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Kubasiak, Fylstra, Thorpe & Rotunno, P.C.

Chicago, Illinois

The Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (to be codified in scattered sections of 42 U.S.C.) (the "Act"), was signed into law and became effective on March 23, 2010.  The Act is the most significant regulatory overhaul of the country's health care system since the passage of Medicaid and Medicare in 1965.  While the Act does not require employers to offer health care coverage, it imposes non-deductible penalties on those applicable "large employers"[1] who fail to offer "minimum essential coverage"[2] to their employees.  This has been popularly described as the "pay or play" provision of the Act.  The Act also imposes a variety of other requirements, including mandatory employer and insurer reporting requirements.

Under its original timetables, both the mandatory employer and insurer reporting requirements, and the employer mandate to provide "minimum essential coverage," were to be implemented effective January 1, 2014.  On July 2, 2013, however, the United States Department of the Treasury announced that it would be postponing the implementation of these provisions until January 1, 2015.[3]  Subsequently, on July 9, 2013, the Internal Revenue Service issued Notice 2013-45, which formally effectuated this announcement.[4]  This postponement is not effective as to other provisions of the Act, such as the premium tax credit under Section 36B or the individual shared responsibility provisions under Section 5000A.

This extension provides employers with an additional year to achieve compliance with certain of the Act's requirements and avoid the "pay or play" penalties.  There remains, however, significant work for employer's to accomplish to both prepare for January 1, 2015, and to comply with the remaining provisions of the Act.

A.        Individual Tasks to Accomplish By Specified Dates.

1.         By July 31, 2013: Pay PCORI Fee (if applicable).  Health insurance carriers and sponsors of self-insured health plans are required to pay a fee to fund the Patient Centered Outcomes Research Institute (the "PCORI Fee").  The PCORI Fee is $1 per-participant for the first plan year ending on or after October 1, 2012, and $2 per-participant in succeeding years.  For plan years ending on or after October 1, 2014, the PCORI Fee may be further adjusted based upon certain criteria.  The PCORI Fee is due no later than the July 31st following the last day of a plan year.  If an employer does not self-insure its health care plan, the employer's insurance carrier will pay the PCORI Fee.  If an employer does self-insure its health care plan, then the PCORI fee would have been due by July 31, 2013.  If this fee was due and an employer did not pay it, the employer should prepare and file IRS Form 720 (Rev. April 2013) and pay the PCORI Fee as soon as possible.

2.         By October 1, 2013: Provide FLSA Notice to Employees.  The Act amended the Fair Labor Standards Act ("FLSA") by creating Section 18B of the FLSA, which requires employers to provide written notice to their employees of coverage options available through the Health Insurance Marketplace (the "FLSA Notice").  The United States Department of Labor ("DOL") has posted model language and a sample FLSA Notice on its website, available at http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf.  Beginning on October 1, 2013, an employer must provide the FLSA Notice to each new employee within 14 days of that employee's start date.  With respect to employees who are or will be current employees as of October 1, 2013, an employer is required to provide the FLSA Notice no later than October 1, 2013.  An employer must provide the FLSA Notice by first-class mail, or an employer may provide it electronically, provided that it meets the DOL's electronic disclosure "safe harbor" criteria, set forth at 29 C.F.R. § 2520.104b-1(c).

3.         By January 1, 2014: Terminate mini-med and limited medical plans and HRA's.  The Act's requirement that health care plans have no annual or lifetime limits for essential medical benefits means that many "mini-med" and limited medical plans and stand-alone Health Reimbursement Arrangements ("HRA's") will no longer be permitted.  If an employer has "mini-med" or limited medical plans, or an HRA, then it should have already terminated them, unless it received a waiver from the United States Department of Health and Human Services ("HHS").  If an employer did receive a waiver from HHS, it will likely expire on January 1, 2014.  Accordingly, most employers will be required to terminate any applicable "mini-med" plans, limited medical plans and HRA's by that date.  If any employer has such a plan or HRA still active, and it did not receive a waiver from HHS, the employer should terminate it as soon as possible.

4.         By either December 2, 2013, or January 1, 2014: Provide updated SBC to employees.  Effective January 1, 2014, whenever an employer is required to provide a Summary of Benefits and Coverage ("SBC") to its employees, the SBC must contain new information that is mandated for 2014 by the DOL, HHS and the Treasury.  As of January 1, 2014, the SBC will be required to state whether the health care plan provides "minimum essential coverage" and whether the plan meets the "minimum value" ("MV") requirement.  A plan will meet the MV requirement if it provides at least 60% coverage for total allowed costs.

An employer must provide an SBC to its employees (i) within 7 business days after the employee requests an SBC, (ii) when they enroll in coverage for the first time, and (iii) prior to the beginning of each plan year (if an employer has open enrollment, the SBC must be provided at open enrollment; if an employer has automatic enrollment, the SBC must be provided 30 days prior to automatic enrollment).  Note, however, that if an employer has automatic enrollment, and utilizes a calendar-year plan, then it would be required to provide the updated SBC to its employees by December 2, 2013, which would be 30 days prior to automatic enrollment on January 1, 2014.

5.         By January 1, 2014: Amend plan documentation and SPD's to reflect new health care coverage requirements.  An employer will need to amend its health care plan documentation and the Summary Plan Description ("SPD") to reflect certain changes that the Act imposes and that will go into effect for plan years beginning on or after January 1, 2014.  As of that date:

a.         Exclusions from coverage for pre-existing conditions will be prohibited;

b.         A health care plan may not impose a waiting period of more than 90 days before an employee becomes eligible for coverage;

c.         No health care plan may impose an annual or lifetime limit on essential medical benefits; and

d.         The definition of "Dependent," which currently includes biological children, adopted children, and step-children, will also include foster children.[5]

6.         By January 31, 2014: Provide W-2's to employees that reflect the cost of health care plans.  The Act requires employers to report, for informational purposes only, the cost of employer-sponsored health care plans in Box 12 of each employee's Form W-2.  Reporting is to be done on a calendar-year basis, regardless of the plan year an employer uses.  The amount reported should include both the portion paid by the employer and by the employee.  An employer is not required to issue a Form W-2, however, for those employees participating in a health care plan but for whom the employer would not otherwise be issuing a W-2.  Accordingly, for the 2013 tax year and going forward, employers will be required to report this information on the Form W-2's that it provides to its employees.  These W-2 forms must be provided to each employee by January 31, 2014 for the 2013 tax year.  This reporting obligation will continue for each subsequent tax year.

7.         By November 15, 2014: Report annual enrollment count to CMS.  The Act provides for payment of a transitional reinsurance program contribution ("Reinsurance Fee") to stabilize premiums in the Health Insurance Marketplace as the reforms of the Act are implemented during the period 2014 through 2016.  HHS will calculate the annual Reinsurance Fee during this period, based upon required reporting to the Centers for Medicare and Medicaid Services ("CMS") of the number of "covered lives" in each health care plan.  Accordingly, employer are required to report their annual enrollment count (based on the first 9 months of the year) to CMS by November 15, 2014.  Thereafter, HHS will notify the party responsible for paying the Reinsurance Fee of the total payment due.  If an employer does not self-insure its health care plan, the insurance carrier will be the party responsible for paying the Reinsurance Fee.  If an employer does self-insure its health care plan, the employer will be responsible for paying the Reinsurance Fee.  For 2014, the Reinsurance Fee will be $63 per covered life.

8.         By January 1, 2015: Complete the following analyses.  Although the "pay or play" provisions of the Act have been delayed until January 1, 2015, employers should take advantage of this delay by getting a head start on some of the analysis and calculations that will be necessary by the time "pay or play" provisions becomes effective.  For some companies, this will include a calculation of whether it has more than 50 "full-time equivalent" employees, to determine whether such companies will qualify as a "large employer."  Regardless of whether a company is a "large employer," however, all employers should undertake the following analysis to determine which of its employees will qualify as full-time employees who must be offered health care coverage in order to avoid the "pay or play" penalty:

a.         Review its methods for tracking hours worked, to ensure that the employer tracks accurately employee hours for purposes of the Act;

b.         Selecting the method by which the employer will determine which of its employees qualify as "full-time equivalent" employees under the Act.  As a general rule, an employer may track its employees' hours on a month-by-month basis or by utilizing a "standard measurement period" of between 3 and 12 months;

c.         Identify all "common-law employees."  The Act considers a worker to be an "employee" if the worker falls within the common law definition of an employer-employee relationship.  As a general rule, this involves an analysis of whether the employer has the right to control and direct the work of the individual providing services.  Most leased/temporary workers and independent contractors will not be an "employee," because the common law typically views the placement agency as retaining the right to control and direct such workers;

d.         Identify all "seasonal employees."  As a general rule, a "seasonal employee" is one who performs labor or services on a seasonal basis, as defined by the DOL, and retail workers employed exclusively during holiday seasons. For purposes of determining whether an employer is a "large employer," employers must count its "seasonal employees," but such seasonal employees may then be excluded from the total number of employees under certain circumstances.

e.         Identify the proper "controlled group" of applicable entities.  Employees of a group of companies that have common ownership may be part of a "controlled group" or "affiliated service group" of companies.  In this situation, the employees of each company are added together to determine if the individual companies are "large employers."  As a result, although an individual employer might have less than 50 equivalent full-time employees, it might nonetheless qualify as a "large employer" when taking into account the employees of other companies within the "controlled group;" and

f.          Determine whether the health care plan provides "minimum value" and is "affordable."  A plan provides "minimum value" if it provides at least 60% coverage for total allowed costs.  A health care plan is "affordable" if a required employee contribution would not exceed 9.5% of household income of such employee.  Since an employer will not necessarily know the household income of its employees, the IRS permits employers to use any 1 of the following 3 "safe harbor" methods to estimate household income:

(i) Form W-2:  The box 1 income for the months during which the employee was eligible for coverage;

(ii) Rate of Pay:  Monthly salary or an hourly employee's rate of pay multiplied by 130 for the months during which the employee was eligible for coverage; or

(iii) Federal Poverty Line ("FPL"):  The FPL for a single individual (currently $11,490).

9.         By January 1, 2014: Advise employees of premium tax credit (if applicable).  The Act provides that beginning on January 1, 2014, individuals may be eligible to obtain a premium tax credit to be used to assist in the purchase of health care through the American Health Benefit Exchanges ("Exchanges") established by individual States.  In order to be eligible, an individual must be between 100% and 400% of the federal poverty level.  (For 2013, this would range from $11,490 for one individual to $94,200 for a family of four.)  Further, the individual must not be eligible for an "affordable" health care plan that provides "minimum value."  If the individual is actually enrolled in a health care plan (and thus actually receiving coverage), but the health care plan is not "affordable" or does not provide "minimum value," then the individual may still receive the premium tax credit.  The credit may be used to obtain a tax refund, so an individual may receive it even if he or she has no income tax liability.  It is also advanceable, so that an individual may have the government pay it directly to a health care provider for purposes of obtaining coverage.  The individual would then need to reconcile the advance payment with the credit on the individual's income tax return.  Eligible individuals must apply for the credit directly through the applicable Exchange.  Although the premium tax credit does not have a direct effect upon employer, they may wish to consider providing to its employees who are not eligible for enrollment in its health care plan information concerning the credit.

B.        Recent Developments: Definition of "Marriage" and Relevance to the Act.

On June 26, 2013, in United States v. Windsor, 133 S. Ct. 2675 (U.S. 2013), the Supreme Court of the United States struck down Section 3 of the Defense of Marriage Act ("DOMA"), which provided a Federal definition of "marriage" that restricted its application to heterosexual couples.  As a result of Section 3 being held unconstitutional, there no longer remains a Federal definition of "marriage," and the Federal government will look solely to State law for its definition.  On August 29, 2013 the Internal Revenue Service issued Revenue Ruling 2013-17.[6]  Revenue Ruling 2013-17 provides that for Federal tax purposes, the terms "spouse," "husband and wife" and "wife" include an individual married to a person of the same sex if the individuals are lawfully married under State law, and the term "marriage" includes such a marriage between individuals of the same sex.  Revenue Ruling 2013-17 further provides that for Federal tax purposes a marriage of same-sex individuals that was validly entered into in a State whose laws authorize the marriage of two individuals of the same sex will be recognized, even if the married couple now lives in a State that does not recognize the validity of same-sex marriages.  Revenue Ruling 2013-17 became effective September 16, 2013.

On September 18, 2013 the DOL issued Technical Release 2013-04[7] which has parallel language to that of Revenue Ruling 2013-17.  The Technical Release provides that the term "spouse" will include individuals who are lawfully married under any State's law, including individuals married to a person of the same sex who were legally married in a State that recognizes such marriages, but who are domiciled in a State that does not recognize such marriages.  Furthermore, the Technical Release defines the term "State" to mean any State of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, American Samoa, Guam, Wake Island, the Northern Mariana Islands, any other territory of the United States, and any foreign jurisdiction having the legal authority to sanction marriages.

The Windsor case, and in particular Revenue Ruling 2013-17 and Technical Release 2013-04, will have an impact on the health care and welfare benefit plans of employers and their implementation of Act, as well as their compliance with existing Federal laws, such as the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA") and the Health Insurance Portability and Accountability Act of 1996 ("HIPAA").  One impact is that if employees of a company previously obtained medical coverage for their same sex spouse through the company, and the company included the value of the coverage in their gross income, such employees may be able to file for a federal tax refund, and the company may be able to file for a refund for excess Social Security and Medicare taxes previously paid for such employees if the period of limitations is open.  The full impact, however, remains to be seen and will depend to some extent upon additional regulations and court and administrative rulings.  Employers need to carefully monitor these developments to assure that they remain in compliance with the Act.

For more information about Kubasiak, Fylstra, Thorpe & Rotunno, please visit www.kftrlaw.com or the International Society of Primerus Law Firms.

[1] A "large employer" is one that has at least 50 "full-time equivalent" employees.  This number includes both full-time employees (i.e. those who work 30 or more hours per week) and the total numbers of hours worked by part-time employees on a monthly basis, divided by 120.  For example, if in a given month Employee A works 65 hours, Employee B works 83 hours, and Employee C works 112 hours, and assuming each was a part-time employee, their monthly total is 260 hours.  Dividing this total by 120 produces 2.16 "full-time equivalent" employees.

[2] "Minimum essential coverage" includes: government-sponsored programs, such as Medicare and Medicaid; employer-sponsored group health care plans (whether insured or self-insured); plans offered in State individual insurance markets; and other coverage recognized by the United States Department of Health and Human Services.

[3] Mark J. Mazur, Continuing to Implement the ACA in a Careful, Thoughtful Manner, Treasury Notes, July 2, 2013, http://www.treasury.gov/connect/blog/pages/continuing-to-implement-the-aca-in-a-careful-thoughtful-manner-.aspx.

[4] Notice 2013-45, 2013-31 I.R.B. 116.

[5] There are other modifications depending on whether or not a health care plan is "grandfathered."

[6] Rev. Rul. 2013-17, I.R.B. 2013-28 (2013).

[7] DOL Technical Release 2013-04; News Release Number 13-1720-NAT