Self-Funding: Points to Consider

Gaining popularity similar to it’s peak in the early 1980’s, self-funding is making a comeback. Many brokers / advisers are not well versed in this concept, and therefore are less likely to present the approach to clients. One point they will also likely not share with clients: commissions are paid on the stop loss premiums, not the entire premium amount.

There are reasons to consider self-funding that typically outweigh the reasons not to self-fund. Most importantly, you should be working with an experienced adviser. One who works with self-funded clients day-in and day-out. An adviser who has relationships with a number of Stop Loss Carriers, Third Party Administrators (TPAs) and Pharmacy Benefit Managers, just to name a few.

The first point to consider – self-funding is not a “one year” solution. I do not recommend self-funding to any of our clients if they are not willing to commit to an overall 3-5 year plan. Typically the concept is a win for the client on average four out of five years, but you must be prepared for the bad along with the good.

Additionally, the size of the group should not deter your group from exploring self-funding as an option for your plan. I hear many of my peers say a group has to be at least 200 or 100 employees to consider self-funding, and that is just not true. If a client is financially stable and the adviser understands and communicates all risks involved in the contract, self-funding can be offered successfully as an alternative for clients with as few as 20-25 employees. Some of our clients in the range of 25 employees have been self-funded for over ten years, and are very happy with the stability of the rates over that time period.

Many smaller to mid-size clients should consider a closer look at self-funding due to some distinct advantages under the Patient Protection and Affordable Care Act (PPACA).

This is the first in a series of posts that will focus on the concept of self-funding. With 30+ years experience in all things self-funded, we have a lot to share. We welcome questions and hope those who read will learn something. Continue to follow us for more information coming soon.

The Affordable Care Act – How the Individual Mandate Impacts Your Employees

As the Patient Protection and Affordable Care Act (PPACA) continues to be implemented, employers and their employees have questions about how the health care law affects them.

In an effort to keep our clients up to date about PPACA, we commit to answering the many questions that arise. Here is a basic sampling of the top questions:

Q: What is the individual mandate?

A: The individual mandate is the provision in the PPACA that says most US citizens and legal residents must have health insurance. For a listing of exemptions refer to www.Healthcare.gov. Some examples include: those who are incarcerated, members of a federally recognized tribe, those with religious exemptions, etc.

Your employees who do NOT comply with the individual mandate will be responsible for penalties when preparing individual tax returns. For 2014, the penalty equates to the greater of $95 or 1% of your annual income. If you earn under $10,150, there is no penalty. For 2015, the penalty equates to $325 or 2% of annual income. For 2016, the penalty equates to $695 or 2.5% of annual income.

As you can see, the Affordable Care Act has a direct impact on your employees regardless of whether or not you offer coverage. Dollars spent paying penalty fees could be used to contribute to group health insurance premiums, which in turn can lead to numerous benefits for your business – including employee retention, higher morale and peace of mind for our employees.

Q: What is the exchange or marketplace?

A: The public marketplace, or exchange, is the website where individuals can comparison shop for health plans and sign up for coverage. You have probably heard this referred to as: www.Healthcare.gov.

Federal tax subsidies to help pay for medical coverage may be available to eligible individuals if they enroll for coverage through the public marketplace.

The types of plans offered through the marketplace must be qualified health plans and must meet certain “metallic” levels of coverage – bronze, silver, gold or platinum. These metallic designations refer to the actuarial value of the plan, or how much, on average, the plan pays for the cost of covered benefits.

Q: What are essential health benefits?

A: Effective for plan years beginning on or after January 1st, 2014, all plans offered through the exchange are also required to cover certain, essential benefits. The PPACA requires plans to cover at least 10 general categories of items and services:

  • Ambulatory patient services (outpatient care)
  • Emergency services
  • Hospitalization
  • Maternity and newborn care
  • Mental health and substance use disorder benefits, including behavioral health treatment
  • Prescription drugs
  • Rehabilitative and habilitative services and devices
  • Laboratory services
  • Preventive and wellness services and chronic disease management
  • Pediatric services, including oral and vision care

Q: Who is eligible for a subsidy through the individual marketplace?

A: Some individuals are eligible for tax credits to assist with premium payments and cost-sharing. Individuals with incomes between 100% and 400% of the federal poverty level are eligible, a family of four with income between $23,850 and $95,400.

Q: As an employer, should I offer health insurance to my employees?

A: Should you decide not to provide health insurance to your employees, you may be subject to penalties of up to $3,000 per employee. If you do provide coverage, it must be affordable and meet minimum value requirements. To maintain affordability, premiums may not exceed 9.55% of an employee’s annual income.

Most employees will find coverage offered through an employer to be more affordable than coverage offered on the marketplace based on your contributions. You have to weigh the cost of providing the benefit against the penalties as well as the intangible impact of not offering any coverage to your employees.

For help in making this important decision, we can work with you through our many resources and tools to estimate potential penalties against the cost of providing health care coverage to your employees.

This content is provided without any warranty of any kind. MedCon has taken reasonable steps to ensure this information is accurate and timely. If you have specific questions that pertain to your unique business environment or industry, we recommend that you consult legal council.

Form W-2 Reporting Requirements

The Affordable Care Act (ACA) requires employers to report the aggregate cost of employer-sponsored group health plan coverage on their employees’ Forms W-2. The purpose of the reporting requirement is to provide information to employees regarding how much their health coverage costs. The reporting does not mean that the cost of the coverage is taxable to employees.

This reporting requirement was originally effective for the 2011 tax year (for the W-2 Forms due by the end of January 2012). However, the IRS later made reporting optional for 2011 for all employers. The IRS further delayed the reporting requirement for small employers (those that file fewer than 250 Forms W-2) by making it optional for these employers until further guidance is issued. For the larger employers, the reporting requirement is mandatory for the 2012 Forms W-2 (that must be issued by the end of January 2013).

The IRS has provided interim guidance on how employers should comply with the Form W-2 reporting requirement. This guidance was first issued in April 2011 in Notice 2011-28. The IRS then revised and clarified its interim guidance by releasing Notice 2012-9 on Jan. 3, 2012. Notice 2012-9 provides technical reporting information for employers that include health coverage cost information on Forms W-2 for 2012 and later years. Employers that voluntarily comply with the reporting requirement for 2011 may also rely on the IRS’s interim guidance in Notice 2012-9.

This MedCon Benefit Systems, Inc. Legislative Brief describes the Form W-2 reporting requirement, including guidance provided by the IRS in Notice 2012-9.

Form W-2 Reporting Requirement

Section 9002(a) of ACA provides that employers must disclose the aggregate cost of applicable employer-sponsored coverage provided to employees on the Form W-2. Section 9002(a) specifically adds this information to the list of other items that must be included on the Form W-2. These items include information such as the individual’s name, social security number, wages, tax deducted, the total amount incurred for dependent care assistance under a dependent care assistance program and the amount contributed to any health savings account (HSA) by the employee or his or her spouse.

The inclusion of this information on the Form W-2 does not change the requirements with respect to taxable income, or the tax exclusion for amounts paid for medical care or coverage. Those items are addressed in another portion of the tax law that is not affected by this change. However, this information may be used to determine whether a plan is a “Cadillac plan” for purposes of the excise tax on high-cost health plans that will take effect in 2018.

The IRS has clarified that the reporting rule does not require an employer to issue a Form W-2 including the aggregate cost of coverage to an individual if the employer does not otherwise have to issue a W-2 for that person. For example, an employer would not have to issue a Form W-2 to a retiree or other former employee receiving no reportable compensation.

Employers Subject to the Reporting Requirement

In general, all employers that provide applicable employer-sponsored coverage must comply with the Form W-2 reporting requirement. This includes government entities, churches and religious organizations, but does not include Indian tribal governments or tribally chartered corporations wholly owned by an Indian tribal government.

For 2012, small employers are not subject to the reporting requirement. Small employers will continue to be exempt from the reporting requirement for later years, unless and until the IRS issues further guidance.

An employer is considered a small employer if it had to file fewer than 250 Forms W-2 for the prior calendar year. Thus, if an employer is required to file fewer than 250 Forms W-2 for 2011, the employer would not be subject to the reporting requirement for 2012. The IRS has indicated that the Internal Revenue Code’s aggregation rules do not apply for purposes of determining whether an employer filed fewer than 250 Forms W-2 for the prior year. However, if an employer files fewer than 250 Forms W-2 only because it uses an agent to file them, the employer does not qualify for the small employer exemption.

Coverage That Must Be Reported

Under the Form W-2 reporting requirement, the information that must be reported relates to “applicable employer-sponsored coverage.” Applicable employer-sponsored coverage is, with respect to any employee, coverage under any group health plan made available to the employee by the employer which is excludable from the employee’s gross income under Code section 106.

For purposes of this reporting requirement, it does not matter whether the employer or the employee pays for the coverage – it is the aggregate cost of the coverage that must be reported. The aggregate cost of the coverage is determined using rules similar to those used for determining the applicable premiums for purposes of COBRA continuation coverage. It must be determined on a calendar year basis.

Some types of coverage do not need to be reported on the Form W-2 under this requirement. These are:

  • Coverage under a dental or vision plan that is not integrated into a group health plan providing other types of health coverage;
  • Coverage under a health reimbursement arrangement (HRA);
  • Coverage under a multiemployer plan;
  • Coverage for long-term care;
  • Coverage under a self-insured group health plan that is not subject to COBRA (such as a church plan);
  • Coverage provided by the government primarily for members of the military and their families;
  • Excepted benefits, such as accident or disability income insurance, liability insurance, or workers’ compensation insurance;
  • Coverage for a specific disease or illness or hospital indemnity or other fixed indemnity insurance, provided the coverage is offered as independent, noncoordinated benefits and payment for the benefits is taxable to the employee; and
  • Coverage under an employee assistance program (EAP), wellness program or on-site medical clinic if the employer does not charge COBRA beneficiaries a premium for the benefits.

The reporting requirement does not apply to amounts contributed to an Archer medical savings account (Archer MSA) or amounts contributed to an HSA. Those amounts are already required to be separately accounted for on the Form W-2.

Also, salary reduction contributions to a health flexible spending arrangement (FSA) under a cafeteria plan are not required to be reported. However, if the amount of the health FSA for the plan year (including optional employer flex credits) exceeds the salary reduction elected by the employee for the plan year, the amount of the health FSA minus the salary reduction election for the health FSA must be reported.

Example: ABC Company maintains a cafeteria plan that offers permitted taxable benefits (including cash) and qualified nontaxable benefits (including a health FSA). The plan offers a flex credit in the form of a match of each employee’s salary reduction contribution. Sandy makes a $700 salary reduction election for a health FSA. ABC Company provides an additional $700 to the health FSA to match Sandy’s salary reduction election. The amount of the health FSA for Sandy for the plan year is $1,400. The amount of Sandy’s health FSA ($1,400) for the plan year exceeds the salary reduction election ($700) for the plan year. ABC Company must include $700 ($1,400 health FSA amount minus $700 salary reduction) in determining the aggregate reportable cost.

In addition, employers may include in the Form W-2 reportable amount the cost of coverage that is not required to be included in the aggregate reportable cost, such as HRA coverage, provided the coverage is applicable employer-sponsored coverage and is calculated under a permissible method.

Methods of Reporting

Coverage Provided after Termination of Employment

If an employer provides coverage (such as continuation coverage) to an employee who terminates employment during the year, the employer may apply any reasonable method of reporting the cost of coverage for that year, as long as that method is used consistently for all employees. Regardless of the method used, an employer does not have to report any amount for an employee who requests a Form W-2 before the end of the calendar year in which the employee terminated employment.

Example: Bob is an employee of XYZ Company on January 1, and continues employment through April 25. Bob had individual coverage under XYZ Company’s group health plan through April 30, with a cost of coverage of $350 per month. Bob elected continuation coverage for the six months following termination of employment, covering the period May 1 through October 31, for which he paid $350 per month. XYZ Company will have applied a reasonable method of reporting Bob’s cost of coverage if it uses either of the following methods consistently for all employees who terminate coverage during the year:

  • Reports $1,400 as the reportable cost under the plan for the year, covering the four months during which Bob performed services and had coverage as an active employee; or
  • Reports $3,500 as the reportable cost under the plan for the year, covering both the monthly periods during which Bob performed services and had coverage as an active employee, and the monthly periods during which Bob had continuation coverage under the plan.

Programs with Non-reportable Benefits

Also, if a program offers benefits that must be reported, and other benefits that are not subject to reporting, an employer may use any reasonable allocation method to determine the cost of the portion of the program providing a reportable benefit. If the portion of the program that provides a reportable benefit is only incidental in comparison to the portion of the program providing other benefits, the employer is not required to include either portion of the cost on the Form W-2.

Coverage Periods Spanning Calendar Years

If a coverage period, such as the final payroll period of a calendar year, includes December 31 and continues into the next calendar year, the employer has the following options:

  • Treat the coverage as provided during the calendar year that includes December 31;
  • Treat the coverage as provided during the following calendar year; or
  • Allocate the cost of coverage between each of the two calendar years using a reasonable allocation method that is consistently applied to all employees. The allocation method should generally relate to the number of days in the period of coverage that fall within each of the two calendar years.

Compliance Steps for Employers

Employers that file 250 or more Forms W-2 for 2011 will have to comply with the reporting requirement for 2012 (W-2 Forms provided in January 2013). These employers should ensure that they (or their payroll providers) are prepared to gather the health coverage information in advance of having to complete the Forms W-2 for 2012. In doing so, they should make sure they can identify the applicable employer-sponsored coverage that was provided to each employee and be prepared to calculate the aggregate cost of that coverage.

Employers may also have to address questions from employees regarding whether their health benefits are taxable under this new requirement. They can assure employees that this reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee’s income, and it is not taxable.

 

MedCon Benefit Systems, Inc. will continue to update you if additional information becomes available with respect to this reporting requirement.

Health Care Reform in the Supreme Court

Last week, the Supreme Court began hearings regarding the constitutionality of the PPACA. Unum U.S. Senior Vice President and General Counsel Chris Collins released a summary of the major issues to be reviewed by the Court regarding the PPACA.

Likely the most discussed issue thus far has been the constitutionality of the individual mandate, followed by the question of whether or not the PPACA would continue to stand if the individual mandate is deemed unconstitutional. The Court will also need to determine if the case can be decided before 2014 when the “tax penalty” goes into effect.

For the full summary from Chris Collins of Unum, please click here to view. Keep checking back as we follow the Supreme Court activity regarding Health Care Reform.

Let Us Reflect

Last week marked the two year anniversary of Health Care Reform, and this week begins with the Supreme Court starting to hear arguments over the law’s constitutionality. I think it is a good time to reflect back on what has happened as reform enters into its third year.

With the exception of young people, who has benefited by having coverage extended to age 26 under their parents’ coverage? More Americans lack coverage today than four years ago. The percentage of uninsured rose to 17.1% this year, the highest rate since 2008.

The Class Act, the part designed to provide long-term care insurance, has unfortunately been dismissed, thrown out, given up on.

“If you like what you have, you can keep it.” If you like your employer-sponsored coverage you can keep it. Unfortunately, according to a Gallup poll, the number of folks getting their coverage from their employer is decreasing. This number reached a record low in 2011, with only 44.6% getting health insurance from employers.

This week marks an unprecedented case. One that will impact most everyone in some way. The Supreme Court has several options, from upholding the law to striking it down in its entirety. It could also avoid the law’s constitutionality at all, if it finds the lawsuits challenging the law are premature.

Whatever happens – MedCon will be watching and keeping up with all updates. Please keep checking back to stay informed.

Could The Debt Ceiling Bill Affect Health Insurance?

IF Congress happens to fail to make the $1.2 trillion in the required cuts, the end result is a mandatory across the board cuts. The cuts would make up the difference between what Congress saves and the $1.2 trillion. If reading between the lines, the cuts could ultimately affect what the Patient Protection and Affordable Care Act of 2010 (better known as the PPACA), has set aside to help consumers and small business employers buy health coverage through the new health insurance exchange system set up to start in 2014.

Many items being considered for savings could all have significant impact on the future of healthcare. Stay tuned!

Are You Up To Date On The Patient Protection And Affordable Care Act?

As your benefit plan professionals, MedCon feels it is important to keep you informed on the latest changes and/or additions to the complicated Patient Protection and Affordable Care Act.

There are several compliance regulations that are scheduled to be in effect soon. You may not have to comply with some of these regulations depending upon your plan status with regard to the “Grandfather” clause. Even if your plan qualifies under the clause, the following provisions are required for all benefit plans renewing on or after September 23, 2010.

  • Dependents covered to age 26
  • No pre-existing conditions for those under the age of 19
  • No lifetime annual coverage limits for “essential health benefits”

The following is a general compliance checklist:

  • Insure an open enrollment process is available to accommodate the 30-day  “special enrollment period” for adult dependent children. (This special enrollment is for those adult children who previously became ineligible due to age limits.)
  • Identify any individuals who have met the current “lifetime” or “annual” benefit limit and are still eligible to participate in the plan. A special 30-day enrollment period must be provided for anyone in this category as well.
  • Correct any current plan wording that is contrary to the pre-existing condition ban based on those under age 19.
  • Evaluate and correct FSA plan designs to coincide with the new exclusion for reimbursement of over the counter drugs purchased on or after January 1, 2011.
  • Prepare the new W-2 reporting requirements effective for the 2012 plan year. Total cost of medical benefits will be reported on the 2013 W-2.
  • Determine your plan’s “Grandfather” status. If yes, then have proper documentation. If no, make sure your plan covers the required “preventive care services” with no cost sharing by the participant.
  • Make sure your plan is in compliance with the emergency service provision. Your plan may not require prior authorization for hospital ER services even if they are out of network. Both in and out of network benefits must be the same insofar as copays and coinsurance is concerned.
  • If you employ more than 200 employees you must be prepared to auto-enroll all full time employees as soon as they are eligible for coverage. Although the date of implementation has not yet has not been set, this is part of the new regulations.

If you have questions or would like more information on healthcare reform, please contact Sharon McReynolds at 214.739.5215 ext. 102. 

*This article is intended to provide general guidance and should not be considered legal advice.