015, this individual penalty increases to the greater of $975 or 2 percent of household income.
MCC: How will the federal government know whether an employer's group health insurance arrangement satisfies the requirements of the Affordable Care Act?
Bruder: Commencing for group health insurance plan years after January 1, 2015, certain employers that sponsor group health insurance plans will be required to submit a filing to the Internal Revenue Service detailing certain information associated with their health insurance benefits. Although these forms have yet to be finalized, the Internal Revenue Service has recently released a draft of these forms, which all applicable employers should begin reviewing to determine what planning, if any, may be necessary for the coming years.
All large employers are subject to these filing requirements. In addition, any employer that sponsors a self-insured group health insurance plan (regardless of the size of the employer) will also be required to submit a filing. These filings effectively supplement the employer reporting of the value of group health insurance coverage as reflected on the employee’s Form W-2, but will contain significantly more information. For example, an employer will be required to file a Form 1095 with the Internal Revenue Service (and to provide a copy to the employee as well). This form (which will vary in substance based upon whether the filing entity is a large employer) will contain such information as the employee’s name, the name of any dependent(s) covered under the plan, the Social Security or tax identification number of such individuals, level(s) of insurance coverage offered by the employer, the months during which such coverage was in effect (if any), whether such coverage meets the applicable requirements of the Affordable Care Act (such as affordability and minimum value), whether the employer meets any of the safe harbor requirements and similar information. If the employer maintains a fully insured arrangement, certain of this information may be provided by the insurance carrier. A sponsor of a self-insured arrangement will need to gather all of this information (or obtain all of such information from the plan’s administrator) to complete this form.
In addition, an employer will also be required to file a Form 1094, which will contain certain general information concerning the group health insurance plan sponsor and the coverage offered by same. However, and as we discussed earlier, this form will also require the employer to disclose whether it is part of a controlled group of entities, and whether it qualifies for the transitional relief afforded to certain employers in 2015. Both of these pieces of information likely will be used by the Internal Revenue Service to determine whether the employer/plan sponsor has satisfied its requirements under the Affordable Care Act. In addition, the employer will also be required to disclose the total number of its full-time employees (including full-time equivalents), thereby affording the federal government with another opportunity to determine compliance based upon the information filed with the Internal Revenue Service.
While these filing requirements are not yet in place, employers need to be cognizant of these filing requirements and begin to establish processes to ensure that all of the necessary information will be readily available. In addition, this process offers employers an opportunity to determine whether any additional actions need to be taken in light of the pending filing requirements.
MCC: Is there a deadline associated with these required filings?
Bruder: Yes. Employers will be required to commence reporting in February, 2016 for the 2015 calendar year. All employer reporting will be completed and determined on a calendar year basis, even if the plan is administered in another manner (i.e., a fiscal year). For employers who will file in excess of 250 Forms 1095, electronic filing of same will be required with a deadline of March 31 for submission to the Internal Revenue Service. All employees are required to receive their respective copy of the Form 1095 no later than January 31.
MCC: Are there any related concerns of which employers need to be aware in 2015?
Bruder: In addition to all of the Affordable Care Act compliance issues, many employers may have become familiar with over the past several years, the federal government is also focusing its enforcement efforts on a seemingly unrelated issue – employee classification – which actually can have a significant impact on an employer’s potential penalties under the Affordable Care Act. In broad terms, the government is concerned that because the penalties under the shared responsibility provisions of the Affordable Care Act are centered within the employer-employee relationship, some employers may be tempted to classify certain individuals as independent contractors to avoid having to provide such individuals with health insurance coverage (and thereby negating the possibility that the employer could be subject to a penalty with regard to same). In addition, the government is concerned that classifying an individual as a contractor may permit an employer to avoid being classified as a large employer. For this reason, we have seen an increase in the number of inquiries being made by the federal government into employee classification issues. While the law in this area is well established, employers should remember that employee classification issues generally are determined based upon the attendant facts and circumstances of any services relationship in light of the multifactor test that the Internal Revenue Service has utilized for many years in determining the proper classification of an individual. During the course of its Affordable Care Act compliance review, an employer should also ensure that all of its service relationships are properly documented and supported by the appropriate circumstances.
Published January 27, 2015.