Affordable Care Act Update

1. Affordable Care Act Update Anita Baker, CPA, CEBS February 8, 2017

2. Disclaimers To ensure compliance imposed by IRS Circular 230, any U. S. federal tax advice contained in this presentation is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed by governmental tax authorities. The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting, or tax advice or opinion provided by CliftonLarsonAllen LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader’s specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her CliftonLarsonAllen LLP or other tax professional prior to taking any action based upon this information. CliftonLarsonAllen LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

3. Learning Objectives • At the end of this session, you will be able to: • Provide a summary of the current regulations affecting large employers • Discuss recent changes in the regulations related to small employer Health Reimbursement Accounts • Discuss recent developments and proposals related to repealing and replacing the ACA

4. Large Employers ALE Determination

5. Large Employer Calculation • Full-Time Employees and FTEs • An employee who has an average of at least 30 hours per week or at least 130 hours per month of paid hours of service is considered full time • FTE considers hours in the month by employees who are not full time, divided by 120 hours • Full Time + FTE = Total FTE • Small Employer < 50 FTEs • Large Employer > 50 FTEs https://www.irs.gov/affordable-care-act/employers/determining-if-an-employer-is-an-applicable-large-employer

6. Large Employer Calculation • Be mindful of variable-hour employees/industries • Construction industry • Hospitality Industry • Recognize the importance of the monthly hours calculation • Issuing 80 W-2s does not necessarily put employer at ALE status • A “rough” calculation reviewing annual payroll creates inaccuracy and worse, a possible filing that is not required • Count FTEs for preceding year for current year reporting

7. Seasonal Worker vs. Seasonal Employee • Seasonal worker exception may be used to determine ALE status • Employee is excluded from ALE headcount if working <120 days during the year (four months) and if by including the seasonal worker the employer was considered an ALE during those months • Must look at entire preceding year to use seasonal worker exception *Understand your client’s workforce and employment throughout the year

8. Large Employers Measurement Methods

9. Measurement Methods Available • Monthly Measurement Period • Under this method, ALE determines each employee’s status as full-time employees by counting the employee’s hours of service for each calendar month • A full-time employee with respect to a calendar month is one employed an average of at least 30 hours/service per week or 130/hours per month • Simplest method available • Best used for steady workforce

10. Measurement Methods Available • Look-back Measurement Method • Under this method, ALE determines each employee’s status as full time by looking back to standard measurement period • If employee attained on average at least 30 hours of service per week during the measurement period, then ALE must treat employee as full time during a subsequent stability period, regardless of employee’s actual hours during the stability period, as long as he/she remains employee • Best used for variable-hour employees

11. Seasonal Worker vs. Seasonal Employee • Seasonal employee exception may be used to determine if employer is required to offer insurance to seasonal employee • Seasonal employee is hired into position of employment for six months or less • Whether employee is expected to work at least 30/hours per week is irrelevant • Period of employment for seasonal employee begins approximately at same time each year and continues for six months or less (agribusiness/recreational (ski resort)) • Unusual situations, employee may work longer than six months

12. Seasonal Worker vs. Seasonal Employee • Seasonal employee exception is relevant only when determining an employee’s status as a full-time employee under the look-back measurement method • Notice: Seasonal worker definition IS NOT the same as seasonal employee definition • In theory, using a longer look-back method could essentially eliminate the requirement to offer insurance to seasonal employees

13. Look-back Method Employee Uses • Look-back method is more complex than monthly- measurement method • Use of LB-method should be considered for employers not offering variable employees health insurance • Generally reduces penalties for no offer of coverage • New hires create additional tracking since initial measurement period is different than ongoing employees • Change in status or position creates other hurdles • Software products available to handle tracking

14. Large Employers Affordability

15. Understanding Affordability • Employers recognize reporting requirements and penalty for no offer but need guidance on affordability • Employers may be assessed penalties for not offering affordable insurance • IRS allows for three safe harbors to ensure employers are not penalized for not offering affordable coverage • Accountants and Insurance Agents need to discuss affordability with clients

16. W-2 Safe Harbor • The required contribution for the year does not exceed 9.5% of the employee’s Form W-2 wages for the calendar year • Expected employers may rely on 9.66% for 2016

17. Rate-of-Pay Safe Harbor • The required monthly contribution does not exceed 9.5% of an amount equal to 130 hours multiplied by the employee’s hourly rate of pay • Expected employers may rely on 9.66% for 2016

18. Federal Poverty Line Safe Harbor • The required monthly contribution does not exceed 9.5% of the federal poverty line for a single individual for the applicable calendar year divided by 12 • Expected employers may rely on 9.66% for 2016

19. Large Employers Penalty Calculation

20. Penalty Calculation • No offer of coverage: $2,000 per full-time employee annually (excluding first 30 full-time employees) • Offer of unaffordable coverage: $3,000 per full-time employee receiving a federal subsidy • Penalty for offering unaffordable insurance is capped to: (lessor of) penalty calculated if the employer offered no insurance at all compared to penalty determined by number of employees receiving subsidies • $2,000 and $3,000 amounts are indexed for inflation

21. Employer Mandate Penalty Process • IRS is still finalizing process • Timing: IRS will contact employers sometime after individual tax deadline • Process • IRS reviews three data sources: Forms 1094/1095-C, Individual Tax Forms of Employees, and Information about Exchange Subsidies • Initial contact from IRS to inform about potential liability • Opportunity for employer to respond • IRS to send notice and demand for payment • Payment made separately from other tax payments

22. Penalty Trigger • Potential Penalty Trigger • Used in Penalty Calc

23. Penalty Triggers (Lines 14-16)

24. Notification: §1411 Certification • Notices of Employee Eligibility for Exchange Subsidies • Employer has right to appeal within 90 days • IRS penalty calculation is a separate process • Benefits to appealing: • Minimize employee’s potential liability to repay subsidies • Additional protection for employer against 4980H penalties

25. Large Employers Lessons Learned

26. ACA Reporting Challenges and Lessons Learned Challenges Lessons Learned Form 1095-C is NOT a W-2 … it takes a lot of time! Coding Lines 14 and 16 are confusing • For example, COBRA to active employee is 1E, COBRA to recent term is 1H, but COBRA to prior year term is 1G… Errors are very common and penalties are large Start early in 2016 (deadline extended to 3/2/17) Establish a thorough review process and carefully choose service providers Understand common errors and penalty triggers

27. Common Errors in 2015 • Misclassification of employees • Misuse of Code 2D – Limited Non-Assessment Period • Blank months when unemployed instead of 1H/2A • Blank Line 16 when a code applied • Inappropriate use of 1A – Qualifying Offer • Incorrect amounts in Line 15 (or any amounts with Line 14 as 1A)

28. Filing Form 1094-C • Electronic filing required if over 250 Forms 1095-C • Process for electronic filing through AIR System: • Option 1: Service provider or software company handles transmission • Option 2: Employer transmits directly to IRS • For Option 2, employer must complete four steps: • Register to use IRS e-Services Tools • Apply for Transmitter Control Code (specific to 1094/1095) • Required Testing with AIR System • Electronically File XML File through AIR

29. Individual Mandate Penalties

30. Employee Status Under ACA • Individual mandate requires ACA-approved insurance • 2014 penalty greater of: • $95 per uninsured person in household (limited to three); or • 1% of household income • 2015: • $395 per uninsured person; or • 2% of household income • 2016 and After: • Penalty maximizes at $695 per person; or • 2.5% of household income

31. Individual Mandate Exempt Individuals • Member of recognized religious sects who have a religious conscience exemption • Member of health care sharing ministries • Individual who is not U.S. citizen or national who is nonresident alien or is present in the U.S. illegally • Incarcerated individual, other than those who are incarcerated pending the disposition of charges • Member of Indian tribes • Individual with short-coverage gaps • Individual whose household income is less than requirement to file a tax return • Individual who cannot afford coverage (premiums greater than 8% of household income) • Individual with a hardship-exemption certificate

32. Exchange Subsidies • Refundable premium assistance tax credit for low- and middle-income individuals purchasing health insurance through an ACA exchange • Multi-step Process: • Purchase health insurance through exchange • Exchange pays portion of premium (advance payment) based on individual’s estimate of income • Or employee pays entire premium • Advance payment reconciled in Form 1040 [Sec. 36B] • Could create tax liability or refundable credit

33. Recent Changes- Health Reimbursement Accounts

34. Health Reimbursement Accounts • IRS Notice 2013-54 • No employer stand-alone use of Sec. 105 medical reimbursement plans and Sec. 106 reimbursement of employee health insurance premiums. • $100 per day per employee penalty. • As a result, small employers, forced to abandon these plans, generally increased employee taxable compensation to offset the former tax-free benefits, increasing tax costs to both the employer and employee

35. Legislative Relief Effective January 1, 2017 • H.R. 34 has relief language in the form of new code Sec. 9831(d), removing the $100/day/employee penalty for small employers. • An eligible small employer is one who employs fewer than 50 FTEs and does not offer a group health plan to any of its employees. • The qualified small business HRA provides for the reimbursement of out-of-pocket medical expenses and insurance premiums incurred by the employee and the employee’s family members.

36. Legislative Relief Effective January 1, 2017 • The plan is nondiscriminatory (although exclusions are allowed for employees with less than 90 days of service, those under age 25, and part-time and seasonal workers). • All reimbursements are provided by the employer; no salary reduction contributions are allowed. The reimbursements are deductible to the employer and tax-free to the employee.

37. Legislative Relief Effective January 1, 2017 • The total payments and reimbursements on behalf of any employee do not exceed $4,950 per year, or $10,000 per year if the plan allows reimbursement for family members of the employee. • If the employee has purchased health insurance through an ACA Exchange, any Premium Tax Credit will be reduced (but not below zero) to the extent of the permitted benefit under the qualified small employer health reimbursement arrangement, determined on a monthly basis.

38. Employee Notice and Reporting Requirements • A small employer adopting this arrangement must provide a written advance notice to each eligible employee which includes: • The amount of the employee’s permitted benefit for the year; • A directive that the employee should provide the amount of the benefit arrangement to any health insurance exchange in which the employee participates; and • A statement that the employee does not have exempt reimbursements if the employee fails to maintain ACA-level health coverage for the year

39. Employee Notice and Reporting Requirements • In general, the employer notice is due 90 days before the beginning of each year or within 90 days after enactment of the new law. • In addition, the employer must report the total amount of permitted benefit for the year as memo information on the employee’s W-2.

40. The Future of the ACA Repeal and Replace?

41. Future of the Affordable Care Act- Executive Order January 20, 2017 • Seeking “prompt repeal” of the ACA • Executive branch imperatives • Ensure that ACA is being efficiently implemented • Minimize economic and regulatory burdens • Provide states more flexibility and control to create fee and open healthcare market • Revision of regulations is likely

42. Future of Affordable Care Act-Executive Order January 20, 2017 • Secretary of HHS and the heads of all (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to: • waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.

43. Future of Affordable Care Act-Executive Order January 20, 2017 • Secretary of HHS and the heads of all (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to: • greater flexibility to States and cooperate with them in implementing healthcare programs • encourage the development of a free and open market in interstate commerce for the offering of healthcare services and health insurance, with the goal of achieving and preserving maximum options for patients and consumers.

44. RESOURCES

45. IRS Provided Resources

46. How We Can Help

47. Where to Go for More Information CLAconnect.com/ACAquote/

48. Thank you for attending! • Questions?

49. Questions? Anita Baker, CPA, CEBS Managing Principal Employee Benefit Plans CliftonLarsonAllen LLP Anita.baker@CLAconnect.com 602-604-3563 Thank you! For more information on health reform: CLAconnect.com/healthreform