Health insurance reform: A guide for employers
by Beth O'Neal"Fair and Reasonable" Contribution (includes self-insured plans)
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. The Massachusetts Division of Health Care Finance and Policy has set forth a test to determine whether an employer is making a "fair and reasonable" contribution.
Employers must determine whether, in the 12 consecutive month period beginning October 1, 2006, and ending September 30, 2007, they had 11 or more Full-Time Equivalent Employees. Full-time equivalency is based upon all payroll hours for all employees working in Massachusetts (except those employees who have worked less than 1 calendar month), divided by 2,000. 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 2,000 hours, only 2,000 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.
"Fair and Reasonable" Test
An employer is making a "fair and reasonable" contribution where:
1. At least 25 percent of Full-Time Employees are enrolled in the employer’s group health plan to which the Company is making a contribution (referred to as the Primary Test);
or
2. The Company offers to pay at least 33 percent of the individual premium cost of any group health plan for those Full-Time Employees employed at least 90 days during the period from October 1 through September 30 (referred to as the Secondary 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 ($295 per Full-Time Equivalent Employee) 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. For this initial period, the health-care coverage offered by the employer must have been available to all eligible Full-Time Employees no later than July 1, 2007.
Calculation of the Primary Test
Full time for the calculation of this test is defined as the lower of (a) the number of weekly payroll hours an employee is required to work in order to be eligible for the employer's full-time health plan benefits (meaning the equivalent level of employer contribution to the employer’s health plan that is offered to full-time employees) or (b) 35 payroll hours per week. Full-Time Employees do not include Seasonal Employees, Temporary Employees, or Independent Contractors as defined below.
In order to calculate whether the employer meets and, if so, to demonstrate the percentage of participation (i.e., 25 percent), employers will report the average annual number of Full-Time Employees enrolled in the employer’s health plan and the average number of Full-Time Employees. The following calculation has been set forth by the Division of Unemployment Assistance by Administrative Bulletin dated September 14, 2007:
(a) Identify and record the number of Full-Time Employees enrolled in the employer’s health plan on the last day of each quarter ending on December 31, 2006, March 31, 2007, June 30, 2007, and September 30, 2007.
(b) Identify and record the number of Full-Time Employees on the employer’s payroll on the last day of each quarter on the days identified above (record 0 if there were no employees on the payroll).
(c) Calculate the average number of Full-Time Employees enrolled by adding the values recorded in (a) and dividing by the number of non-zero quarters.
(d) Calculate the average number of Full-Time Employees on the employer’s payroll by summing the values recorded in (b) and dividing by the number of non-zero quarters.
(e) Calculate the average annual employee participation rate by dividing the result of (c) by the result of (d). If this result is 25 percent or more, the Primary Test is met.
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 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.
Independent Contractor shall also include an individual who provides services not deemed to be employment for federal employment tax and wage withholding purposes in accordance with IRC sections 3121 and 34 and with the 20-factor test established by the Internal Revenue Service Revenue Ruling 87-41.
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.
Free Rider Surcharge / Section 125 Plan
Effective July 1, 2007, an employer with 11 or more Full-Time Equivalent Employees in the Commonwealth of Massachusetts is required to adopt and maintain a Section 125 Plan. The legislation also provides for the assessment of an employer surcharge against employers that employ 11 or more Full-Time Equivalent Employees and that are required to, but do not, maintain a Section 125 Plan, also called a Cafeteria Plan.
Employers must 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 Employees. Full-time equivalency is based upon all payroll hours for all employees working in Massachusetts (except those employees who have worked less than 1 calendar 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 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.
Section 125 Plans
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 the Section 125 Plan requirement.
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 one 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 above)
• 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 (excluding tips)
• Student interns and 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
• Students who are employed part-time as employees of the educational institution they attend and who, as a condition of attending that educational institution, participate in a qualifying student health insurance program (i.e., section 18 of M.G.L. ch. 15A or a qualifying student health insurance program in another state) or in a health plan with comparable coverage, as required by state law
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 (e.g., including those who are not otherwise eligible for employment benefits).
Eligibility for Inclusion in Employer’s Section 125 Plan
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 to which an employer is making a 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 its 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
Employers shall be required, but only upon the request of the Connector, to provide a copy of its Section 125 Plans to the Connector within seven business days of the Connector’s request. Plans that are not available to any Massachusetts employee are not subject to the filing requirement.
Non-Discrimination Requirements
Effective July 1, 2007, the new law also requires that insurance contracts or policies delivered in the commonwealth of Massachusetts be offered by the employer to all eligible employees who live in the commonwealth and it also prohibits the employer from making a smaller contribution (fixed dollar amount or percentage) to a full-time employee than the employer makes to any other full-time employee who receives an equal or greater total hourly or annual salary for its group health insurance or HMO offerings. This part of the law will prohibit employers from offering coverage to certain full-time employees and not other full-time employees. It also will prohibit an employer from offering to pay a greater amount of the premium cost of the plan for full-time employees with higher incomes. In other words, the health insurance contracts cannot discriminate against lower-paid employees. These rules do not apply to self-funded (i.e., self-insured) arrangements and there is also an exception for coverage provided under collective bargaining agreements.
Based upon the information published to date by the Division of Insurance, it is likely that the following practices will be permitted:
■ an employer may establish different percentage contributions for different plan choices, so long as the contributions made with respect to each plan on behalf of full-time employees do not differ based on the salary level of the full-time employees;
■ an employer may establish a fixed dollar amount as a contribution to premiums for all full-time employees regardless of salary;
■ an employer may provide greater contribution levels for increasing lengths of service, so long as it is designed as a reward for longevity rather than as a pretext for providing better health insurance contributions to the more-highly-paid employees; and
■ an employer may establish greater contribution levels for those fulltime employees who participate in company-sponsored health and wellness programs.
These new rules will essentially eliminate disparate treatment of different classes of full-time employees, hourly versus salaried, etc., both as to waiting periods and employer contribution levels. It will also prevent small-business owners from, for example, paying 100 percent of the group health care premiums for themselves, while paying a lesser percentage for the rest of their full-time employees.
Required Forms
Effective July 1, 2007, employers with 11 or more Full-Time Equivalent Employees are subject to reporting requirements. The same calculation
described under the Fair and Reasonable Contribution and the Free Rider
Surcharge heading is used to determine whether an employer has 11 or more Full-Time Equivalent Employees (and is subject to these reporting obligations).
Employee Health Insurance Responsibility Disclosure ("HIRD") Form
The Employee 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 employer must obtain a signed Employee 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 ("HIRD") Form
Regulations issued on June 20, 2007, provide that the Employer HIRD Form will include information effective as of July 1 of each year. Employers are required to complete the FSC online filing process, which includes HIRD information.
Therefore, the employer will satisfy both reporting requirements by completing the online filing by November 15, 2007. The online filing process is available after October 1, 2007, at https://fsc.detma.org.
MA 1099-HC Department of Revenue Form
The Massachusetts Department of Revenue has issued a draft Form 1099-HC and draft instructions to permit the reporting of whether Massachusetts residents 18 and over have health-care coverage during the preceding year. This relates to that part of the law providing for the loss of a taxpayer’s personal exemption if the taxpayer does not have health insurance, as required. Presently, the law imposes these reporting obligations on employers; however, it is expected that employers will be able to contract with their third-party administrators or insurance carries to fulfill their compliance obligations.
The Connector
The Commonwealth Health Insurance Connector is an authority created by the statute which will provide information and assist individuals and small businesses in obtaining health insurance. The Connector Web site is continually updated and can be accessed at mass.gov/connector or mahealthconnector.org. A model Section 125 Plan is available in the Section 125 Plan Handbook for Employers available on the Connector’s Web site.
Beth O’Neal, Esq., is a partner in the Boston law firm of Masterman, Culbert & Tully LLP. She can be reached at meo@mctlaw.com.
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.
Beth O'Neal Beth O’Neal, Esq., is a partner in the Boston law firm of Masterman, Culbert & Tully LLP. 
