Employer Health Plan Premiums Rose in 2016, But Just Barely

Premiums for Affordable Care Act (ACA) marketplace coverage continue to sky rocket, with the average cost of a benchmark plan in the individual market place rising 20% this year. There is very different news for employer-sponsored plans. According to the nonprofit Kaiser Family Foundation, in 2016 annual family premiums rose on average a modest 3% to $18,142 per year, of which workers paid on average $5,277, just barely outpacing the average increase in workers’ wages (2.5%) and inflation (1.1%).

Based on its 2016 annual survey of employers, the Kaiser Family Foundation reported that the low increase is part of an ongoing trend: family premiums have increased less than 5% in each of the last six years, for a total increase of 20% since 2011. In contrast, family premiums increased by 31% between 2006 and 2011 and by 63% between 2001 and 2006.

So why the historically low rates? Higher employee deductibles may be part of the answer. Covered employees continue to move into high deductible plans with Health Savings Account (HSAs) or linked to Health Reimbursement Arrangements (HRAs), which have lower average premiums that traditional group health plans. In 2016, 29% of covered employees where enrolled in high deductible plans compared with 20% in 2014. Preferred provider organization plans (PPOs), which have higher than average premiums, saw the opposite trend: 48% of covered workers were enrolled in such plans, down from 58% in 2014.

The survey also looked at the impact of the ACA on employer coverage. This year, ACA shared responsibility provisions took full effect, with the result that applicable large employers (ALEs) — employers with 50 or more full-time employees (including full-time equivalents) — must offer group health plan coverage that meets the ACA’s value and affordability standards to their full-time employees (and dependents) in order to avoid penalties. The survey found that 93% of ALEs offered health benefits to at least some of their employees and that the great majority of those ALEs offered coverage that met the ACA’s value and affordability requirements.

Other topics in the survey include:

• Trends in spousal coverage. A growing percentage of firms are using limitations and incentives to require or encourage spouses to enroll in other employer coverage available to them.
• Single coverage premiums. Premiums for single coverage averaged $6,435 annually, with employees bearing on average $1,129 of that cost.
• Health risk assessments. 59% of large employers that offer health benefits also offer employee health risk assessments, which ask employees questions about lifestyle, health status and medical history. 54% of the large employers that use health risk assessments provide financial incentives to encourage employee participation — including reduced premiums or cost sharing, contributions to an HSA, or cash.
• Biometric screenings. 53% of large firms offer biometric screenings, which are physical exams that measure health indicators such as weight, blood pressure and cholesterol. 59% of these firms offer financial incentives to employees who participate in the screening. A smaller percentage (14%) tie incentives to attaining specific health outcomes, such as weight loss or reduced cholesterol levels.

Employers who want more information concerning trends in employer-sponsor health coverage can access the survey at http://www.kff.org/ehbs.

Crossing the Threshold – Small Business to “ALE”

While many of us have been crossing our fingers behind our backs, hoping that the Affordable Care Act’s employer reporting and shared responsibility penalties would be repealed, many small businesses have crossed the threshold to applicable large employer (ALE) status as a result of hiring or business ownership changes. A business that averaged 50 or more full-time employees (including full-time equivalent employees) in 2016 is an ALE for reporting and penalty purposes in 2017.

Determining whether your business is an ALE is a simple five-step process: First, for each month in 2016, count the number of employees who were employed to work on average at least thirty hours per week. Count all full-time common law employees (including seasonal employees) who work for all entities treated as part of the same controlled group or affiliated service group. Second, for each month of 2016, add the total number of hours for all other employees not counted in step one and divide each monthly sum by 120 – the result is the number of full-time equivalents for each month. Third, add the results of steps one and two to obtain twelve sums – one for each month of 2016. Fourth, determine the average of the sums obtained in step three by adding them up and dividing by twelve (do not round up). If the result is less than fifty, you’re not an ALE. If the result is fifty or more, there’s another step: you still might not be an ALE if you had more than fifty employees for no more than four months during 2016 and you exceeded fifty in those months because you had seasonal employees.

If your business has crossed the threshold to ALE status, consider your vulnerability to the (nondeductible) employer penalties: If you didn’t offer group health coverage to at least 95% of your full-time employees (and their children) and a full-time employee obtains subsidized “Marketplace” coverage for a given month, the business will be subject to a penalty equal to $188.33 per full-time employee in excess of 30 for that month (Penalty A). Alternatively, if you did offer group health coverage to at least 95% of your full-time employees (and dependents) but a full-time employee declined your coverage and instead obtained subsidized Marketplace coverage for a given month, the business will be subject to a penalty for that month equal to the lesser of the Penalty A amount or $282.50 for each full-time employee who had subsidized Marketplace coverage (Penalty B). An employee can obtain subsidized Marketplace coverage and trigger the employer penalty for a given month if you didn’t offer group health coverage that meets the minimum value and affordability tests.

An ALE that escapes the penalty still is subject to the ACA’s employer reporting requirements. The IRS has devoted a webpage to reporting resources for employers.

New Guidance on Taxation of Contributions and Benefits Under New York State’s Paid Family Leave Program

The New York State Department of Taxation and Finance (the “Department”) recently provided guidance regarding the taxation of contributions made under, and benefits paid under, New York State’s new paid family leave program (“Program”).  After reviewing applicable law and other guidance, and after consulting with the Internal Revenue Service regarding the appropriate tax treatment of Program contributions and benefits, the Department provided the following guidance:


  • Premiums paid by employees through wage deductions are to be deducted from employees’ after-tax wages; and
  • Employers should report employee contributions on IRS Form W-2 using Box 14 – State disability insurance taxes withheld.


  • Benefits paid to employees are taxable non-wage income that must be included in federal gross income;
  • Taxes are not to be automatically withheld from benefit payments, but employees may request voluntary tax withholding; and
  • Benefits are generally required to be reported by payers on IRS Form 1099-MISC.

The Department’s guidance is welcome clarification.



Some of our employer client sponsors of pre-approved 401(k) plans have contacted us regarding plan amendment notices received recently from their prototype or volume submitter plan document sponsors relating to the expanded use of forfeitures in their plans. An employer is informed either that an amendment has already been made for all employers that have adopted the plan form or requests or suggests that they adopt the amendment for their particular plan. The amendment specifically allows amounts in forfeiture accounts to now be used to fund qualified nonelective contributions (“QNECs”) and qualified matching contributions (“QMACs”) and, for safe harbor plans, to fund safe harbor plan contributions. Bottom line: the news is all good, and the amendment should be welcome and/or adopted for virtually all plans.

This mass amendment of plans stems from Proposed Treasury Regulations issued by the IRS in January of this year which reverse a multi-year position taken by the IRS to the effect that QNECs and QMACs had to be fully vested when first contributed to the plan, rather than when allocated to the accounts of participants.  QNECs and QMACs are primarily used by non-safe harbor 401(k) plans to meet the ADP and ACP nondiscrimination tests for plans that do not use distributions of excess contributions to remedy a failed test.  After much lobbying by benefits lawyers, actuaries and accountants, the IRS has finally accepted the view that the better reading of the Internal Revenue Code and the Treasury Regulations is that nonforfeitability conferred by the plan sponsor when such contributions are allocated to accounts is what matters.  The new right to use forfeitures for QNECs and QMACs also extends to 401(k) safe harbor matching or nonelective contributions, which must also be fully vested when allocated.  Taxpayers may rely on the regulations for periods preceding the date the regulations eventually become final. If the Final Regulations are more restrictive than the Proposed Regulations the Final Regulations will not be applied retroactively to create a noncompliance problem for any plan amended in reliance on the Proposed Regulations.  Lingering remaining questions, however, are whether forfeitures could be used for safe harbor 401(k) contributions made for the 2016 year or even whether forfeitures arising in 2016 could be used in 2017.  We are not aware that the IRS has yet clarified with any formal or informal comments.

Such an amendment is a discretionary plan amendment, meaning if the employer wants to reallocate forfeitures under the new regulations at a time in 2017 prior to making the amendmentthen it must adopt the amendment before the 2017 plan year end.

Finally, if you are an adopter of an individually-designed 401(k) plan, you will very likely wish to make this amendment to your plan.  Feel free to contact Jackson Lewis so we may help you with an amendment suited to your plan.

The FICA Tax Exemption for Non-Resident Aliens in the U.S. Under F, J, M, or Q Visas

A common issue for employers of non-resident aliens authorized to work in the U.S. is whether (and when) such individuals are exempt from FICA taxation.   Under the Internal Revenue Code, a nonresident alien (“NRA”) in the United States under a teacher, researcher, trainee, or student visa is exempt, within certain limitations, from FICA taxation.

A teacher, researcher, or trainee is an individual (other than a foreign student) “admitted temporarily” to the U.S. as a nonimmigrant under Code §§ 101(a)(15)(J) or (Q) of the Immigration and Nationality Act and who substantially complies with the requirements of being admitted. These individuals are in the U.S. under a J-1, Q-1, or Q-2 visa.

A foreign student is any individual “admitted temporarily” to the United States as a nonimmigrant student under Code §§ 101(a)(15)(F), (M), (J), or (Q) of the Immigration and Nationality Act and who substantially complies with the requirements of being admitted. These individuals are in the U.S. under an F-1, J-1, M-1, Q-1, or Q-2 visa.

The determination of whether an F-1, J-1, M-1, Q-1, or Q-2 visa holder is a resident alien or a non-resident alien is set forth under the Code’s residency rules. If any of these visa holders becomes a resident alien under the rules, that individual loses the nonresident alien FICA exemption.  These rules provide that:

  • A teacher/researcher/trainee visa holder is not exempt for the current year if for any two calendar years during the preceding six years the person was exempt as a teacher/researcher/trainee or as a foreign student.
    • If the teacher or trainee received compensation from a foreign employer, the person is no longer exempt if for any four years during the preceding six years the person was exempt as a teacher/trainee or as a foreign student.
  • A “foreign student” is no longer exempt after five years.

An individual will be deemed a resident during any calendar year in which the person is 1) lawfully admitted for permanent residence (i.e., has a green card, married to a U.S. citizen or a U.S. resident); 2) makes an election in the first election year to be treated as a resident of the U.S. for that year; or, 3) meets the “substantial presence test.” The substantial presence test requires an analysis of days present in the U.S. over the past three years.

If an individual meets the substantial presence test, the person is deemed a U.S. resident for tax purposes and is no longer exempt from FICA taxes. If a foreign student or teacher/researcher/trainee does not meet the substantial presence test, the person remains exempt (assuming the individual has not been lawfully admitted for permanent residence nor made an election to be treated as a resident in the first election year).

For more information on how to determine whether your employees with F, J, M, and Q visas qualify for the non-resident FICA tax exemption, please contact Amy Peck (Amy.Peck@jacksonlewis.com), Kathy Barrow (BarrowK@jacksonlewis.com), or Amy Thompson (Amy.Thompson@jacksonlewis.com) — our team would be happy to assist you.

Loss of COBRA Subsidies – A Marketplace Conundrum

While helping employers craft severance packages, we have often cautioned that a well-meaning offer by an employer to subsidize a former employee’s COBRA coverage for a period of time can result in unintended consequences. Namely, when that subsidy ends, that former employee may find himself or herself with a very high COBRA premium and no opportunity to seek individual coverage through one of the Affordable Care Act’s exchanges (the “Marketplace”) until the next Marketplace open enrollment period. This position—that loss of an employer COBRA subsidy is not an event that creates eligibility for mid-year special enrollment period (“SEP”) in the Markteplace—is one that has been supported by the available guidance, including the ACA’s regulations regarding SEPs and the Marketplace website, www.healthcare.gov. That is, until late last year….

Around October 2016, practitioners began to notice a change on the Marketplace website. Specifically, healthcare.gov currently provides in a couple of different spots that loss of an employer-provided COBRA subsidy does entitle an individual to a SEP. Notably, however, no change has occurred to the underlying regulations, nor has there been any formal communication from any of the agencies that are responsible for administering the ACA acknowledging or explaining this change.

We recently spoke with representatives at Health and Human Services—the folks actually responsible for enrolling people in individual coverage via the Marketplace—who indicated confusion over the change on the website and stated that their enrollment system is still not set up to provide a SEP to an individual in such circumstances. In particular, they noted that the information on the healthcare.gov website is not binding upon them and that they must process enrollments according to the way their system is set up.

It is also important to note that a position handed down from the federal Marketplace via healthcare.gov may or may not be picked up by the states. For example, we’ve learned anecdotally that the New York State exchange will allow a SEP for the loss of an employer subsidy only if the employer was paying the subsidy directly to the insurance carrier, not if the employer was providing reimbursement directly to the employee. Other state exchanges may take a different position.

We continue to investigate this issue, but in the meantime recommend that employers design their severance packages without any reliance on the idea that a former employee will qualify for SEP when their employer-provided COBRA subsidy ends.

Court Rules that Company Discretionary Offer of Voluntary Separation Agreements Does Not Create an ERISA-Covered Severance Plan

It always has been difficult to give a consistent answer as to whether informal severance arrangements have created an ERISA-covered severance plan. In Mance v. Quest Diagnostics Inc., 2017 WL 684711 (DC NJ 2017), the U.S. District Court held that Quest’s decision to provide some departing employees with severance benefits under a voluntary separation agreement (“VSA”) process was provided on such a discretionary basis that it did not establish a plan under ERISA.

By way of background, the U.S. Department of Labor and the courts uniformly have held since the 1980’s that severance pay benefits are covered by ERISA if the severance benefits are provided pursuant to a “plan, fund or program.” Under the test most commonly applied by the courts including the District Court here, a “plan, fund or program” will be established for purposes of ERISA if, from the surrounding circumstances, a reasonable person can ascertain (1) the intended benefits, (2) a class of beneficiaries, (3) the source of financing, and (4) procedures for receiving benefits.  The courts have applied these factors to find that the existence of an ERISA plan can be established from written guidelines set forth in internal policy statements or corporate manuals or by descriptions in employee handbooks or from an employer’s consistent past practice of awarding severance benefits to involuntarily terminated employees.

But to make the determination more confusing, the Supreme Court has added the requirement that a plan, fund or program subject to ERISA will not exist unless it is necessary to establish an “administrative scheme” to provide the benefits. Fort Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987).  The court decisions understandably have not established a hard and fast rule regarding how much administration is too much.

Interestingly, the District Court found that Quest had established a separate administrative scheme to determine both eligibility for and the type of VSA benefits that might be offered to an employee. However, the District Court found that having an administrative scheme by itself did not establish an informal ERISA-covered severance plan.  Applying the factors described above for determining whether a “plan, fund or program” existed, the Court found that a reasonable person could not determine the class of intended beneficiaries, the intended benefits or the process to request VSA benefits.  Accordingly, Quest did not create an informal ERISA plan.  (Note that the VSA benefits at issue were separate from the benefits provided by Quest under its ERISA-covered severance pay plan).

COMMENT: It is important to note that the application of ERISA to severance pay benefits is more favorable to employers than state law:

  • An employer may design a severance plan under ERISA that specifically provides the employer with the discretion to make determinations that affect an employee’s eligibility for benefits. Further, a deviation from a plan’s written terms for particular individuals does not prohibit the employer from again applying the written terms to other individuals.
  • A participant who sues for benefits is entitled only to the actual benefits – unlike state law, ERISA does not permit consequential or punitive damages or provide for tort remedies. (In egregious cases, a court may award attorney’s fees.)
  • ERISA does not provide for jury trials and claims for benefits may be removed to federal court.
  • If a severance plan is properly drafted, company decisions will be reviewed by a court only to determine whether the decision is “arbitrary and capricious” (or an “abuse of discretion”).

New Bill Could Add Safe Harbor to Definition of Employee

In the employee benefits world, a lot can hang on an individual’s classification as an employee. Whether someone is a leased employee, an independent contractor, or a member of the rank and file can have a dramatic impact on a retirement or welfare plan. While employers typically attempt to create relationships that comply with the law, the IRS might not always agree. And it’s a bit more complex than one might expect at first. ERISA attorneys joke about the unhelpful and circular nature of ERISA §3(6) (“[t]he term ‘employee’ means an individual employed by an employer”). At the same time, tax practitioners will readily rattle off a list of twenty (yes, 20!) factors that can go into the determination.

A bill newly introduced in the U.S. Senate aims to change the complex analysis. Senate Finance Committee member John Thune, R-S.D., has introduced the New Economy Works to Guarantee Independence and Growth (NEW GIG) Act of 2017. By adding a safe harbor, the bill would “would ensure that the service provider (worker) would be treated as an independent contractor, not an employee, and the service recipient (customer) would not be treated as the employer,” according to the press release. The bill focuses on three elements: 1) the relationship between the parties, 2) the location of the services or means by which services are provided, and 3) a written contract.

Of course, we can’t throw out our twenty factors test just yet. The bill would merely provide a safe harbor. For relationships that don’t meet the criteria, the common law tests would still apply. While passage of the bill is yet to be determined, and its application to ERISA is also a bit murky (this is a tax provision aimed at collecting income and employment taxes), the legislation will be welcome news to many employers who have a difficult time discerning where the line is between independent contractor and employee.


On July 10, the Fifth Circuit Court of Appeals announced that the full Court would re-hear a recent case concerning the applicable standard of review in an ERISA denial of benefits case – which is often outcome-determinative in favor of insurers and benefit plans.

As we previously reported, in Ariana M. v. Humana Health Plan of Tex., Inc., 2017 U.S. App. Lexis 7072 (April 21, 2017), a three-judge panel of the Fifth Circuit reviewed a summary judgment in favor of a Plan Administrator who denied benefits to a claimant with eating disorders.  Even though the plan in question did not call for deference, the Court, bound by its prior decision in Pierre v. Conn. Gen. Life Ins. Co. of N. Am., 932 F.2d 1552 (5th Cir. 1991), applied an abuse of discretion standard.  Not surprisingly, the panel affirmed the District Court’s grant of summary judgment.  However, a separate concurring opinion (joined by all three judges), called Pierre into question and set the stage for a reversal.

The concurring opinion noted that the Fifth Circuit is the only circuit that applies a deferential standard to factual determinations made by an Administrator when the plan does not vest the Administrator with that discretion, and pointed to the growing number of state laws prohibiting discretionary clauses in insurance contracts.  Based on these factors, the panel opined that Pierre has not withstood the test of time:  “This question concerning the standard of review for ERISA cases is not headline-grabbing.  But it is one that potentially affects the millions of Fifth Circuit residents who rely on ERISA plans for their medical care and retirement security.”  The panel concluded that, given the “lopsided split” in the circuits and the potential for conflicting standards across different jurisdictions, further review of Pierre is warranted.

So, just as the outcome in Ariana M. v. Humana Health Plan was no surprise, it is not the least bit surprising that the Fifth Circuit has decided to re-examine the standard of review it applies in ERISA denial of benefits cases.  And it is probably not too difficult to guess that the Court, en banc, will reverse Pierre, and align with other circuits holding that a de novo review is called for when reviewing decisions made by retirement and health plans during some of life’s most difficult times.



An Update on the DOL’s Fiduciary Rule

The DOL’s much anticipated (or maligned depending on the audience) Fiduciary Rule expands the definition of what constitutes investment advice under ERISA and thereby increases the number and types of retirement plan service providers that are considered ERISA fiduciaries (see our prior coverage of the Fiduciary Rule here, here and here).  It also imposes stringent compliance and disclosure requirements in order for those service providers to avoid breaching their ERISA fiduciary duties.

Reaction to the Fiduciary Rule has been mixed, and many hoped that the new DOL leadership would repeal the Rule.   That did not occur, and the Rule went into effect on June 9, 2017.  However, there is a phased implementation period for compliance with new prohibited transaction exemptions (e.g., Best Interest Contract Exemption; Principal Transactions Exemption).  During that phase-in period (which expires on January 1, 2018), service providers must only comply with more limited impartial conduct standards in order to take advantage of the exemptions. This means that from June 9 until January 1, service providers that wish to take advantage of the exemptions will generally need to provide advice that meets the best interests of the investor (without regard to the adviser’s financial or other interests), charge only reasonable compensation (as described in the rules under ERISA 408(b)(2)), and avoid making materially misleading statements. The prohibited transaction exemptions allow service providers to receive compensation for certain investment advice that they would otherwise be prohibited from receiving under ERISA’s prohibited transaction rules.

The DOL previously noted that it would continue to review the Fiduciary Rule and seek public comments on potential changes (see here for further information).  Consequently, on July 6, 2017, the DOL published a Request for Information seeking public input on several aspects of the Fiduciary Rule, including the following:

  • Whether the applicability date (currently January 1, 2018) for certain prohibited transaction exemptions, such as the Best Interest Contract Exemption, should be delayed.
  • Whether the Principal Transactions Exemption can be revised to better serve investors and provide greater market flexibility.
  • Whether certain requirements related to service provider contracts should be eliminated or changed.
  • Whether service provider disclosure requirements can be simplified.
  • Whether recommendations to make or contribute to a retirement plan should be expressly excluded from the Rule’s definition of investment advice.
  • Whether there should be an amendment to the Rule (or streamlined exemption) for certain investment transactions involving bank deposit products and Health Savings Accounts.
  • Whether the exclusion from the Rule for certain arms-length transactions with independent plan fiduciaries that have financial expertise should be expanded or changed (including whether additional relief should be provided through a prohibited transaction exemption).
  • Whether a streamlined exemption or other change to the Rule could be developed for investment advisers that comply with or are subject to updated standards of conduct that may be adopted by the SEC or other regulators.

Comments on delaying the applicability date for prohibited transaction exemptions are due on July 21, 2017, and all other comments are due on August 7, 2017.