Last November, Melissa Ostrower wrote an excellent blog on the perils of employers reimbursing employees for health care premiums. (See: https://www.benefitslawadvisor.com/2014/11/articles/health-care-reform-legislation/premium-reimbursement-arrangements-employers-beware/)   At the time of her article, the Department of Labor had just published a new FAQ which stated, in general, that where an employer provides cash reimbursements to employees for the purchase of an individual market health care policy or provides cash in lieu of coverage to employees with high claims risks, such action would be considered part of a plan, fund or arrangement governed by the Affordable Care Act (“ACA”).   Because these arrangements — by their nature — can never comply with the ACA group health plan provisions, they may subject employers providing such arrangements to penalties.

 

Earlier this year, the IRS issued Notice 2015-17 reemphasizing that where an employer provides reimbursements or payments, either pre-tax or post-tax, that are dedicated to providing medical care — such as cash reimbursement for the purchase of an individual market policy — such an arrangement is itself a group health plan. And because such an arrangement fails to satisfy market reforms, it may trigger a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under IRC Section 4980D.

 

But, what about COBRA reimbursements? COBRA reimbursements should be allowed so long as the reimbursements are for group health coverage that otherwise complies with the ACA market reforms. However, for terminating employees, keep in mind that the end of a subsidized or reimbursed COBRA premium period is not a special enrollment event — such as loss of coverage due to termination of employment, reduction in hours or the end of a COBRA continuation period — which would allow the employee immediate access to health insurance marketplace coverage. Thus, the employee needs to be mindful of how to coordinate COBRA coverage with the next marketplace open enrollment, or subsidized COBRA may not prove to be particularly beneficial.

 

For new employees, coverage under a prior employer’s group health plan is often continued under COBRA for a period of time. Again, it is important to be sure that the underlying plan is ACA compliant. In addition, if you are the new employer, you still have the obligation — without regard to any COBRA continuation coverage a new employee may have — to offer coverage under your own group health plan within 90 days or possibly be subject to the ACA’s shared responsibility penalty.

 

Bottom line: Any direct or indirect, pre-tax or post-tax employer reimbursement for individual health insurance premiums could subject an employer to some big penalties.   For now, COBRA premium reimbursement is permissible so long as the underlying plan is ACA compliant.

Since the enactment of the Affordable Care Act (ACA), larger employers have wondered about an auto-enrollment provision that the ACA added to the Fair Labor Standards Act (FLSA). Under that provision, employers that are subject to the FLSA and which employed more than 200 full-time employees would have been required to automatically enroll new full-time employees in one of the employer’s health benefits plans (subject to any waiting period authorized by law). Certain notices would have been required giving employees an opportunity to opt out of any coverage in which the employee was automatically enrolled.

Employers have been in limbo about auto-enrollment since December 2010, when the Department of Labor advised in a Frequently Asked Question that because the statute requires implementation of the requirement “[i]n accordance with regulations promulgated by the Secretary [of Labor],” and no regulations had been issued, employers were not required to comply with FLSA section 18A until the DOL completed its rulemaking.

Wonder no more. Today, President Barack Obama signed H.R. 1314, the “Bipartisan Budget Act of 2015,” which among other things repealed the auto-enrollment requirement from the FLSA. For many employers, this will be welcomed relief from yet another ACA compliance requirement.

Note, however, employers may decide to use “default” or “negative” elections for enrolling employees into health plan coverage or certain other benefits. Under a default or negative enrollment arrangement, an otherwise eligible employee will be deemed to have elected a certain type and level of coverage, unless the employee timely returns a written waiver of that coverage. The Internal Revenue Service permitted this practice in a 2002 Revenue Ruling, and affirmed the approach in proposed regulations under Section 125, issued in 2007. This practice may even be applied to HSA contributions made under a cafeteria plan.

As many expected would be the case for the ACA’s auto-enrollment requirement, to implement default or negative elections under Section 125, employers would need to provide notice to employees about the coverage and cost, and provide the opportunity to opt-out of the arrangement. In many cases, negative or default elections will involve payroll deductions made without an affirmative election by the employee to reduce his or her wages to pay for that benefit. Some state wage withholding laws, however, have an express requirement that there be an affirmative election by the employee before any deductions may be made. But, the DOL has taken the position that in this context such wage withholding laws are preempted by ERISA. Still, employers may want to avoid the ire of an aggressive state labor official seeking to enforce his or her state’s wage law, even if the battle may be won by the employer in court.  Employers should consider this practice carefully and consult with appropriate counsel.

 

Since the passage of the Multiemployer Pension Plan Amendments Act of 1980 (“MPPAA”) the financial well-being of employers contributing to multi-employer defined benefit pension plans has been tied to the funding of those plans, many of which have been underfunded for decades. The downward spiral has been exacerbated by several unalterable factors: an increase in retirees, a decrease in active participants whose contributions support the retirees and an increase in life expectancy.

 

Recent events have highlighted the worsening of the crisis. On October 1, 2015, the Central States Southeast and Southwest Area Pension Fund, one of the largest multi-employer pension funds in the country, filed an application with the Treasury Department requesting permission to reduce core benefits for participants in accordance with the Multiemployer Pension Reform Act of 2014 (“MPRA”) and sent an explanation to its participants.   If the application is approved, it will potentially impact pensions of 400,000 participants.

 

MPRA represented a recognition by Congress that existing legislation was insufficient to adequately protect the solvency of multi-employer plans and the pension benefits of millions of participants. Specifically, the Pension Benefit Guaranty Corporation (“PBGC”) — the statutory “back stop” in ERISA — lacks sufficient assets to meet its mandate to provide pensions to participants of failing plans.

 

Although long a Congressional concern, the financial health of individual funds was an unknown area until 2006. The issue was demystified by the Pension Protection Act of 2006 (“PPA’06”), which sought transparency by requiring plans to reveal their funding status on an annual basis through the distribution of actuarial certifications and required the adoption of procedures for “funding rehabilitation.” Under the “rehabilitation plans,” contribution amounts ceased to be an issue of negotiation. Rather, contribution amounts became mandated by the pension fund.

 

Soon after PPA’06’s effective date of January 1, 2008, the stock market tanked.   Despite the subsequent rebound in the stock market, the over-all fiscal health of many multi-employer plans failed to improve.

 

The Central States application should serve as a warning.   All employers contributing to multi-employer pension plans must remain alert concerning the status of those funds and should not agree to proposed terms in negotiations without considering the impact upon the company’s financial well-being.

 

Employers should become pro-active and perform an annual “benefits due diligence.” It should be two-fold: (1) a review of the annual Form 5500 and (2) an annual  request to the pension fund for an estimate of the withdrawal liability the employer would incur if it withdrew on the last day of the plan year preceding the date of request. The pension fund’s response must also contain an explanation of the methodology used in determining withdrawal liability. The fund is required to provide this information under Section 101(l) of ERISA.

 

We will keep you posted on developing issues involving multi-employer defined benefit pension funds.

Due to the popularity of limited liability companies (LLCs) as a form of business entity, we have been approached lately more than ever to structure equity and “phantom” equity based compensation for LLC businesses, including private equity firms and other businesses that embrace an employee ownership culture. Phrases such as “restricted stock”, “stock options” and “stock appreciation rights”, all applicable to corporations, are commonly known. There are, however, equivalent terms applicable to LLCs.

LLCs do not issue stock. Rather, they issue membership “units” as equity. If an LLC has “checked the box” to be taxed as a corporation for Federal tax purposes, it generally can sponsor the equivalent of an employee stock ownership plan, and can issue the equivalent of incentive stock options. Most LLCs, however, are not taxed as corporations, but rather are taxed as partnerships (if they have more than one member). For these LLCs, the equivalent of an employee stock ownership plan and incentive stock options are not available. However, these LLCs have a host of other equity and phantom equity based compensation tools available to them, which are briefly described below.

LLCs taxed as partnerships can issue:

  • “Restricted or Performance Units”, equivalent to restricted stock in a corporation. These are typically earned over a period of three to five years or as performance targets are met. The underlying units will generally determine whether the holder as any voting rights or interests in the annual profits of the LLC.
  • “Capital Interests” that provide the holder with a direct interest in a percentage of the LLC value at a liquidity event (commonly the sale or other change of control of the business, and sometimes upon termination of employment). Capital Interests typically do not confer any voting rights or interests in the annual profits of the LLC. They are also commonly used to create the equivalent of stock options, which are exercisable at a strike price equal to fair market value at the time of issuance after any stated vesting or performance requirements are met.
  • “Profits Interests”, which are typically designed to give the holder an interest in the annual profits of the LLC (based on a percentage of LLC value of a number of units), PLUS a capital appreciation right (equivalent to a stock appreciation right in a corporation) measured from the date of issuance to a liquidity event. “Carried Interests”, which are commonly issued by private equity firms, are different than Capital Interests, in that a Carried Interest is a phrase commonly used to describe a transferable interest in the annual profits of the LLC, without any capital appreciation rights attached. Profits Interests are also commonly used to create the equivalent of stock options, which are exercisable at a strike price equal to the value at the time of issuance after any stated vesting or performance requirements are met.
  • “Phantom Unit Rights” or “Unit Rights”, which are the equivalent of phantom stock in a corporation. These entitle the holder only to a payment at a liquidity event equal to the value of a unit at the time of the liquidity event times the number of Phantom Unit Rights awarded. Phantom Unit Rights do not confer to the holder any of the other benefits, rights and privileges of being an actual unit holder in the LLC, which minimizes issues in the governance of the business of the LLC. For this reason, they have become popular. Phantom Unit Rights confer past and future value of an LLC unit, measured from the time of the award.
  • “Phantom Unit Appreciation Rights”, which are the equivalent of phantom stock appreciation rights in a corporation. These entitle the holder only to a payment at a liquidity event equal to the increase in value of the LLC (based on a number of units) measured from date of the award to the date of the liquidity event. These also do not confer to the holder any of the benefits, rights and privileges of being an actual unit holder in the LLC (hence the reference to being “phantom”), which minimizes LLC governance issues. These have become even more popular compared to Phantom Unit Rights because Phantom Unit Appreciation Rights confer only future value of an LLC unit measured from the time of the award.

These forms of equity and phantom equity based compensation provide great flexibility to LLCs in structuring compensation packages and providing incentives to employees and other service providers who assist in creating value in their businesses.

The Internal Revenue Service recently announced its cost-of-living adjustments applicable to dollar limitations for retirement plans and Social Security generally effective for Tax Year 2016 (see IR-2015-118 ). Most notably, the limitation on annual salary deferrals into a 401(k) plan (along with the other retirement plan limitations) remains unchanged. The dollar limits are as follows:

LIMIT 2015 2016
401(k)/403(b) Elective Deferral Limit (IRC § 402(g))

The annual limit on an employee’s elective deferrals to a 401(k) or 403(b) plan made through salary reduction.

 $18,000 $18,000
Government/Tax Exempt Deferral Limit (IRC § 457(e)(15))

The annual limit on an employee’s elective deferrals concerning Section 457 deferred compensation plans of state and local governments and tax-exempt organizations.

 $18,000 $18,000
401(k)/403(b)/457 Catch-up Limit (IRC § 414(v)(2)(B)(i))

In addition to the regular limit on elective deferrals described above, employees over the age of 50 generally can make an additional “catch-up” contribution not to exceed this limit.

 $6,000 $6,000
Defined Contribution Plan Limit (IRC § 415(c))

The limitation for annual contributions to a defined contribution plan (such as a 401(k) plan or profit sharing plan).

 $53,000 $53,000
Defined Benefit Plan Limit (IRC § 415(b))

The limitation on the annual benefits from a defined benefit plan.

 $210,000 $210,000
Annual Compensation Limit (IRC § 401(a)(17))

The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing.

 $265,000

($395,000 for certain gov’t plans)

 $265,000

($395,000 for certain gov’t plans)
Highly Compensated Employee Threshold (IRC § 414(q))

The definition of an HCE includes a compensation threshold for the prior year. A retirement plan’s discrimination testing is based on coverage and benefits for HCEs.

 $120,000

(for 2016 HCE determination)

 $120,000

(for 2017 HCE determination)
Key Employee Compensation Threshold (IRC § 416)

The definition of a key employee includes a compensation threshold. Key employees must be determined for purposes of applying the top-heavy rules. Generally, a plan is top-heavy if the plan benefits of key employees exceed 60% of the aggregate plan benefits of all employees.

 $170,000 $170,000
SEP Minimum Compensation Limit (IRC § 408(k)(2)(C))

The mandatory participation requirements for a simplified employee pension (SEP) includes this minimum compensation threshold.

 $600 $600
SIMPLE Employee Contribution (IRC § 408(p)(2)(E))

The limitation on deferrals to a SIMPLE retirement account.

 $12,500 $12,500
SIMPLE Catch-up Limit (IRC § 414(v)(2)(B)(ii)))

The maximum amount of catch-up contributions that individuals age 50 or over may make to a SIMPLE retirement account or SIMPLE 401(k) plan.

 $3,000 $3,000
Social Security Taxable Wage Base $118,500 $118,500

 

 

 

Both buyers and sellers in asset sale transactions should be cognizant of the ongoing erosion of the common law rule that the purchaser is not responsible for the seller’s liabilities absent a contractual assumption of such liabilities, as evidenced by a recent Ninth Circuit case finding that the theory of successor liability may be used to hold an asset purchaser liable for the predecessor’s $2.2 million withdrawal liability obligation to a multiemployer pension plan. Federal courts originally applied successor liability in the context of federal labor law where the successor employer had notice of an unfair labor practice and continued, without interruption or substantial change, the seller’s business operations. Over the years, this “successor liability” rule has been expanded to cover various other statutory liabilities under labor and employment law.

In Resilient Floor Covering Pension Tr. Fund Bd. of Trs. v. Michael’s Floor Covering, Inc., 9th Cir., No. 12-17675, 9/11/15 (“Resilient”), the Court of Appeals for the Ninth Circuit has joined the Seventh Circuit (Chicago Truck Drivers, Helpers and Warehouse Workers Union (Independent) Pension Fund v. Tasemkin, Inc. 59 F.3d 48 (7th Cir. 1995) and Tsareff v. ManWeb Services, Inc., 7th Cir., No. 14-1618, 7/27/15) to explicitly apply the successor liability rule to a seller’s withdrawal liability from a multiemployer pension plan (withdrawal liability is an employer’s share of any underfunding in the plan following its exit from the plan) so long as the successor had notice of the liability. Consistent with prior labor and employment cases involving successor liability, the Court found that the primary factor in determining if an employer is a bona fide successor is whether, under the totality of the circumstances, there is substantial continuity between the old and new employer. In turn, the Court reasoned that continuity is best judged by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base. Other factors a court may consider are whether –

  1. the new employer uses the same plant,
  2. the same or substantially the same work force is employed,
  3. the same jobs exist under the same working conditions,
  4. the same supervisors are employed,
  5. the same machinery, equipment, and methods of production are used, and
  6. the same product is manufactured or the same service is offered.

The Appeals Court reversed and remanded the case to district court for further consideration, finding that the district court failed to properly identify or weigh the successorship factors.

Two troubling peculiarities in the Resilient case merit mention:

First, the Court gave no consideration to the seeming lack of an asset purchase agreement between the parties. The owner of the alleged successor was a former salesman of the predecessor entity. Once it was announced that the predecessor would be closing operations at the end of the year, the salesman decided to start his own business in the same field – he obtained a lease on the same storefront and warehouse as the predecessor, used the same phone number and similar signage as the predecessor, bought 30% of the predecessor’s tools, equipment and inventory at a public auction, and hired many of the same employees. The predecessor did not sell, give, or otherwise assign its customer lists or any portion of its customer information to the “successor.” However, the Court notes that the “successor” did retain many customers, in large part through his prior personal and business relationships developed while employed as a salesman by the predecessor.

Second, the predecessor probably never would have been assessed any withdrawal liability but for the alleged successor’s actions to start his own company. Under a special rule covering the building and construction industry, the predecessor could have avoided withdrawal liability if he did not return to doing the same type of work covered by the collective bargaining agreement on a non-contributory basis for at least five years. The pension fund took the position that the “building and construction” exception did not apply because the “successor” essentially continued the predecessor’s work without making contributions to the fund. As a result, Resilient represents a disturbing expansion of the successor liability doctrine to both create withdrawal liability (by imputing the purchaser’s actions to the asset seller) and also to hold the purchaser liable for the withdrawal liability created as a successor.

Given the expansion of the successor liability doctrine in cases such as Resilient and the large amounts of withdrawal liability that can potentially be assessed (such amounts can and often do exceed twenty years of annual contributions), those contemplating purchasing assets (or asset sellers who are indemnifying their purchaser) or otherwise continuing the operations of a business that historically has contributed to a multiemployer pension plan should engage legal counsel with specialized knowledge of withdrawal liability to review potential liability and explore possible alternatives for structuring the transaction to minimize or eliminate such liability.

Internal Revenue Code section 6056 requires applicable large employers (“ALEs”) to report certain details about the group health plan coverage they offer to full-time employees annually in a similar manner as wages are reported on Forms W-2. Very recently, the IRS issued the final versions of Forms 1094-C (the ALE’s summary report of health plan coverage to the IRS) and 1095-C (the ALE’s reports to full-time employees and persons enrolled in health plan coverage), along with instructions to these Forms. The IRS also published final Form 1094-B and 1095-B, the Forms for reporting by health insurance carriers and self-funded plans required under Code section 6055. The forms and instructions contain several requirements that ALEs and certain other employers will find surprising and often difficult to administer.

 

As an initial matter, it is extremely important that ALEs both recognize the circumstances under which they are required to comply with the ACA’s reporting requirements and put into place the operational measures to assure their Forms 1094-C and 1095-C are filled out correctly and completely. It is the ALE who is responsible for the Form 1094-C and 1095-C reports, not the health insurance carrier or plan administrator. It is the ALE who will be liable for tax penalties if the Forms are either not submitted to the IRS and employees or are erroneous.

 

All employers who have 50 or more full-time plus full-time equivalent employees must report on Forms 1094-C and 1095-C for 2015, whether or not they have below 100 employees and are entitled to the transition relief that renders them ineligible for ACA penalties until 2016. The information an ALE must put together in order to complete the required forms includes the identities of employees who were offered coverage; the identities of individuals covered by the ALE’s health plan by month; the type of coverage chosen; the price of coverage; and the affordability safe harbor relied upon by the ALE. ALEs who wait until the end of the year to commence gathering and organizing the data needed for reporting will find themselves scrambling to get Forms out to full-time employees and plan participants by the February 1, 2016 deadline.

 

Penalties for failing to submit correct reports to the IRS and to covered individuals are $250 per report, per year, up to a $3 million cap. If the IRS determines an ALE intentionally disregarded ACA reporting requirements, the penalty is $500 per report, per year, with no monetary cap. This means, for example, that an ALE with 200 full-time employees who mistakenly fails to report, or submits erroneous reports, may be penalized $50,000 in 2016. The same ALE who intentionally disregards the reporting requirements will be penalized $100,000. These penalties are in addition to the assessable penalties under Code section 4980H that an ALE may incur if it fails to offer full-time employees minimum essential coverage that is affordable and has minimum value.

 

An ALE may be granted relief from the reporting penalties if it can demonstrate it attempted in good faith to comply with the reporting requirements. There is no “good faith” defense available to an ALE who is found to have acted with intentional disregard of Code section 6056’s reporting obligations.

 

One “surprise” contained in the 2015 ACA reporting instructions impacts non-ALE employers: Non-ALEs must submit Form 1094-B to the IRS and Form 1095-B to covered individuals if they sponsor a group health plan that is self-funded. Essentially, the IRS requires these employers to comply with the same reporting requirements as group health insurance carriers.

 

Another potential 2015 ACA reporting “surprise” concerns supplemental health plans. In mid-September, the IRS published Notice 2015-68, stating that a forthcoming Proposed Regulation will provide that reporting will not be required for minimum essential coverage that supplements and provides benefits to participants with other minimum essential coverage, so long as the primary and supplemental coverage have the same plan sponsor or the coverage supplements government-sponsored coverage, like Medicare. Following the guidance proposed by Notice 2015-68, the final Instructions to Form 1094-B and 1095-B provide the following rules with regard to supplemental minimum essential coverage:

 

  • A health plan provider is only required to report one type of minimum essential coverage with respect to an individual who is covered by more than one type of minimum essential coverage.

 

  • If an individual is covered by two group health plans sponsored by the same employer, a provider of minimum essential coverage will not need to report such coverage with regard to that individual; so long as a report is required to be filed with respect to the individual’s other minimum essential coverage plan.

 

Thus, an ALE who sponsors both a self-funded major medical health plan and an HRA that covers an employee will be required to report on Form 1095-C for the employee on either the major medical plan or the HRA, but not both.

 

Good news may be found, consistent with the draft IRS Instructions: the final Instructions for Forms 1094-C and 1095-C allow ALEs who make payments to a union for minimum essential coverage for full-time employees are, this year, permitted to indicate on Form 2019-C (via a Code series 2 indicator on line 16) that they make such payments and, thereby, avoid providing the more detailed coverage information required by the Form. This likely provides some solace to those ALEs who voiced concerns that they may not possess the information necessary to complete the Forms.

 

Employers who are members of an Aggregated ALE Group (i.e., a controlled or affiliated service group under Code § 414) must each report and file with the IRS one “Authoritative Transmittal” Form 1094-C. On this Form, the employer member will not only report the Forms 1095-C that it has distributed to full-time employees and covered persons, but will also identify the other ALEs that are part of the Aggregated ALE Group.

 

For employees who work for more than one member of an Aggregated ALE Group there are two different reporting requirements for the two types of arrangements that may exist. For full-time employees who work for more than one member of the Aggregated ALE group each month, each employer member must issue a Form 1095-C for the employee for each month of coverage. For full-time employees who work for one employer member for some months of the year and another employer member for the remainder of the year, the employer member need report only for those months the employee work for that member.

 

Finally, perhaps in an effort to simplify reporting (whether or not it accomplishes that goal) the IRS has permitted certain eligible ALEs to rely upon a “Qualifying Offer Method” of ACA-required reporting. This method relieves the ALE from having to complete Part II, line 15 of Form 1095-C for each month for which the employee received a “Qualifying Offer.”

 

To be eligible to use the “Qualifying Offer Method,” the ALE must certify that it made a “Qualifying Offer” to one or more of its full-time employees for each month of the year in which the employee was “full-time” and thus may expose the ALE to a Code section 4980H penalty. A “Qualifying Offer” is defined in the instructions as “an offer of MEC [minimum essential coverage] providing minimum value made to one or more full-time employees for all calendar months during the year in which the employee was a full-time employee for whom a section 4980H assessable payment could apply, at an employee cost for employee-only coverage for each month not exceeding 9.5% of the mainland single federal poverty line, divided by 12, provided that the offer includes an offer of MEC to the employee’s spouse and dependents.” Various additional requirements may also apply under this method, depending upon whether the ALE is relying upon transition relief for 2015.

 

ALEs should make arrangements for completing and submitting their Forms 1094-C and 1095-Cs now, as the deadlines for February 1, 2016 for delivery of the Forms 1095-C to employees and March 31, 2016 for electronic submission of the Form 1094-C and attachments to the IRS. Hopefully, the Form 1095-Bs that employees receive from the insurance carriers will conform to the information provided by their ALEs on the Form 1095-Cs. The IRS has issued no guidance concerning correction if an employee receives conflicting Forms, or which of the Forms it will rely upon (i.e., the Form 1095-B from the carrier, or the employer’s Form 1095-C) in the event of any inconsistency.   We (meaning employee benefit professionals and ALEs) all look forward to an interesting first quarter 2016.

Background 

Effective 2018, Section 4980I of the IRC — the so-called “Cadillac Tax,” which was added to the IRC by the ACA — will impose a 40% nondeductible excise tax on the aggregate cost of applicable employer-sponsored health coverage that exceeds an annually-adjusted statutory dollar limit. For 2018, the dollar limits are $10,200 for self-only coverage and $27,500 for other than self-only coverage, subject to any potential upward adjustment based on age and gender characteristics of an employee population or other applicable adjustment factors. The cost of coverage that exceeds the dollar limit is referred to as the “excess benefit.”

Notice 2015-52

On July 31, 2015, IRS and Treasury issued Notice 2015-52, describing, and inviting comment concerning, potential approaches to Section 4980I issues for anticipated incorporation into proposed regulations. Notice 2015-52 supplements Notice 2015-16, which was issued earlier in 2015 and which described potential implementation approaches to other and related Cadillac Tax issues.

Public comments concerning Notice 2015-52 must be submitted to the IRS by October 1, 2015.

Notice 2015-52 highlights include:

Who pays the tax?

The coverage provider is liable for the tax. Who is the coverage provider? That depends on the type of plan at issue: with an insured plan, it’s the insurer; with an HSA or Archer MSA, it’s the employer; and for all other applicable coverage, it’s “the person who administers the plan benefits” — a term that is not defined in the ACA or elsewhere. IRS and Treasury are considering defining “the person who administers the plan benefits” as the person responsible for the day-to-day administration of the plan (processing claims, etc.) — generally, the third party administrator of a self-insured plan — or, in the alternative, as the person that has ultimate authority or responsibility for administration of plan benefits (eligibility determinations, etc.) — which is determined based on the terms of the plan document and is typically the employer.

At the end of each calendar year, the employer will calculate the tax that applies for each employee. Then, the employer will notify each coverage provider and the IRS concerning the amount of excise tax the coverage provider owes on its share of the excess benefit. Each coverage provider will then pay its portion of the excise tax.

IRS and Treasury are considering the designation of a particular quarter of the calendar year as the time for payment of the excise tax.

Who’s the employer? 

Related employers will be aggregated and treated as a single employer, consistent with IRC Section 414 provisions. This creates special issues regarding how to identifying: the applicable coverage; the employees to be taken into account for age, gender and high-risk profession adjustments to the applicable dollar limits; the employer responsible for calculating and reporting the excess benefit; and the employer liable for any penalty for improper calculation of the tax.

How is the Cost of Applicable Coverage Determined?

The cost of applicable coverage is determined using rules similar to those that apply in calculating COBRA premiums. Many plans, however, may face timing issues when calculating the cost of applicable coverage: self-insured plans may need to wait for the expiration of a run-out period before the actual cost of coverage can be determined and experience-rated insured plans may need to reflect subsequent period premium discounts back to the original coverage period. With regard to account-based plans with employee contributions that can fluctuate from month to month — such as HSAs, MSAs and FSAs — a safe harbor is being considered under which total annual employee contributions would be allocated on a pro-rata basis over the plan year, without regard to when the contributions are actually made. Safe harbor treatment is also being considered for FSAs with carry-forward salary features: employee annual salary reductions would be included in the cost of applicable coverage only in the year the salary reductions occur, without regard to any carry-forward that happens.

To the extent a coverage provider — other than an employer — incurs liability for the excise tax and passes through some or all of that liability to the employer, the reimbursement from the employer is taxable income to the coverage provider. It is anticipated that any reimbursement of the excise tax — and reimbursement of any associated income tax — could be excluded from the cost of applicable coverage only if separately billed.

Employer takeaways: The Cadillac Tax is highly complex and employers will play a key role in compliance. Although repeal is always possible, employers should start preliminary planning for their role in administering the tax.

An “applicable large employer” is subject to a penalty if either (1) the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan and any full-time employee obtains a subsidy for health coverage on a government exchange (Section 4980H(a) liability) or (2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer-sponsored plan, but one or more full-time employees obtains a subsidy on an exchange because the employer’s coverage was not affordable or does not provide minimum value (Section 4980H(b) liability).

What does “affordable” mean for this purpose? Affordable means that an employee’s required contribution for individual coverage under his employer’ plan may not exceed 9.5 percent (indexed) of the employee’s household income. As employers do not generally have the household income information of their employees, the regulations under Internal Revenue Code Section 4980H provide three separate safe harbors under which an employer may determine affordability based on information that is readily available to the employer – (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor.

  • For example, if an employer uses the Form W-2 safe harbor, health coverage will be deemed to be affordable for Section 4980H(b) liability purposes if an employee’s required contribution is no more than $190 per month and his Form W-2 compensation is $2,000 per month ($190 is 9.5% of $2,000).

However, if the employer also offers employees an “opt-out” payment for those who decline coverage, then this opt-out amount must be counted as part of the employee contribution, according to informal discussions with Internal Revenue Service representatives (speaking in their individual rather than official capacities).

  • Therefore, using the previous example, if the employer offers employees a $100 per month opt-out payment, the employee contribution amount would be deemed to be $290 per month, rendering the insurance unaffordable under the Form W-2 safe harbor ($290 is 15.5% of $2,000).

While this impact of cash opt-out payments on affordability is not clearly articulated in the Section 4980H regulations, the Internal Revenue Service’s informal position described above is consistent with the final regulations relating to the requirement to maintain minimum essential coverage and makes sense from an economic standpoint. We note that the Internal Revenue Service also stated informally that it may treat similar cash payments to Service Contract Act and Davis-Bacon Act employees differently.

Employer takeaway: If you have analyzed affordability without taking into account any opt-out payments you offer, you should take another look at whether your plan is affordable.

 

Five years ago, Chief Justice Roberts observed: “People make mistakes. Even administrators of ERISA plans.” Conkright v. Frommert, 559 U.S. 506, 509 (2010). Four years ago, searching for a mechanism to provide monetary relief for such mistakes under ERISA, the Supreme Court reached into the desiccated maw of early 19th century trust law and pulled out the make-whole remedy of surcharge. CIGNA Corp. v. Amara, 131 S. Ct. 1866 (2011). While the contours of the surcharge remedy are still being worked out in the lower courts, it currently appears to have only two elements – (1) a breach of fiduciary duty (2) that results in actual harm.

Since this important change in ERISA jurisprudence, we have noticed a significant increase in ERISA breach of fiduciary duty claims against employers alleging errors in the administration of life insurance plans in particular. Many such cases seem to involve conversion, porting, and/or continuation of coverage provisions. (Hereafter, “conversion” provisions.) Plaintiffs are blaming denied life claims on their employers – for instance, in failing to provide accurate or timely information about conversion issues that allegedly caused the rejection of an application for conversion. As even the Chief Justice recognizes, plan administration mistakes – sooner or later – are inevitable. Given this inevitability, employers – especially small to medium-sized employers – may have cause to reconsider whether the liability risks outweigh the value of providing life insurance benefit plans to their employees.

While there are fiduciary liability risks associated with the administration of any kind of plan, surcharge claims under life insurance plans seem to provide a particularly tempting variety of low-hanging fruit for the ERISA plaintiffs’ bar. First, there is often a substantial – and relatively undisputed – amount of money at issue. Benefits under such plans commonly reach six figures. Claims of a quarter to a half million dollars are not at all uncommon. Second, life insurance policies are often complex documents, particularly when it comes to conversion provisions. Far too often, small to medium-size employers simply are not attuned to the specialized language of insurance. Indeed, in our experience, such employers are often surprised to learn that the full weight of fiduciary responsibility may rest upon their shoulders – and not upon the insurance companies – to ensure employees are properly informed about when and how to exercise conversion rights. See Brenner v. Metropolitan Life Ins. Co., 2015 U.S. Dist. LEXIS 36044 at * 21 (D. Mass. Mar. 3, 2015) (insurer, “in general … would not be considered liable for failing to send an individual notice of conversion or to otherwise advise the [insureds] of their rights”). We suspect the combination of high damages and fertile ground for mistakes creates a tempting target for the ERISA plaintiffs’ bar.

In recent months, more than one client – after facing expensive litigation over alleged conversion administration issues – has expressed to us a concern that group life insurance plans may no longer be worth the risk of litigation. In our view, it is a legitimate question. Sooner or later, mistakes will be made. If any mistake, in the eyes of ancient trust law, is a breach of fiduciary duty (see, e.g., Stiso v. Int’l Steel Grp., 604 Fed. Appx. 494 (6th Cir. 2015) (misleading statements were a breach of fiduciary duty, whether “made intentionally or negligently”)), it seems to follow that a large court award – if not inevitable – is at least a highly probable risk. Perhaps judge-made exceptions will ameliorate the risk over the years to come. But that possibility will be of little comfort to employers watching their litigation budgets in the meantime.

Almost twenty years ago, the Supreme Court noted the “competing congressional purposes” of ERISA, “such as Congress’ desire to offer employees enhanced protection for their benefits, on the one hand, and, on the other, its desire not to create a system that is so complex that administrative costs, or litigation expenses, unduly discourage employers from offering welfare benefit plans in the first place.” Varity Corp. v. Howe, 516 U.S. 489, 497 (1996) (emphasis added). One wonders, will the newly minted ERISA surcharge remedy – while providing significant monetary relief for a few plaintiffs – ultimately result in the complete loss of some kinds of benefit plans – such as life insurance plans – for employees generally? Your comments are welcomed.