Health Insurance: The clock is ticking for Cape businesses
The deadline is approaching
As the deadline of July 1 draws nearer, employers are becoming more concerned about the ultimate effect the new Massachusetts Health Care Reform Act will have on their businesses. With all the uncertainty about effective dates, formulas, numbers of employees to be counted and positions excluded, it is not surprising that employers are still asking the most basic questions:
• What do I need to be doing?
• How am I supposed to do it?
• When do I have to do it?
• How much is it going to cost me?
This newsletter is designed to help you understand your obligations under the new legislation. To bring you the most current information about the Health Care Reform Act, Cape Business has partnered with the Employment Law Group of Masterman, Culbert & Tully LLP. Please note that the information contained in this article is based upon the law and regulations issued through June 20, 2007. If you have questions, we encourage you to contact Beth O'Neal, Esq., at meo@mctlaw.com or Patricia Granger, Esq., at pag@mctlaw.com, or at (617) 227-8010.
SECTION 125 PLANS
Should I implement a Section 125 Plan for my employees? Who needs to be included in the Plan? How do I set it up? If I already have a Plan, do I need to do anything?
Applicability
First, employers need to determine whether, in the 12 consecutive month period beginning April 1, 2006 and ending March 31, 2007, they had 11 or more Full-Time Equivalent ("FTE") Employees. If so, they will be subject to the Section 125 Plan requirements on July 1, 2007. Full-time equivalency is based upon all payroll hours for all employees working in Massachusetts (except those employees who have worked less than 1 month), divided by 2000. If the calculation results in 11 or more, the employer has 11 or more Full-Time Equivalent Employees. In adding up the payroll hours for all employees, if any employee has worked in excess of 2000 hours, only 2000 hours are to be included. Payroll hours, for purposes of being counted in the calculation, include regular, vacation, sick, FMLA absence, short-term disability, long-term disability, overtime and holiday payroll hours. After this initial calculation, the determination period (for purposes of calculating whether the employer has 11 or more Full-Time Equivalent Employees), will be based upon a fiscal year (i.e., from July 1 through June 30).
If employers have 11 or more FTE Employees, they are required to adopt and maintain a qualifying Section 125 Plan, also referred to as a Cafeteria Plan, by July 1, 2007.
A qualifying Section 125 Plan must meet both the IRC Section 125 requirements AND the M.G.L. c. 151F Connector requirements. Once the qualifying Section 125 Plan is adopted, employers have until September 1, 2007, to enroll all eligible employees.
An employer that provides medical care coverage to and pays the full monthly cost of such medical care coverage (both individual AND any dependent coverage as elected by the employee) for all of its employees who are not otherwise excludable (see below) is exempt from this requirement.
Contents of a Section 125 (Cafeteria) Plan
Section 125 Plans allow employees to create an account into which pre-tax money deducted from wages is deposited. The employer need not make a contribution to the Section 125 Plan, but it must arrange for the payroll deduction for the employee's contribution. Throughout the year, the employee may then deduct from the account to pay for the employee’s health insurance premiums. Some plans also include day-care expenses, and other health-care related expenses (such as prescriptions), but these extra benefits are not required.
The Section 125 Plan must be at least a “premium-only plan” that offers access to two or more “medical-care coverage options.” Employers may determine which options are offered so as to limit the number of insurance carriers or entities to which it has to transmit funds on a monthly basis, e.g., certain Connector plans.
Importantly, an employer’s Section 125 Plan must cover all employees (except the excludable employees listed below) and must allow employees the option of paying up to the full cost of their health-care premiums with the pre-tax dollars deducted from their wages and set aside in the Plan.
Note: An employer needs to ensure that its Section 125 Plan covers regular, part-time employees working 64 hours or more per month, even those who are not employer-benefits eligible.
Excludable employees not required to be included in the Section 125 Plan:
• Employees under age 18
• Temporary employees (as defined below)
• Part-time employees working fewer than 64 hours/month on average
• Wait staff, service employees, bartenders who earn, on average, less than $400 in monthly payroll wages
• Student interns or coop students
• Employees whose employers are required to contribute to a multi-employer health benefit plan based on their employment
• Seasonal employees on a J-1 student visa or H-2B visa who are required to enroll in travel health insurance
An employer may create different Section 125 Plans to cover different types of employees; for example, if an employer has already established a Section 125 Plan for some employees (e.g., those who are eligible for employment benefits), another plan may be created to cover those who now must be included.
Employers may also impose waiting periods on employees for enrollment in the Section 125 Plan. For employees eligible for group health insurance coverage, the waiting period for eligibility for the Section 125 Plan may be the same waiting period as for employer’s group health insurance coverage for which the employee is eligible and includes an employer contribution toward such coverage. For employees who are not eligible for the employer’s group health insurance coverage and/or the employer makes no contribution towards it group health insurance plan, the waiting period for eligibility for the Section 125 Plan cannot exceed 60 days.
Filing of Section 125 Plan with the Connector
Currently, the regulations require covered employers to submit a copy of the qualifying Section 125 Plan to the Connector or its designee. However, the Connector has reserved the right to change the filing requirements and has indicated a preference that employers merely be required to maintain a copy of the Section 125 Plan for inspection.
Consequences for failing to comply
If the employer does not adopt and maintain a qualifying Section 125 Plan, the employer will be required to pay a Free Rider Surcharge if its employees or their dependents use state funded care at a predetermined rate and use at least $50,000 in free care provided by the state in a fiscal year.
The surcharge amount is based on another formula that includes the number of employees, the number of admissions and visits made by the employee and the employee's dependents, the total amount of services attributed to the employer, and the percentage of employees for whom the employer does provide insurance.
The Free Rider Surcharge will not apply if the employer maintains a qualifying Section 125 Plan.
Other resources
A model plan is available in the Section 125 Plan Handbook for Employers available on the Connector’s Website. This handbook also includes copies of the regulations. To set up a new Section 125 Plan or to modify your existing Section 125 Plan, contact an insurance broker, payroll vendor or attorney.
HEALTH INSURANCE
Should I provide health insurance to my employees? If so, who is eligible and what type of coverage must I provide?
Fair Share Contribution and Assessment
Effective October 1, 2006, employers with 11 or more Full-Time Equivalent Employees who are employed at Massachusetts locations are required to make a “fair and reasonable” contribution to the health insurance costs of its employees.
If an employer with 11 or more Full-Time Equivalent Employees is making a “fair and reasonable” contribution it is exempt from the Fair Share Assessment.
The calculation to determine the number of FTE Employees is the same as for the Section 125 calculation previously discussed.
“Fair and reasonable” Test
An employer is making a "fair and reasonable" contribution where:
Primary Test: At least 25 percent of Full-Time Employees are enrolled in employer’s group health plan to which the employer is making a contribution; or
Secondary Test: Employer contributes at least 33 percent of the premium cost of any group health plan it offers to its Full-Time Employees that were employed at least 90 days during the period from October 1 to September 30.
Calculation of the Primary Test
A Full-Time Employee for the calculation of this test is one who works 35 hours per week during the year of October 1 through September 30 in a Massachusetts location.
Full-Time Employees do not include Seasonal Employees, Temporary Employees, or Independent Contractors as defined below.
A “Seasonal Employee," excluded from the definition of a Full-Time Employee, is an employee who is hired to perform services for wages by a seasonal employer during the seasonal period, in the employer's seasonal operations for a specific temporary seasonal period; that has been notified by the Division of Unemployment Assistance that the individual is performing services in seasonal employment for a seasonal employer; whose employment is limited to the beginning and ending dates of the employer’s seasonal period; and whose employment does not exceed 16 weeks.
A "Temporary Employee," excluded from the definition of a Full-Time Employee, is an employee who works for an employer on either a full or part-time basis; whose employment is explicitly temporary in nature; and whose employment does not exceed 12 consecutive weeks during the period from October 1 through September 30.
And finally, an "Independent Contractor," excluded from the definition of a Full-Time Employee, is an individual who meets the following definition, including all three of the following tests:
An Independent Contractor is an individual who provides services not deemed to be employment because:
(a) such individual has been and will continue to be free from control and direction in connection with the performance of such services, both under his/her contract for the performance of such services and in fact; and
(b) such service is performed either outside the usual course of the business for which the service is performed or is performed outside of all the places of business of the enterprise for which the service is performed; and
(c) such individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.
Under the Primary Test, there is no minimal level of coverage required of the group health insurance plan or to the amount contributed by the employer, but the employer must contribute some amount. Consequently, a mini-med plan sponsored by an employer to which the employer contributes would qualify as a group health insurance plan.
Calculation of the Secondary Test
The definition of a Full-Time Employee is the same as under the Primary Test. In applying the Secondary Test, the employer must contribute 33 percent of the premium cost of the lowest cost group health insurance plan offered by the employer. The 33 percent contribution applies only to individual coverage for the employee, not dependant coverage.
Consequences for failing to meet either test
Non-contributing employers who do not meet either the Primary or Secondary Test will be assessed a Fair Share Contribution of up to $295 per Full-Time Equivalent Employee, per year. This calculation will include all Full-Time Equivalent Employees regardless of whether they have health insurance coverage. Initial liability for the Fair Share Contribution will be based upon data from October 1, 2006, to September 30, 2007.
To date, the Division of Unemployment Assistance, which is charged with collecting the Fair Share Contribution, has not issued its final regulations.
DOCUMENTATION
What forms am I required to complete? When are they due?
Required forms
Employers with 11 or more Full-Time Equivalent Employees are subject to reporting requirements. To determine whether you have 11 or more FTE Employees (and are subject to these reporting obligations), the same calculation applies.
Employee Health Insurance Responsibility Disclosure Form
The HIRD form must be completed by each employee who either declines the employer’s group health insurance coverage or declines the offer to utilize the employer’s Section 125 Plan for the purchase of health insurance coverage.
The Employee HIRD Form is now available. To obtain the form, click here. The employer must obtain a signed HIRD form by the earlier of 30 days after the close of the applicable enrollment period for the employer's health insurance and/or its Section 125 Plan, or September 30 of the reporting year. For employees terminating participation or for new hires, forms must be obtained within 30 days of termination or enrollment. Copies must be retained by the employer for three years.
Employer Health Insurance Responsibility Disclosure Form
Regulations issued on June 20, 2007 provide that the Employer HIRD Form will include information effective as of July 1 of each year. Future regulations will address the specific form and manner of reporting required of employers.
This column, which may be considered advertising under the ethical rules of certain jurisdictions, is intended as a general discussion of the topics covered, and does not constitute the rendering of legal advice or other professional advice by Masterman, Culbert and Tully LLP or its attorneys. In compliance with U.S. Treasury regulations governing tax practice, any U.S. Federal tax advice contained in this publication is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties or in connection with the promoting, marketing or recommending to any individual of any transaction or matters addressed therein.
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