12.04.2015
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Updates
The Affordable Care Act (ACA) has significantly changed the legal landscape for employer-sponsored health plans by adding reporting obligations, benefit mandates, fees, notices and potential penalties for plans that do not meet specific coverage and cost requirements. In merger and acquisition (M&A) transactions, the ACA requirements should be considered before and after closing to avoid unpleasant and perhaps expensive surprises later. Although each M&A transaction is unique and no list of ACA due diligence issues can be exhaustive, some of the more important matters are addressed here and can easily be tailored to requests that are appropriate for the transaction.
Employer Shared Responsibility
Is the Seller an ALE?
The ACA imposes special “employer shared responsibility” obligations and potential penalties on Applicable Large Employers (ALEs). Therefore, the buyer, also known as the acquirer, in any M&A transaction will need to know whether the seller, also known as the target, is an ALE.
For ACA purposes, the term “employer” means the common-law employer, so any buyer must exercise care in determining whether the seller has properly classified its employees. For example, individuals who are classified as contract workers or consultants, and paid on Form 1099s rather than W-2s, should be reviewed carefully to ascertain whether the buyer is comfortable with those classifications.
An employer is an ALE if it (along with the members of its controlled group) employed an average of at least 50 full-time employees on business days in the preceding calendar year. There are special rules relating to whether seasonal workers and veterans have to be included. Also, keep in mind that seasonal workers and seasonal employees are not the same. Seasonal workers are relevant to ALE determination, while seasonal employees are relevant to penalty calculations, discussed below. A full-time employee is one who worked 30 or more hours per week. In addition, full-time equivalents must be included when determining whether the employer is an ALE. To determine the number of full-time equivalents, the aggregate hours of non-full-time employees, up to a maximum of 120 hours per any one employee, must be totaled and divided by 120.
If the seller has fewer than 50 full-time and full-time equivalent employees, it will not be subject to the employer shared responsibility provisions, and the buyer would not need to worry about the large penalties involved for the failure to satisfy these provisions prior to closing. Note, however, that the seller’s employees will be added to the buyer’s controlled group employees going forward after the transaction closes, which could (and typically does) make the buyer an ALE upon closing.
Employer Shared Responsibility Penalties, Effective for Years Beginning On and After 01.01.2015
If the seller is an ALE, it must comply with the employer shared responsibility rules unless it qualifies for limited transition relief available for 2015 only. The transition relief applies to certain ALEs with 50-99 full-time and full-time equivalent employees and frees those ALEs from liability for employer shared responsibility penalties if they meet certain requirements. Note, though, that even if an ALE qualifies for the penalty transition relief, it must still comply with the reporting requirements discussed below. If the seller ALE does not qualify for the transition relief, it may be subject to penalties under Code Section 4980H. The penalties come into play regardless of whether the health plan is fully insured or self-insured. Only full-time employees are counted in calculating the penalties, not full-time equivalents.
Under the ACA, penalties are determined on a member-by-member basis for an ALE that is a controlled group. There are two potential penalties—a penalty for ALEs that do not offer minimum essential coverage and a penalty for ALEs that offer minimum essential coverage that is not affordable, does not provide minimum value or both.
An ALE-member that does not offer minimum essential coverage to at least 95% (70% for 2015 only) of its full-time employees, i.e., those who work on average at least 30 hours per week, faces a potential penalty of (1/12)($2,080)[1] multiplied by the number of full-time employees employed by the ALE-member minus 30 employees (80 for 2015 only), for each month of noncompliance. This penalty is only triggered if at least one full-time employee seeks coverage on the Exchange, aka Healthcare Marketplace, and qualifies for a premium subsidy. This penalty can be especially damaging because it is calculated based on all full-time employees (minus 30 or 80, depending on the year).
If an ALE-member offers minimum essential coverage that is either unaffordable (the lowest cost, employee-only premium exceeds 9.5% of the employee’s household income) or does not provide “minimum value,” i.e., it fails to pay at least 60% of the cost of covered benefits and, under proposed regulations, does not provide substantial coverage for inpatient hospitalization and physician services, that ALE-member could be subject to a different potential penalty. The penalty is (1/12)($3,120) multiplied by the number of full-time employees who seek coverage on the Exchange and qualify for a premium subsidy for each month of noncompliance. Although significant, this penalty is usually considered to be less damaging than that for failure to offer minimum essential coverage, because it is calculated based on only the full-time employees who purchase Exchange coverage and qualify for a premium subsidy.
The employer shared responsibility penalty rules offer two methods for an employer to determine which employees meet the definition of full-time employees: the monthly measurement method and the look-back measurement method. The employer is free to choose which method it uses, and may use different methods for different classes of employees, but it is subject to specific limits on the classifications it may use.
The ACA penalty provisions specifically include in the definition of employer any predecessor employer. In addition, under certain circumstances the IRS will hold a successor employer responsible for a predecessor’s benefit, tax and employment liabilities. Therefore, a buyer could be responsible for pre-closing employer shared responsibility penalties even if the seller is compliant for all months after the closing.
Staffing/PEO Workers
For purposes of the employer shared responsibility penalties, employee is defined as a common-law employee of the ALE, which means special problems can arise if an employer has contracted with a staffing agency or a professional employer organization (PEO). In such cases, a special rule provides that if the seller pays more for staffing/PEO workers who elect coverage under the staffing firm/PEO’s plan, the seller will be treated as having made an offer of coverage to such workers and may avoid employer shared responsibility penalties, assuming the coverage is affordable and provides minimum value.
HIPAA
Some sellers may argue that enrollment/disenrollment data cannot be provided because such information is protected health information (PHI) subject to HIPAA. However, enrollment and disenrollment information usually is created by the employer, and HHS has stated that when an employer performs the enrollment function, it does so on behalf of the participant or beneficiary, not as a plan administration function. Therefore, enrollment and disenrollment information created by the employer when enrolling and disenrolling participants and beneficiaries and still in the employer’s hands is not PHI and is not subject to HIPAA’s requirements.
Reporting Requirements
Form W-2
Since 2012, the ACA has required employers to report the “aggregate cost” of “applicable employer-sponsored coverage” on employees’ Forms W-2. The failure to comply subjects the employer to the same penalties as for failure to comply with the Form W-2 information reporting requirements. Transition relief provides that only employers who (1) provide applicable employer-sponsored coverage to employees and (2) file 250 or more Forms W-2 for the preceding calendar year are subject to this requirement. For determining the number of Forms W-2 filed, the controlled group rules do not apply. Recently, the penalty for Form W-2 failures was doubled to $250 per W-2, up to an annual maximum of $3 million.
If the seller has fewer than 250 employees, this requirement does not currently apply. If the seller has 250 or more employees, review of the seller’s W-2 compliance should be coordinated with the review of the seller’s other federal tax documents.
Code Sections 6055 and 6056
Under the ACA, all ALEs must file certain reports regardless of whether they offer health plan coverage. Non-ALEs that offer self-insured health plan coverage must file certain reports. In addition, insurers must report on insured health coverage they provide to employer-sponsored group health plans. This reporting is required on a calendar year basis and the reports for 2015 are due early in 2016. Although the reports are filed on a calendar year basis, they must provide information on a monthly basis. Therefore, it is important for a buyer to be able to review coverage data and elections for acquired employees for each month during the reporting year. The reports are filed on a controlled group member-by-member (entity) basis. The failure to comply subjects the employer to the same penalties as for failure to comply with the Form W-2 information reporting requirements. ALEs relying on the transition guidance for those with 50-99 full-time employees must still file to certify that they are eligible for the transition guidance set forth in the regulations.
Summary of Non-ALE Filing Requirements
- If the seller is a non-ALE with a fully insured plan, the seller is not required to file these reports, and there may be no risk to the buyer, assuming the seller’s status as a non-ALE and the status of its plan as fully insured are properly confirmed.
- If the seller is a non-ALE with a self-insured plan, the seller must file Forms 1094-B and 1095-B.
- If the seller is a non-ALE with no health plan, it is not required to file any of these forms.
Summary of ALE Filing Requirements
- If the seller is an ALE with a fully insured plan, the seller must file Forms 1094-C and 1095-C, and the insurer must file Forms 1094-B and 1095-B.
- If the seller is an ALE with a self-insured plan, the seller must file Forms 1094-C and 1095-C.
- If the seller is an ALE with no health plan, it must file Forms 1094-C and 1095-C.
The reporting forms require Social Security numbers for all covered individuals. A special rule allows use of date of birth but only if the Social Security number has been solicited as required by IRS rules.
Benefit Mandates
The ACA requires that employer-sponsored group health plans comply with a specific list of requirements, such as providing coverage to children up to age 26, prohibiting annual and lifetime limits, covering preventive care at no cost, etc. If the group health plan fails to satisfy these mandates, the plan sponsor is subject to an excise tax under Code Section 4980D of $100 per day with respect to each individual to whom the failure relates. The tax must be self-reported on Form 8928 and must be filed by the entity’s due date for filing its tax return. The U.S. Department of Labor may also bring an enforcement action with civil penalties, usually in response to a failure to meet any documentary requests, of up to $1,000 per day. Plan participants may also bring lawsuits enforcing compliance. These mandates have slowly become effective starting in 2010.
If the plan is fully insured, the insurance contract will be subject to state and federal law. As a result, the seller will have little control, if any, over the content and benefits provided. In such cases, there is lower risk to the buyer, and little benefit mandate-related diligence, other than with respect to grandfathered plans, will be needed. With respect to self-insured plans, although the seller will have control over benefits provided, a review of any group health plan for compliance with the benefit mandates may be very time consuming and the extent of due diligence should be considered relative to the risk.
Notices
Summary of Benefits and Coverage
The ACA requires employers to provide a “summary of benefits and coverage” (SBC) at certain designated times. The SBC must also meet specified content requirements. Sample SBCs are available on the U.S. Department of Labor’s website. Ordinarily, the failure to provide an adequate and timely SBC puts an employer at risk for a penalty of up to $1,000 per day per affected participant or beneficiary. However, until further guidance is issued, no penalties will be imposed on plans and insurers that are working diligently and in good faith to provide the required SBC content in an appearance that is consistent with the final regulations, but the excise tax under Code Section 4980D, mentioned above, may apply.
Exchange Notice
The ACA requires all employers to provide written notice of health coverage options, including the Exchanges, to new hires within 14 days of hire. Currently, there are no penalties for failure to provide the notice, but such failure may be a breach of ERISA fiduciary duties.
Additional ACA Requirements to Consider if the Seller Has a Self-Insured Plan
Patient-Centered Outcomes Research Institute (PCORI) Fees
If the group health plan is self-insured, the employer must report and pay an excise tax calculated on the number of covered lives under the plan. The fee for plan years that ended after 9/20/14 and before 10/1/15 is $2.08 per covered life. The amount is likely to change for future years. The fee is reported and paid using IRS Form 720 on or before July 31 of the year following the last day of the plan year, and it applies from 2013 to 2019. The failure to file a return or pay the tax is subject to the same penalties as apply for other return-filing failures, e.g., Form W-2 failures, and failures to pay income and other taxes.
If the plan is fully insured, the responsibility to report and pay the fee falls on the insurance provider and is likely recouped through increased premiums.
Reinsurance Fees
If the plan is self-insured and has a third-party administrator, the plan must pay $44 per covered life for 2015 ($27 in 2016) to the U.S. Department of Health and Human Services. This fee has been in place since 2014 and will continue through 2016. These fees are treated as federal debt subject to the federal debt collection rules, and also the False Claims Act, if the plan fails to pay. Records must be kept for a minimum of 10 years showing such payments were made.
If the plan is fully insured, the insurance provider is liable for making reinsurance contributions. For 2015 and 2016, there is a limited exemption for self-insured group health plans that self-administer claims processing or adjudication and plan enrollment, but this is not a common arrangement as most self-insured plans use a third-party administrator.
Health Reimbursement Arrangements (HRAs) and Employer Payment Plans
Many employers use HRAs to provide health coverage to their employees. An HRA is an arrangement that is funded entirely by the employer, reimburses covered and substantiated medical expenses for employees, spouses and children, and may allow the employee to carry over an unused balance to subsequent years. Employers have significant control over HRA design. However, HRAs do not comply with the ACA requirements that health plans cover preventive care with no cost-sharing and impose no annual or lifetime limits. Therefore, stand-alone HRAs violate the ACA. Still, if an HRA is integrated with an employer-sponsored major medical plan, using either of two methods permitted under agency guidance, the HRA is permissible. See our The Affordable Care Act Creates Compliance Challenges for HRAs and Other Arrangements update for more information.
Another method of providing health coverage to employees is through an employer payment plan, by which an employer reimburses the employee, generally on a pre-tax basis, for all or part of the premium for individual health insurance purchased by the employee or directly pays the carrier for the employee’s individual policy. These arrangements violate the ACA’s prohibition on annual and lifetime limits. Employer payment plans violate the ACA regardless of whether the employer treats the payments to the employee as pre-tax or after-tax. However, an employer may provide to employees an after-tax payment, in the amount of all or part of the premium, without violating the ACA if the use of such a payment is in no way limited to payment of premium amounts, and there is no substantiation of the use of such a payment by the employee required.
Either a stand-alone HRA (including any type of non-integrated HRA) or an employer payment plan will likely trigger the $100/day/affected employee excise tax.
Greater ACA Consideration in M&A Deals
As we head into 2016 and much of the ACA’s transition guidance ends, we believe ACA compliance and potential penalties warrant even greater consideration in M&A transactions than in the past. Because every M&A transaction is unique, the ACA due diligence issues described in this update are intended only as a starting point in evaluating the ACA compliance of a seller. The scope of diligence in many cases will depend on the buyer’s determination of the seller’s ALE status and the seller’s responses to diligence questions asked by the buyer. The extent of any investigation by the buyer may also depend on the size of the entities involved, the value of the transaction and the overall risk tolerance of the buyer relative to any potential penalties.
Consideration should be given to whether the definitive agreement for the M&A transaction should include ACA-specific representations and warranties in addition to the typical employee benefits provisions. It is important to note that general compliance with law provisions may not be sufficient because incurring penalties for the failure to offer coverage to full-time employees, in accordance with the employer shared responsibility requirements, may not be treated as a violation of the ACA. The other provisions in the definitive agreement, including indemnity, survival, limitations and other rights, should also be revised to reflect any necessary or appropriate adjustments relating to the buyer’s diligence findings.
ENDNOTE
[1] The original applicable dollar amounts of $2,000 for the Code Section 4980H(a) penalty and $3,000 for the Code Section 4980H(b) penalty are indexed for inflation. The IRS released Notice 2015-87 on December 16, 2015 providing the inflation adjusted amounts for calendar year 2015.
© 2015 Perkins Coie LLP
