Taking Charge

Source: UBA

A new study finds that more defined contribution plan sponsors are taking an active role to understand and monitor the performance of the funds in their plans. Research by Callan Associates reveals that 40.7 percent of plan sponsors said they swapped out under-performing funds or managers in 2012, a 9.2 percent increase from 2011


Less than half of small businesses offer benefits

Source: https://eba.benefitnews.com
By Tristan Lejeune

Less than half of U.S. small businesses offer benefits to employees, according to research from LIMRA released this week. The firm finds that 47% of those with two to 99 employees offer benefits, the lowest level in two decades.

In its survey of 754 private small businesses, LIMRA spoke to the individuals who made or shared decision-making regarding business insurance and employee offerings. Samples were weighed by company size, industry and region based on U.S. Census Bureau data.

Seventy-eight percent of small American businesses are family-owned, LIMRA reports, and such firms had a sharper decline in benefit penetration (47% down to 40%) than non-family-owned ones between 2005 and 2012. Female-owned businesses, which accounted for a quarter of the total, tend to be smaller, produce less revenue and are less likely to offer insurance benefits than male-owned firms (37% versus 50%).

“The recession has had an impact on smaller employers’ ability to offer benefits, particularly those with fewer than ten employees,” says Kim Landry, LIMRA Product Research analyst. “The weak economy caused a lot of small firms to close, while the new firms cropping up to replace them are less likely to offer benefits. Many small businesses are also hesitant to add new benefits until the economy improves.”

Landry says that among those who do still offer benefits, health care and pharmacy remains the most popular by far, as well as the most common.

“These benefits provide an opportunity for small business owners to obtain coverage not only for their employees, but also for themselves and their families,” notes Landry. “We also found dental and vision coverage to be common offerings among small businesses, as these products tend to be very popular with employees.”

Life insurance also is offered frequently, because of its low cost and ease of administration, LIMRA reports. Accident insurance and short- and long-term disability, however, have what LIMRA calls fairly low penetration rates.

Census Bureau data reveal that 35% of the U.S. workforce is in small businesses, which account for 98% of American companies.

 


Costly Suits

Source: United Benefit Advisors
Employers dished out more than $400 million to settle discrimination cases with the Equal Employment Opportunity Commission (EEOC) in fiscal year 2012. In the private sector, retaliation was the most common charge, followed by racial and sexual discrimination, respectively, the EEOC report found. The number of private-sector cases in 2012 reached 99,412, a slight dip from the previous year.


Employee questions on PPACA exchanges likely to spike

Source: https://eba.benefitnews.com
By: Gillian Roberts

Ignorance will not be bliss come October when state and federal exchanges begin enrollment for individuals and small group employees. While brokers are experiencing anxiety about their role in such exchanges, employees of all types may be confused about their options — thus providing brokers the chance to come to the rescue with targeted communication on the subject.

“Most employees don’t think [health reform] impacts them yet,” says Mike Thompson at PricewaterhouseCoopers’ human resource services. But, when more information begins to come out on public exchanges, “employees are very likely to be very confused,” he adds. “It’s one of the reasons that HHS deferred employers communicating about the exchanges to their employees.”

Jim Blaney, CEO, human capital practice, Willis North America, says employees are concerned about costs the Patient Protection and Affordable Care Act might pass on them, and how exactly PPACA’s exchanges will affect them. “I get the feeling that employees might start to think that their employer will just throw them out on the exchanges for coverage,” he says. “That will bring around a whole set of communications opportunities for the broker and the employer.”

According to a Kaiser Family Foundation analysis in fall 2009, about 2% of uninsured people could purchase health insurance through a workplace plan, but simply chose not to do so. These same employees are likely to have questions about exchange eligibility come this fall, and turn to their HR department (and broker) for answers. For example, according to a Lake Research and Enroll America survey compiled last fall, 78% of all uninsured were not aware that they may qualify for subsidies and will have coverage options in 2014.

“There's a lot of need for targeted education by state, versus federal campaigns,” says Mollyann Brodie, director of public opinion and media research at Kaiser Family Foundation.

The Department of Health and Human Services in late January launched Health Insurance Marketplace, a website and marketing campaign designed to educate people about exchange open enrollment. According to HHS spokesman Fabien Levy, the agency is targeting both uninsured and insured people through email and text message updates, as well as social media conversations on Twitter, Facebook, Tumblr and YouTube. He points out that the Congressional Budget Office predicts that 9 million Americans will obtain coverage through the exchanges in 2014.

State organizations vary drastically in the level of education and tools provided to residents. Some of the most active states so far are Maryland and California. Both have informational websites dedicated to their respective exchanges. Willis’ Blaney says confusion for employees will likely increase when more states begin their awareness campaigns.

There is also a need for education in the small business market, says Sarah Dash, a researcher at Georgetown University’s Center on Health Insurance Reforms. With so much still undetermined, and many more HHS regulations and communications to come, Kaiser’s Brodie says moving forward with an education campaign is more important than ever. “If we wait until the public is perfectly informed” on the details of PPACA, she says, “we’ll be waiting forever.”


ERISA Bonding - Not as Easy as it Looks

Separating ERISA bonds from fiduciary liability insurance

Source: https://roughnotes.com

By Michael J. Moody, MBA, ARM

The Employee Retirement Income Security Act (ERISA) has been the law of the land since 1974, with regard to employee benefits. Its specific purpose is to protect the assets of millions of American workers so that funds are available when they retire. It's a federal law that, in essence, sets minimum standards for private company pension plans. Most of its requirements took effect on January 1, 1975. While it does not require corporations to create pension plans, it does establish minimum standards for those that do start pension plans.

For the most part, the key sections of the law have remained as they were in 1975. One section (Section 412) has been a source of concern for employers and their insurance agents because it deals directly with the Act's bonding requirements. In response to numerous requests, the Department of Labor, which oversees ERISA, published a Field Assistance Bulletin (#2008-04) that addresses a number of issues surrounding the bonding requirements. While the Bulletin is helpful in understanding the requirements, it was not meant to change any existing parts of Section 412. The Bulletin provides a set of 42 questions and answers that address many of the areas where employers have requested further clarification.

ERISA Bonding 101

At the most basic level, the bonding requirements are pretty straightforward. The Act, for example, requires that "every fiduciary of an ERISA-covered employee benefit plan and every person who handles funds or other property of such plans must be covered by a bond." There are, however, a number of exceptions to this requirement, as there are with most of the other specific requirements and, as such, are beyond the scope of this article. What follows, however, are a number of requirements that generally apply in all situations.

Bond limits must be issued for at least 10% of the amount of the funds handled, subject to a minimum limit of $1,000 per plan and a maximum of $500,000 per plan.

Several other points to keep in mind regarding the bonding requirements:

• Bonds cannot be obtained from just any bonding or insurance company. They must be placed with a surety company or reinsurer that is listed by name on the IRS's Listing of Approved Sureties as noted in IRS Department Circular 570.

• No plan or party-in-interest may have any control or significant financial interest in the surety or reinsurer, or in an agent or broker who arranges for the bond.

• Bonds must be written for a minimum of one year. Additionally, the bond must also have a one-year period after termination to discover losses that occurred during the original term of the bond.

• Coverage from the bond must be from the first dollar of loss; thus, the bond cannot have a deductible feature.

• An employee benefit plan can be insured on its own bond, or it can be added as a named insured to an existing employer bond as long as it satisfies ERISA's minimum requirements.

Other than the requirements noted above, the DOL allows quite a bit of flexibility with the bond. For example, a plan may be covered under a single bond or one bond that covers multiple plans. Permissible bond forms can range from individual, named schedule, position schedule or even a blanket bond.

Potential trouble spots

One area of considerable confusion that has continued to exist since the original Act was passed is the difference between an ERISA bond and fiduciary liability insurance. ERISA bonds are in fact fidelity bonds that protect the plan against fraud or dishonesty by individuals who handle plan assets. These bonds are a specific requirement of the ERISA legislation. On the other hand, fiduciary liability insurance generally protects the employer and/or fiduciaries from losses due to a breach of fiduciary duty. While fiduciary liability insurance is not a requirement under ERISA, many employers have chosen to provide this important coverage in their corporate insurance portfolio. To complicate the situation further, the insurance industry offers both the bond and fiduciary liability coverage under a single policy. While this type of comprehensive protection is very useful, it needs to be remembered that only the bond is required under ERISA. Additional coverages are available at the discretion of the employer.

Due in large part to the types of risks involved, there are few risk mitigation strategies that can be employed to lower the risk of loss. However, one method of risk mitigation that is being used and suggested by some consultants revolves around "credentialing" of all internal personnel and outside service providers. Typically this approach will require an approval and adoption of a written policy statement. The key element would be conducting criminal background checks and other prudent investigations to reconfirm the suitability of individuals serving in fiduciary positions or otherwise acting in a capacity covered by ERISA's bonding requirements. Care should be taken to comply with the applicable notice and consent requirements for conducting third-party background checks under the Fair Credit Reporting Act and other applicable laws.

While this may initially appear to be overkill, it should be remembered that ERISA generally prohibits individuals convicted of certain crimes from serving as plan fiduciaries. Further, it also prohibits plan sponsors, fiduciaries or others from knowingly hiring, retaining, employing or otherwise allowing these convicted individuals to handle plan assets for the 13-year period after the later of their conviction or the end of their imprisonment.

Additionally, the credentialing process should also include a review that verifies the sufficiency and adequacy of the bonding that is in effect for both internal personnel as well as outside service providers. Unless a service provider can provide a legal opinion that adequately demonstrates that an ERISA bonding exemption applies, plan sponsors and fiduciaries should require the third-party service provider to provide proof of appropriate bonding that is in compliance with ERISA and other appropriate laws.

Conclusion

While there are some exceptions to ERISA's bonding requirements, the fact remains that a bond is required for every pension plan. The bond must extend coverage to those persons whose position requires them to come in direct contact with or exercise discretion over plan assets. Further, the bonds must be in amounts and form acceptable to the DOL. They must comply with all the provisions as outlined in Section 412 of the ERISA legislation.

Fiduciary liability insurance is not required by ERISA, but it can provide agents and brokers with an excellent opportunity to broach the subject with an employer. Losses following the recent financial crisis have increased, and today's fiduciary liability policies offer a variety of coverage enhancements and can provide an employer with a number of advantages, while covering many gaps in their corporate insurance programs. Becoming a key knowledge source for employers in a narrow area such as this can be a real door opener for any agency.

 


Flu Season Turns Corner, But Challenges Remain

Source: United Benefit Advisors

Although the height of the flu season looks to be waning, employers can expect the effects of the annual wave of sickness among the U.S. workforce to linger for a few more months.

The Centers for Disease Control and Prevention (CDC) recently predicted that high flu activity will hang around for a few more weeks and then start to drop in late February or early March, except in the West, where the flu arrived later this year, according to USA TODAY.

"We're not at the end but we're nearing the end," said Michael Jhung, an epidemiologist with the CDC.

This year's bout of flu hit the East in December, nearly a month earlier than usual, the CDC reported. That quick start to the flu season means the virus is already running its course in most areas of the country.

The early emergence and ferocity of this year's outbreaks (CDC reported that this year's virus is sparking more severe symptoms than in past years) has rekindled the debate over mandated paid sick time for employees.

The topic is especially hot in New York City, which is pondering a sick-time ordinance under the shadow of a tight municipal election, according to The Associated Press. Two likely mayoral candidates are pressing for the City Council to decide on the measure, which has languished for nearly three years.

While the topic makes for good politics, many employers worry that mandates on employee sick time could be devastating to their businesses. Michael Sinensky, who saw four of his seven bars shut down after Hurricane Sandy, told the AP that his business simply can't afford "additional social initiatives."

Many employers, though, are starting to re-evaluate the public health benefit of containing diseases compared with short-term costs of paid sick leave, said John A. Challenger, CEO of Challenger, Gray & Christmas. "Right now, where companies' incentives lie is butting right up against this concern over people coming into the workplace, infecting others and bringing productivity of a whole company down," Challenger told the AP.

For now, an employer's best defense against a flu-ridden workforce is to protect employees before they fall ill, according to online posts by Smart HR Manager and the Occupational Safety & Health Administration, which cite some tips that businesses can implement to stave off productivity-killing outbreaks:

  • Make flu vaccination a priority. It might be too late to help much this season, but employers can start making plans now to prepare for next year.
  • Be prepared to educate employees about the importance of vaccinations and ways to stay healthy, such as regular hand-washing with soap.
  • Find out what your employees want and expect from an immunization program.
  • Be flexible in allowing employees to go off-site to get flu vaccines.
  • Encourage workers to not share phones, computers or equipment unless absolutely necessary.
  • Keep common areas in the office clean.

 


Regulation Roundup: The Hits Keep On Coming

Source: United Benefit Advisors

The federal government in the past few weeks has kept up the fast pace of pumping out benefits-related guidance -- a trend that started at the end of 2012 --  with a set of final and proposed regulations for the health care reform law, a final HIPAA rule and a compromise on the Obama administration's coverage requirement for contraceptives.

HIPAA: The Department of Health and Human Services (HHS) released its HIPAA omnibus final rule in late January. The final rule establishes new rights for individuals to access their health information, calls for updates to business associate contracts, beefs up privacy protections for patients and gives the government more power to enforce the law, according to a HealthLeaders Media article.

Employers should expect tougher policing of HIPAA-related infractions by federal agencies, experts say.

"The 'good old days' of voluntary compliance and 'slaps on the wrist' seem to be a thing of the past," Brad M. Rostolsky, a partner with Reed Smith, LLP, told HealthLeaders Media. "As a result, it's important that regulated businesses, from the top down, are seen to have buy-in to HIPAA compliance efforts."

Contraception Compromise: HHS has tweaked its requirement that religious nonprofit organizations provide their female members coverage for birth control, according to a PPACA Advisor release from United Benefit Advisors (UBA). Instead, insurance companies, after being notified of the employer's objection to the coverage, would be required to provide coverage at no cost to workers through separate policies. If the employer is self-insured, it can use a third party to set up a separate health policy that would provide coverage for contraceptives. The costs for this action may be be offset by the fees that insurers will pay to participate in the government-run health care exchanges, slated to go online in 2014.

Affordability: The IRS finalized a rule that clarified that the health coverage "affordability" requirement (that an employee's premium contribution not exceed 9.5 percent of household income) under the Patient Protection and Affordable Care Act (PPACA) will be based on self-only coverage, according to a Business Insurance online report. Employers with plans that fail that test face a $3,000 penalty for each full-time employee who is not offered affordable coverage and instead receives a premium subsidy from the government to purchase insurance in a health care exchange. The proposed regulation left open the possibility that the affordability test might have applied to family coverage, but the IRS removed that scenario with its final rule.

HRAs: A new set of frequently asked questions posted by federal agencies limits the use of health reimbursement arrangements (HRAs) in the coming government-run health insurance exchanges, an online report by the Society for Human Resource Management (SHRM) notes. The FAQs state that an HRA that is not integrated with a group health plan but instead functions as a "stand-alone" benefit falls under the PPACA provision that limits the annual amount an individual is required to spend on health care coverage. The report points out that this restriction means funds from stand-alone HRAs can't be used to buy individual coverage through the online exchanges, slated to open in 2014.

Timothy Jost, a professor at Washington and Lee University School of Law, told SHRM that many employers were hoping to offer employees "a fixed-dollar contribution" through an HRA. Such a move "would permit the employee to take advantage of the tax subsidies currently available through HRA coverage but get the employer out of the health insurance business." For many employers, this now will not be possible.

Minimum Coverage: A proposed PPACA rule clarifies what types of services would be considered "minimal essential coverage," UBA reports. Services such as on-site clinics, limited-scope dental and vision, long-term care, disability income and accident-only income would not qualify as employer-sponsored minimal essential coverage. More details can be found in the Federal Register: https://www.gpo.gov/fdsys/pkg/FR-2013-02-01/pdf/2013-02141.pdf

Exchange Notice Delay: Employers who were concerned about a fast-approaching deadline to distribute notices on the exchanges can relax for a few more months. The Department of Labor (DOL) has pushed the date (originally March 1) to late summer or early fall. The DOL is preparing model language for the notice, and a final date will be announced later, the agency said.

 


Training, Benefits Can Bring Millennials Around

Source: United Benefit Advisors

Maybe it's an age thing.

An annual survey by the Center for Professional Excellence notes that the perceived professionalism of entry-level (and thus usually younger) workers by their managers has slipped during the past five years, with about 45 percent of those polled saying their employees' work ethic has worsened, according to a report by Workforcemagazine. Respondents cited a "too-casual" view of work (87 percent), workers not being self-starters (72 percent) and "a lack of ownership in one's work" (69 percent).

The survey reflects an emerging trend that poses a tough challenge to HR professionals: how to encourage "millennials" -- today's youngest workers -- to adapt and succeed within a company's business culture.

The first step, according to Joel Gross of Coalition Technologies, is to train young workers from the start on what is to be expected in their jobs. Aaron McDaniel, an author and millennial himself, agrees.

"We haven't necessarily been taught how to be successful in a working environment," McDaniel told Workforce.

Creating a strong line of communication about expectations is only part of the equation when trying to elevate the performance of millennials. As with most employees, compensation can serve as a strong motivator for millennials, as well.

After seeing wages stagnate during the recent economic recession, today's young workers say they prefer guaranteed salary increases over benefits -- a shift from employees who came before them -- according to a recent study by the National Association of Colleges and Employers (NACE). In prior studies, medical insurance benefits topped the list for young workers as the most important form of compensation, according to Edwin Koc, a director at NACE.

"We've basically asked the same question since 2007 and far and away, employer-paid medical insurance was the No. 1 benefit that they were seeking," Koc said in a FOX Business report. "[Now] they want to be assured that their starting salary is not going to be what they have for the next five years, but that they can actually move up a little bit."

While salary is always a major factor in compensation discussions, employers should be diligent about educating workers about the value of other employer-sponsored benefits, experts say. This includes the importance of health coverage (even for young and seemingly healthy workers), retirement plan options and even tuition reimbursement, if the company offers it.

Employers also should be open-minded if millennials make suggestions about new benefits that would work for them, said Tracy McCarthy, chief HR officer at SilkRoad.

"I appreciate when employees ask this and I take it as an opportunity to help less-seasoned employees understand business financial concepts and how benefits play into the equation," McCarthy told FOX Business. "Most employees expect and appreciate transparency."

 


The Check is NOT in the Mail

Source: https://analytics.ubabenefits.comBy Lesa Caputo, Benefit Advisor

The Reality of Health Care Budgeting Shortfalls and the Impact on Employers Now and in the Future

I can’t remember the last time that I went out to my mailbox to check for new mail on a Saturday afternoon but, nonetheless, I was shocked when I heard it announced on the morning news recently that Saturday mail delivery would be ending in order to help the U.S. Postal Service find some relief to its serious budgetary issues.  However, my shock was not that the good old “snail mail” service was struggling or even that it needed the $2 billion it estimates it will save annually by ceasing Saturday mail delivery.1  My shock was that this new “savings” would not achieve even 50 percent of the pennies in the couch needing to be found to pay the $5.6 billion annual retiree health care fund that the USPS was unable to pay in 2012, despite federal law that they fund this benefit in advance for future retirees. So aside from the “benefits” of a tan and the great calf muscles received from many years of mail delivery, does this mean that those who have devoted their entire careers to a government entity with the expectation of certain other benefits (namely that their health care benefits will be paid as promised upon retirement and until death) just isn’t going to happen?  The envelope please...

What will happen to the burgeoning population of retirees in future decades who find not only their retirement underfunded but also their health care?  And what will the impact of the difficult decisions that these generations will have to make be on Medicare, Medicaid, long-term care costs and the commercial health care insurance industry that already does a fair amount of subsidization for shortfalls that already exist in these programs now?  Read on about the real date-sensitive material enclosed

As America ages, U.S. employers face an emerging business challenge due to the impacts to both corporate health care costs and employee productivity resulting from the eldercare and caregiving crises.  A recent study shows that eldercare costs U.S. businesses more than $33 billion in lost productivity annually through absenteeism, distraction, replacement, reduced hours and more. 1

The business disruption breaks down like this -- 12 percent take leaves of absences, 36 percent miss workdays and 40 percent rearrange their schedule. 2  And millions more fall into the category of presenteeism -- physically at work but mentally dealing with distractions that impair productivity.  Employees who’ve faced caregiving issues are increasingly concerned about their own long-term care. With the average cost for a skilled nursing facility topping $79,935 per year, skyrocketing care costs are the No. 1 risk to a secure retirement for baby boomers.3  Not only is long-term care more costly than most people realize, but also (contrary to popular belief) health insurance, disability plans, even Medicare and Medicaid, don’t cover many of the care options most people would choose.

So what can employers do today to address these issues and reduce the amount of junk mail invading their employees mental inboxes?  There are several solutions:

  1. Health and Wellness Initiatives: Whether your organization already embraces the investment in a truly integrated wellness program that rewards and incentivizes healthy behaviors or you are in the initial stages of investigating the true return on investment (ROI) in such a program, make sure that your wellness program includes mechanisms to help identify, address and provide resources for employees suffering the negative effects of stress -- including being a member of the “sandwich generation.
  2. Core Long-Term Care Benefits with “Buy Up” option: Although there has been a significant exodus of carriers from the long-term care insurance industry of late, there are still a couple of well-established carriers offering “true group” coverage, whereby the employer can purchase a basic group long-term care program to fund for their employees and allow employees to “buy up” to a higher level of benefits at their own cost on a voluntary basis.  No matter how long-term care benefits are offered to employees, it is essential that caregiving awareness and education be coupled with the introduction, enrollment and implementation of a successful long-term care plan.
  3. Group Retiree Health Plans: More and more employers are finding that their current provider of medical benefits for their active employees and retirees under age 65 is not interested in insuring their retiree population of those age 65+ in coordination with Medicare.  In response to this need, UBA’s Strategic Allies such as The Hartford are offering stand-alone group policies to employers that may be funded by the employer or paid by the retiree to fill the gaps in their Medicare medical and pharmacy benefits.  Large employers that are self-funding their medical benefits may especially want to inquire with a UBA Partner advisor about the potential reduction to their claims liability from implementing an insured group retiree health plan.
  4. FMLA Absence Management: There is no doubt that larger employers experiencing a high volume of FMLA-related leaves of absence appreciate the peace of mind and convenience of outsourcing this labor-intensive and very complicated HR responsibility.  But convenience aside, there is also a very quantifiable potential cost saving reason for employers to consider investing in a FMLA absence management program.  When maternity is excluded, caregiving accounts for 40 percent of all FMLA leaves and those who are on FMLA leave for caregiving are four times as likely to file an LTD claim. LTD claims are typically coupled with high medical costs.  And so thecirculation continues until the final notice arrives C.O.D.

The Megro Benefits Company has access to discounted premiums, fees and administration for all of these solutions and more.  Contact us to discuss these ideas in more detail.

Employers who make it a priority to deliver a well-intentioned employee benefits package to ensure their employees peace of mind about their futures will find the return on their investment in the form of first-class employees reporting for work every day of the week -- and maybe even on Saturdays!

References:

  1. Washington Post:  Mandate Pushed Postal Service into the red for first quarter, February 2013
  2. The MetLife Caregiving Cost Study: Productivity Losses to U.S. Business, June 2006
  3. The MetLife Market Survey of Nursing Home & Home Care Costs, September 2009
  4. Caregiving in the United States, National Alliance for Caregiving and AARP, 2004

 


Determining if 'play or pay' applies to you

Source: https://eba.benefitnews.com

By Deborah L. Grace

Under the Patient Protection and Affordable Care Act, a large employer is subject to penalties if it fails to offer to full-time employees health coverage or if the coverage that it offers is not affordable or does not provide minimum value. These new “shared responsibility” rules are effective as of January 1, 2014, and apply to all employers, including non-profits and governmental entities. This article describes the regulations proposed by the Internal Revenue Service in December 2012 for determining if an employer is a “large employer” for purposes of the shared responsibility rules of Section 4980H of the Internal Revenue Code.

What is a large employer?

For any calendar year, an employer is a “large employer” if it employed an average of at least 50 full-time and full-time equivalent employees on business days during the preceding calendar year. The calculation used to determine large employer status seems deceptively easy. An employer totals the number of full-time employees and FTEs that it employed each month and then divides that total by 12. If the resulting number is 50 or greater, the employer is a large employer.

An exception is provided for an employer who, for 120 days or less during the calendar year, exceeded the 50 full-time employee threshold due to the employment of seasonal employees. This means that hiring activity for 2013 may affect an employer’s status as a large employer for 2014. Note also that this analysis must be made for every calendar year.

All employees of entities that are under common control, as determined under Code Section 414(b) or (c), or that are members of an affiliated service group under Code Section 414(m) or (o), are taken into account in determining if the members of the group constitute a large employer. For example, suppose Company A has 20 full-time employees and Company B has 40 full-time employees. Company A owns 80% of the stock of Company B.

Under Code Section 414(b), Company A’s ownership of at least 80% of the stock of Company B causes Companies A and B to be members of a parent-subsidiary controlled group. Because of the controlled group status, the employees of Company A and B are added together when determining large employer status, resulting in both Company A and Company B being large employers for purposes of the shared responsibility rules.

Who is an employee?

For purposes of these rules, only common-law employees are counted. A sole proprietor, a partner in a partnership, a member of a limited liability company taxed as a partnership, and a 2-percent or more S corporation shareholder is not counted as an employee. Also excluded from this test’s definition of “employee” is any individual who is paid by a staffing agency but provides services to an employer on a substantially full-time basis, including an individual whose services would meet the “leased employee” definition of Code Section 414(n).

How does an employer determine if an employee is full-time?

A “full-time employee” is one who is employed by the employer an average of at least 30 hours of service per week or 130 hours of service per calendar month. Consistent with longstanding Department of Labor rules, hours of service include both hours for which the employee is paid for services performed and also hours for which the employee is paid and no services are performed due to vacation, holiday, illness, disability, layoff, jury duty, military duty or leave of absence. If an employee is paid on an hourly basis, then the employer must use those hours to determine if the employee’s status for the month is full-time.

Use of equivalencies for non-hourly employees. If an employee is not paid on an hourly basis, then the employer may use one of the following methods to determine the hours that the employee worked: (i) count actual hours worked by the employee; (ii) credit 8 hours of service for any day that the employee would be credited with at least 1 hour of service; or (iii) credit 40 hours for each week that the employee would be credited with at least 1 hour of service. An employer cannot use an equivalency method if it would result in understating an employee’s hours. For example, if an employee usually works three 10 hour days a week, the employer cannot use the days-worked equivalency, since that would understate the employee’s hours.

Service outside the U.S. Hours worked outside the U.S. where the employee does not receive the U.S. source income for that service are disregarded. As a result, a U.S. entity that is a member of a multinational controlled group may, for purposes of determining whether it is a large employer, exclude individuals who do not work in the U.S. For example, a U.S. sales office of a multinational entity with no other presence in the U.S. that has 5 full-time employees will not be a large employer for purposes of the shared responsibility rules. Note, the proposed regulations do not change the rules under COBRA that require all employees, including foreign nationals with no U.S. source income, to be counted when determining if the entity has crossed the 20 employee threshold and thereby be required to offer COBRA continuation coverage to qualified beneficiaries.

How does an employer calculate the number of full-time equivalents?

All employees (including seasonal employees) who were not full-time employees for any month are included in calculating the employer’s FTEs for that month. The number of FTEs is determined using a two-step process. First, the employer must calculate the aggregate number of hours of service (but not more than 120 hours of service for any employee) for all employees who were not employed on average at least 30 hours of service per week for that month; second, the total hours for the month for all such non-full-time employees is divided by 120. Fractions are included in determining a monthly FTE count but, as explained in the next paragraph, are disregarded for the determination of whether an employer is a large employer.

How does an employer calculate its large employer status?

Once the employer has the number of full-time employees and FTEs that it employs each month during the prior calendar year, the employer totals these monthly numbers and then divides that total by 12 to determine the average. Fractions are disregarded for this purpose. For example, an employer that has on average 49.9 full-time employees (including FTEs) for the preceding calendar year is allowed to round the total down, and therefore would not be a large employer.

Transition Rule. For 2014, an employer may determine its large employer status by using a period of at least 6 consecutive months in 2013 rather than the full 2013 calendar year. This transition rule will allow an employer who is close to the 50 full-time employee threshold time to determine its status for 2014 and make any needed adjustments to its health plan to comply with Code Section 4980H. For example, an employer could determine its large employer status during the period of March through August 2013 and then decide what changes are needed for its health plan (or implement a plan) between September through December 2013.

What is the seasonal employee exception?

An employer that on average exceeds the 50 full-time employee threshold (taking into account FTEs) for 120 days or fewer during a calendar year due to the employment of seasonal workers during that 120 day period is not a large employer. The 12 day period does not need to be consecutive, and an employer may choose to use four months as a measuring period in place of 120 days. An employee may be able to be treated as a “seasonal worker” for purposes of the large employer definition if the employee worked on a seasonal basis for more than four consecutive months.

Definition of Seasonal Worker. Under Code Section 4980H, employees who perform services on a seasonal basis as defined by the Secretary of Labor, including migrant and seasonal agricultural workers, and retail workers employed exclusively during holiday season qualify as seasonal workers. Under the proposed regulations, the IRS has determined that the term seasonal employee is not limited to agricultural or retail workers, and would include individuals whose employment “is of the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year.” Until further guidance is issued, an employer may apply a reasonable good faith interpretation of this definition. For example, it may be reasonable for an accounting firm to determine that the additional staff hired during the months of February through April to prepare individual income tax returns are seasonal workers.

If an employer is not in existence during all of 2013, then it will be a large employer if it reasonable expects to employ an average of at least 50 full-time employees (taking into account FTEs) on business days during 2014.

In a merger of acquisition situation, Code Section 4980H defines the term “employer” to include any predecessor to such employer. The IRS has indicated that in defining a predecessor employer, it may use rules similar to those that apply for determining a successor employer for employment tax purposes. Under those rules, an employer that acquires all of the property used in a trade or business of another employer is a successor employer to the predecessor business.

What are the Suggested Next Steps?

Determine if your business will be a large employer for 2014, based on the company’s anticipated full-time employee count for 2013. If the company and other members of its controlled group regularly employ between 40 and 60 full-time employees and FTEs, establish a 6 month or longer transition period in 2013 to determine large employer status for 2014.

Steps that a large employer will want to take, including determining if the health plan that it offers employees is affordable and provides minimum value and identifying full-time employees who must be offered coverage to avoid a penalty, will be addressed in a subsequent article.