Hedge Fund Managers: The Big Headache of Healthcare Reform

FinOps takeaway: Your count of “full-time employees” may not be what the IRS says it is. 

Mainstream attention on the controversial US healthcare legislation has focused on how difficult or financially affordable access to health insurance may be for individual people. For employers, there is a far larger and only slowly emerging story in the huge difficulty and cost they face — not only to provide insurance, but also to deal with the multitude of operational tasks necessary to comply.

The largest fund management firms, banks and broker-dealers might have the internal resources and deep pockets to handle the Patient Protection and Affordable Care Act to a T. That’s not always the case with their often smaller and more numerous brethren in the hedge fund community, where the stress is already taking a toll as evidenced by the lively discussion and angst shared by attendees of a recent gathering of the Hedge Fund Association (HFA) in New York.

Intended as a way to establish minimum standards for health benefit plans and to ensure affordable coverage for more Americans, the ACA is now viewed by most employers as a massive headache for two reasons. Those are the potential higher explicit cost to provide healthcare to more employees and the data management requirements to meet rigorous reporting standards.

Like their peers in other sectors of the financial industry, hedge fund managers will be required to comply with the ACA beginning in 2015 — unless they can prove they should be exempt, which would typically be the case with they have fewer than fifty full-time employees and full-time equivalents. If not exempt, they will have to provide insurance to eligible employees. They will also have to report on the employees they cover and the plans they offer to the ACA’s administrator — the Internal Revenue Service (IRS). The reporting deadline is the end of March 2016 if they file electronically, a likely scenario if they are a large employer. Paper-based filings must be submitted a month earlier. Hedge fund managers also have to provide similar information to each eligible full-time employee in January 2016, which the employees will include in their annual tax filings.

Such reports will enable the IRS to know whether each full-time employee was offered coverage during each month of the preceding year, whether the coverage was considered “affordable” under the IRS’ rules, and it it met the standards of minimum essential coverage and 60 percent actuarial value. The IRS will fine employers not meeting the ACA’s requirements for shared responsibility — between employer and employee — for health coverage.

Eligibility Calculations

The onerous reporting tasks are pressing hedge fund managers into some tough decisions on whether they should try to handle the compliance work in-house or outsource part of it. They are already likely to be running a tight ship operationally, trying to keep overhead to a minimum. Attendees at the HFA meeting cautioned that the potential compliance costs might result in cutting back on new hires and  trying to make do with the people they have, even if they are ramping up their trading volumes or expanding into new asset classes and investment strategies.

“As is the case with all other financial institutions, hedge fund management firms can’t game the system and simply hire a lot of part-time staff or seasonal employees,” explained Kym Porter, a benefits consultant with TriNet who spoke at the HFA event. The San Leandro, California-headquartered firm expanded its reach to the hedge fund and private equity fund market through the acquisition of specialist provider Ambrose in 2013.

Of course, hedge fund managers can legally hire as many part-time or even seasonal employees as they want. However, that’s not necessarily a total cure for controlling the costs of healthcare benefits under ACA. The administrative challenge involved with keeping track of their hours of work and proving to the IRS that they are really part-time or seasonal employees will make those hires cost more than just their paychecks, hedge fund specialists tell FinOps. The hours of non-full-time staff now become part of the complex reckoning of the number of full-time employees and full-time equivalents that determines whether or not the firm must comply with ACA.

“Depending on the number of part-time and seasonal employees and the number of hours of employment, a hedge fund management shop could easily fall under the ACA without initially thinking it does,” warned Porter. Three start-up hedge fund managers attending the HFA gathering told FinOps Report that, although they have too few employees now to be subject to ACA rules, they are not taking their exempt status for granted.  “It’s [the legislation] a moving target, so we will have to see whether the exemption lasts,” said one hedge fund manager.

Who Does the Work?

For larger firms, the tasks of tracking hours and calculating if the firm must comply, is exempt, or is eligible for a one-year reprieve — also known as transitional relief –would likely fall to the human resources department. However, as many of even the mid-sized hedge fund managers have just one full-time HR staffer, the compliance department could be asked to verify the HR manager’s number-crunching and decisions. That is if, the hedge fund management firm has an HR specialist or a dedicated in-house compliance officer. In some instances, an office manager responsible for paying bills and payroll could be handed the task. With little to no experience in complex health benefits legislation, he or she will also likely turn for help to the compliance director, who might view outsourcing as an attractive alternative.

Accurate reporting requires the right data. As is usual in regulatory reporting, the data may be located in more than one application, in different formats, and may be full of inconsistencies. “At least four, if not five systems including human resources,  payroll, benefits, and absence management will need to be accessed, and they don’t speak to each other today,” explained John Haslinger, vice president of strategic advisory services for employer services at ADP in Atlanta.

Pulling the reporting data together will likely involve of the IT department or integration consultants. If there is not already a data governance initiative to support data integration, this may be trigger to finally start one.  Hopefully, existing reporting software is up to the job of aggregating the required information from disparate systems, including tracking any missing data on days the employee isn’t actually on the job but which legally count as work days: examples include time spent on jury duty or family leave. And don’t forget the need for long-term data storage; all information reported to the IRS must be retained for at least seven years as part of the employee’s permanent tax record.

For firms large enough to manage ACA internally, the chief compliance officer will have to get up to speed on ACA quickly and possibly hire a dedicated health benefits specialist, if not more than one, according to Sean Knipe, a vice president of TriNet’s Ambrose unit in New York. Why? The due diligence work is pretty rigorous and specialists will need to not only determine whether the firm falls under the ACA in 2015 but also monitor potential changes in its compliance status. As soon as it falls under ACA, it will have to be ready to report which insurance carrier it will use and prove that carrier meets the criteria for eligibility under the ACA.

Costly Mistakes

All this work has a reason; mistakes equate to hefty penalties from the IRS.  Large firms who offer no health insurance beginning in 2015 can be fined $2,000 a year for every employee after the first 80. The threshold will drop to the first 30 in 2016. The penalty is triggered if just one employee tries to obtain subsidized insurance on his or her own through the healthcare marketplace.

Larger hedge funds that do offer health insurance to all eligible employees — defined as at least 70 percent of all full-time employees and their dependents — don’t get an automatic break. They can still end up being fined about US$3,000 per employee on an annualized basis for those employees under ACA who were not offered coverage or if their insurance plans don’t meet the ACA’s two standards; they must be “affordable” and have a 60 percent actuarial value. The ACA’s goal is to ensure that an employer’s plan is at least as generous as a “bronze level” plan offered under the healthcare marketplace — aka one of the state exchanges. A 60 percent actuarial value means that 60 percent of the risk pool’s expenses would be paid for; however any one individual could have more or even less than 60 percent paid on their behalf.

Deliberately choosing to pay the penalty instead of providing healthcare is not considered violating the law, but paying the IRS is not the only cost associated with that path. The penalties are non-deductible. Just as worrisome is reputational or headline risk. “All we need is for investors to find out or a journalist to publish an article about how we don’t care about our employees,” said a compliance manager at a Connecticut-based hedge fund shop.

It’s easy to see why some firms are thinking about hiring a dedicated health benefits specialist, and why others are looking at external benefits specialists, such as TriNet and ADP, for help with the necessary reporting to the IRS and to determine an employee’s full-time status.  Although TriNet’s Ambrose unit has traditionally specialized in small to mid-sized hedge fund and private equity fund managers with fewer than fifty employees, the firm expects interest from far larger players. “Hedge fund managers will want their HR manager or other employees spending their time recruiting and training the best talent rather than handling administrative burdens,” said Knipe. “We’re not trying to eliminate the HR manager but take away the most costly tasks.”

Trust but Verify

As usual, outsourcing compliance tasks doesn’t absolve the fund manager from legal liability, especially if it is providing the external provider with inaccurate information. As with all outsourcing agreements, monitoring service level agreements is critical. One key required deliverable from the outsourced consulting firm: monthly reports on each employee who is receiving health care insurance and the amounts paid by the company and employee.

ADP’s Haslinger suggested that hedge fund managers verify reports provided by an external agent by conducting an annual audit and periodic sample testing. “If there is a wide disparity between individuals being paid and individuals being offered benefits (and ultimately those electing coverage), it’s a red flag,” he said. The answer: have an HR specialist research research the ratio of actual full-time employees to variable hour and part-time employees so that the mistake can be corrected.

For hedge fund managers who think they don’t have to comply with the ACA because they have too few employees, think again. The ACA isn’t letting them off the hook that easily. “If a hedge fund manager and all of its portfolio companies are considered to be part of the same control group, then all of the entities within the control group would comprise an applicable large employer including the hedge fund itself,” explained Haslinger, who recommended that hedge fund managers should consult with legal counsel as to whether the fund and its portfolio companies constitute a control group.

The size and duration of the ACA headache could well end up tempting hedge fund managers to try to finesse the issue by getting ahead of the regulation. Said one attendee at the HFA event, “We might decide to provide all of the employees health insurance just to avoid the difficulties of figuring who is eligible and who is not.”