Identifying and Mitigating ACA-related Liabilities Arising in Connection with Corporate Transactional Activities
Introduction to assessing and managing employer mandate related obligations in the transactional environment
When a corporate transaction, such as merger, acquisition, or spin off, includes one or more participating individual entities qualifying as applicable large employers (“ALE’s”) under the Patient Protection and Affordable Care Act (“ACA”), unanticipated and calamitous consequences may arise from an entity’s failure to forecast, identify, assess, and document the timely and comprehensive performance of the substantive employer obligations mandated by ACA’s Employer Shared Responsibility Provisions (“ESRPs,” also referred to as the “employer mandate”). To be sure, employer mandate compliance-related oversights, missteps, and other failures have the potential to result in substantial post-transaction liabilities with far reaching and costly legal and regulatory ramifications.
Ranging from agency-imposed civil monetary penalties, assessments, and corrective mandates, to enforcement investigations and threats of civil litigation and reputational harm, the potential consequences of ESRP-related compliance failures simply cannot be overstated. Particularly in the instance of a corporate transactional activity, such as a merger or acquisition, the thoughtful and diligent evaluation of compliance assuredness activities required for satisfactory performance of all employer mandate-related obligations must be front and center. Rather than contemplation as a mere afterthought, or even altogether overlooked, the development and archival of an on-going and comprehensive record detailing an entity’s satisfaction of the mandate’s requirements must be a fully-integrated element of every corporate transaction.
Despite the on-going and very real potential for accrual of the wide-ranging penalties and other consequences detailed above, the federal agencies have published surprisingly little guidance in the way of specific advice or practical operational guidance directing transacting parties as to their ACA-related termination and transfer obligations.
Consequently, evaluation and assignment of organizational liabilities, transfers of obligations, and analysis and mitigation of successor employer liabilities and responsibilities remains a relatively murky exercise for transacting parties, and nearly a decade following enactment of the ACA. As such. employers are largely left to their own devices to identify, evaluate, evidence, and where required, transfer, ACA-related liabilities through developing and implementing an individualized and good faith interpretation of the legislative spirit and healthcare related policy objectives underlying the employer mandate.
This compliance workbook is divided into three distinct parts:
Part I. In Part I, parties to the transaction will develop a summarized inventory of the seller’s historical and present performance of the component tasks underlying satisfaction of the employer mandate’s required activities. This includes tasks related to the administration and reporting of employer provided offers of coverage to employees and their spouses and dependents, as well as on-going evaluations and certifications of minimum value, affordability, and as to the scope and quality of minimum essential coverage offerings.
Part II. In Part II of this series, parties to the transaction will learn to evaluate and assess of the status of a target entity’s ACA qualifying health insurance coverage to ascertain whether, and to what extent, the coverage constitutes (or constituted) ACA qualifying minimum essential coverage (or “MEC”). Assessment of the MEC status of a health insurance coverage is a complex inquiry in and of itself, so much so that incorporation of an overview of the required components and conditions necessary for MEC qualification is essential to any due diligence operation.
Part III. Finally, in Part III, transacting parties will learn to preparate and execute the acquiring entity’s information production requests, as directed to the target (seller’s) organization. Evaluation and evidencing of a seller’s comprehensive and scope-appropriate satisfaction of its ACA-related employer mandate obligations requires an acquiring entity’s examination of compliance assuredness activities across a wide range of human resources, finance, and organizational governance operations, and is typically inclusive of present-day operations, as well as historical activities.
Upon performance of Parts I-III, transacting parties should be appropriately prepared to engage for the closing of any deal , having researched, assessed, and archived the performance of the ACA required essential activities and other regulatory mandated requirements.
Part I: Inventorying the seller’s present and historical performance of the component tasks underlying satisfaction of the employer mandate
In the ACA context, the first transaction related action step for an acquiring entity requires the acquiring entity to develop a summarized inventory evidencing the seller ’s present and historical performance of the component tasks underlying satisfaction of the employer mandate’s required outcomes. Thoughtful preparation of this inventory will guide the acquiring entity through the development and deployment of an appropriate and reasonably comprehensive deal related due diligence operation.
For this step, it is important to remember that the employer mandate’s required outcomes (administration and regulatory reporting of employer provided offers of coverage to employees and their spouses and dependents, as well as on-going evaluations and certifications of minimum value, affordability, and scope and quality of minimum essential coverage) require an employer to conduct and document the performance of an extensive range of operational and administrative activities. As such, an acquiring entity’s identification, analysis, and evidencing of a seller’s present and prior performance of these essential underlying tasks is frequently more important than merely evidencing an entity’s outcomes respecting its performance of the employer mandate related activities.
While every transaction gives rise to its own unique set of employer considerations, circumstances, and related compliance challenges, the development and deployment of an inventory of a seller’s present and historical performance of the tasks underlying satisfaction of the employer mandate is generally a standardized analytic exercise respecting the full landscape of corporate transaction opportunities. This is true because performance of the tasks underlying satisfaction of the employer mandate outcomes is required of all applicable large employers, regardless of any particularized environmental any operational circumstances unique to the specific employer. Consequently, development and deployment of a component tasks performance inventory will typically be static from one transaction to the next; therefore, utilization of a standardized and consistently applied inventory will result in successful performance of due diligence operations respecting nearly all corporate transactions.
Following, a sample inventory is provided for acquiring entities to utilize in their due diligence operations (see Table One, next page). Comprehensive performance of this model activities inventory should result in a successful and comprehensive due diligence operation respecting most, if not all, transactional activities.
| TABLE ONE: Summarized Inventory of Employer Mandate Compliance Considerations for Due Diligence Operations | |
| No. | Compliance Consideration or Required Performance Evaluation |
| (1) | ALE designation status of the target entity, particularly where, because of same, an entity has achieved ALE status within the most recent three-year period, either through organic growth or as the result of transactional activities. |
| (2) | Target entity’s historical satisfaction of the annual ACA employer information reporting requirements, including: (a) evidencing preparation and delivery of participant enrollment statements (generally accomplished by providing employees with a copy of the entity’s Form 1095-C, as filed with the IRS, or via development and dissemination of substitute forms comprised of substantially the same information); and, (b) evidencing preparation and filing (or electronic transmittal respecting groups sized 250 or greater) of the entity’s Form 1095-C’s, Employer-Provided Health Insurance Offer and Coverage, and the accompanying Form 1094-C’s, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. Note: The evaluation should evidence seller’s reporting related activities occurring within the most-recent three-year period and must be inclusive of all filing and/or transmittal dates, as well as delivery methodologies and dissemination dates for the entity’s employee statements. |
| (3) | Target entity’s performance of timely and comprehensive corrective activities conducted in response to any delinquent and/or unfulfilled annual reporting requirement, as well as evidence of the correction and/or amendment of participant statements, regulatory filings, and all other related information arising with respect to historical performance of the employer mandate obligations. |
| (4) | Target entity’s resolution-related activities conducted in connection with the receipt of any proposed or final penalty assessment from the Internal Revenue Service citing employer mandate related compliance failures, such as deficiencies as to timeliness of offers of coverage, quality of coverage, affordability of coverage, scope of coverage, and length of coverage. |
| (5) | Target entity’s performance of annual information reporting requirements mandating the employer’s disclosure of the cost of coverage under its group health plan in Box 12 of the entity’s annual IRS Form W-2 statements. |
| (6) | Target entity’s historical performance of the offer of coverage requirements extending enrollment eligibility to employees, dependents, and spouses, inclusive of fulltime, part-time, shared, reclassified, seasonal, newly- hired, terminating and retiring and/or retired individuals. |
| (7) | Target entity’s present and historical operations respecting the measurement of hours of active employment service performed by workforce members for the purpose of evaluating weather, and to what extent, such workers may accrue a future right to receive an offer of enrollment eligibility respecting the entity’s available ACA qualifying coverage. This evaluation should be inclusive of all part-time, fulltime, newly-hired, and recently reclassified enrollment ineligible individuals. Evaluation should indicate underlying measurement methodologies, as well as the entity’s standard lookback, administrative, and stability periods to the extent the entity utilized the lookback measurement methodology. |
| (8) | Respecting any currently or historically employed seasonal workers, evaluation of the entity’s seasonal period election, identity and employment service dates of workers that are, or were, classified as seasonal workers, identification of any workers who held-over and remained in active service upon expiration of the entity’s seasonal period election, and whether any such held-over worker was denied a timely of enrollment by the entity. |
| (9) | Respecting any currently engaged or historically engaged academic interns performing service for, or on behalf of, the entity, evaluation of the then-current academic enrollment status of each such individual, as well as all supporting information demonstrating whether any such individual was receiving current academic credit in exchange of performance of hourly service for the entity, or, in the alternative, such individual was receiving federal work study grant dollars as renumeration respecting any hours of service performed for the entity. |
| (10) | Target entity’s present and historical assessment and certification activities conducted to ascertain whether, and to what extent, the qualifying coverage offered by the entity was maintained with an actuarial value of at least 60 percent (60%), meaning that such coverage paid for no less than 60 percent (60%) of benefits covered by the plan. |
| (11) | Target entity’s present and historical assessment and certification activities conducted to ascertain whether, and to what extent, the qualifying coverage offered by the entity was affordable to enrollment eligible employees, inclusive of identification of the specific affordability measure utilized by the entity respecting the coverage offered throughout the most-recent three-year period. |
| (12) | Target entity’s present and historical assessment and certification activities conducted to ascertain whether, and to what extent, the qualifying coverage offered by the entity was provided inclusive of all required essential benefits, as detailed under the ACA and within supporting implementational agency rulemaking (see Table Two for an overview of the component elements of an ACA qualifying offer of minimum essential coverage). |
| (13) | Respecting the most recent three-year period, target entity’s assessment and operational activities related to classification of employment status for newly-hired workers, to the extent the entity requires any individual to satisfy an ACA qualifying bona fide orientation period of not more than ninety (90) days as a prerequisite to receiving an otherwise required timely offer of enrollment respecting the entity’s ACA qualifying coverage (inclusive of the names of any individuals required to satisfy a bona fide orientation period, the length of the period, identification of employment-related activities performed by a worker during orientation, and the operation of the orientation period’s effective delay respecting offers of coverage). |
| (14) | Respecting the most recent three-year period, target entity’s assessment and operational activities related to the administration of any enrollment waiting period requirement pursuant to which newly hired and/or recently reclassified workers, despite being otherwise eligible for enrollment in the entity’s health plan, are required to satisfy an enrollment waiting period of not more than 90 (ninety) days as a prerequisite to receiving an otherwise timely offer of enrollment respecting the entity’s ACA qualifying coverage (inclusive of any employee communications articulating the operation of such waiting period). |
| (15) | Respecting the most recent three-year period, target entity’s evaluation and administration activities related to effectuation and archival of written and/or electronically-maintained waivers of enrollment received from otherwise eligible individuals, who have nonetheless voluntarily elected to decline an otherwise qualifying offer of enrollment respecting the entity’s ACA qualifying coverage (inclusive of duplicates of any such written and/or electronically as received and archived by the entity). |
| (16) | Respecting the most recent three-year period, target entity’s evaluation and administration activities related to designation of employment status respecting any individual classified as an independent contractor (or any other self-employment classification status), to the extent such designation had the operational effect of terminating the individual’s right to receive a qualifying offer of enrollment respecting the entity’s ACA qualifying coverage. Note: Evaluate and document the underlying analytic standards applied by the entity for the purpose of assigning independent contractor and/or self-employment status designations. Controlling designation standards include one or both of the following: (a) DOL Wage & Hour Division’s Economic Realities Test performed pursuant to the standards and requirements of the Fair Labor Standard Act; and/or (b) IRS control and independence evaluation, analyzing behavioral, financial, and relationship control dynamics. |
| (17) | Respecting the most recent twelve (12) month period, target entity’s evaluation and administration activities related to the receipt, analysis, and effectuation of any participant-reported qualifying life event pursuant to which such participant (and/or any enrollment eligible dependent of such participant), commenced or terminated participation respecting the entity’s ACA qualifying coverage. |
| (18) | Respecting the most recent twenty-four (24) month period, target entity’s evaluation and administration activities related to the receipt, analysis, and effectuation of COBRA qualifying employment status events, pursuant to the operation of which any individual was offered and/or accepted an election opportunity respecting the entity’s ACA qualifying coverage (inclusive of the names of any such individuals (including primary participants, as well as any eligible dependents), in addition to dates of occurrence of COBRA qualifying events, effective dates of enrollment elections, effective months of COBRA mandated participation, and dates of termination respecting such coverage). |
| (19) | Respecting the most recent twenty-four (24) month period, target’s entity’s evaluation and administration activities related the occurrence and effectuation of any worker’s retirement from active employment, to the extent such worker was an active participant in the entity’s’ ACA qualifying coverage as of the effective date of such retirement, and to the extent the entity offers eligible retired workers an enrollment opportunity respecting its employer sponsored ACA qualifying coverage. |
| No. | Compliance Consideration or Required Performance Evaluation |
| (20) | Respecting the most recent twelve (12) month period, entity’s evaluation and administrative activities related to the receipt, analysis, and effectuation of the occurrence of any qualifying life event arising with respect to any eligible and enrolled individual participating in the entity’s ACA qualifying coverage (inclusive of the individual’s name, enrollment status (primary participant, dependent, spouse), the underlying qualifying event, date of the qualifying event, and the date of commencement or termination of enrollment). |
| (21) | Respecting the most-recent three (3) year period, entity’s evaluation and administrative activities related to the receipt, analysis, and effectuation of the commencement or termination of active enrollment status respecting the entity’s ACA qualifying coverage, to the extent such modification of enrollment status related to the underlying participant’s enrollment or disenrollment from qualifying coverage available through a state or federally-sponsored insurance marketplace. |
| (22) | Respecting the most recent 12 (twelve) month period, entity’s evaluation and administrative activities related to any employment status designation activities of the entity, pursuant to the operation of which, any employee was designated as a participant in an employer defined sub-classification of workers who are categorically deemed ineligible to enroll in the entity’s ACA qualifying coverage, despite being otherwise eligible individuals (e.g., sales or commission-based workers, academic institution faculty and staff, contingent workers, workers performing entity-designated probationary periods, workers hired through placement and/or recruiting agencies, temporary workers, etc.). |
For more information
We’re ready when you are. Get in touch and a friendly, knowledgeable Baldwin advisor is prepared to discuss your business or individual needs, ask a few questions to get the full picture, and make a plan to follow up.
This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The content of this document is made available on an “as is” basis, without warranty of any kind. The Baldwin Insurance Group Holdings, LLC (“The Baldwin Group”), its affiliates, and subsidiaries do not guarantee that this information is, or can be relied on for, compliance with any law or regulation, assurance against preventable losses, or freedom from legal liability. This publication is not intended to be legal, underwriting, or any other type of professional advice. The Baldwin Group does not guarantee any particular outcome and makes no commitment to update any information herein or remove any items that are no longer accurate or complete. Furthermore, The Baldwin Group does not assume any liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Persons requiring advice should always consult an independent adviser.
The Baldwin Group offers insurance services through one or more of its insurance licensed entities. Each of the entities may be known by one or more of the logos displayed; all insurance commerce is only conducted through The Baldwin Group insurance licensed entities. This material is not an offer to sell insurance.
