What Does the Affordable Care Act Mean for Law Firms?

The majority of the new mandates will go into effect in 2014 and beyond. However, there are steps you need to take now to make sure your firm is prepared for what lies ahead.

Health Reform Timeline ' Updated July, 9, 2013

The first thing you need to know is that the Affordable Care Act is being rolled out in phases. Here's an overview of upcoming provisions. ” '

2013

Medicare payroll tax

• An additional Medicare payroll tax of 0.9% will apply to earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly. You will be required to withhold this 0.9% tax from each of your employees who earns wages above the $200,000 individual income threshold, regardless of the employee's filing status or employee's spouse's income, if any. An analogous provision applies to self-employed persons.
• Also, a 3.8% unearned income Medicare surtax on the lesser of net investment income or the excess of modified adjusted gross income (AGI) over the same threshold amounts will go into effect for tax year 2013.

Employee exchange notice

• Notifies employees of the availability of health insurance exchanges (explained below)
• Original deadline for employers to issue the notice was March 2013, but it's been delayed to late summer or early fall 2013

Cap on healthcare flexible spending accounts (FSA): $2,500

• Applies to plan years that begin on or after January 1, 2013

Open enrollment begins

• Individuals and small businesses will be able to purchase health plans through the new health insurance marketplace. Open enrollment starts October 1, 2013, for coverage effective January 1, 2014.

2014

Health insurance exchanges

• The exchanges will create new marketplaces for individuals and small businesses to buy health coverage.' States are required to either set up their own health insurance exchanges by 2014 or let the federal government do it for them. The federally operated exchange will serve residents of states that have opted not to create their own exchanges or are unable to operate an exchange by January 2014. As of April 1, 2013, 17 states and D.C. have declared plans to create a state-based exchange, seven states are planning for a partnership exchange and 26 will default to the federal exchange, according to the Kaiser Family Foundation.

Cost-sharing Limits

• Annual Deductible Limit ' effective for plan years beginning in 2014, the annual deductible for a health plan in the small group market (less than 50 employees in Florida) may not exceed $2000 for self-only coverage and $4000 for family coverage. The annual deductible limit does not apply to self-insured plans or large group plans.
• Out-of-pocket Maximum ' unlike the deductible limits, the limits for out-of-pocket maximum include self-insured plans and large group plans.' For plan years beginning in 2014, the OOP maximum may not exceed $6350 for self-only coverage and $12,700 for family coverage.' Also, all out-of-pocket expenses incurred by the insured, with the exception of premiums, will accumulate towards the OOP maximum.

90-day maximum waiting period

• Group health plans or insurers offering group coverage cannot apply waiting periods for coverage that are greater than 90 days

Definition of a full-time employee

• Employees who work at least 30 hours per week are considered full-time”
• Impacts employer calculation of FTEs and auto-enrollment provision

No pre-existing condition exclusions or annual or lifetime maximums

• Insurers cannot' discriminate or refuse coverage to adults based on their past or present health status (this is already in place for children and teenagers under 19 years old)
• Elimination of lifetime and annual limits for essential benefits

Auto-enrollment

• Employers with more than 200 employees must automatically enroll employees into one of its health benefit plans (if it offers such coverage)
• The automatic enrollment program needs to include adequate notice and an opportunity for employees to opt-out

Wellness incentives

• Starting in 2014, employers can offer employees rewards of up to 30% of the cost of coverage (potentially increasing to 50% of the cost of coverage) for participating in a wellness program and meeting certain health-related standards, such as not smoking.
• These incentives help increase employee engagement and offer initiatives to avoid unhealthy behaviors and improve lifestyle choices.

2015

Play or pay employer mandate

• Businesses with 50 or more full-time equivalent (FTE) employees must offer coverage or pay a penalty (explained below)

Essential health benefits and affordability

• To avoid a penalty, employers must offer coverage that provides a minimum level of coverage (actuarial value) and is 'affordable' for all full-time employees.

2016

• Until 2016, states have the choice of classifying small businesses as having a maximum of either 50 or 100 FTEs for the purposes of determining which businesses will be allowed to purchase health plans through the state-run exchanges. Starting in 2016, all businesses that have 100 FTEs or fewer will be eligible to buy coverage through the exchanges.

2017

• States can allow groups larger than 100 members to purchase coverage through the exchange

2018

Tax changes

• New tax, referred to as the “Cadillac tax,' on employer-sponsored health plans that offer policies with generous coverage levels; this40% excise tax will be imposed on businesses that offer employer-sponsored health plans with aggregate values that exceed $10,200 for individual coverage and $27,500 for family coverage.

2020

• 'Donut hole' coverage gap in Medicare prescription benefit is fully phased out; Seniors continue to pay the standard 25% of their drug costs until they reach the threshold for Medicare catastrophic coverage

What You Should Be Doing Now

The good news is many law firms and other professional service firms already offer employee health coverage that is sufficient to meet the minimum requirements for coverage and affordability under the Affordable Care Act, says Sean Dugan, senior vice president of insurance broker Hays Companies of Florida.

'In my experience, most law firms already meet or exceed these levels, but it's a still a good idea to have a benefits advisor or broker perform a check during 2013 to make sure you are in compliance before the laws go into effect next year,' he says.

Check minimum essential coverage, minimum value and affordability

An insurance broker can help you determine if your current health plan offers minimum essential coverage and 'minimum value' (plan would pay at least 60% of expenses that are covered under plan's provisions). He or she can also help you calculate if your plan is considered 'affordable' under ACA.

To be considered affordable under the law, an employee's required annual contribution amount for employee-only coverage may not exceed 9.5% of their annual income.' To determine if your current plan is affordable for all employees, perform this 9.5% check for your lowest wage employee, looking only at the employee's income (Box 1 of Form W-2). Currently, there is no requirement that dependent coverage be 'affordable.'

Law firms should carefully review the compensation structure of partners and other firm employees to ensure compliance with the'non-discrimination requirement of healthcare reform.' 'That is, in simple terms, are the firm's partners and other highly compensated employees receiving a richer benefit than other employees of the firm?' explains Beverly Beattie, founder and CEO of Selden Beattie Benefit Advisors.”If the firm is self-insured, its benefit advisor should ensure it is currently testing and passing under IRS Section 105(h).' We are still awaiting further regulation for fully-insured plans; however, we expect the test to be similar in nature.'

The Affordable Care Act requires some employers to report the cost of coverage under an employer-sponsored group health plan on their employees' W-2. The benefits are not taxable, but this requirement is intended to provide employees with 'useful and comparable consumer information on the cost of their healthcare coverage.' Please note: This requirement currently applies only to employers who file 250 or more W-2 forms per year.

Count and Calculate Number of Full-Time Equivalent Employees

Employers with 50 or more FTEs are considered to be 'large' employers under ACA and are subject to a financial penalty if they choose not to offer health insurance coverage to employees who work the requisite number of hours per week. To determine if your law firm is a 'large' employer and subject to 'play or pay,' you must calculate how many FTEs you have.

This calculation will also enable you to determine which of your employees are eligible for health benefits at any point in time, accounting for variables like seasonality and caseload. It is especially important to track hours for part-time and seasonal employees (e.g., paralegals and legal assistants who were brought in to help with a big case) during a specific, pre-determined 'measurement period'; if they work an average of 30 hours a week or more, they will be eligible for health benefits under ACA.

Independent contractors'are not considered employees and therefore would not count toward employers' number of full-time employees. However, be careful not to misclassify employees as contractors, which could trigger a red flag for the IRS. Sole proprietors, partners and 2% (or more) S-corporation shareholders are also not considered employees and are therefore not counted.

ACA uses long-standing IRS controlled group rules to combine employers for purposes of health reform. All 'related' companies, as defined under the Tax Code, are treated as a single employer under ACA, which means the employees of all related employers within the controlled group are counted when determining whether the controlled group, treated as one, is a 'large' employer. Therefore, simply subdividing your company into smaller companies will not allow you to escape the employer mandate.

Decide if Your Firm Will 'Play or Pay'

Some employers will choose to pay the penalty rather than 'play' ' this is where the calculations can get a bit tricky.'

If you are a 'large' employer under ACA, do not offer any health coverage to your employees, and'at least one of your FTEs'receives an exchange subsidy from the government, your firm will be subject to the following penalty: # of FTEs ' 30 FTEs x $166.67/month, which translates into a $2,000 penalty per year for each uncovered worker beyond 30 employees. If you offer coverage, but it is considered to be 'unaffordable' or below the minimum essential benefit standards, the penalty is $250/month (or $3,000 per year) for each FTE who receives a premium credit or cost share through a health insurance exchange. Of course, there are strategic reasons why your firm may decide to maintain coverage ' even if you have fewer than 50 employees or if you determine the cost of offering coverage is higher than the penalty you would pay for not offering coverage. Providing health benefits may be part of your firm culture, and it can be a valuable recruiting tool that helps you attract and retain top performers.

Another point to consider is that your law firm would lose some tax savings if you decide not to offer health coverage. The FICA tax savings on employer/employee health plan premiums and the employer tax deduction for employer health plan costs may exceed the difference between the penalty and cost to provide health coverage. Your accounting professional can help you navigate all of the'Affordable Care Act tax provisions including the tax implications of offering coverage versus choosing not to.

Beattie suggests asking yourself the following questions as you perform a comprehensive cost-benefit analysis and strategically consider whether your firm should 'play or pay.'

• What are my reasons for offering group health coverage now, when I don't 'have to'? Will these reasons still apply in 2015 and beyond?
• If I drop coverage, do I believe my employees will demand additional compensation?
• Do I believe my competitors will discontinue group health coverage?
• Do I believe the exchanges will be ready in 2014?
• Would I need additional staff for reporting or to handle inquiries from and about the exchange?
• Should I redesign my plan (perhaps to stay just above the 60% minimum value threshold)?
• Do I need to redesign my contribution strategy to meet affordability requirements?
• If I don't offer coverage, do I have money in the budget for the non-deductible penalty?
• Have I considered if my position would be the same if the penalty for not providing coverage increased to $5,000 or $7,500?

Beattie recommends that law firms work with a benefits advisor to develop a benefit strategic plan that maps out their benefits programs over the next three to five years. Use your corporate values and strategic goals as your guide when making ACA decisions, she says, and you will be able to successfully navigate health reform and make informed decisions in the best interests of your firm and your employees.

Steven A. Davis, CPA, is a member of this newsletter's Board of Editors, and leads the Accounting Services practice at Kaufman, Rossin & Co. He provides internal control and consulting engagements for law firms. He can be reached at'[email protected].

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Many law firms have seen an uptick in business since the Patient Protection and Affordable Care Act (ACA), aka Obamacare, was signed into law in 2010. Healthcare reform has brought clients seeking legal advice on how to comply with the complex healthcare laws. Business owners might need help revising benefits offerings and updating employee manuals or separation agreements to avoid employment-related lawsuits. And clients in the healthcare industry may be looking for legal counsel as they grow their operations and restructure their companies to adapt to a rapidly expanding healthcare market.

If you manage a law firm, you might be excited about all of the'new business opportunities that the Affordable Care Act presents, but have you taken the time to think about how the new laws will impact your firm and your employees?

You will have many important decisions to make and deadlines to meet as the health reform laws are implemented. Many larger law firms already offer benefits that meet or exceed the minimum requirements, but there are specific calculations, notice requirements, new tax provisions and other changes of which you need to be aware.

The majority of the new mandates will go into effect in 2014 and beyond. However, there are steps you need to take now to make sure your firm is prepared for what lies ahead.

Health Reform Timeline ' Updated July, 9, 2013

The first thing you need to know is that the Affordable Care Act is being rolled out in phases. Here's an overview of upcoming provisions. ” '

2013

Medicare payroll tax

• An additional Medicare payroll tax of 0.9% will apply to earned income in excess of $200,000 for individuals and $250,000 for married couples filing jointly. You will be required to withhold this 0.9% tax from each of your employees who earns wages above the $200,000 individual income threshold, regardless of the employee's filing status or employee's spouse's income, if any. An analogous provision applies to self-employed persons.
• Also, a 3.8% unearned income Medicare surtax on the lesser of net investment income or the excess of modified adjusted gross income (AGI) over the same threshold amounts will go into effect for tax year 2013.

Employee exchange notice

• Notifies employees of the availability of health insurance exchanges (explained below)
• Original deadline for employers to issue the notice was March 2013, but it's been delayed to late summer or early fall 2013

Cap on healthcare flexible spending accounts (FSA): $2,500

• Applies to plan years that begin on or after January 1, 2013

Open enrollment begins

• Individuals and small businesses will be able to purchase health plans through the new health insurance marketplace. Open enrollment starts October 1, 2013, for coverage effective January 1, 2014.

2014

Health insurance exchanges

• The exchanges will create new marketplaces for individuals and small businesses to buy health coverage.' States are required to either set up their own health insurance exchanges by 2014 or let the federal government do it for them. The federally operated exchange will serve residents of states that have opted not to create their own exchanges or are unable to operate an exchange by January 2014. As of April 1, 2013, 17 states and D.C. have declared plans to create a state-based exchange, seven states are planning for a partnership exchange and 26 will default to the federal exchange, according to the Kaiser Family Foundation.

Cost-sharing Limits

• Annual Deductible Limit ' effective for plan years beginning in 2014, the annual deductible for a health plan in the small group market (less than 50 employees in Florida) may not exceed $2000 for self-only coverage and $4000 for family coverage. The annual deductible limit does not apply to self-insured plans or large group plans.
• Out-of-pocket Maximum ' unlike the deductible limits, the limits for out-of-pocket maximum include self-insured plans and large group plans.' For plan years beginning in 2014, the OOP maximum may not exceed $6350 for self-only coverage and $12,700 for family coverage.' Also, all out-of-pocket expenses incurred by the insured, with the exception of premiums, will accumulate towards the OOP maximum.

90-day maximum waiting period

• Group health plans or insurers offering group coverage cannot apply waiting periods for coverage that are greater than 90 days

Definition of a full-time employee

• Employees who work at least 30 hours per week are considered full-time”
• Impacts employer calculation of FTEs and auto-enrollment provision

No pre-existing condition exclusions or annual or lifetime maximums

• Insurers cannot' discriminate or refuse coverage to adults based on their past or present health status (this is already in place for children and teenagers under 19 years old)
• Elimination of lifetime and annual limits for essential benefits

Auto-enrollment

• Employers with more than 200 employees must automatically enroll employees into one of its health benefit plans (if it offers such coverage)
• The automatic enrollment program needs to include adequate notice and an opportunity for employees to opt-out

Wellness incentives

• Starting in 2014, employers can offer employees rewards of up to 30% of the cost of coverage (potentially increasing to 50% of the cost of coverage) for participating in a wellness program and meeting certain health-related standards, such as not smoking.
• These incentives help increase employee engagement and offer initiatives to avoid unhealthy behaviors and improve lifestyle choices.

2015

Play or pay employer mandate

• Businesses with 50 or more full-time equivalent (FTE) employees must offer coverage or pay a penalty (explained below)

Essential health benefits and affordability

• To avoid a penalty, employers must offer coverage that provides a minimum level of coverage (actuarial value) and is 'affordable' for all full-time employees.

2016

• Until 2016, states have the choice of classifying small businesses as having a maximum of either 50 or 100 FTEs for the purposes of determining which businesses will be allowed to purchase health plans through the state-run exchanges. Starting in 2016, all businesses that have 100 FTEs or fewer will be eligible to buy coverage through the exchanges.

2017

• States can allow groups larger than 100 members to purchase coverage through the exchange

2018

Tax changes

• New tax, referred to as the “Cadillac tax,' on employer-sponsored health plans that offer policies with generous coverage levels; this40% excise tax will be imposed on businesses that offer employer-sponsored health plans with aggregate values that exceed $10,200 for individual coverage and $27,500 for family coverage.

2020

• 'Donut hole' coverage gap in Medicare prescription benefit is fully phased out; Seniors continue to pay the standard 25% of their drug costs until they reach the threshold for Medicare catastrophic coverage

What You Should Be Doing Now

The good news is many law firms and other professional service firms already offer employee health coverage that is sufficient to meet the minimum requirements for coverage and affordability under the Affordable Care Act, says Sean Dugan, senior vice president of insurance broker Hays Companies of Florida.

'In my experience, most law firms already meet or exceed these levels, but it's a still a good idea to have a benefits advisor or broker perform a check during 2013 to make sure you are in compliance before the laws go into effect next year,' he says.

Check minimum essential coverage, minimum value and affordability

An insurance broker can help you determine if your current health plan offers minimum essential coverage and 'minimum value' (plan would pay at least 60% of expenses that are covered under plan's provisions). He or she can also help you calculate if your plan is considered 'affordable' under ACA.

To be considered affordable under the law, an employee's required annual contribution amount for employee-only coverage may not exceed 9.5% of their annual income.' To determine if your current plan is affordable for all employees, perform this 9.5% check for your lowest wage employee, looking only at the employee's income (Box 1 of Form W-2). Currently, there is no requirement that dependent coverage be 'affordable.'

Law firms should carefully review the compensation structure of partners and other firm employees to ensure compliance with the'non-discrimination requirement of healthcare reform.' 'That is, in simple terms, are the firm's partners and other highly compensated employees receiving a richer benefit than other employees of the firm?' explains Beverly Beattie, founder and CEO of Selden Beattie Benefit Advisors.”If the firm is self-insured, its benefit advisor should ensure it is currently testing and passing under IRS Section 105(h).' We are still awaiting further regulation for fully-insured plans; however, we expect the test to be similar in nature.'

The Affordable Care Act requires some employers to report the cost of coverage under an employer-sponsored group health plan on their employees' W-2. The benefits are not taxable, but this requirement is intended to provide employees with 'useful and comparable consumer information on the cost of their healthcare coverage.' Please note: This requirement currently applies only to employers who file 250 or more W-2 forms per year.

Count and Calculate Number of Full-Time Equivalent Employees

Employers with 50 or more FTEs are considered to be 'large' employers under ACA and are subject to a financial penalty if they choose not to offer health insurance coverage to employees who work the requisite number of hours per week. To determine if your law firm is a 'large' employer and subject to 'play or pay,' you must calculate how many FTEs you have.

This calculation will also enable you to determine which of your employees are eligible for health benefits at any point in time, accounting for variables like seasonality and caseload. It is especially important to track hours for part-time and seasonal employees (e.g., paralegals and legal assistants who were brought in to help with a big case) during a specific, pre-determined 'measurement period'; if they work an average of 30 hours a week or more, they will be eligible for health benefits under ACA.

Independent contractors'are not considered employees and therefore would not count toward employers' number of full-time employees. However, be careful not to misclassify employees as contractors, which could trigger a red flag for the IRS. Sole proprietors, partners and 2% (or more) S-corporation shareholders are also not considered employees and are therefore not counted.

ACA uses long-standing IRS controlled group rules to combine employers for purposes of health reform. All 'related' companies, as defined under the Tax Code, are treated as a single employer under ACA, which means the employees of all related employers within the controlled group are counted when determining whether the controlled group, treated as one, is a 'large' employer. Therefore, simply subdividing your company into smaller companies will not allow you to escape the employer mandate.

Decide if Your Firm Will 'Play or Pay'

Some employers will choose to pay the penalty rather than 'play' ' this is where the calculations can get a bit tricky.'

If you are a 'large' employer under ACA, do not offer any health coverage to your employees, and'at least one of your FTEs'receives an exchange subsidy from the government, your firm will be subject to the following penalty: # of FTEs ' 30 FTEs x $166.67/month, which translates into a $2,000 penalty per year for each uncovered worker beyond 30 employees. If you offer coverage, but it is considered to be 'unaffordable' or below the minimum essential benefit standards, the penalty is $250/month (or $3,000 per year) for each FTE who receives a premium credit or cost share through a health insurance exchange. Of course, there are strategic reasons why your firm may decide to maintain coverage ' even if you have fewer than 50 employees or if you determine the cost of offering coverage is higher than the penalty you would pay for not offering coverage. Providing health benefits may be part of your firm culture, and it can be a valuable recruiting tool that helps you attract and retain top performers.

Another point to consider is that your law firm would lose some tax savings if you decide not to offer health coverage. The FICA tax savings on employer/employee health plan premiums and the employer tax deduction for employer health plan costs may exceed the difference between the penalty and cost to provide health coverage. Your accounting professional can help you navigate all of the'Affordable Care Act tax provisions including the tax implications of offering coverage versus choosing not to.

Beattie suggests asking yourself the following questions as you perform a comprehensive cost-benefit analysis and strategically consider whether your firm should 'play or pay.'

• What are my reasons for offering group health coverage now, when I don't 'have to'? Will these reasons still apply in 2015 and beyond?
• If I drop coverage, do I believe my employees will demand additional compensation?
• Do I believe my competitors will discontinue group health coverage?
• Do I believe the exchanges will be ready in 2014?
• Would I need additional staff for reporting or to handle inquiries from and about the exchange?
• Should I redesign my plan (perhaps to stay just above the 60% minimum value threshold)?
• Do I need to redesign my contribution strategy to meet affordability requirements?
• If I don't offer coverage, do I have money in the budget for the non-deductible penalty?
• Have I considered if my position would be the same if the penalty for not providing coverage increased to $5,000 or $7,500?

Beattie recommends that law firms work with a benefits advisor to develop a benefit strategic plan that maps out their benefits programs over the next three to five years. Use your corporate values and strategic goals as your guide when making ACA decisions, she says, and you will be able to successfully navigate health reform and make informed decisions in the best interests of your firm and your employees.

Steven A. Davis, CPA, is a member of this newsletter's Board of Editors, and leads the Accounting Services practice at Kaufman, Rossin & Co. He provides internal control and consulting engagements for law firms. He can be reached at'[email protected].

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