Transcript Slide 1

For a copy of the following presentation, please visit our
website at www.UBAbenefits.com. Go to the Wisdom tab and
then to the HR webinar series page.
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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
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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.)
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Kathleen Barrow, Partner (Omaha/Rapid City)
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Over 20-years experience in ERISA employee benefit, executive compensation and
employment-related tax matters
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Practice focuses on employer and plan defense of IRS and DOL audits of plans, payroll and
compensation systems
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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)
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Substantial experience counseling clients in a broad array of employee plan compliance
matters, including welfare benefit plans, cafeteria plans, COBRA and HIPAA
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Represents clients before the IRS and DOL in EPCRS applications, private letter ruling
requests and letters of determinations
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Provides analysis, advice and counsel on tax and securities issues arising from equity-based
compensation
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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
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“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
o Individuals must acquire and maintain “minimum essential coverage” for
each month, qualify for an exemption, or pay a penalty through their
individual tax returns
o The obligation to have coverage applies to all individuals, including
children and seniors unless an exemption applies
o 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
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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
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“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
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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
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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
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That there is no calendar year plan also in existence in the workplace that might cover the
employees
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Employers with fiscal year plans will still have to report all of 2014 information for Section
6056 purposes (i.e., that portion of 2013 plan year falling into 2014)—but may “count” fulltime 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
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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”
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Three primary factors—
o Behavioral controls
• Who controls the timing, job functions, place and manner and
means of the work?
o Financial controls
• Who controls what is charged; when the worker is paid; what
expenses are reimbursed; and what tools and supplies are
purchased?
o Type of Relationship
• Is the relationship exclusive and long-term?
• Is the worker “key” to the product or service the employer provides
to clients?
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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
o A person who is a leased or temporary employee may still be an
employee for purposes of common law; and
o Federal tax guidance allows for an employee to be “coemployed” by two different employer entities in some
circumstances
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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. 70-630—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”
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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 31.3121(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
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“Applicable Large Employers” who
o 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
o 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)
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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
o 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
o 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 FullTime Equivalent employees for that month
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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
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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 2013
instead of the whole calendar year
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All members of controlled and affiliated service groups
are considered when determining whether an entity is an
“Applicable Large Employer”
Code section 414
o 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
o Employees of partnerships or proprietorships under common control --80% of the decision-making power rests with the same individuals
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o 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
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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
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Joy Napier-Joyce
Jackson Lewis Baltimore Office
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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
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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)
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“Applicable Large Employer” definition is avoided if all
employees in excess of 50 were employed 120 days or
fewer during the calendar year; and
o The employees were “seasonal” as defined by the Secretary of
Labor under 29 CFR 500.20(s)(1); or
o The employees were agricultural or retail employees working
only during the holiday seasons
o Proposed regulations state that a good faith, reasonable
interpretation of “seasonal” will be accepted until further
guidance—not limited to agricultural or retail workers
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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”
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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”
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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
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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
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Transition Relief
o 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 2014
solely because it failed to offer dependent coverage for that year
o Recognizes that expanding coverage to dependents requires
substantial revisions to plans and procedures
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Does not include any coverage that consists of
“Excepted Benefits”, which includes
o 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.
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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
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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 yearend (including wages reported by third-party payor for
employer)
o 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
o Does not include pre-tax deferrals to 401(k) plan, 125 plan, etc.
o May vary based on leaves of absences/fluctuations in hours
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o 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
o Predictable and can be applied prospectively
o Can only be used if the employer does not reduce the hourly or monthly wages
of the employees during the year
o Does not vary based on leaves of absence or fluctuations in hours
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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
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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
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The regulations provide a transition rule for Section
125/cafeteria plans allowing an employee to make a midyear status change in 2013 to either elect or drop
coverage. Cafeteria plans must be amended by
12/31/14 to reflect the rule
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Determine whether they are an Applicable Large
Employer
o If less than 50 Full-Time employees on average, calculate FullTime Equivalent employees for 2013. Consider whether to
average over a 6-month period vs. a 12-month period
Evaluate the coverage currently provided
o Is it offered to substantially all Full-Time employees and their
dependents?
o Is it “affordable”?
o Does it provide “minimum value”?
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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)
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[email protected]
[email protected]
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in the UBA Employer Webinar Series
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follow-up question, you can email the presenters today or tomorrow at:
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www.UBAbenefits.com
www.jacksonlewis.com
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