2016 YEAR-END
TAX GUIDE
Affordable Care Act: 2016 Update
By Michael D'Addio - Principal, Tax and Business

There are many questions about the continuing vitality of the Affordable Care Act. Whatever its future, however, employers and individuals must be prepared for the changes which have occurred in 2016. The law will have a greater impact in 2016 than in prior years.

Status of the Affordable Care Act
In this election year, we hear the competing promises of Republicans to repeal "every word" of the Affordable Care Act and of the Democrats who defend it. The ultimate fate of the law may depend on which party wins the Presidency and Congress this year.

Several major insurance companies have announced significant decreases in their participation in many of the state and federal health Exchanges created under the Act. Aetna, which has reported an estimated $430 million of related losses, is withdrawing from 11 of 15 Exchanges where it previously offered health insurance coverage. United Healthcare and Humana will reduce policies offered in many states. Younger and healthier individuals have opted to pay the individual penalty for not having health insurance coverage rather than pay Exchange-based health insurance premiums. As a result, coverage under the Exchange policies ends up being more expensive than anticipated for those remaining in the plans, as costs are allocated across a smaller pool of participants.

The actions of these and other insurance companies will decrease the number of policies offered on many Exchanges. In some locations, there may be only one health plan option offered. Insureds may lose their current physicians and other health-care providers, who do not participate in the offered plan. Some members of Congress have openly questioned whether the government should impose a penalty when an individual fails to purchase coverage where few options are made available on the applicable Exchange.

Judicial Action
There were a number of cases decided in 2016 that look at constitutional challenges to certain aspects of the law.

  • In Zubik v Burwell, the Supreme Court looked at a challenge by religious nonprofit organizations to the birth control mandate contained in the law. Most of the lower courts had decided this issue in favor of the government. Given the current composition of the court, a 4-to-4 deadlock would cause the lower court decisions to stand. Instead of that result, the Supreme Court sent the cases back to the lower appellate courts to attempt to reach compromises between the parties.
  • In House v Burwell, a district court gave ACA opponents a favorable result. This case declared cost-sharing subsidies paid to insurance companies improper since they were never authorized by Congress. The federal judge stated that this is a violation of the Constitution's separation of powers. This case is currently under appeal.
  • 2016 also saw the end of litigation started several years ago claiming that the "religious conscience exemption" to the individual shared responsibility payment violates the Establishment of Religion clause of the Constitution. This position was rejected by a federal district court in 2014 and an Appeals Court in 2015. The Supreme Court denied certiorari at the beginning of this year.

Full Implementation of the Employer Mandate Rules in 2016
Under the Affordable Care Act, Applicable Large Employers may be subject to penalties under certain circumstances. These penalty rules were scheduled to begin in 2014, but due to several extensions, they did not apply until 2015. Full application was further delayed under a number of transition rules in 2015. The employer mandate rules are fully applicable in 2016, causing more employers to be subject to their requirements.

An Applicable Large Employer (ALE) is defined as one who has 50 or more full-time employees and full-time equivalent employees. For this purpose, a "full-time employee" is one who works an average of 30 hours per week or 130 hours per calendar month. Those employees not meeting the definition of a full-time employee must have their hours totaled and divided by 120 to determine the number of "full-time equivalent employees." If the sum of an employer's full-time employees and full-time equivalent employees totals 50 or more, the employer is an Applicable Large Employer. Related companies may need to be treated as a single company for purposes of aggregating their full-time employees and full-time equivalent employees to determine ALE status.

Under a transition rule, for 2015, employers with 50 to 99 employees were not treated as Applicable Large Employers, and the potential penalties did not apply if certain conditions were satisfied. For 2016, employers with 50 to 99 employees will be treated as ALEs.

Applicable Large Employers are potentially subject to two penalties under the ACA if:
  • An ALE: a) does not provide minimum essential coverage to its full-time employees; b) at least one full-time employee purchases health insurance on an Exchange; and c) the full-time employee receives a premium tax credit (which will be referred to as the "No Coverage" Penalty).
  • If an ALE: a) offers minimum essential coverage to its full-time employees but the coverage does not provide "minimum value" or is not "affordable"; b) at least one full-time employee purchases health insurance on an Exchange; and c) the full-time employee received a premium tax credit (which will be referred to as the "Bad Coverage" Penalty).

For 2015, the "No Coverage" Penalty was $2,080 (the $2,000 statutory amount adjusted for inflation)for all of the actual full-time employees of the Applicable Large Employer in excess of a 30. Under a transition rule, the 30-person threshold was increased to 80 for employers who had 100 or more full-time and full-time equivalent employees. For 2016, the exemption threshold is 30 for all covered Applicable Large Employers. In addition, the penalty amount is increased to $2,160.

For 2015, the penalty under the "Bad Coverage" scenario was $3,120 (the $3,000 statutory amount adjusted for inflation) of the number of full-time employees who purchased insurance on the Exchange and receive a premium tax credit. While this penalty is based solely on those full-time employees purchasing Exchange coverage, there is no threshold number. However, this penalty can be no more than the penalty calculated under the "No Coverage" scenario.

In a somewhat confusing section of the regulations, "affordability" for an employee is based not on the coverage actually selected by such employee but on the cost to the employee of the lowest cost "self-only" coverage. For 2015, the offered coverage is considered affordable to the employee if the lowest self-only coverage cost is no more than 9.5% of Employee Household Income. For 2016, this is raised to 9.66% of Household Income. Household Income means the modified adjusted gross income of the employee and members of the employee's family (including spouse and dependents) who are required to file an income tax return. Since the employer will generally not have the information to determine an employee's Household Income, the regulations provide three safe harbors to determine affordability. Instead of Household Income, the employer can use Form W-2 wages, the Federal Poverty Level or an amount based on the employee's rate of pay.

In 2015, an ALE was considered to have offered coverage to its full-time employees if the coverage was made to at least 70% of full-time employees. For 2016, the ALE must provide coverage to at least 95% of full-time employees to avoid the penalties.

2015 was the first time Applicable Large Employers (including those with between 50 and 99 employees) had to file information returns to the IRS and to covered employees by filing Forms 1094-C and 1095-C (and in certain situations Forms 1094-B and 1095-B). Due to the uncertainties surrounding the preparation of these forms, IRS provided two types of relief.

  • IRS stated that it would not impose a penalty for an incorrect or incomplete information return if the filer could show good faith efforts to comply with the 2015 filing requirements.
  • The Service issued Notice 2016-4 which extended the time for filing the returns with IRS by three months. The date for electronically filed returns was extended from March 31, 2016 to June 30, 2016. For those not filed electronically, the due date was extended from February 29, 2016 to May 31 2016.

For 2016, automatic extensions should not be expected. Therefore, employers must be prepared to file these forms by their due dates early in 2017.

Miscellaneous Taxes
Certain taxes imposed under the APA have been delayed under recent legislation.

  • The Cadillac Tax (a 40% excise tax on the cost of health coverage exceeding certain thresholds) was scheduled to take effect in 2018. This excise tax has been delayed until January 1, 2020. The cost of health insurance for this purpose would include both the employer and employee costs. The tax applies to plans costing more than $10,200 for individuals and $27,500 for family coverage. Projections indicate that 75% of employee health plans could exceed these thresholds. The tax is imposed on the insurer and it is not clear how the excise tax cost will be passed out to consumers. In addition to delaying the effective date, the Cadillac tax payments will be tax-deductible.
  • The Medical Device Tax, a 2.3% tax on devices sold, has been suspended and will now apply to devices sold on or after January 1, 2018. This will permit further study on the impact of this tax.

While both the Cadillac Tax and the Medical Device Tax are not popular, there is some concern about repealing these provisions. They are part of the revenue sources which support the economics of the ACA.

Individual Penalties
An individual without qualifying minimum essential coverage will be subject to a "shared responsibility payment" (the Individual Mandate), which is reported on the individual's income tax return. The penalty amounts have increased for 2016 to the higher of:

  • $695 per adult, with $347 per dependent child under age 18, subject to a maximum of $2,085 per family; or
  • 2.5% of the amount annual household income exceeds the income tax filing threshold for the taxpayer, subject to a cap of the National Average Bronze Plan Premium.