HEALTH REFORM IN A NUTSHELL

1. HEALTH REFORMIN A NUTSHELL What Employers Need to Know Alson R. Martin Randal L. Schultz amartin@lathropgage.com rschultz@lathropgage.com

2. Health Reform in a Nutshell: What Employers Need to Know • With the passage of the most significant reform of America's modern-day health care system, employers must assess what the Patient Protection and Affordable Care Act (PPACA) means for them. This presentation seeks to provide you with an overview of the most important things an employer needs to know about health reform. This material is informational only and does not constitute legal advice regarding any specific situation.

3. Health Reform in a Nutshell: What Employers Need to Know • PPACA amends the Internal Revenue Code, ERISA, and the Public Health Service Act (PHS Act or PHSA). States have the primary authority to enforce the Public Health Service Act provisions with respect to group and individual market health insurance issuers, and HHS will only step in to the extent HHS believes the state has failed to substantially enforce these provisions.

4. Health Reform in a Nutshell: What Employers Need to Know • HHS, IRS & DOL have already issued many PPACA healthcare reform regulations. Many more regulations will be issued.

5. What’s Covered & What’s Not • Healthcare reform covers insured and self-funded comprehensive medical health plans. • Health reform does not regulate “Excepted Benefits,” which include stand­-alone vision, stand-alone dental, cancer, long-term care insurance, most FSAs, Medigap insurance, as well as accident and disability insurance that make payments directly to the individual. • Healthcare reform also does not affect retiree only plans.

6. US Supreme Court Decision • The US Supreme Court in NFIB v. Sebelius (June 28, 2012) ruled that (1) Congress had the power to adopt the individual mandate as a tax under its taxing authority (but not under the Commerce Clause, an important limitation on the Commerce clause); (2) for purposes of the Anti-Injunction Act that prevents judicial decisions on taxes until they are assessed by the IRS, the individual mandate is a penalty and not a tax for this purpose; and (3) that while the 2014 Medicaid expansion is constitutional but the law's remedy is unconstitutional. The remedy was that a state that did not agree to the Medicaid expansion lost its federal funding for the expansion and its current funding. • The Court held that a state not implementing the expansion would only lose funds for the expansion, but not its existing federal funding, in effect making the expansion optional for each state. Many states are not increasing Medicaid eligibility to those making less that 133% of Federal Poverty Level.

7. 2010 • SMALL BUSINESS TAX CREDIT: Tax credits for employers with 24 or fewer employees (excluding owners, certain relatives, and seasonal employees) with average wages of less than $50,000, covering up to 35% of employer-paid premiums (25% for tax-exempt entities). In 2014, that credit increases to 50% for for-profit employers (35% for tax-exempt employers) and will be available for an additional two consecutive years. • YOUNG ADULTS: Health insurers are required to let adult children stay on their parents' policy up to their 26th birthday. In addition, the employee has no taxable income and the employer has a deduction for this coverage of an adult child.

8. Plan Years Beginning On/After Sept. 23, 2010 Grandfathered Health Plans Are Subject To: • Prohibition of lifetime benefit limits • No rescission except for fraud or intentional misrepresentation • Children, who are not eligible for employer-sponsored coverage, covered up to age 26 on family policy • Pre-existing condition exclusions for covered individuals younger than 19 are prohibited • Restricted annual limits for essential benefits

9. Plan Years Beginning On/After Sept. 23, 2010 New & Non-Grandfathered Health Plans Same requirements as Grandfathered Plans plus: • No cost-sharing for preventive services • Discrimination for comprehensive health insurance in favor of highly compensated is prohibited. However, IRS has delayed effective date and has yet to issue regulations. • Children covered up to age 26 on family policy • Internal appeal and external review processes • Emergency services at in-network cost-sharing level with no prior authorization • Parents must be allowed to select a pediatrician as a primary care physician for their children and women must be allowed to select an OB-GYN for their primary care physician Grandfathered plans are not subject to the requirements above. For more on the importance and rules regarding grandfathering, see the discussion under the question “What actions do I need to take/not take to preserve grandfathered status, and why does grandfathered status matter?”

10. Plan Years Beginning On/After Sept. 23, 2010 • Any insurance policy sold to new entities or individuals after March 23, 2010 will not be grandfathered, even if the product was offered in the group or individual market before March 23, 2010. • Collectively Bargained Plans. There is no delayed effective date for collectively bargained plans, whether fully insured or self-insured. Thus, plans maintained pursuant to one or more collective bargaining agreements in effect on March 23, 2010, must comply with the new rules at the same time as other grandfathered plans.

11. Collectively Bargained Plans • The regulations provide that fully insured (but not self-insured) collectively bargained plans retain their grandfather status until the current agreement (i.e., the agreement in effect on March 23, 2010) expires. Self-insured collectively bargained plans are subject to the rules in the same way as other covered health plans. • Thus, a change in carriers under a fully insured collectively bargained plan does not result in loss of grandfather status if the change is made before the current agreement (i.e., the agreement in effect on March 23, 2010) expires. • Changes to benefits that apply while the current collective bargaining agreement is in effect, such as increasing co-payments, do not result in loss of the grandfather. • However, whether the grandfather applies after the expiration of the collective bargaining agreement is measured by comparing the benefits in effect at that time to the benefits in effect on March 23, 2010. If the changes are not within the permitted parameters then the plan will cease to be grandfathered when the relevant agreement expires.

12. Grandfathered Plans POSTPONED INSURED HEALTH PLAN NONDISCRIMINATION RULES do not apply to “grandfathered” plans continuously in existence March 23, 2010. As discussed in more detail hereafter, grandfathered plans cannot be changed except in minor respects.

13. Grandfathered Plans Grandfathered health plans are subject to certain health reform requirements, as follows: • Prohibition of annual and lifetime benefit limits (except that provisions annual limit prohibitions not applicable for individual health insurance coverage). • No rescission except for fraud or intentional misrepresentation. • For plan years beginning before January 1, 2014, children, who are not eligible for employer-sponsored coverage, covered up to age 26 on family policy. • Pre-existing condition exclusions for covered individuals younger than 19 are prohibited. • Pre-existing condition exclusions prohibited for all persons in 2014. • Prohibition on waiting period of more than 90 days. • Summary of Benefits & Coverage (SBC). • Medical Loss Ratio provisions.

14. Grandfathered Plans Grandfathered plans DON'T have to: • Cover preventive care for free • Guarantee your right to appeal • Protect your choice of doctors and access to emergency care • Be held accountable through Rate Review for excessive premium increases • Grandfathered individual health insurance plans (the kind you buy yourself, not the kind you get from an employer) don't have to: End yearly limits on coverage Cover you if you have a pre-existing health condition

15. Grandfathered Plans Notice Requirement • Unfortunately, while the law does not require this, the current regulations require that a grandfathered plan notify participants each year that the plan is a grandfathered plan beginning Sept. 23, 2010. This requirement, if incorporated in final regulations, could cause plans qualified as grandfathered plans not to be grandfathered because many employers have not given this annual notice as required.

16. 2011 W-2 Information Reporting • An employer was required show the value of health insurance for employees’ on their Form W-2 for 2011 and thereafter. However, this deadline was extended a year by the IRS, so the first time most W-2s will include this information will be in 2013 for calendar year 2012. • Smaller Employer Exemption: Until the issuance of further guidance, an employer is not subject to the W-2 reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.

17. 2011 – Simple Cafeteria Plan • NEW SIMPLE CAFETERIA PLAN available for businesses with 100 or fewer employees. This is modeled after the Simple 401(k) plan - the employer gets a pass on all nondiscrimination requirements if • 1) eligibility and benefits meet stated requirements; and • 2) a minimum contribution is made to the plan each year. • However while it appears to be Congress’ intent to exempt Simple cafeteria plans from the new PPACA health insurance nondiscrimination rules, that is not yet clear. Nevertheless, it is easy to design around. Probably only owners of C corporations who are “employees” can be covered, as in regular cafeteria plans.

18. 2011 – Nonprescription OTC Drugs • NONPRESCRIPTION OVER-THE-COUNTER DRUGS(except insulin and OTC equipment and supplies, like crutches, bandages, contact lens solution, blood sugar tests) are no longer an eligible medical expense under a health care flexible spending account (FSA), a health reimbursement arrangement (HRA), a health care savings account (HSA). • Solution – Get a Dr’s order for these OTC items at your annual checkup.

19. 2012 – Federal LTC Benefit Eliminated • FEDERAL LONG TERM CARE BENEFIT. • Community Living Assistance Services and Supports (CLASS) Act, and the employee, not the employer, was pay for it through payroll deductions unless they opt out. • HHS determined this benefit could not be adequately funded on a sustainable basis, and it has now been eliminated from the healthcare reform law.

20. 2013 FSA CAP OF $2500 • FSA EMPLOYEE CONTRIBUTIONS CAPPED AT $2500. Contributions to flexible savings accounts (FSAs) for healthcare and child care will be limited to $2,500 per year, indexed by the Consumer Price Index in subsequent years. • Employer contributions are limited to $500, so the total annual medical reimbursement benefit can be $3000 if the employer also contributes to the plan. • Why this limit? To raise revenue because these items are not taxed.

21. 2013 MEDICARE TAXES Wages and earned income - from a rate of 1.45% to 2.35% - for singles earning more than $200,000 a year and families above $250,000, for a total of 3.8% paid by employer and employee above the threshold. Investment Income - A new Medicare tax is imposed on investment income for those with income above the $200,000/$250,000 levels. • Tax does not apply to income exempt from gross income, such as exempt gain from the sale of a principal residence, tax-exempt bonds, etc. • Tax also does not apply to IRA and retirement plan distributions.

22. July 31, 2013 Payment of PCORI Fees • IRS Form 720 is used to report and pay the Patient Centered Outcomes Research Institute Fee ("PCORI fee") to the IRS by July 31 for the preceding year. • The PCORI fee for plan years ending on or after October 1, 2012, and before October 1, 2013 is $1.00 multiplied by the average number of covered lives in the group health plan. The PCORI fee for the second year will increase to $2.00 times the average number of covered lives in the group health plan and is indexed for increases in national health expenditures for the following years. • The fee applies to certain "specified health insurance" policies and includes medical policies, retiree-only policies, any accident or health insurance policy (including a policy under a group health benefit plan) issued to individuals residing in the United States. • Health reimbursement arrangements (HRAs) are considered self-funded health plans and are subject to the PCORI fee. If the plan sponsor also maintains a self-funded medical plan with the same plan year, the medical plan and HRA may be treated as one plan for purposes of the PCORI fee. However, if the medical plan is fully insured, the medical plan and HRA must be treated as separate plans for purposes of the PCORI fee, with the insurer paying the fee for the medical plan and the employer/plan sponsor paying the fee for the HRA.

23. October 1, 2013 and ThereafterEmployer Provided Exchange Notice • The employer’s health plan year is not relevant as to the required delivery of this notice. Originally required March 1, 2013, this notice must be provided by all employers, regardless of size, to employees by Oct. 1, 2013. Notices must be provided to both active part-time and full-time employees (not spouse or dependents) regardless of whether eligible for the employer’s health plan, if any. • New employees hired on and after October 1, 2013 must receive the notice within 14 days of hire. This 14-day notification period for new hires is in effect from October 1, 2013 through 2014 (the timing to be revisited at that point). • Notice can be sent first class mail or electronically. • There are 2 model notices. For employers with a health plan, see http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf. For employers with no health plan, see http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf. • Part B of the Notice for employers with health benefits may be confusing to participants, as it gives them current year information about the employer’s health plan when many may be exploring exchange insurance in following year.

24. 2014 Provisions Taking Effect in 2014 • Eliminate Preexisting Condition Exclusions • Rating Rules (3:1 age: 1.5:1.0 Tobacco use) • Guaranteed Issue (Subject to open Enrollment period) • Guaranteed Renewal (permits use of open enrollment) • Prohibit Discrimination or use of pre-existing conditions on Health Coverage for Minimum Essential Benefits • Maximum Deductible ($2,000 individual; $4,000 family) – Only for policies sold through state exchange • 90-day Maximum Waiting Period

25. 2014 - Individual Mandate • Minimum Penalty. Most Americans must have major medical health insurance or pay this tax of $95 in 2014, $325 in 2015, and $695 (or up to 2.5 % of household income above threshold amount for filing tax return, if greater) in 2016. Families will pay half the penalty amount for children under 18, up to a cap of $2,085 per family (equal to 3 people, no matter how large the family). After 2016, penalties are indexed to Consumer Price Index - CPI-U. • For example, a couple with one child over 18 (or two children age 18 or under), and no coverage, would pay a minimum of $285 in 2014, $975 in 2015 and $2,085 in 2016. That would be the total no matter how many uninsured dependents a taxpayer has. • Maximum Penalty. The tax is more for persons with higher taxable incomes. When phased in, it will be 2.5 percent of household income that exceeds the income threshold for filing a tax return.

26. Exemptions From Individual Mandate • Individuals Who Cannot Afford Coverage. If an employer offers coverage that would cost the employee more than 8 percent of his or her household income (for self-only coverage) that individual is exempt from the tax. • Taxpayers With Income Below Filing Threshold. Also exempt are those who earn too little to be required to file tax returns. For 2011, those thresholds were $9,500 for a single person under age 65, and $19,000 for a married person filing jointly with a spouse, for example. The thresholds go up each year in line with inflation, so those cut-offs will be higher in 2014. • Hardships. HHS can grant hardship exemptions. • Other Exemptions. Also exempt are members of Indian tribes, persons with only brief gaps in coverage, those in jail, religious objectors, and members of certain religious groups currently exempt from Social Security taxes, i.e., Anabaptist (Mennonite, Amish, and Hutterite).

27. 2014 HEALTH CARE EXCHANGES (MARKETPLACES) • These new state-based marketplaces will give individuals and small businesses (with 100 or fewer employees, or just 50 if state elects) a place to shop for standardized, private health insurance. Subsidies are provided for those earning less than 400% of the federal poverty level. Offerings at platinum, gold, silver and bronze levels. • 16 states are setting up their own exchanges. 8 additional states are partnering with HHS to set up their exchanges. In the rest of the states, HHS is required to set up the state marketplace. • In June 2013, GAO reported that it "cannot yet be determined" if the exchange marketplaces will be ready for enrollment in all states.

28. 2014 – Additional Items EXCHANGE SUBSIDIES: To help pay for insurance, subsidies will be given to persons or families with incomes of less than 400% of the federal poverty level ($94,200 a year for a family of four and $45,960 for an individual using 2013 FPL). MEDICAID ELIGIBILITY will increase to 133 % of poverty level for all nonelderly individuals in states adopting the Medicaid expansion. States will receive increased federal funding to cover these new populations. 13 states are not expanding their Medicaid program and 6 others probably will not do so. 27 states are participating in the expansion. AUTO-ENROLLMENT. Any employer with 200 or more full-time employees must begin auto-enrolling all eligible employees into its health plan, providing employees notice and allowing them to opt-out of coverage.

29. 2014 - Additional Items • Employees are ineligible to receive federal tax credits if premiums of employer sponsored coverage are less than 9.5 percent of income. • When premium costs exceed 8 percent of income, employees are exempt from individual mandate penalty.

30. 2014 – Exchange Insurance Loophole • Persons purchasing insurance on exchange can have 12 months of coverage by only paying first 9 months of premiums. Intent was to give people who can’t pay premiums due to hardship, such as layoff, a chance to catch up. • If Individual does not pay last 3 months premiums, the insurance pays providers in month 10 but not months 11 and 12. • Such an individual remains eligible to buy exchange insurance the next year even if missed premiums never paid!!

31. 2014 – No More Stand Alone HRAs & Medical Expense Reimbursement Plans • Stand-alone (those not integrated with comprehensive medical coverage) health reimbursement accounts (“HRAs”) and medical expense reimbursement plans will not comply with the ACA “group health plan” rules prohibiting annual and lifetime limits on the dollar value of essential health benefits. FSAs are not subject to the rules on annual and lifetime limits. • The regulations allow annual limits of $750,000 for plan year 2011, $1.25 million for plan year 2012, and $2 million for plan year 2013. • Essential health benefits are ambulatory patient services; emergency services; hospitalization; maternity and newborn care; mental health and substance abuse services; prescription drugs; rehabilitative and habilitative services and devices; laboratory services; preventive and wellness services and chronic disease management; and pediatric services (including oral and vision care).

32. Plan Years Beginning In 2014 – 90 Day Waiting Period Maximum; PHSA 2708 • The maximum 90-day wait rule applies for plan years beginning on or after January 1, 2014. All calendar days are included in the 90-day period, including weekends and holidays. Both grandfathered and non-grandfathered group health plans must comply. The test applies solely for eligible employees. • If a group health plan conditions eligibility on an employee regularly working a specified number of hours per period (or working full time), and it cannot be determined that a newly hired employee is reasonably expected to regularly work that number of hours per period (or work full time), the plan may take a reasonable period of time to determine whether the employee meets the plan’s eligibility condition. The plan may require that any employee having completed a number of cumulative hours of service not to exceed 1,200 hours. • Violations are subject to the 4980H excise tax.

33. 2015 - EMPLOYER MANDATE • IRS Postponed Effective Date From 2014 to 2015. Employers with at least 50 full-time (30 or more hours per week) and full-time equivalent employees must offer insurance meeting specified requirements or pay a $2,000 per full-time worker penalty after its first 30 employees if any of its full-time employees receive a federal premium subsidy through a state exchange. • A different penalty, not exceeding that above, applies for employers of at least 50 full-time and full-time and equivalent employees that offer insurance that does not meet federal requirements and at least one employee purchases insurance on an exchange.

34. 2018 - TAX ON HIGH-COST HEALTH PLANS • A 40% excise tax will be imposed on insurance companies for high-cost "Cadillac" plans starting in 2018. • “High cost” is defined as employee-only coverage costing $10,200 or more and family coverage costing $27,500 or more (high-risk specialty employees have higher limits). These amounts will be indexed in 2019 and beyond. • The cost of stand-alone (separate) dental and/or vision insurance, cancer insurance, and other specified types of coverage is not counted in determining this cost.

35. Practical Results - Holtz-Eakin & Smith, “Labor Markets and Health Care Reform: New Results,” AMERICAN ACTION FORUM (May 2010), Health reform provides strong incentives for employers, perhaps with the agreement of their employees, to drop employer-sponsored health insurance for as many as 35 million Americans . . . and raising the gross taxpayer cost of the subsidies to roughly $1.4 trillion in the first 10 years. This could be the cost of health insurance subsidies and government long-term care coverage.

36. Practical Results - Holtz-Eakin & Smith, “Labor Markets and Health Care Reform: New Results,” AMERICAN ACTION FORUM (May 2010), • $450 billion was projected for subsidies for individuals who do not receive health insurance from their employers. For example a family earning $59,000 a year in 2014 would receive a premium subsidy of about $7,200. A family making $71,000 would receive about $5,200; and even a family earning about $95,000 would receive a subsidy of almost $3,000. By 2018, subsidy amounts and the income levels to qualify will grow substantially.

37. Practical Results - Holtz-Eakin & Smith, “Labor Markets and Health Care Reform: New Results,” AMERICAN ACTION FORUM (May 2010), • The simplest calculation focuses on the tradeoff between employer savings and the $2,000 penalty (per FTE employee over 30 FTEs) imposed by the PPACA on employers whose employees are not covered. • Caterpillar recently noted that it could save 70 percent on health care costs by dropping coverage and paying the penalties. AT&T’s $2.4 billion cost of coverage would drop to $600 million for the penalties if it ceased to provide health benefits.

38. Practical Results - Holtz-Eakin & Smith, “Labor Markets and Health Care Reform: New Results,” AMERICAN ACTION FORUM (May 2010), Health insurance is only one portion of the overall compensation package employees receive. If one portion of that package is reduced or eliminated, wages will likely be increased to retain and attract valuable labor where there is competition for these employees. Thus, the key question is whether the employer can keep the employee happy by discontinuing health coverage and increasing wages. Of course, this would subject larger employers to the employer mandate penalty, but that penalty is far less that the cost of health coverage.

39. Practical Results - Holtz-Eakin & Smith, “Labor Markets and Health Care Reform: New Results,” AMERICAN ACTION FORUM (May 2010), The CBO estimated that 19 million people would receive exchange insurance subsidies at a cost of about $450 billion over the first 10 years. This analysis suggests that the number could easily be triple that (19 million plus an additional 38 million in 2014) –for a cost of $1.4 trillion. The gross cost would be partially offset by the receipt of the $2,000 employer mandate penalties.

40. Practical Results - Holtz-Eakin & Smith, “Labor Markets and Health Care Reform: New Results,” AMERICAN ACTION FORUM (May 2010), If high-wage workers want to continue to receive health insurance, the new non-discrimination rules, if and when they become effective, force employers to offer equivalent insurance to most workers. For those firms dominated by lower-wage workers that will provide no coverage and, if they now provide it, then discontinue it, and pay the workers increased compensation and the employer mandate penalty, then once the nondiscrimination rules are effective for insured plans, it will not be able to provide health insurance solely for the high wage workers or the employer will have a $100/day ($36,500 per year) penalty times 75% of its employees.

41. Health ReformUnaffordable Coverage One of the most challenging provisions to interpret and apply is the requirement that employers provide “affordable” coverage – meaning that full-time employees must generally be asked to pay no more than 9.5% of their household income for coverage. Regulations will have to clarify whether the 9.5% affordability standard applies to just employee-only coverage or to family coverage as well, and whether all plans offered or just the lowest-cost plan will need to meet the standard.) 38% of US employers have at least some employees for whom coverage would be considered “unaffordable.

42. Health ReformAdditional Practical Impact Mercer found that 31% of all employers with 500 or more employees and 20% of those with 20,000 or more employees offer unaffordable coverage. • If employer coverage is “unaffordable,” and at least one employee receives government assistance to buy individual coverage through a health insurance exchange, beginning in 2014 the employer must pay a yearly penalty of $3,000 per full-time employee who gets government assistance and buys coverage in an exchange (up to a maximum of $2,000 times the number of full-time employees in excess of the first 30).

43. Health ReformAdditional Practical Impact • For employers trying to understand their potential risk for incurring the penalty, determining each employee’s household income presents a significant challenge. Employers don’t have access to information on employee household income. Safe harbors exist, e.g., an employer can use the Box 1 W-2 income it pays. • Employers’ Reactions. Employers’ reactions to enactment have run the gamut from shock to shrug as they consider reform’s impact on their benefit budgets. Some anticipate a whole new strategy, while others expect they’ll tweak a few plan provisions. Variations tend to reflect size, industry, workforce structure, and employee demographics.

44. Health ReformAdditional Practical Impact • Mini-Med Limited Benefit Plans. Mini-med, or limited benefit, plans, which typically limit coverage to $50,000 to $100,000 per year, will no longer be an employer option for employees who work an average of 30 or more hours a week. • Majority Of Employers Can Anticipate Making Some Plan Design Changes. It will generally cost an employer more to offer a generous plan and cap the contributions for low-income employees at 9.5% of their income.” Employers that continue to provide coverage may adopt a safety-net plan that meets the minimum requirements as the new standard plan and offer a more generous plan at higher cost to employees.

45. Health ReformDoes Nothing For Cost Shifting Health insurance reform does not address the inequities between provider costs paid by government-sponsored plans and those paid by employer-sponsored plans. Medicare and Medicaid have lower payment rates than private insurers, leaving providers looking to the private sector to make up for these lower reimbursements. The one thing reform does for states participating in the Medicaid expansion is to reduce uncompensated charity care, a help to providers.

46. Health ReformEmployer Strategies • Mercer says employers face not only new sources of cost, but also the risk of continued and more intensive cost shifting from government-sponsored programs. As a result, it is highly likely that the cost trend may increase at a higher rate than expected over a 10-year period. • Make More Employees Part-Time; Subcontract Work To Independent Contractors; Increase Part-Time Employees; Hire Older Workers On Medicare. Employers that are facing significant cost increases because of the requirements to cover new groups of employees will weigh all possible alternatives .

47. Health ReformMay Reduce Coverage For Many Rather than expanding access to coverage, the law may result in employers reducing the number of hours employees are eligible to work to under 30 hours per week, as there is no employer penalty for not providing health coverage to these part-time employees. Such employees would have no health coverage and lower incomes that what they might have otherwise had. Mercer found 34% of employers would consider changing their workforce strategy so that fewer employees work 30 hours or more per week, and 38% would consider offering only a lower-cost plan for part-timers.

48. Frequently Asked Questions – Small Employer Tax Credit What do I need to know about the small employer health care tax credit – Do I qualify? • For-profit and non-profit businesses are eligible for a tax credit for their health insurance premiums if they have (1) 24 or fewer full-time equivalent (FTE) counted employees (employees not counted are owners, designated family members, and seasonal employees working fewer than 120 days per year) and (2) if the counted employees’ average compensation is less than $50,000 per year. • The credit is largest for employers with 10 or fewer FTE employees with average compensation of no more than $25,000 for the counted employees. • The tax credit phases out gradually, and no longer applies once an employer's counted FTE employees’ average wages equal or exceed $50,000 per year or once the employer has 25 or more counted FTE employees.

49. Frequently Asked Questions • To obtain the credit, an employer must pay at least 50% of the cost of health care coverage for each counted worker with insurance. • In 2010, the employer could qualify if it paid at least 50% of the cost of employee-only coverage, regardless of actual coverage elected by an employee. For example, if employee-only coverage costs $500 per month and family coverage costs $1,500 per month, and the employer pays at least $250 per month (50% of employee-only coverage) per covered employee, then even if an employee selected family coverage, the employer would meet this contribution requirement to qualify for the tax credit in 2010. • Beginning in 2011, however, the percentage paid by the employer for each enrolled employee must be a uniform percentage for that coverage level. If the employee receives coverage that is more expensive than single coverage (such as family or self-plus-one coverage), the employer must pay at least 50 % of the premium for each employee’s coverage in 2011 and thereafter.

50. Frequently Asked Questions – Tax Credit • Thus, grandfathered health insurance plans that, for instance, provide for 100% of family coverage for executives and employee-only coverage for staff will qualify for the tax credit in 2010 but not in 2011 or beyond. • For tax-exempt entities, the federal tax credit is applied against federal income tax withholding and Medicare taxes, and both the employee and employer shares. The credit is 35% of covered premiums (25% for non-profits) and, for 2 consecutive years in 2014 and thereafter, 50% (or 35% for non-profits) respectively. Example: In 2010, a qualified for-profit employer has nine FTEs (not counting the owner, certain relatives, and seasonal employees working fewer than 120 days per year) with average annual wages of $24,000 per counted FTE. The employer pays $75,000 in health care premiums for those counted employees (which amount does not exceed the average premium for the small group market in the employer's state and otherwise meets the requirements for the credit). The credit for 2010 equals $26,250 (35% x $75,000). For tax years beginning in 2010 through 2013, the maximum credit for a tax-exempt (not-for-profit) qualified employer is 25 % of the employer’s premium expenses that count towards the credit.