The Employer Mandate Handbook

Copyright ©2013-2014 Mario K. Castillo

All rights reserved under

International and Pan-American Copyright Conventions

Published in the United States by

Chelsea Press, an Imprint of Creek Falls Publishing - 2014

ISBN: 978-0-9916387-0-3

Library of Congress Control Number: 2014909952

Disclaimer: The content in this book is only for educational purposes and is not a substitute for legal advice. This publication is not an omnipotent guide. The intent of this publication is to provide general information about the subject matter discussed herein. The publication provides information with the express understanding that neither Mario K. Castillo nor Monty & Ramirez, LLP is rendering legal, accounting, or tax advice. You should obtain appropriate, personalized advice from tax and legal counsel on all matters arising from the requirements outlined throughout the book. Neither the publisher, Mario K. Castillo, nor the law firm of Monty & Ramirez LLP assumes any liability for errors or omissions or for the use or interpretation of information herein, directly or indirectly.

Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any electronic or mechanical means (including electronic, mechanical, photocopying, recording, or otherwise) without prior written permission from the copyright owner, Mario K. Castillo. Please mail requests for permission to make copies of any part of this publication to the address below.

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Contents

About the Author

Preface

Acknowledgments

I. Does the Employer Mandate Apply to You?

Chapter 1.Introduction: A New World

Chapter 2.Controlled Groups

Parent-Subsidiary Controlled Groups

Identify Involved Ownership Interests

Attribute Ownership Interests

Exclude Ownership Interests

Test for 80% Ownership

Brother-Sister Controlled Groups

Identify Involved Ownership Interests

Attribute Ownership Interests

Exclude Ownership Interests

Test for Controlling Interest and Effective Control

Combined Controlled Groups

Summary

Chapter 3.Affiliated Service Groups

Non-Management Affiliated Service Groups

Identifying A-Organization Affiliated Service Group

Identifying B-Organization Affiliated Service Group

Identifying a Significant Portion of the Business

Historical Performance Test

The 10% Ownership Test

Management Affiliated Service Groups

Attribution in Affiliated Service Groups

Summary

Chapter 4.Applicable Large Employer

Creating an Employee Roster

Independent Contractor vs. Employee

Owners, Leased Employees, Direct Sellers, and Real Estate Agents.

Identifying Employee Types

Hours of Service vs. Hours Worked

Workers Subject to Modified Hours of Services Rules

Full-Time Employees

Full-Time Equivalent Employees

The Applicable Large Employer Determination

The Seasonal Worker Exception

2015 Initial ALE Determination

New Employers’ ALE Determination

Summary

II. Employee Eligibility and Demand for Benefits Under the Employer Mandate

Chapter 5.Delay and Transition

ALEs With Fewer Than 100 Full-Time Employees

Limited Workforce Size

Maintain Workforce Size and Aggregate Hours of Service

Maintain Previously Offered Health Coverage

Certification of Eligibility for Transition Relief

New Employers and Eligibility for the 2016 Delay

Non-Calendar Year Plans and the 2016 Delay

Non-Calendar-Year Plan Transition Relief

Individual Employee Deferment Method

Significant Percentage of All Employees Delay Option

Significant Percentage of Full-Time Employees Delay Option

Delay of Employer Mandate Penalties Separate from Reports Required

Multi-Employer–Plan Transitions

Chapter 6.Measuring Full-Time Employees

Monthly Measurement Method

Full-Time Employee’s Fourth Month

Returning Employees Under Monthly Measurement Method

Look-Back Measurement Method

Employee Type Determines Appropriate Look-Back Method

Ongoing Employees

New Employees

Change in Employment Status

Change in Employment Status under the Monthly Measurement Method

Change in Employment Status under the Look-Back Measurement Method

New Employees Hired into High-Turnover Positions

Temporary Employees from Staffing Agencies

Employee Transfers Between Measurement Methods.

Transfers from Look-Back to Monthly Measurement Method.

Transfers from Monthly to Look-Back Measurement Method

Transfers from Foreign ALEM to Domestic ALEM

Summary

Chapter 7.Surveying Employees:

Advantages and Disadvantages

Retaliation Claims

Retaliation Claims Arising During 2013–2014

Retaliation Claims Arising in 2015

Chapter 8.Practical Issues in Offering Coverage

Offer Coverage to Eligible Full-Time Employees and Their Dependents

Make Offers of Coverage in Writing

Give Adequate Time To Consider the Offer

Adhere to 90-Day Waiting Periods for Eligible Employees

Employee Fails to Pay Premiums

Employee Misses Offer of Coverage

Summary

III. Employee Benefits Under the Employer Mandate

Chapter 9.Qualified Health Plans

Small- and Large-Group Definitions

Qualified Health Plan (QHP)

Minimum Essential Coverage

Minimum Value

Affordability

Review of Qualified Health Plans

Chapter 10.Practical Issues in

Offering QHPs and Alternatives

Financial Obstacle

Minimum Contribution Levels

Minimum Participation Levels

Out-of-Pocket Maximum Limits

Ratings Limits

QHP Alternatives and Supplements

Self-Funded or Self-Insured Plans

Skinny Plans

Mini-Med Plans and Skinny Plans

Employer Funding of Healthcare Premiums

Health Reimbursement Arrangement (HRA)

Health Flexible Spending Accounts (FSAs)

Health Savings Accounts (HSAs)

Chapter 11.Wellness Programs

Wellness Programs Are the Exception to the Rule

Types of Regulated Wellness Programs

Participatory Wellness Programs

Health-Contingent Wellness Programs

Regulatory Requirements of Health-Contingent Plans

Frequency of Opportunity to Qualify

Maximum Size of Reward

Reasonable Program Design

Uniform Availability and Reasonable Alternative Standards

Notice of Availability of Reasonable Alternative Standard

IV. Where To Purchase Benefits

Chapter 12.The Individual Exchange and The Individual Mandate

The Individual Mandate

Exemptions to the Individual Mandate

Member of Recognized Religious Sects or Divisions

Member of Healthcare-Sharing Ministries

Non-Citizen Unlawfully Present in the United States

Incarcerated Individual

Individual Who Cannot Afford Coverage

Individual with Household Income Below Return-Filing Threshold

Member of Indian Tribe

General Hardship Exemptions

Short Coverage Gap Exemption

Additional Exemptions for Employees and Claiming Methods

Compiling Information from Employees

The Health Insurance Exchange or Marketplace

Chapter 13.SHOP Exchanges and Tax Credits

Shop Exchanges

Tax Credits

Eligible Entities

Tax Credit Eligibility Requirements

V. Employer Reporting Requirements and Penalties

Chapter 14.Reporting Requirements

IRC Section 6055 Record Reporting Requirements

Section 6055 Information Returns

Section 6055 Employee Statements

Section 6055 Employee Statements Provided Electronically

IRC Section 6056 Record Reporting Requirements

Section 6056 Information Returns

Section 6056 Employee Statements

Electronic Furnishing of Section 6056 Employee Statements

Simplified Section 6056 Reporting Methods for Eligible ALEMS

Section 6056 Employee Statements and Government Units

Chapter 15.Employer Mandate Penalties

Special Transitional Penalty Relief For An ALE’s First Penalty Year

Standard Operating Procedure Once All Transitional Relief Expires

Employer Did Not Offer Insurance Coverage

Single-Entity Employer Mandate Penalties

Multi-Entity Employer Mandate Penalties

Employer Did Offer Insurance Coverage

Penalty Notification and Deductibility

Summary

Questions and Answers

Chapters 1 and 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15

Glossary

Last Word

References

ABOUT THE AUTHOR

Mario K. Castillo is a labor and employment attorney at the law firm of Monty & Ramirez LLP in Houston, Texas, where he helps employers avoid or minimize liability and defends them when litigation is necessary. Prior to joining Monty & Ramirez, Mario completed a four-year term as briefing attorney to the Honorable Felix Recio of the Southern District of Texas.

Mario received a Juris Doctorate from the Maurer School of Law at Indiana University, Bloomington, Indiana. Prior to attending law school, Mario received a Bachelor of Arts in Government from the University of Texas in Austin.

Follow Mario on Twitter @mariokcastillo for the latest on the Affordable Care Act and other important news to employers. Mario also regularly posts articles and sample forms at www.theacaadviser.com.

PREFACE

On March 23, 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act (ACA).¹ Most people know the ACA as Obamacare, the Affordable Care Act, or simply as the healthcare reform law. While people call it by many names, the emotion the law conjures up is indisputable. Some Americans think the law is great, some are moderately in favor of it, and others hate it.² While we can agree to disagree about the merits of passing the law, it does not change the reality that the ACA is the law of the land and employers should begin to prepare for it. Congress passed it, the President signed it, and the Supreme Court upheld it.³ It is now time for employers and their advisors to begin implementation throughout the United States.

These are uncertain times for those managing a business. Most employers know that the ACA statute and its corresponding regulations span several thousand pages.⁴ Employers of all sizes must identify exactly how the ACA will affect them as business owners. Faced with a daunting new law with mysterious fines that everyone seems to be scared and angry about, business owners have turned to public sources of information such as the television and the Internet. Sadly, quite often employers receive misinformation masquerading as information through those mediums. Misinformation of the law’s contents is already widespread, barely four years after its enactment. In short, there is a real need for this book, which provides a comprehensive overview of the employer mandate and answers many of the questions that other authors ignore or overlook.

My goal in this book is to increase the understanding of how the employer mandate works. I will identify where the rules are clear and where they are unclear. This book is the product of my interactions with employers, managers, and supervisors who have asked many of the same questions now answered in this book. Most importantly, as you prepare for the ACA’s employer mandate, this book will enable you to learn about the associated rules and regulations and avoid many of the mistakes others will have made without that knowledge.

Compliance with the ACA is but a fraction of the issues employers face today. Where appropriate, I will link the ACA with other employer concerns to ensure that employers make decisions considering the many variables attendant to running a successful business.

We all learn in different ways. To account for that reality, there are several ways to approach this book. The first, of course, is to read it from start to finish. The second, and probably the more advisable approach, is to break it into manageable pieces. Some readers might want to begin by reviewing the question and answer section at the end of the book. I divided the text into five sections.

Following the text, there are some additional resources: a compilation of anticipated questions and answers that are organized and keyed to the chapter in which further discussion of the topic is available and a glossary of terms.

Note that throughout the book, a distinction is made between a legal entity and a business. A legal entity (unless otherwise noted) refers to a corporation, a partnership, a limited liability company, or any of the many forms that legal entities can take under state law. A business refers to a for-profit enterprise that may be a single legal entity or a collection of multiple legal entities.

Finally, there is no universal response to the employer mandate requirements because each business, its workforce, and its managers are different. My purpose here is to guide. I hope you will find this book neutral, straightforward, and helpful as you prepare for 2015 and beyond.

ACKNOWLEDGMENTS

Many people helped to mold this book. I am indebted to friends that read early drafts and provided invaluable feedback. I am particularly grateful to Lena Chaisson-Munoz, Craig Smith, and Jon Morris for reading and commenting on early drafts. I also want to thank my technical editor, Dr. Joyce Evans, and my book designer Jean Dukate for their meaningful contributions to this project. Finally, I want to thank Nancy Molina for her help in finalizing citations.

I am very grateful to my friends and family for graciously enduring the absolute focus a project of this magnitude required. I am most grateful for my wife, Jessica. Her patience and grace as I worked on this project, for two years, is humbling. Undoubtedly, she endured more than her fair share of employer mandate discussions. This project would not have been possible without her support.

PART I

DOES THE

Employer

Mandate

APPLY TO YOU

CHAPTER

1

Introduction: A New World

The Patient Protection and Affordable Care Act (ACA) became law on March 23, 2010.⁵ The ACA regulations require certain employers to offer certain qualified insurance coverage to certain employees.⁶ The ACA’s employer mandate goes into effect on January 1, 2015.⁷ The employer mandate applies to applicable large employers (ALEs),⁸ not to all business employers, and stipulates that affordable, qualified insurance be provided to full-time employees.⁹ A clear understanding of the terminology—applicable large employer, single employer, Qualified Health Plan, affordability, full-time employee—as used in the ACA is critical in the quest to avoid costly penalties and unnecessary headaches. This is a new world created by the ACA, and this book is designed to be a resource for understanding the ACA terminology and regulations.

The distinction between the employer and the applicable large employer (or ALE) is best represented by the relationship among three circles denoting employer types (Figure 1). Not all employers are ALEs; the ALE is a subset of employers and is defined on the basis of number of full-time employees, or their equivalent, in the business. A critical first step in evaluating the impact of the ACA on your business is to determine if you will be classified as an ALE. It is the ALE that must be compliant with the employer mandate provisions. This book will clarify how each business is classified by employer type in the new world of the ACA.

Although the ACA is a new law, many of its provisions are much older. For example, the ACA never defines single employer. Instead, the ACA refers to the definition of the term in much older statutes.¹⁰ In 1974, Congress passed the Employee Retirement Income Security Act of 1974 (ERISA) aimed at regulating retirement benefits in the private sector.¹¹ Before ERISA, creative employers would arrange their companies in a way that allowed them to offer retirement benefits to some employees but not to others.¹²

An employer would split a business traditionally owned as a single legal entity into two entities, staffing one entity with the most essential employees and the second entity with remaining employees. The business owner would offer generous retirement benefits to essential employees and offer meager, or no, benefits to non-essential employees. Because regulators frowned upon treating employees so differently within the same company, employers circumvented that regulation by dividing their business into multiple companies. To curtail such employer behavior, Congress passed ERISA in 1974 and amended it again in subsequent years, making it tougher to discriminate against certain employees and circumvent the single-employer designation.¹³

The single-employer label borrowed from ERISA is not equivalent to a single corporation, a single partnership, or a sole proprietorship. Each of those would be considered a single-legal-entity business. The following typical single legal entities traditionally would be considered single employers: a corporation (Inc.), limited partnership (LP), limited liability company (LLC), limited liability partnership (LLP), professional corporation (PC), or general partnership (GP). The ACA single-employer business label is more expansive than the traditional term—single employer. A collection of unrelated businesses or legal entities (e.g., a taco restaurant, a dry cleaner, and a car wash) that have the same owners can be classified as a single-employer type business according to the ACA.¹⁴ Further, if that single-employer type business (i.e., the collection of three entities) has 50 or more full-time employees (or their equivalent), it will qualify as an ALE and will be subject to the employer mandate regulations.¹⁵

Business owners that own several legal entities should be aware that those otherwise separate legal entities can be collectively treated as a single-employer type with respect to ACA regulations if the conditions are right. Chapter 2 will explain how a single business entity transforms into a controlled group. And Chapter 3 introduces how a business transforms from a single entity into an affiliated service group. The ACA considers controlled groups and affiliated service groups as single-employer type businesses.¹⁶ As the number of legal entities increases in a single-employer business arrangement, it becomes more likely that that employer will be deemed an ALE (subject to the employer mandate).¹⁷

Most employers are aware that the number and type of employees are important parameters for establishing if the business is a large employer and subject to the employer mandate. And the media has devoted significant time highlighting the 50-employee rule (50 full-time employees or their equivalent) as the key threshold parameter that places a business into the large-employer category (the ALE).¹⁸ That focus overlooks the critical preliminary step of correctly identifying the size of the business. The size assessment can be incorrect if some legal entities are mistakenly omitted. Conversely, if legal entities are over-included, an employer may act beyond what the law requires. When counting employees (for the 50-employee rule), an employer must consider employees from all legal entities.¹⁹ Therefore, correctly adding up your businesses first is more important. A mistaken assumption could be extremely costly in penalties.

I have heard business owners express ideas about how to avoid compliance with the employer mandate by rearranging businesses. There are employers that believe they will find a creative business arrangement, or they may shrink their businesses to avoid the employer mandate. The ACA drafters anticipated this and prepared accordingly—not one of the proposed theories can survive even the basic tests, which are presented in Chapters 2 and 3 of this book.Employers contemplating creative business arrangements should consider whether it is worth the financial risks (in time, energy, and legal and accounting fees) they will face trying to circumvent the employer mandate. In the end, such arrangements may prove more costly than just offering the right kind of insurance or paying the penalties. Even the most ingenious of schemes may not be successful because regulators are already a step ahead, sealing the holes.

Ultimately, the size assessment of a business is critical and can be incorrect if some legal entities are mistakenly omitted. Conversely, if legal entities are over-included, an employer may act beyond what the law requires. That is why we must begin by defining the scope of the employer according to the ACA.

[Figure 1] Schematic showing the applicable large employer as a subset of all business employers.

CHAPTER

2

Controlled Groups

Chapter 1 introduced the concept of employer types and briefly explained that the Affordable Care Act (ACA) considers related (and even unrelated) legal entities to be classified as a single-employer type business. This chapter expands the discussion of private²⁰ employer types and shows how various single legal entities can be collected and treated as a single-employer business.

If you conduct business through multiple legal entities, this section is particularly relevant to you and is also relevant to business owners who are considering splitting one owned legal entity into several legal entities. The ACA’s provisions collect related legal entities in several ways and treat them as a single-employer business. There are two main forms of groups—controlled groups and affiliated service groups.²¹ In this chapter, the discussion addresses controlled groups²² and a slight variation, common control groups.²³ Chapter 3 will address affiliated service groups.

The only difference between controlled groups and common control groups are the legal entities involved.²⁴ Controlled groups arise from incorporated legal entities (corporations). Common control groups arise from all other unincorporated legal entities (everything other than a corporation). The rules are the same for both groups. Remember then, when I refer to a controlled group, I also mean a common control group. Although most of the examples in this chapter are corporations, the legal entities involved could also be other types of legal entities (partnerships, limited liability companies, etc.).

Legislators sometimes take shortcuts when drafting new laws. One common shortcut is to borrow definitions from older laws. Courts interpret the definition in the new law the way they have interpreted the definition in the old law.One reason for the shortcut is to create stability in the law. Another reason is to take advantage of the work already performed to explain the old law.

The ACA is a new law that borrows definitions, processes, and rules from an old law, the Employee Retirement Income Security Act (ERISA). The ACA specifically borrows ERISA’s single-employer definitions.²⁵ In keeping with ERISA’s definition, a single-employer type business includes controlled groups, common control groups, and affiliated service groups. All employees of all companies within a controlled group are treated as being part of a single-employer business.²⁶ There are three types of controlled groups: a parent-subsidiary controlled group, a brother-sister controlled group, and a combined group.²⁷

Parent-Subsidiary Controlled Groups

If you only do business through a single legal entity, and you are the only owner of that one legal entity, and that legal entity does not own any other legal entities, then this discussion of parent-subsidiary controlled groups does not apply to your business. Skip ahead to the section entitled Brother-Sister Controlled Group.

A parent-subsidiary controlled group may exist if your present or future ownership structure meets any of the following conditions: your legal entity owns another legal entity; another legal entity owns part of your legal entity; or you are thinking about breaking up your legal entity into several smaller entities and intend to remain as the owner of all of the smaller entities. The ACA considers a parent-subsidiary controlled group to be a single-employer type.²⁸Employers must consider all employees in all the companies within a parent-subsidiary controlled group when determining applicable large employer (ALE) status.²⁹

There are generally four steps used to determine if a legal entity is part of a parent-subsidiary controlled group:

• Identify ownership interests of the legal entity and of businesses that the legal entity owns.

• Attribute certain ownership interests.

• Exclude certain ownership interests.

• Test for 80% ownership.

Generally, a parent-subsidiary group exists if one legal entity owns more than 80% of another legal entity within the group.

Whereas the ACA has only existed since March 2010, the regulations governing parent-subsidiary controlled groups are much older. Because business owners started trying to hide their ownership interests through various organizational tricks in the 1960s, regulations were designed to test for collusion (attributing interests of one owner to another family member or close business associate) and to exclude dummy ownership interests that disguise the ownership interests of the real owners.³⁰

Identify Involved Ownership Interests

This step requires a survey that defines the owners (business partners) of the legal entity through which you transact business, the owners of other legal entities that own part of your legal entity, and other legal entities that your legal entity owns. People and legal entities may own those other legal entities as well. You have to identify who owns the legal entities with which you might share ownership interests in a subsidiary.

The two most common business organizations involved in parent-subsidiary controlled groups are corporations and partnerships.³¹ Ownership interests are different across different business organizations. Ensure that the correct ownership interest is used for each legal entity. Corporate ownership interests include (a) the combined voting power of all classes of outstanding stock and (b) the total value of all shares of all classes of outstanding stock. Generally, an individual’s total voting power is tied to the total value of the shares owned in the company. For example, Byron owns 56% of BBO Inc.’s stock. Byron probably has 56% of the voting power at BBO unless another arrangement has been made.

Situations exist where voting power and ownership interests are two different things for the same owner. You must use the higher percentage interest in such a situation for the analysis that follows. For example, Byron owns 56% of BBO Inc.’s stock. Byron has 75% of the voting power in BBO. You must use 75%, not 56% when evaluating ownership interests.

Partnership ownership interests include profit interests and capital interests. Generally, an individual’s profit interests are the same as their capital interests. For example, Daria owns 65% of Fried Apple Inc.’s profit interests and owns 65% of the capital interests in Fried Apple. However, situations exist in which profit interests and capital interests are two different things for the same owner. You must use the higher percentage interest in such a situation for the ownership tests that follow. For example, Daria owns 65% of Fried Apple Inc.’s profit interests and 22% of its capital interests. You must use 65%, not 22% when testing for ownership.

[Figure 2] Schematic showing ownership interests within three interrelated legal entities: the parent Acme Corporation and two subsidiaries, Beta and Charlie corporations.

To illustrate this step and all subsequent steps in identifying parent-subsidiary controlled groups, we will work through an example. Bill owns a company called Acme Corporation. Acme owns two other companies: Beta Corporation and Charlie Corporation. No legal entities own any part of Acme. Figure 2 shows the relationship between the involved legal entities, and the ownership interests in each separate legal entity have been documented in preparation for the second step in which the attribution of ownership interests is established.

Attribute Ownership Interests

The rules for attribution of ownership interests are very complex and will only be highlighted here. Regulators will track indirect ownership interests (ownership interests that someone owns through an intermediary) to identify who really owns a particular legal entity.³² In our example in Figure 2, we have only direct ownership interests in the related legal entities. Regulators will look past two intermediary groups to attribute ownership interests back to an owner in a parent-subsidiary controlled group. The two main intermediary groups are (a) options and (b) partnership, estate, and trusts.

Stock Options. Private and public employers sometimes give employees (or others) the opportunity to buy a specific interest in the company through stock purchase. The employer specifies the time and price at which the employee may buy the stock. People refer to this employer offer as a stock option purchase.

For example, assume ABC Company shares are trading at $20. An employee buys a stock option contract that allows the purchase of ABC shares at $20 any time before the contract expires in three months. After one month, ABC company shares are trading at $30, but the employee still has the right to buy those shares at $20. The employee will make a $10 profit on each share purchased with that option (buy at $20 and immediately sell for the current market price of $30). If someone owns stock options to acquire stock, that person is considered (according to