PPACA Core Concepts

Kelley Baker kbaker@hslegalfirm.com

Karen Haase khaase@hslegalfirm.com @KarenHaase

Steve Williams

Bobby Truhe

swilliams@hslegalfirm.com @SteveisEsteban

btruhe@hslegalfirm.com @btruhe

The Patient Protection and Affordable Care Act: Core Concepts and Relevant Regulations for Nebraska Schools The Patient Protection and Affordable Care Act (PPACA) is frequently referred to as "healthcare reform" or by the nickname "Obamacare." The PPACA is over 2,000 pages long and some of its provisions have already been repealed or amended. Other provisions need to be defined or further explained by regulations from various state and federal agencies. Most of those regulations are either not yet finalized or, in many cases, still being written. What follows in this article are some of the core components of PPACA and their potential application on Nebraska's K-12 public school districts.1 Core Concept #1: The Individual Mandate (currently scheduled to take effect in 2014) PPACA requires individuals to maintain minimum health insurance coverage for themselves and their dependents. Unless individuals are exempt, they will have to pay a penalty for every month that they fail to maintain health insurance coverage.

Individuals who are exempt include: those with qualifying religious exemptions, those in a "health care sharing ministry," individuals not lawfully present in the United States, incarcerated individuals, those without coverage for less than three months, members of Indian tribes, those are who residing outside the United States, and bona fide residents of any possession of the United States.

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Much of this article is based on information contained in "Individual Mandate and Related Information Requirements under PPACA," Hinda Chaikind et al., Cong. Research Serv., R 41331 (2010); and "Private Health Insurance Provisions in PPACA (P.L. 111-148)," Hinda Chaikikd et al., Cong. Research Serv., R. 40942, (2010). This article also draws from information contained in "School Districts and the New Federal Health Care Law," Texas Association of School Boards (2012).

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Copyright Š 2012 Harding & Shultz, PC LLO. All rights reserved.

Core Concept #2: Large Employers Must Provide Affordable Insurance Coverage to Full-Time Employees (currently scheduled to take effect in 2014) During any month in which a school district has more than 50 full-time and full-time equivalent employees, the district is subject to a penalty if: (1) the district does not offer minimum essential coverage that is affordable for any one or more of the district's fulltime employees; and (2) at least one of these full-time employees obtains coverage through the state insurance exchange and receives a premium credit.

A. Definition of a "Large Employer" Large employers are those with at least 50 full-time and full-time equivalent employees.

(For a definition of "full-time employee," see heading B below.) The number of "full-time equivalent" employees is determined by adding together all of the hours worked in a month by employees who are not full time, then dividing by 120 (30 hours per week times 4 weeks in a month). The IRS contemplates that "hours of service" will include all hours paid, including holiday, vacation, and sick leave time. (www.irs.gov/irb/201121_IRB/ar07.html)

B. Definition of a "Full Time Employee" The number of full-time employees is determined by counting all employees who work 30 or more hours per week. The IRS has recently issued regulations for calculating how to determine whether an employee qualifies as "full-time." (http://www.irs.gov/pub/irs-drop/n-12-58.pdf) That regulation contemplates that employers will "look back" for a time period of not less than three but not more than 12 consecutive calendar months to determine whether a specific employee qualifies as "full-time." School districts will be allowed to determine the months in which this measurement period starts and ends. If the employer determines that an employee averaged at least 30 hours per week during this "standard measurement period," then the employer must treat the employee as a full-time employee during a subsequent “stability period,� regardless of number of hours the employee works during that stability period (assuming he or she remains an employee). This "stability period" must last at least six months. On the other hand, if the employer determines that the employee did not work full-time during the standard measurement period, the employer is permitted to treat the employee as not a full-time employee during the stability period that follows.

Page 2 of 7 ____________________________________________________________________________________ This article is not intended to provide legal advice. School districts should consult legal counsel for specific advice pertaining to their particular situation.

Copyright Š 2012 Harding & Shultz, PC LLO. All rights reserved.

Schools will be permitted to treat employees that are represented by a collective bargaining association differently than those who are not represented. Employers are also allowed to treat salaried employees differently than those who are paid by the hour.

In most districts, this will permit schools to treat certificated staff differently than classified staff.

Although the new IRS regulation does discuss "seasonal employees," it does not mention school employees who only work 9 out of 12 months. Other federal laws, like the Family Medical Leave Act, have specific regulations which address the unique school calendar. We anticipate that eventually schools will have similar specific guidance. Beginning in 2014, however, schools must select how they will "look back" for a time period of not less than three but not more than 12 consecutive calendar months, without any special reference to 9-month employees.

We expect that Educators' Health Alliance, along with other potential health insurance vendors, will provide their member schools with plan-specific assistance in determining who qualifies as a "full-time employee." We believe schools are wise to heed the advice of their insurance carrier, in consultation with the school district's legal counsel, in determining which employees are eligible for health insurance coverage.

C. Definition of "Affordable Coverage " Insurance is NOT affordable if the employee's required contribution toward premiums exceeds 9.5% of the employee's household income. To be eligible for a premium credit, an employee's household income may not exceed 400% of federal poverty level (among other things).

Possible safe harbor. The affordability calculation is based on each employee's household income. The IRS has acknowledged that employers generally have no way of knowing an employee's household income. Employers generally do not know about income generated by an employee's spouse or dependents. In September 2011, the IRS issued Revenue Notice 2011-73: Request for Comments on Health Coverage Affordability Safe Harbor for Employers. (Revenue Notice 2011-73 (September 12, 2011), www.irs.gov/pub/irs-drop/n-11-73.pdf). This notice requested comments on a proposed safe harbor for determining the affordability of coverage. Under the proposed safe harbor, affordability of an employer's coverage would be measured by reference to an employee's wages from that employer. A school district could apply the 9.5% test to the wages the district pays to each individual employee and the applicable premiums for the district's health insurance plan. Significantly, the proposed safe harbor would focus

Page 3 of 7 ____________________________________________________________________________________ This article is not intended to provide legal advice. School districts should consult legal counsel for specific advice pertaining to their particular situation.

Copyright Š 2012 Harding & Shultz, PC LLO. All rights reserved.

on the cost of insurance for self-only coverage, whereas eligibility for premium credits is based on the cost of coverage for an employee's entire household.

Core Concept #3: The Significance of Health Insurance Exchanges (currently scheduled to be in place and active by 2014; Note: Nebraska has announced it will not be creating a state exchange and will participate instead in the federal exchange) Regardless of what an employee's income is or how much the school's health insurance plan costs, school districts will not have to pay a penalty under PPACA unless the employee obtained health insurance coverage through a state exchange and received a credit toward the premium for that coverage. By 2014, "American Health Benefit Exchanges" will be created, either by the individual states or, in states like Nebraska that have opted not to create exchanges, by the United States Secretary of Health and Human Services. An exchange is not an insurer, but will provide individuals with access to insurers' plans in a comparable way. Lower income persons who enroll in the exchanges may qualify for a tax credit toward their premium costs and a subsidy for their cost sharing.

Core Concept #4: Penalties for Employers Who Fail to Comply with the Mandate. (currently scheduled to be assessed beginning in 2014) During any month in which a school district has more than 50 full-time and full-time equivalent employees, the district will be subject to a penalty if (1) the district does not offer minimum essential coverage that is affordable for any one or more of the district's full-time employees; and (2) at least one of these full-time employees obtained coverage through the state insurance exchange and received a premium credit. Note that BOTH of these conditions must exist before a school district will be subject to a financial penalty. The penalty is assessed monthly.

In 2014, the monthly penalty will be the lesser of: 

1/12th of $3,000 for every employee who obtains a premium credit and insurance through the exchange (i.e. $3,000 per year per exchange-insured employee);

 1/12the of $2,000 times every full-time employee employed by the district, less 30.

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Copyright Š 2012 Harding & Shultz, PC LLO. All rights reserved.

Here is an example: Presume your district has exactly 50 full-time employees. To calculate the penalty, you calculate the amount for which the district could be liable under both formulas: Under the formula relative to your total full-time employees, you calculate the penalty based on your total full-time employees (50), less 30: 1/12 x $2K x 20 = $3,333.33 per month.

Next, you calculate under the formula based upon the number of employees eligible for the credit and insurance on the exchange. For example, if you only had 5 employees obtain insurance on the exchange, you would pay 1/12 x $3K x 5 = $1,250 per month.

Thus, in this district, the monthly penalty for NOT providing insurance would be $1,250.

For subsequent calendar years, the penalty will be indexed by a premium adjustment percentage.

It is important to note that although the PPACA calls the amount a school district must pay a "penalty," the dollar amounts here are not so high that employers are forced to provide insurance or to increase the amount they pay towards health insurance in every case. Some school districts might conclude that it is more fiscally responsible for certain employees to obtain insurance through the exchange. In other words, PPACA does not require all employers to offer affordable insurance to every full-time employee; it creates incentives to balance between the cost of employer-provided health insurance and the cost of using the state exchange.

Core Concept #5: New Administrative Responsibilities. (some of the new administrative responsibilities begin in January 2013) A. Additional Notices and Reports School districts will have to provide their employees with new notices and will have to submit additional reports to the federal government.

Although these are the responsibility of individual school districts, we anticipate that the Educators' Health Alliance as well as the payroll and accounting software used by most schools will guide

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bookkeepers and administrators through this process. Schools will not be expected to create these notices and reports on their own.

Beginning with W-2s issued in 2013 (on 2012 earnings), employers must report the aggregate cost of employer-sponsored coverage on Form W-2. This reporting is informational only and does not cause the excludable employer-provided health care to become taxable.

By March 2013 employers must provide new employees with information about the existence of the health insurance exchange. Again, we anticipate that the school district's insurance carrier will provide schools with this notice, much as they provide schools with other notices required by COBRA and other state and federal statutes and regulations.

Beginning in 2014, employers must submit to the Secretary of Health and Human Services information about their health insurance plans and employee enrollment. We anticipate that the federal government will supply forms for the submission of this information.

B. Flexible Spending Accounts Subject to New Limits Effective January 1, 2013, the PPACA prohibits an employee from contributing more than $2,500 to a health flexible spending account. This amount will be indexed to inflation starting in 2014. Most Nebraska school districts use third-party administrators to manage their flexible spending accounts, and those administrators have already accounted for this new rule.

C. New Nondiscrimination Rules School districts are accustomed to laws prohibiting discrimination based on race, sex, age, disability, or another protected characteristic.

Now, the PPACA prohibits discrimination based on compensation. The PPACA prohibits employers from favoring "highly-compensated employees," although the statute does not define what constitutes a "highly-compensated employee." As with so many details of PPACA, we are still waiting for regulatory guidance from the federal government about how to apply the law in specific circumstances.

The nondiscrimination rules were supposed to take effect with plan years beginning after September 23, 2010. (Rev. Notice 2010-63, 2010-41 I.R.B., available at www.irs.gov/irb/2010-41_IRB/ar07.html) However, the IRS has delayed enforcement Page 6 of 7 ____________________________________________________________________________________ This article is not intended to provide legal advice. School districts should consult legal counsel for specific advice pertaining to their particular situation.

Copyright Š 2012 Harding & Shultz, PC LLO. All rights reserved.

until after regulations have been issued. (Rev. Notice 20112011-1, 2011-3 I.R.B. available at www.irs.gov/irb/2011-02_IRB/ar10.html) Based on our understanding of most school districts' compensation structure, we do not believe the new nondiscrimination rules will pose a significant issue for Nebraska schools. However, school districts that pay more toward the health insurance premiums for their superintendent or other highly-paid members of the administrative team should start thinking now about how to comply with this new requirement. One solution is to treat excess premium payments – the difference between the amount the district pays toward the superintendent's premiums and the amount the district pays towards the other employees' premiums – as taxable income subject to withholding. Another alternative is to convert excess premium payments to salary. If the district does convert excess premium payments to salary, the board should note the reason for the change in the affected administrators' salary to avoid potential problems with the Nebraska Public Employees' State Retirement System.

Conclusion The PPACA is complicated and can be overwhelming. However, individual school districts will not be deciding how to comply with the law in a vacuum. The Educators' Health Alliance and other third-party benefit administrators will provide substantial assistance and will bear a good deal of the responsibility for meeting PPACA's new requirements. This will allow Nebraska schools to focus on other issues such as the nondiscrimination requirements, balancing the cost of offering affordable coverage against potential penalties and new administrative requirements.

Most of the responsibilities that will be shouldered by school districts do not become effective for one or more years. We will provide H & S School Law friends and clients with additional guidance as deadlines approach and rules are clarified. We strongly urge all school districts against making decisions based on incomplete information.

As always, if you have questions about the PPACA or any other legal issue, you should consult with your school district's attorney or contact Kelley, Karen, Steve or Bobby.

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Page 7 of 7 ____________________________________________________________________________________ This article is not intended to provide legal advice. School districts should consult legal counsel for specific advice pertaining to their particular situation.

Copyright © 2012 Harding & Shultz, PC LLO. All rights reserved.