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Leave Donation.

In mid-September, the IRS announced income tax relief for individuals who donate through their employers to aid victims of the Louisiana storms that began on August 11, 2016. See IRS Notice 2016-55 (Sept. 16, 2016). To get this special relief — similar to that provided for leave donation aid given after the September 11, 2001 terrorist attacks, Hurricane Sandy, and the Ebola outbreak in Africa — an employer must establish a leave-based donation program (a “Leave Donation Program”). Under that program, employees forego their vacation, sick, or personal leave and ask the employer instead to make a cash-equivalent donation to charitable organizations aiding those victims from the Louisiana storms.

Under normal tax concepts, if an employee can direct an employer to make a charitable contribution on the employee’s behalf, that amount is typically included in the donating employee’s income and is thus subject to tax, as the IRS views the amount donated as “constructively received.” Under the IRS Notice, however, there will be no income to the employee foregoing vacation, sick, or personal leave when the employer makes the cash-equivalent donation (prior to January 1, 2018) to qualified tax-exempt organizations (as described in Internal Revenue Code § 170(c)) that are providing relief to the victims of the Louisiana storms. Moreover, employers will not have to include such cash amounts in Box 1, 3, or 5 of the employee’s Form W-2. Under this IRS tax relief, the employee will not be viewed as in constructive receipt of income. However, the donating employee will not be allowed a charitable deduction on his or her individual income tax return (the employee already avoided receiving income; a charitable deduction of the donated cash-equivalent would be viewed as “double dipping” on the tax benefit). Employers making contributions on behalf of the employee may deduct the payments as trade or business expenses (as the vacation, sick, or personal leave would have been deductible to the employer). [Certainly, an individual can contribute (and get a deduction for contributing) to a charity that helps Louisiana storm victims, but using a Leave Donation Program such as this allows not only for the individual to avoid income tax and but also for the employer to avoid associated employment tax obligations.]

Leave Donation Program vs. Leave Sharing Program.

We notice that employers sometimes confuse Leave Donation Programs and Leave Sharing Programs. Cash that an employer contributes because an employee has foregone vacation, sick, or personal leave, as described above, is done through a “Leave Donation” Program. This program is distinguishable from a “Leave Sharing” Program, where employees share their vacation, sick, or personal leave with co-workers who are in need of additional leave to tend to those co-workers’ own personal medical needs or major disasters.
Leave Sharing.

An employee’s donation to an employer’s Leave Sharing Program is framed as an assignment of income issue (that is, the employee “assigns” income he or she expects to receive to someone else). Normally, under tax concepts, the cash-equivalent of a donor employee’s leave is income (i.e., will show on the employee’s Form W-2), subject to income, FICA, and FUTA tax. As with the Leave Donation Program described above for charity aid to victims, the IRS here allows for exceptions to income inclusion for employer Leave Sharing Programs if an employee may donate to and thus share leave with co-workers to use for the limited instances of a “medical emergency” or “major disaster.”
Generally, a “medical emergency” requires the would-be recipient employee’s prolonged absence from work be due to a major illness or medical condition (e.g., cancer, heart attack, etc.) that would result in a substantial loss of income, without the benefit of a Leave Sharing Program. See PLR 200720017 (Feb. 9, 2007) (analyzing tax relief from assignment of income when an employer has a proper Leave Sharing Program in place). A “major disaster” is one where employees need leave assistance tied to an event that the President of the United States has declared as such. See Notice 2006-59, 2006-28 I.R.B. 60.

The IRS imposes stringent requirements on employers when designing a Leave Sharing Program. Employer and employee missteps often occur from good intent. Perhaps an employee wants to specify which specific employee can use the donated sick leave. That can’t be done. Sometimes an employer believes that any employees affected by a public health crisis (such as those suffering from the Zika virus) can avail themselves of shared leave. That also can’t be done.

Recommendation: Leave Donation or Leave Sharing?

An employer wanting to provide a vehicle for employees to donate — through a charity — to victims of a certain crisis should design a Leave Donation Program. An employer wanting to provide a charitable environment (but not a charity donation) where employees can share leave with co-workers experiencing a medical emergency or President-declared major disaster should design a Leave Sharing Program. In either situation, a well-crafted program will help insulate employers and employee from easily-avoided income and employment tax consequences.

In Notice 2015-87, the IRS addressed the impact of employer opt-out payments — payments made to employees who decline enrollment in an employer’s group health plan — on affordability for ACA purposes. Employers who do not offer group health coverage that is affordable as defined under the ACA risk significant penalties.  For 2016, group health coverage is considered affordable if the employee’s cost for the least expensive self-only coverage under the plan does not exceed 9.66% of the employee’s annual household income.  For 2017, the percentage increases to 9.69%.

The Notice discussed two types of opt-out payments: unconditional opt-out payments — pursuant to which an employee does not have to provide any substantiation of other coverage (or anything else) in order to receive the payment — and conditional opt-out payments — pursuant to which the employee is required to provide substantiation of other coverage (such as a spouse’s group health coverage, but not individual market coverage) in order to receive the payment.  The Notice explained that, generally, unconditional opt-out payments are the equivalent of a salary reduction contribution that increases the employee’s cost of coverage (subject to relief for unconditional opt-out arrangements adopted before December 16, 2015).   Few specifics, however, were provided concerning conditional opt-out payments for purposes of the ACA employer mandate and informational reporting.

Recently issued proposed regulations reaffirm and clarify the approach described in Notice 2015-87: unconditional opt-out payments increase the employee’s cost of coverage (and, accordingly, impact whether the coverage is affordable under the ACA), conditional opt-out payments made pursuant to an “eligible opt-out arrangement” do not.

So, what is a conditional payment under an eligible opt-out arrangement? It has two requirements:  (a) the employee must decline enrollment in employer-sponsored coverage and (b) at least annually, the employee must provide reasonable substantiation that he/she and his/her “tax dependents” — i.e., family members including spouses and children for whom the employee expects to claim a personal exemption — have minimal essential coverage from a source other than the individual market place.

The proposed regulations generally apply beginning January 1, 2017, but may be relied on by employers immediately. Employers who offer, or are considering offering, opt-out payments should review their arrangements in light of the proposed regulations.

The ACA requires “applicable large employers” (those with 50 or more employees) to offer health coverage meeting affordability and other standards to their full-time employees. Failing to offer minimum essential coverage to at least 95% of full-time employees, or offering coverage that is not “affordable,” may result in significant penalties if a full-time employee receives a federal premium tax credit to purchase coverage through an ACA exchange. A full-time employee is one who works on average 30 or more hours per week or 130 or more hours per month. The hours of part-time employees are converted to full-time equivalents to determine whether a business is an applicable large employer, but only full-time employees must receive offers of complying coverage.

The ACA regulations define the term “employee” with reference to the common-law standard and assume that most workers are employees. Generally, an employer has the right to control and direct the individual who performs the services, not only as to what work is to be done, but how, where and when it is to be accomplished.

As budgeting and workforce planning for 2017 is underway, now is a good time to catalogue and assess your existing and planned staffing arrangements to determine who are and who may be deemed to be your employees by looking closely at the following:

1. Independent contractors performing work that is long term or fundamental to your business could be deemed your employees. Consider them carefully, especially if you are near the 50-employee threshold or if their addition to your workforce could cause you to fail to offer coverage to at least 95% of your full-time employees. Review your accounts payable records, and scrutinize carefully any payments made to someone who uses a Social Security number as their Taxpayer ID number.

2. Examine your employee census for “temporary employees,” and review your medical plans to determine whether they are or should be covered. If full-time, they are considered in determining whether you offer coverage to 95% of your full-time workforce, and, whether full or part-time, they are included in calculating full-time equivalents to determine whether you are an applicable large employer.

3. If you utilize a Professional Employment Organization (PEO) — an organization that hires your employees and provides payroll, benefits and other HR support — then you should review your contract to insure that the PEO offers minimum affordable coverage to each full-time member of your staff and that you are charged an appropriate, additional fee for each employee who elects coverage. The ACA regulations offer this way for the employer to provide required coverage, but the arrangement has other serious benefits implications and should be analyzed closely and in consultation with legal counsel.

4. Payrolling — where the client recruits and refers workers to a staffing company that acts as their employer — is a gray area between a PEO and a traditional staffing agency model that may receive heightened IRS scrutiny. Examine payrolling arrangements carefully and weigh their risks and advantages compared to true PEOs and traditional staffing companies.

5. The IRS generally takes the view that employees of temporary staffing agencies are employed by the agency and not the client company. If you use a staffing company for temporary labor, review your contracts and practices to reinforce that the arrangement is not a PEO.

Key takeaway: Companies that classify all of their workers properly are best positioned to be found in compliance with ACA requirements. For questions about ACA’s employer mandate or assistance in analyzing your workforce composition, please contact Jackson Lewis.

As companies complete their Section 6055 and 6056 reporting under the Affordable Care Act (ACA), now it’s time to be on the lookout for notices regarding ACA penalties.

Watch for Notice Letters:  According to CMS, the Federally-Facilitated Marketplace will begin sending batches of notifications to certain employers whose employees received premium subsidies when purchasing health insurance on the marketplace exchange.  Click here for a link to the publication from CMS regarding  the 2016 Employer notice Program:  https://www.cms.gov/site-search/search-results.html?q=employer%20notice%20program.  Employers should be on the lookout for these notification letters; they might be hard to spot because it’s unclear whom they will come from or to whom they will be addressed.  They could look like junk mail, and employers don’t want them to get thrown away.

Why Would A Company Get A Letter If It Complied With the ACA?:  If an individual calls the Healthcare.gov helpline and attests that his employer failed to provide affordable minimum value coverage, the employee can receive coverage subsidies based on his own statements, whether accurate or not.  Uninsured part-time employees, contractors and temps might have received subsidies, claiming to be full-time employees.  Whether obtained by fraud or mistake, when an eligible employee receives subsidies, it brings risk to the employer.

90 Days to Appeal:  If an employer receives a notice, the company should act quickly because employers only have 90 days to appeal.  Click here for a link to the Employer Appeal Request Form:  https://www.healthcare.gov/marketplace-appeals/employer-appeals/.  Take note that only the Internal Revenue Service can determine whether an employer is subject to a penalty under 4980H(a) or (b).

ACA Retaliation Rules:  Employers should carefully consider how to proceed in light of the ACA retaliation rules, which say that a company cannot “discharge or in any manner discriminate against any employee with respect to his or her compensation, terms, conditions, or other privileges of employment because the employee (or an individual acting at the request of the employee) has received a credit under the ACA or reported any violation of, or any act or omission the employee reasonably believes to be a violation of the ACA.”  See our previous blog about the retaliation rules:  http://www.jacksonlewis.com/resources-publication/health-care-reform-law-protects-employees-employment-retaliation.

Action Steps:  We recommend that employers put a (documented) process in place to put outside counsel or other persons who are not responsible for employee discipline in charge of the notification letters and related appeals in order to help avoid or defeat a later adverse action claim.  If an employer can show that the person who made a termination or disciplinary decision did not have knowledge that the employee had received a credit under the ACA or reported any violation of the ACA, that will help the company prove that it would have taken the same adverse action in the absence of the employee’s protected activity.

We each had to hold our collective breath, but the Wage and Hour Division (WHD) of the Department of Labor (DOL) finally issued an All Agency Memorandum 220  (AAM) last week on March 30, 2016 to provide guidance to governmental agencies on how the Affordable Care Act’s (ACA) provisions regarding the employer shared responsibility provisions interact with the fringe benefit requirements of the McNamara-O’Hara Service Contract Act (SCA) and Davis-Bacon Act and the Davis-Bacon Related Acts (DBRA) (together DBA/DBRA).

What is particularly nice about the AAM is that there are no surprises in the WHD’s position.  We feel prescient!

What we have counseled and anticipated for our government contractor clients, as we awaited the WHD’s views on the intersection of these three laws, actually is the position of the WHD. We thus summarize the salient provisions of the AAM.

SCA, DBA/DBRA, and ACA are Separate Laws.

The AAM underscores that the SCA, DBA/DBRA, and ACA are separate federal laws.  It is why we at Jackson Lewis stress that a government contractor applicable large employer (ALE) should be mindful that each law is independent.  Thus, for example, just because an ALE satisfies SCA does not necessarily mean it satisfies ACA.  None of the guidance in the AAM contradicts this principle.

ACA Employer Shared Responsibility.

In general, the ACA’s employer shared responsibility provisions require an employer with an average of at least 50 full-time employees (including full-time equivalents) to provide its full-time employees (and their dependents) affordable health care offering minimum value.  If the ALE to whom this applies chooses not to offer such health care, then it may make a non-deductible payment (by way of an excise tax) to the Internal Revenue Service (IRS).

Employer Contribution to Health — Appropriate Credit to SCA and DBA/DBRA Fringe.

Under SCA and DBA/DBRA, an employer cannot take credit against the required prevailing wage benefits for those benefits required by federal, state, or local law (such as the federal obligation for an employer to contribute to Social Security).  The AAM provides long-awaited guidance that, because an ALE may offer ACA-compliant health care or, alternatively, may simply pay an excise tax to the IRS, the ACA does not require an employer to provide health care.  Consequently, WHD permits ALEs to credit contributions to a health plan towards SCA or DBA/DBRA fringe obligations.

Employer Payment of Excise Tax – Inappropriate Credit to SCA and DBRA Fringe Care.

If an ALE decides alternatively to forego providing health care by instead paying the excise tax to the IRS, the employer cannot credit the payment of such tax towards SCA or DBA/DBRA fringe obligations.  The AAM notes that such a payment does not confer benefits specifically on the workers and therefore is not a bona fide fringe benefit as that term is defined and interpreted under SCA and DBA/DBRA.

The Choice of Providing Cash or Benefits Remains the Employer’s.

Government contractors’ employees often wrongly believe they should have the choice in receiving cash in lieu of SCA or DBA/DBRA mandated benefits.  The AAM reconfirms that whether to provide employees with benefits or cash in lieu is the ALE’s option (so long as not otherwise required under a collective bargaining agreement):

Thus, for example, if an ALE covered by SCA/DBRA chooses to provide all employees with fringe benefits in the form of health coverage, it may do so even if some or all of its employees might prefer to receive. . . cash.  * * *  [A] contractor need not obtain an employee’s concurrence before contributing the [entire fringe to health care].

Bear in mind, however, that an employee’s concurrence (and a writing authorizing deductions) is needed for any benefit the employer intends to provide that requires an employee payment or premium from wages.  For example, if pays 100% of a medical plan benefit for an employee than the employer simply can provide the benefit (and take credit under SCA/DBA/DBRA).  On the other hand, if the employer pays only 80% of the medical plan benefit, then the employee must agree to the benefit and the employee portion deductions.

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Those government contractor ALEs needing guidance on the how to comply with each of the SCA, DBA/DBRA, and ACA (and how to coordinate the intersection of those independent federal laws) should contact Jewell Lim Esposito or Leslie Stout-Tabackman at 703.483.8300.

In the last six months, several clients called me regarding substantial balances in a so-called “forfeiture account” in their 401(k) plans.  A few of these clients have forfeiture accounts that violate the ERISA requirements.  It is imperative that forfeitures be handled properly since both the IRS and the Department of Labor (DOL) on audit generally review how forfeitures have been handled by the plan.

The basic rule is that forfeitures must be allocated on an annual basis.  Forfeitures should not be held over into later years.  Failure to comply with this requirement can result in disqualification of the plan or potential penalties imposed by the DOL.  Sometimes this failure is due to an accidental failure to timely deal with the forfeitures.

Proper disposition of forfeitures depends upon the terms of the 401(k) plan.  For example, many plans first use forfeitures to pay proper plan expenses.  However, the employer should make sure that the plan document specifically allows for payment of plan expenses.  Otherwise, the payment of such expenses may result in plan disqualification or a prohibited transaction. We see many adoption agreements for prototype plans that do not provide for payment of plan expenses.

In addition, forfeitures can be used to reduce employer contributions including matching contributions and non-elective contributions.  Finally, forfeitures can merely be reallocated to participants’ accounts as an additional amount for participants.  Reallocation is somewhat typical for employers who have profit sharing plans that are not 401(k) plans.

Most notably, the IRS has recently taken the position that forfeitures cannot be used to offset safe harbor contributions under a regular or QACA safe harbor plan.  Use for safe harbor contributions can also result in plan disqualification.

In addition, forfeitures cannot be used for certain corrections under the IRS Employee Plans Compliance Resolution System (EPCRS).

When a regulatory agency determines that forfeitures have been carried over, the agencies may require the plan sponsor to retroactively determine who should have received allocations each year.  If your plan has a forfeiture account that includes amounts carried over from one year to another, you should review that account and take appropriate action so that the account does not include any carryovers.  Of course, this creates a monetary burden and a significant administrative burden on employers.

For the second time in Amgen Inc. v. Harris, the Supreme Court reversed the Ninth Circuit because of its failure to apply the proper pleading standard for claims alleging breach of the duty of prudence against fiduciaries who manage employee stock ownership plans (ESOPs). The Supreme Court’s opinion sets forth a specific, stringent pleading standard for such claims – though questions remain as to how strictly lower courts will interpret that standard. The opinion also shows that it will be strategically advantageous for defendants to attack claims against ESOP fiduciaries at the pleading stage.

The plaintiffs were former Amgen employees who participated in an ESOP holding Amgen’s common stock. After the value of Amgen’s stock dropped, the employee-stockholders filed a class action alleging that the plan’s fiduciaries had breached their duty of prudence under the Employee Retirement Income Security Act (ERISA). Specifically, they alleged that the plan’s fiduciaries had inside information that investing in Amgen’s stock was imprudent but nevertheless (1) allowed the plan’s participants to continue investing, and (2) failed to disclose the inside information to the public. The district court dismissed the complaint for failure to state a claim, but the Ninth Circuit reversed. The plan fiduciaries petitioned to the Supreme Court.

While that petition was pending, the Supreme Court issued its decision in Fifth Third Bancorp v. Dudenhoeffer, which addressed the duty of prudence owed by ERISA fiduciaries who manage ESOPs. In Dudenhoeffer, the Supreme Court held that ESOP fiduciaries are not entitled to a presumption of prudence. The elimination of this presumption was widely viewed as a negative development by those who manage and represent ESOPs. However, in Dudenhoeffer, the Supreme Court did include fiduciary-friendly language recognizing the unique challenges of ESOP fiduciaries who are blamed for failing to act on inside information about the employer’s stock. Specifically, the Supreme Court stated:

To state a claim for breach of the duty of prudence on the basis of inside information, a plaintiff must plausibly allege an alternative action that the defendant could have taken that would have been consistent with the securities laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

…

[L]ower courts faced with such claims should also consider whether the complaint has plausibly alleged that a prudent fiduciary in the defendant’s position could not have concluded that stopping purchases—which the market might take as a sign that insider fiduciaries viewed the employer’s stock as a bad investment—or publicly disclosing negative information would do more harm than good to the fund by causing a drop in the stock price and a concomitant drop in the value of the stock already held by the fund.

This pleading standard acknowledges that freezing investments into an ESOP and disclosing negative information about company stock to the public will usually do more harm than good. The Supreme Court intended the standard to separate plausible from meritless claims.

Following the issuance of Dudenhoeffer, in 2014 the Supreme Court granted the fiduciaries’ petition for review in Amgen I, vacated the judgment, and remanded for further proceedings consistent with Dudenhoeffer. On remand, the Ninth Circuit again reversed dismissal of the complaint against Amgen and denied rehearing en banc over a strong dissent by Judge Kozinski. The fiduciaries again petitioned for Supreme Court review.

In a short, per curiam decision (Amgen II), the Supreme Court on January 25, 2016, held that the Amgen complaint did not contain sufficient factual allegations to state a claim for breach of the duty of prudence against the ESOP fiduciaries. The Supreme Court emphasized that the Ninth Circuit did not correctly apply the Dudenhoeffer standard. The Ninth Circuit assumed it was plausible that freezing investments into Amgen’s ESOP would not harm plan participants. However, the complaint did not allege that a prudent fiduciary “could not have concluded” that freezing the investments into the ESOP would have done more harm than good. Accordingly, the Court reversed and remanded (again). The Supreme Court noted that the district court could decide whether to allow the plaintiffs to amend the complaint to attempt to meet this standard.

The plaintiffs on remand following Amgen II, as well as plaintiffs in other actions, might simply allege that a prudent fiduciary “could not have concluded” that alternative actions, such as freezing investments into the ESOP and public disclosure of negative inside information, would have done more harm than good. It remains to be seen whether such a conclusory allegation, devoid of a factual basis, will meet muster under Amgen II. There exists a strong argument that the Supreme Court intended to require the allegation of specific facts demonstrating how a prudent fiduciary could not have reached such a conclusion. Given that public disclosure of negative insider information (even if permitted by securities laws) and freezing ESOP investments will typically do harm by causing the value of the employer’s stock to drop, the lower courts will also have to decide what types of factual allegations and special circumstances will suffice under this stringent standard.

While decided in the context of an ESOP, Amgen I and II are also important decisions for 401(k) plans that offer employer stock as an investment option, particularly those plans with ESOP features. Although we will need to await future litigation for complete certainty, we expect that Amgen pleading standards will likely apply in 401(k) plan stock drop litigation. 401(k) plan fiduciaries should continue to carefully monitor company stock as a prudent investment option for their participants and be prepared to substantiate — through appropriate documentation and otherwise — compliance with the fiduciary duty to periodically review and update investment offerings and possible consideration of inside information in accordance with the securities laws.

While taxpayers were completing their holiday shopping and preparing to spend time with their families, Congress and the Internal Revenue Service (“IRS”) were busy changing laws governing employee benefit plans and issuing new guidance under the Patient Protection and Affordable Care Act (“ACA”). The results of that year-end governmental activity include the following:

Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”)

The PATH Act, enacted by Congress and signed into law by President Obama on December 18, 2015, made the following changes to federal statutory laws governing employee benefit plans:

  • The ACA’s 40% excise tax (“Cadillac Tax”) on excess benefits under applicable employer sponsored coverage — so called “Cadillac Plans,” due to the perceived richness of such coverage — is delayed from 2018 to 2020.
  • Formerly a nondeductible excise tax, any Cadillac Tax paid by employers will now be deductible as a business expense.
  • Commencing with plan years after November 2, 2015, employers with more than 200 employees will not be required to automatically enroll new or current employees in group health plan coverage, as originally required under the ACA.
  • The rules governing the circumstances under which church plans will be treated as sponsored by a single employer for purposes of Code section 414’s aggregation rules have been modified. These new provisions, in particular, clarify the circumstances under which church organizations will be deemed a single employer for purposes of Code section 403(b) plans.
  • After December 31, 2015, individual taxpayers who purchase private health insurance via the Healthcare Exchange will not be eligible to claim a Health Care Tax Credit on their tax returns.

IRS Notice 2015-87

On December 16, 2015, the IRS issued Notice 2015-87, providing guidance on employee accident and health plans and employer shared-responsibility obligations under the ACA. Guidance provided under Notice 2015-87 applies to plan years that begin after the Notice’s publication date (December 16th), but employers may rely upon the guidance provided by the Notice for periods prior to that date.

Written in a Q & A format, Notice 2015-87 covers a wide-range of topics from employer reporting obligations under the ACA to the application of Health Savings Account rules to rules for identifying individuals who are eligible for benefits under plans administered by the Department of Veterans Affairs. Following are some of the highlights from Notice 2015-87, with a focus on provisions that are most likely to impact non-governmental employers.

  • Guidance applicable to Health Reimbursement Arrangements (“HRAs”)
    • Funds held in an HRA that covers two or more participants who are current employees (as opposed to retirees or other former employees) may not be used to purchase an individual insurance policy on the marketplace, without regard to whether the participants have the opportunity to purchase coverage under an integrated group health plan sponsored by their employer.
    • An HRA that covers an employee’s spouse or dependents (i.e., a family HRA), may not be integrated with a group health plan that covers only the employee (i.e., self-only coverage).   To satisfy market reform requirements under the ACA, an HRA may only reimburse medical expenses of those individuals (employee, spouse, and/or dependents) who are also covered by the employer’s group health plan providing minimum essential coverage (“MEC”) that is integrated with the HRA.  Realizing that many HRAs do not currently restrict employees from reimbursing family member medical expenses if the family members are not enrolled in the employer’s MEC plan, the IRS and Treasury will not treat such HRAs — if otherwise integrated with an employer’s MEC plan as of December 16, 2015 — as non-integrated for plan years beginning prior to January 1, 2017. Thus, employers who currently sponsor HRAs that are properly integrated with a MEC plan have until the first day of the plan year commencing on or after January 1, 2017 to amend their HRAs to condition HRA benefits on enrollment in and coverage under the MEC plan.
    • For the purpose of determining “affordability” under the ACA, employer contributions that are required by the terms of a MEC-integrated HRA and that are permitted to be used by employees to pay premiums, to meet cost-sharing requirements under the MEC plan, or to pay for medical expenses not covered by the MEC plan are treated as reducing the employee’s required contribution — without regard to whether the employee in fact uses the HRA to pay his or her share of contributions under the MEC plan. Thus, the price of lowest cost, self-only coverage is reduced by the employer’s required contribution amount under the terms of the HRA.
  • Guidance applicable to Cafeteria (Code §125) Plans and Other Arrangements
    • Employer flex contributions to a cafeteria plan will reduce the price of lowest cost, self-only coverage for ACA affordability purposes if: (i) the employee may not elect to receive wages in lieu of the employer contribution; (ii) the employee may use the employer contribution to purchase MEC; and (iii) the employee may only use the employer contribution to pay for medical care as defined under Code § 213.
    • Employer opt-out payments, i.e., wages paid to an employee solely for waiving employer-provided coverage may, in the view of Treasury and the IRS, effectively raise the contribution cost for employees who desire to participate in a MEC plan. Treasury and the IRS intend to issue regulations on these arrangements and the impact of the opt-out payment on the employee’s cost of coverage. Employers are put on notice that if an opt-out payment plan is adopted after December 16, 2015, the amount of the offered opt-out payment will likely be included in the employee’s cost of coverage for purposes of determining ACA affordability.
  • Guidance Under the ACA
    • Treasury and the IRS will begin to adjust the affordability safe harbors to conform with the annual adjustments for inflation applicable to the “9.5% of household income” analysis under the ACA. For plan years beginning in 2015, therefore, employers may rely upon 9.56% for one or more of the affordability safe harbors identified in regulations under the ACA, and 9.66% for plan years beginning in 2016. For example, in a plan year commencing in 2016, an employer’s MEC plan will be “affordable” if the employee’s contribution for lowest cost, self-only coverage does not exceed 9.66% of the employee’s W-2 wages (Box 1).
    • To determine which employees are “full-time” under the ACA, “hours of service” are intended to include those hours an employee works and is entitled to be paid, and those hours for which the employee is entitled to be paid but has not worked, such as sick leave, paid vacation, or periods of legally protected leaves of absence, such as FMLA or USERRA leave. However, “hours of service” are not intended to include hours not worked by the employee but for which an employer may be required to make a payment for the employee’s benefit, such as workers’ compensation leave, periods during which an employee is receiving unemployment compensation, or periods during which an employee is receiving disability income.
    • Treasury and the IRS have observed that certain educational organizations are using staffing agencies to avoid the rule that an employee must have a break in service of at least 26 consecutive weeks before that employee may be treated as a new hire — thereby subject to a new eligibility waiting period or a new initial measurement period. In order to address this perceived abuse, Treasury and the IRS anticipate issuing amended regulations to require that staffing agency employees who primarily provide services to educational organizations during an entire year (including employees in bus driving or janitorial positions) be treated as employees of the educational organizations for purposes of the 26 week break in service rule.
    • For purposes of ACA penalties, an offer of TRICARE coverage by an applicable large employer to an eligible full-time employee for any month will be deemed to be an offer of MEC for that month.
  • Guidance concerning COBRA obligations and Flexible Spending Accounts (“FSAs”)
    • An FSA is not required to offer COBRA coverage to an employee who experiences a qualifying event unless the amount the employee is entitled to receive from the FSA from the date of the qualifying event to the end of the plan year exceeds the amount the FSA could require as premiums for COBRA continuation coverage for the remainder of the plan year. The amount the employee is entitled to receive from the FSA includes any $500 carry-over amount to which the employee may be entitled.
    • For purposes of determining the cost of COBRA continuation coverage under an FSA, amounts carried-over from a prior plan year are not included in the 102% of applicable premium determination.
  • Guidance concerning ACA reporting obligations
    • The Treasury and IRS remind applicable large employers that they will provide relief from penalties for failing to properly complete and submit Forms 1094-C and 1095-C if the employers are able to show that they made good faith efforts to comply with their reporting obligations.

 

Happy New Year!

As the calendar year comes to an end, group health plan sponsors must remember that if they took advantage of the ACA relief of IRS Notice 2014-55, amendments to their cafeteria plans by year end are needed.

Notice 2014-55 was effective as of September 18, 2014, and it allowed participants to revoke a cafeteria plan election for group health coverage, that is not a health FSA and provides minimum essential coverage, for 2 specific situations. These circumstances arise where participating employees may want to purchase a Qualified Health Plan through a competitive marketplace (Exchange or Marketplace coverage).

The first set of circumstances addressed by Notice 2014-55 was that employees experiencing a change in employment status where they no longer expect to average 30 hours of service per week, but remain eligible for employer-provided coverage, may revoke a cafeteria plan election and elect other minimum essential coverage.

This situation would ordinarily arise with group health coverage designed to avoid the employer shared responsibility penalties of Code § 4980H. Determining whether an employee has experienced a reduction of hours may be done by using scheduled or expected hours instead of actual hours worked by the employee. Plan sponsors should also keep in mind that a reduction of hours that does not result in a change in employment status – moving from full-time to part-time status – may not present the participant with a revocation opportunity.

The second scenario arises when participants who made a cafeteria plan election for group health coverage intend to enroll in Marketplace coverage during either a special enrollment period or the Marketplace’s annual enrollment period (for non-calendar year plans). The employee’s (and related individuals’) Marketplace coverage must begin no later than the day immediately following the revocation of the group health coverage.

Without the new election change permitted for Marketplace enrollment, participants may have had to continue their participation in employer-sponsored health coverage despite becoming eligible to enroll on the Exchange. Permitting an election change under these circumstances allows participants to adjust their coverage as their eligibility for Marketplace coverage changes.

Notice 2014-55 also provided that plan sponsors could rely on its provisions immediately and plan amendments were not required at the time. Moving forward, cafeteria plans must be amended (if they choose to implement these permitted change rules) by the last day of the calendar year in which the revocations were made, unless the election was made in 2014. If the revocation occurred in 2014, the cafeteria plan is allowed to amend as of the last day of the following plan year.

Amending cafeteria plans for the 2 new permitted changes also provides a good opportunity for plan sponsors to evaluate the method used for measuring employees’ hours of service for its effectiveness (i.e., are most of the people initially designated as a full-time employee remaining in that classification) and consistency (e.g., how hours counted while employees on FMLA). We anticipate that sponsors should have more clarity as to the effectiveness and consistency of their group health plan design and administration after working through this year’s ACA reporting requirements – which are also just around the corner.

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.