November/December 2013

David J. Braun is an attorney specializing in school law with Miller, Tracy, Braun, Funk & Miller, Ltd. in Champaign.

The health reform legislation signed by President Obama in 2010 will have major implications for school districts and their health insurance plans beginning in 2014. Titled the “Patient Protection and Affordable Care Act” (PPACA), the law now provides for substantial financial penalties for employers that do not provide sufficient coverage or discriminate in favor of certain employees. Until now, many employers have postponed addressing much of the law for several reasons: there were political and legal challenges to the law, there were no regulations to explain the law, and it was perceived there was sufficient time to remedy issues that may exist. Following the United States Supreme Court’s affirmation of the Constitutionality of the funding mechanism underlying the law, beginning in 2014 new rules (and employer penalties) will go into effect. In other words, schools bargaining contracts (both administrative and collective bargaining) in 2013 need to begin considering the implications of present provisions in light of the new rules, as well as the implications of district circumstances on the district’s employees.

As is true for any new law and regulatory structure, the most important thing to do beyond understanding the rules is to build trust with the district’s staff. While the changes will impact districts financially, it will also impact employees individually. While many of the changes may be beneficial, some may be painful for employees. The best way to share the responsibility of implementing change is to establish or build a relationship of trust and openness, sharing information, facts, and possible solutions. The more interested persons, experts, and other representatives are involved, the more thoroughly reasoned (and therefore safer) the solutions devised will be.

The first thing for every board to understand is that benefits conferred under health care plans, whether or not they are district managed, are mandatory subjects of bargaining. Therefore, before any discussions regarding a change to insurance occur, the district should consult its collective bargaining representatives, and seek input regarding their interests. Involving the union is the only sure-fire way to build the trust necessary to get agreement to make a change which may be mutually beneficial, or which may be beneficial to the district but less so to the employees affected.

There are at least four major issues that must be addressed by districts in their collective bargaining agreements in two broad areas: discriminatory pitfalls and coverage issues.

Discriminatory pitfalls

According to the regulations of the Internal Revenue Service (IRS - the federal agency that enforces tax laws), there is now a penalty (called an “excise tax”) that applies to districts with health insurance plans that discriminate in favor of “highly compensated employees.” “Highly compensated employees” are those employees whose compensation is in the top 25percent of all the employees working for an employer.

In other words, if a superintendent, assistant superintendent, principal, or other highly compensated administrator (or possibly other highly compensated employee, including teachers or counselors) receives a health benefit that other employees don’t receive (such as, perhaps, board-paid family insurance benefits), the school district may be subject to a penalty. The penalty, according to proposed regulations pointing to IRS law, will be $100 per day, per employee discriminated against. 26 U.S.C. § 105(h), 26 U.S.C. § 4980D. Moreover, the federal government, a plan participant, or the plan administrator itself may bring action against the district in order to force it to provide the benefits to all its employees. 29 U.S.C. § 1132. It is important to note that, at this time, it is unclear whether any particular benefit (such as family insurance) will be discriminatory under the new rules — but the penalty will apply to whatever benefit might be discriminatory.

The way each district will fix this issue is different. Some districts may elect to offer more benefits to all employees, and some may elect to reduce benefits to some employees or all employees. Some districts may change employee compensation structures, and many will likely alter their insurance plans. Excluded from IRS penalties, presently, are dental and vision plans, but that does not mean that the final regulations will continue to exclude such benefits.

There are a myriad other issues as well— if a district changes the compensation of an employee, the change may result in a penalty issued by the Teachers’ Retirement System (TRS), as well as potentially unanticipated tax liability. TRS’s rules (or interpretation of the rules that already exist) may change in the coming years, and when those rules and interpretations change, there may be an impact (positive or negative) on how compensation for employees is treated.

It is, therefore, important for each school district to assess its own plans, rights, penalties, and compensation particulars. The issues involved will affect all employees. Administrators will be responsible both for protecting their own families and compensation packages, but also (through their union) for making sure their own packages don’t cause a politically (and financially) disastrous penalty for the district. It is important for everyone to work together. Does the district have a tax-sheltered plan for health insurance? Is there a way to structure the provision of health insurance to make all employees’ benefits the same? Are particular employees involved within the pension window (where their compensation will affect their pension costs and changes may affect the district’s ability to avoid penalty)?

By examining a district’s particular plans, it may be possible to share the burden of the new requirements. Districts are well-advised to examine both their administrators’ benefits as well as those of all of their employees in order to ascertain whether there is an opportunity to avoid the excise tax penalty and avoid the potentially politically costly results of failing to address the issues.

Otherwise discriminatory plans
While the issue of administrator benefit structures is pressing, perhaps a more complex issue with which districts will grapple is the larger issue of health care plans that discriminate generally in favor of a large class of employees (rather than in favor of a single employee or small group of employees). While the rules which apply may be the same, the issue raised by a larger class of represented employees may be much more complex to fix. It is unclear how the rules will apply to district collective bargaining agreements, but there is an analogous rule (105(h)) from the IRS law regarding self-insured plans. The IRS law illustrates the trouble that exemptions (which are referenced by the proposed rules) may create.

Under 26 U.S.C. § 105(h) (the analogous rule which presently applies exclusively to self-insured plans), collective bargaining agreements are excluded from determination of discriminatory benefits. Therefore, for purposes of 105(h), the determination of discriminatory benefits within the unit is unlikely (at the present time) to result in discriminatory penalties under 105(h). However, because we do not yet know whether this exemption will apply under the rules, it is unclear whether we will be able to rely on this exemption after this year.

Take, for instance, a collective bargaining agreement provision that makes benefits payments contingent upon salary (so that the employee’s contribution toward his premium is based on a percentage of his salary). Even though this contribution system (favoring employees with higher salaries) would otherwise violate the discriminatory benefits provision, because the plan was collectively bargained, it is excluded from the discriminatory benefits penalty under the self insurance rules. 26 U.S.C. § 105(h). However, such exclusion does not apply to minimum essential coverage or affordable coverage rules, which may, in fact, result in a penalty. Because the rules are not yet final, it is impossible at this time to know whether the collective bargaining agreement exemption will apply to plans other than those that are self-insured, it is impossible to know at this time whether such plans are safe at this time.

Moreover, some districts may have multiple collective bargaining units, each with different plans. It is unclear, today, whether the rules will ultimately exempt such situations from the discriminatory plan rules (such as, if the teachers receive a benefits that custodians do not receive).

Districts should consider their individual circumstances. What realities exist in the district? Is there a great deal of trust, or do the employees mistrust the board and/or the administration? As with any other paradigm-shift in employment law, the best immunization against potential problems is communication. Speaking openly and honestly with employees and union representatives about the problems and potential solutions will build long-term trust, and increase the likelihood that all parties will be motivated to engage in some sort of shared-responsibility discussion.

Coverage issues
What is Minimum coverage? Large employers (those employing more than 50 full-time equivalent employees) must provide minimum essential coverage to all employees. Full-time equivalent employees (for purposes of the IRS regulation) are those who are entitled to be paid for 30 hours weekly. Part-time employees may count into the calculation of 50 full-time employees: the number of part-time employees’ hours in a month over the number of hours in that month over a period of three months equals the number of full time employees. For example:

A district has 30 full-time employees, and 30 part-time employees. The part-time employees work 20 hours per week apiece. 20 hours x 4.5 weeks in the month = 90 hours. 90 hours x 30 part-time employees = 2700 hours. 2700 hours/130 hours = ~20 full-time employees.

Therefore, the district has 50 full-time employees (30 FT employees+ 20 FTE employees) and is, by law, a large employer subject to the non-discrimination rules.

Minimum essential coverage requires employers, under the present rules proposed, to provide health care coverage which meets two requirements:

1. Bronze level coverage, which is coverage whereby the employer covers at least 60% premium coverage; and

2. The employee’s contribution to his or her coverage may not cost more than 9.5% of the employee’s income.

Failure of a large employer to offer any coverage to employees will subject a district to a penalty in the amount of $2,000 for each full-time employee in excess of 30.

Failure of a large employer to offer sufficient coverage (that is, minimum essential coverage) to employees will subject a district to a penalty of up to the amount of the lesser of $3,000 per employee who is not covered or $2,000 for each full-time employee in excess of 30.

In the collective bargaining agreement covering all staff, each certified employee is fully covered by health insurance, with a fully employer-paid premium, and each non-certified employee is compensated for 50 percent of his health insurance costs. Non-certified employees typically contribute 15 percent of their W-2 Box 1 income to pay their health care insurance premiums. W-2 Box 1 income, however, is taxable income. It does not include tax-sheltered benefits, such as TRS payments, 403b retirement annuities, or section 125 tax-sheltered health contributions. Box 1 income may be substantially less than what is commonly recognized by an employer as the employee’s “salary.”

In the foregoing example, the district would owe a penalty of up to $30,000 per year (45 employees not adequately covered – 30 employees = 15 employees. 15 employees x $2,000 = $30,000).

If, in the foregoing example, all employees were covered by the same plan as non-certified employees (50 percent coverage), the penalty would instead be up to $100,000 (80 employees not adequately covered – 30 employees = 50 employees. 50 x $2,000 = $100,000).

The purpose of the penalty is to subsidize the government’s ability to pay the employee’s insurance coverage procured on the open market. The “penalty” is paid to the government, while the government will pay a subsidy to the employee in order to assist the employee in getting coverage on the open market.

Operation of penalties
If, in the foregoing example, only 10 employees actually access the insurance market and purchase insurance outside the district, the penalty would be $30,000 (10 employees drawing subsidy x $3,000 per-employee penalty = $30,000).

 The “penalty” in this case (unlike the penalty applicable to discriminatory benefits plans) is not a penalty, but rather a premium credit that will enable those employees to use the public insurance exchanges to buy insurance. The employer mandate that will begin in 2014 says employers with more than 50 employees must provide for minimum essential coverage or pay for the employee to go get that coverage on the open market. The only way to guarantee avoiding such “penalties” is to offer minimum essential coverage to all employees.

Again, there are several matters to consider. First, the unusual definition of “full-time” under ACA (an employee entitled to be paid for 30 hours per week) means the district may have many more “full-time” employees than previously anticipated in other contexts. Second, the cost of health care may or may not exceed the cost of the penalty — in other words, it may be financially beneficial for a school district to pay the penalty. However, as this is a matter for collective bargaining, such a solution may be both legally and politically impossible.

Some districts may find it beneficial to cut the number of hours of employees who work near the 30-hour threshold. However, two problems arise: first, reducing a group of employees’ hours is a mandatory subject of bargaining (where the employees are represented) and cannot be accomplished without a reduction in force. Bargaining such a reduction may prove to be very difficult when a union is in place, particularly when it becomes clear that the purpose is to defeat the requirement to provide insurance. Second, if there is no union, reduction in hours may create distrust among employees — districts are well-advised, even where no union covers employees, to carefully consider their options before removing rights from employees, particularly where such change may be designed to avoid health care provision requirements. Such an approach may achieve the short term goal of fixing the insurance problem at the long term expense of encouraging unionization.

What is Affordable coverage? Affordable” under the proposed rules means that the employee need not spend more than 9.5 percent of his total household income on health insurance. Because it may not be possible for employers to assess every employee’s household income (spouses and others may contribute substantially to the income of the household), the IRS has offered a “safe-harbor.” As the rules are presently proposed, an employee’s W-2 Box 1 income may be used to calculate 9.5 percent of any employee’s income for purposes of determining whether minimum essential coverage is being offered.

Much like “minimum essential coverage,” an employer who fails to provide “affordable coverage” subjects itself to required subsidization of health insurance for under-covered employees. Again, the penalty is the lesser of $3,000 per employee seeking open-market insurance, or $2,000 per employee (more than 30) who is not offered “affordable coverage.”

Employers should consider their individual facts and circumstances on these matters. While the rules are complicated, the solutions are not reached unilaterally. As collective bargaining on these matters is required, districts are best-advised to bring both the decision-makers and those impacted by the decisions into the room early in order to invest everyone in the solution as well as the outcome.