Final regulations provide guidance on the employer shared-responsibility provisions (employer mandate) of the Patient Protection and Affordable Care Act (PPACA) and provide transition relief for certain employers.
The IRS issued final regulations regarding the reporting requirements under PPACA for health insurance issuers, self-insured employers, and applicable large employers. Under the regulations, employers will be able to use simplified reporting methods in certain instances.
The IRS clarified certain aspects of the calculation of the small employer health coverage tax credit and the rules governing health flexible spending arrangements.
The IRS also released a notice discussing amendments to qualified retirement plans that may be required as a result of the Windsor Supreme Court decision recognizing same-sex marriages for federal tax purposes.
Legislation, court cases, and various forms of IRS guidance addressed funding, nondiscrimination testing, and rollover contributions for pensions and other qualified plans.
Since the issuance of guidance and other developments covered in last year’s annual update of employee benefits and compensation in The Tax Adviser,1 the IRS issued a significant number of final rules and guidance on a wide range of compensation and benefit issues including, in particular, those implementing provisions of the Patient Protection and Affordable Care Act (PPACA).2 This article highlights some of those notable rules and guidance, as well as case law pertaining to employee benefits.
PPACA requires companies employing 50 or more full-time employees and/or full-time equivalents (FTEs) to offer minimum essential coverage that is affordable to their full-time employees and dependents or pay certain excise tax penalties.3 This year, the IRS issued final regulations on these employer shared-responsibility provisions, sometimes called the “employer mandate.”4 In addition to providing guidance on matters related to the employer mandate, such as tracking hours of service and determining full-time employees, the final rules offer transition relief to certain companies subject to the mandate.
In particular, as temporary transition relief, the final rules delay until Jan. 1, 2016, the imposition of penalties for violating the employer mandate for “applicable large employers” with 50 or more but fewer than 100 full-time employees and FTEs. This relief does not apply if, between Feb. 9, 2014, and Dec. 31, 2014, the employer reduced the size of its workforce or overall hours of service of its employees to below the relief ceiling (unless for bona fide business reasons) or eliminated or materially reduced health coverage it offered on Feb. 9, 2014. To qualify for this relief, applicable large employers must certify to the IRS that they met these conditions.
A separate transition rule provides that employers with 100 or more full-time employees and FTEs must offer health coverage in 2015 to at least 70% of their full-time employees and their dependents, rather than 95% as required under the law and regulations.5 Moreover, if an employer fails to provide health coverage when required in 2015, the excise tax will be one-twelfth of $2,000 per month per full-time employee less 80. (The reduction by 30 full-time employees, as allowed under the statute,6 will apply beginning in 2016.)
The employer mandate final rules also provide permanent relief to certain employers. Under Sec. 4980H(c)(2)(C)(ii), an employer in its first calendar year of existence may determine whether it is an applicable large employer for that year based on its reasonable expectation when it first comes into existence of the average number of full-time employees and FTEs it will employ during that year. Under the final regulations, this remains the case even if the employer subsequently has more such employees and FTEs in the year than it initially expected.7 An employer that becomes an applicable large employer during a calendar year is not subject to the penalties for the period January through March of that year if it offers minimum essential coverage to its full-time employees by April 1.8 An employer with a new hire who is reasonably expected to be a full-time employee is not subject to the penalties with respect to the new hire if it offers him or her minimum essential coverage by the first day of the month after he or she completes three full calendar months of employment.9
Insurer and Employer Reporting Requirements
Also in 2014, the IRS issued final regulations10 on PPACA reporting requirements that enable it to enforce the employer and individual11 mandates and administer the Sec. 36B premium tax credit for certain insurance purchased on exchanges. Reporting will be required beginning in January 2016 for coverage provided in 2015.
Health insurance issuers and self-insured employers providing minimum essential coverage must report its details to the IRS and to all covered individuals. Health insurers will report to each individual and the IRS on Form 1095-B, Health Coverage, and to the IRS on an aggregate basis for those they cover on Form 1094-B, Transmittal of Health Coverage Information Returns. Applicable large employers will report the offer of coverage and enrollment in coverage to each employee and the IRS on Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and on an aggregate basis on Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. Employers that provide self-insured coverage must fill out an additional section on Form 1095-C regarding the details of the coverage provided.
The reporting forms will require, among other information, the name and Social Security number or other taxpayer identification number of the employee and each individual covered under the policy, which requires collecting and reporting dependents’ Social Security numbers. The plan sponsor is responsible for reporting for a self-insured group health plan. Moreover, all employers required to offer minimum essential coverage must report information about their full-time employees and the coverage they offer for each month in a calendar year. This will require tracking coverage information every month, beginning in January 2015.
Simplified reporting is available to employers who make and certify they have made a qualifying offer to a full-time employee for an entire year. A qualifying offer is an offer, to a full-time employee for the entire year, of minimum essential coverage providing minimum value at an employee cost for employee-only coverage not exceeding 9.5% of the federal poverty line that includes an offer of minimum essential coverage to the employee’s spouse and dependents. A plan fails to provide minimum value if its share of the total allowed costs of benefits provided under the plan is less than 60% of such costs.12 For 2015 only, simplified reporting may be used even for employees who do not receive a qualifying offer for all 12 months in 2015 if the employer certifies that it made a qualifying offer to at least 95% of its full-time employees and their spouses and dependents.
Additional simplified reporting is available to an applicable large employer that offers minimum essential coverage providing minimum value that was affordable to at least 98% of all employees (and their spouses and dependents), regardless of whether the employees are full-time employees. An applicable large employer must meet the 98% threshold each month separately, rather than on average over a calendar year.
Note that reporting under Secs. 6055 and 6056 is separate from, and in addition to, reporting on Form W-2, Wage and Tax Statement. Without regard to Forms 1094-C and 1095-C, employers must continue to report the cost of employer-provided coverage on Form W-2, a requirement that has been in effect for Forms W-2 issued beginning in January 2013.13
Small Employer Health Insurance Tax Credit
Also in 2014, the IRS issued final regulations on the PPACA small employer health insurance credit.14 Sec. 45R offers a tax credit for two consecutive tax years to employers (1) that employ 25 or fewer FTEs,15 (2) whose FTEs have average annual wages of no more than $50,000 (adjusted for inflation for tax years beginning after Dec. 31, 2013),16 and (3) that are required to make a nonelective contribution of at least 50% of the premium cost on behalf of each of their employees who enroll in a qualified health plan they offer through a Small Business Health Options Program (SHOP) exchange.17
For tax years beginning in 2014 and after, the maximum credit amount is 50% (35% for small tax-exempt employers) of the lesser of (1) the nonelective contributions paid or (2) the amount of nonelective contributions the employer would have paid under the arrangement if each employee were enrolled in a plan with a premium equal to the average premium for the small group market in the rating area in which the employee enrolls for coverage.18 To the extent an employer does not owe tax in the current year, it may carry the credit back or forward as provided in Sec. 38. Furthermore, to the extent health insurance premium payments exceed the total credit, an employer may claim a business expense deduction for the excess.
The final regulations provide that leased employees included in a qualifying coverage arrangement may be included in calculating the credit. Although seasonal workers working 120 days or fewer for the employer during the tax year are not included in the calculations of FTEs and average wages,19 the final regulations clarify that if the employer pays a premium under a qualifying arrangement on their behalf, they may be included in the credit calculation. The regulations also address premium surcharges for tobacco use and discounts or rebates for wellness programs, among other matters.
The IRS also provided relief with respect to the PPACA provision requiring covered entities engaged in the business of providing health insurance for U.S. health risks to pay an annual fee based on net premiums written for such insurance.20
Notice 2014-24 provides a temporary safe harbor for covered entities that report direct premiums written for expatriate plans on a supplemental health care exhibit (SHCE).21 An expatriate policy is a group health insurance policy that provides coverage to employees, substantially all of whom are (1) working outside their country of citizenship; (2) working outside their country of citizenship and outside the employer’s country of domicile; or (3) non-U.S. citizens working in their home country. Final regulations issued in November 2013 include a rebuttable presumption that all direct premiums reported on the SHCE, including for expatriate plans, are for U.S. health risks.22
Data for insureds reported under Sec. 6055 (described above) could provide covered entities with information to rebut the presumption. However, because the Sec. 6055 reporting requirements were delayed until 2016 for coverage in 2015, the notice provided a temporary safe harbor for covered entities subject to the annual fee. If certain requirements are met, for fee years 2014 and 2015, the safe harbor will allow covered entities to treat 50% of the aggregate dollar amount of their direct premiums written for expatriate plans as reported on their SHCE as not for U.S. health risks. Thus, they may exclude this amount in reporting direct premiums written on Form 8963, Report of Health Insurance Provider Information, which is used by the IRS to calculate the annual fee.
Health Flexible Spending Arrangements
The IRS also issued a number of rules and other guidance on other health benefit provisions besides those introduced by PPACA, including health flexible spending arrangements (FSAs).
In Notice 2013-71, the IRS amended the FSA rules to permit plans to allow their participants to carry over up to $500 per plan year of unused funds to the next plan year without reducing the amount participants can contribute to the FSA for the next plan year. The carryover right, however, cannot be offered to participants in addition to the grace period right, which allows participants 2½ months following the end of a plan year to use any remaining funds in an FSA.23
In Chief Counsel Advice (CCA) 201413006, the IRS concluded that correction procedures provided in Prop. Regs. Sec. 1.125-6(d)(7) for improper payments made using debit cards provided under a cafeteria plan to pay or reimburse employee medical expenses may be applied to health FSAs. An improper payment occurs when FSA funds are used for an expense that is not qualified and properly substantiated. An employer may correct an improper payment by demanding repayment of the amount of the improper payment to the plan. If the employee fails to repay the amount after such a demand, the employer may withhold the amount from the employee’s wages to the extent allowed by law. After taking those steps, the employer may apply a claims substitution or offset to resolve any improper payments that remain outstanding.
If these measures fail to correct the improper payment, the employer should treat the improper payment as it would any other business indebtedness and seek collection through procedures consistent with other business indebtedness. If all other correction procedures have been exhausted, the employer should treat the improper payment as business indebtedness that, to the extent it is forgiven, results in taxable income to the employee, subject to income and employment tax withholding.
CCA 201413005 analyzed the interaction of the carryover of unused funds from a general-purpose FSA described above with an individual’s eligibility to participate in a health savings account (HSA) plan in the carryover year. Individuals are eligible to contribute to an HSA for any month they are covered under a high-deductible health plan (HDHP) and are not covered under any health plan that is not an HDHP and provides coverage for any benefit that is covered under the HDHP. The CCA concluded that participation in a health FSA will generally disqualify an individual from contributing to an HSA because the FSA will constitute other coverage. This includes participating in a general-purpose FSA solely by carrying forward unused amounts from the prior year. Moreover, the disqualification will be for the entire plan year, even if the health FSA has paid or reimbursed all amounts before the end of the plan year.
However, an FSA may be compatible with an HSA if the FSA covers only dental and/or vision care. If an employer also provides such an HSA-compatible FSA, an individual may contribute to an HSA and participate in the HSA-compatible FSA, including by carryover of unused funds to it from a general-purpose FSA maintained in the prior year.