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The rules for employer-sponsored wellness programs continue to be a moving target; most recently, regulations issued by the Equal Employment Opportunity Commission (“EEOC”) intending to address issues under the Americans with Disabilities Act (“ADA”) and the Genetic Information Non-Discrimination Act (“GINA”). Many employers are already well aware of the wellness regulations under the Affordable Care Act that for some years now have permitted incentives for certain health contingent programs, such as biometric screenings and tobacco cessation programs, in some cases allowing incentives of up to 50% of the applicable premium. But some of the same wellness incentives permissible under the ACA raise issues under the ADA and GINA. The EEOC tried to address some of those issues through regulation, but wound up losing in court against the AARP (formerly the American Association of Retired Persons) which challenged the EEOC’s methods for developing the regulations. So, we are basically back where we started, namely, what to do with wellness programs that are permissible with the ACA regulations, but may not be consistent with rules under the ADA or GINA (or programs that do not raise ACA issues at all, but still have compliance requirements under the ADA and/or GINA).

What’s the problem? We focus here on the ADA. In general, the ADA prohibits employers from subjecting employees to disability-related inquiries or medical examinations. One exception from this rule is that the inquiry or examination is part of a voluntary health program. However, the EEOC had not formally defined the term “voluntary” or explained what constitutes a “health program.” Thus, it had been unclear whether employers could offer incentives to encourage employees to participate in programs that involved such inquiries or examinations, something the ACA clearly permitted. The EEOC finally issued regulations to permit certain incentives for employees to answer disability-related questions or undergo medical examinations that would not cause the program to be involuntary. As noted, those regulations have been vacated.

EEOC modifies its regulations. On December 20, 2018, in response to the AARP decision, the EEOC revised its regulations to remove the incentives that had been permitted.  What remains in the regulations presently is that a health program that includes disability-related inquiries or medical examinations (such as a health risk assessment or biometric screening) is voluntary as long as the program meets certain requirements:

  • Employees may not be required to participate;
  • The employer may not deny coverage or limit the extent of benefits under any of its group health plans or package options for employees who do not participate;
  • The employer does not take any adverse employment action or retaliate against, interfere with, coerce, intimidate, or threaten employees; and
  • The employer provides employees with a confidentiality notice that: (i) is understandable; (ii) explains the type of medical information that will be obtained and the specific purposes for which the medical information will be used; and (iii) describes the restrictions on the disclosure of the employee’s medical information, the employer representatives or other parties with whom the information will be shared, and the methods that the covered entity will use to ensure that medical information is not improperly disclosed (including whether it complies with the HIPAA privacy and security regulations).

What remains unclear is whether offering an incentive to an employee to participate in a disability-related inquiry or medical examination as part of an otherwise compliant program would be viewed by the EEOC to be impermissible. Notably, prior to issuing its wellness program regulations, the EEOC had sued employers over the design of their health plans, including in cases where the programs appeared to be more consistent with typical program offerings and incentives.

Note that the EEOC made similar changes to its regulations under GINA that had permitted inducements to an employee for the employee’s spouse to provide his or her current health status information as part of a health risk assessment administered in connection with an employee-sponsored wellness program. Employers should review their wellness programs carefully, and not just those that are tied to their group health plans, to see whether they are compliant with the ADA and GINA.

 

 

In the spirit of the holidays, the Internal Revenue Service gave a gift to sponsors of 403(b) tax-deferred annuity plans on December 4, 2018, by issuing IRS Notice 2018-95.  For plan sponsors that exclude part-time employees from their 403(b) plans, this gift provides a 10-year nod on their historical plan administration, despite noncompliance with the once-in-always-in part-time exclusion condition.

The Notice contains many conditions to qualify for the relief.  It also does not provide blanket relief covering all potential administrative issues involving the exclusion of part-time workers.  So, just as important as the relief itself is what the relief does not cover, serving as an important reminder to plan sponsors about the circumstances in which part-time employees may be excluded from 403(b) plans.

The 403(b) Plan Universal Availability Requirement

One of the tax-law based nondiscrimination requirements applicable to 403(b) plans is the “universal availability” requirement.  This requirement means what is says – generally, if any employee is allowed to make elective deferrals into the plan, every employee must be permitted to do so.  The plan must be universally available.

There are some important exceptions to this requirement, one of which relates to part-time employees.  Your Section 403(b) plan can exclude part-time employees from participating.

Importantly, this exclusion of part-time workers must be in your written plan document.  You cannot simply exclude part-time employees or classes of employees who typically work part-time hours operationally, taking the position only full-time employees are eligible.  This is a legal compliance issue requiring correction and to which IRS relief is not available.

Who Qualifies as a Part-Time Employee?

Like most employee benefit rules, there is a technical legal meaning to the term “part-time.”  This definition may not jive with your employment practices, and it is not the opposite of “full-time” as under the Affordable Care Act (“ACA”).  So, this tends to be an area ripe for legal compliance issues.

Under the Section 403(b) regulations, an individual is part-time if:

  • Looking forward from their first date of hire, you do not expect them to work at least 1,000 hours during their first year of employment (the “first-year exclusion”); and
  • Looking backward for each year ending after the initial year, the employee did not actually work 1,000 hours (the “look back exclusion”). The plan can use either anniversary dates or the plan year when applying these rules.

These concepts are similar to the ACA measurement methods involving variable hour employees.  However, it should be noted, they use the retirement plan 1,000 hours of service requirement, in lieu of the 30- hour requirement used for group medical plans.

The Once-In-Always-In Condition

Simply applying the above rules for excluding part-time employees is not enough to meet the universal availability requirements.  Instead, there is a third requirement — the once-in-always-in condition, which says:  Once an employee meets the 1,000-hour requirement, that employee no longer can be excluded from the 403(b) plan based on being a part-time employee.

For example, say you hire Joe Blow in June of 2016, expecting Joe to work 750 hours per year.  But, Joe actually works 1040 hours during his first year of employment and 750 hours every plan year after that.  The ONLY year for which you would be permitted to exclude Joe from your plan is Joe’s first year when you reasonably expected him to work under 1,000 hours.  Because Joe actually worked 1,040 hours during that first year, Joe can no longer be excluded from the plan based on being a part-time employee for succeeding years.  This is true even though Joe never again works 1,000 hours.

Note how different this rule is from the ACA regulations, which enable employers to apply the look-back rules during measurement periods on a year-by-year basis, resulting in employees coming in and out of group medical plans during their periods of employment.

Many employers have administered their 403(b) plans like their group medical plans where part-time employees come in and out of eligibility based on the number of hours they worked during the prior year.  So in the case of Joe Blow, many employers would have let Joe into the 403(b) plan based on his actually working 1,040 hours during his first 12-months of employment.  Yet after that first plan year of participation, they would have excluded Joe from the 403(b) plan by virtue of his working only 750 hours per year.  This is not allowed by the once-in-always-in condition and is what the IRS relief specifically addresses.

Operational Relief from the Once-In-Always-In Condition

During the relief period (defined below), the IRS has said that a plan will not be treated as failing to satisfy the requirements for the part-time employee exclusion simply because the plan did not apply the once-in-always-in condition.  Stated differently, the relief applies only if:

  • The plan contains an express exclusion of part-time employees;
  • The plan administrator applied the first year exclusion rule correctly;
  • The plan administrator applied the look back exclusion rule correctly for subsequent plan years;
  • No employees working part-time hours received different or special treatment (such as allowing an executive’s child working 10 hours per week to participate in the 403(b) plan when others working similar hours are excluded); and
  • The only mistake is that the plan had part-time employees coming in and out of participation based on the number of hours they worked each year.

Section 403(b) plans that are individually designed also must be amended on or before March 31, 2020, to reflect that the once-in-always-in condition was not applied.  Comparatively, pre-approved Section 403(b) plans, such as those that use an Adoption Agreement platform, are not required to be amended as a condition of this relief.

Take the example above where Joe Blow was hired in June of 2016 with the expectation of his working 750 hours per year.  But Joe Blow actually worked 1040 hours during his first year of employment and 750 hours every year after that.  If the employer allowed Joe Blow to participate after he actually worked 1040 hours, but then excluded Joe thereafter based on his working 750 hours per year (in violation of the once-in-always-in condition), then the plan should qualify for the operational relief described in the IRS Notice, assuming the plan is amended, as needed.

Relief Period

The relief period begins with tax years beginning after December 31, 2008, (January 1, 2009, for calendar year plans).  This is the general effective date for the Section 403(b) regulations, which set forth the once-in-always-in requirements.  The relief period ends on one of two dates:

  • For plans that use a plan year basis of measurement, the last day of the last exclusion year that ends before December 31, 2019, (December 31, 2018, for calendar year plans);
  • For plans that use an anniversary date basis of measurement, the last day of the employee’s last exclusion year that ends before December 31, 2019, (e.g., July 19, 2019, for an employee hired on July 20, 2015).

Fresh Start Opportunity

The IRS Notice also contains a special rule, allowing plans essentially to start over and have a fresh start on the administration of the once-in-always-in condition.  This enables employers to apply the once-in-always-in condition for years that begin on and after January 1, 2019, as if the condition first became effective January 1, 2018.  This means that the plan can ignore the prior application of the once-in-always-in condition in determining whether an employee should be offered an elective deferral opportunity during the 2019 plan year.

Back to our example:  Because Joe worked only 750 hours during 2018, Joe may be excluded during the 2019 plan year, even though Joe worked over 1,000 hours during his first year of eligibility beginning in June of 2016.  The plan gets a fresh start and need only look back to the 2018 exclusion year in determining whether Joe should be offered an elective deferral opportunity during the enrollment period for 2019.

Plans need not be amended to reflect the use of this fresh start opportunity. 

Summary

Employers who sponsor 403(b) plans that exclude part-time employees, but which have been administered in contravention of the once-in-always-in condition just received a significant gift.  This relief has the potential for saving employers material amounts in the form of corrective contributions.  That said, it is crucial that employers who qualify for this relief act now to ensure they administer their plans correctly starting in 2019 and, for individually designed plans only, amend their plans on or before March 31, 2020, to reflect plan’s actual operations.

The relief is very narrow and does not extend to more general failures to comply with the terms of the plan.  For example, employers who have been excluding part-time employees from their 403(b) plans when the plan does not contain this explicit exclusion and employers who have excluded employees who normally work fewer than 30-hours per week from their 403(b) plans (rather than applying the 1,000 hours of service rules) are not covered by this relief.  These employers should seek counsel on the correction of the operational failures under the IRS Employee Plans Compliance Resolution System (“EPCRS”), the latest version of which is IRS Revenue Procedure 2018-52.

On December 14, 2018, a federal district judge sitting in Texas ruled that, without the so-called “individual mandate” which requires individual taxpayers to maintain minimum essential coverage, the rest of the Patient Protection and Affordable Care Act as amended (widely known as the “ACA”) is “INVALID”.

What was the case about?

Texas v United States was brought in Judge Reed O’Connor’s court by numerous states and two individual plaintiffs seeking the court’s declaration that the individual mandate is unconstitutional and that the remainder of the ACA is inseverable from the individual mandate.

For context, remember that this case followed –

  1. the Supreme Court’s 2012 decision in National Federation of Independent Businesses v. Sebelius that the individual mandate is unconstitutional under the Commerce Clause but could fairly be read as exercising Congress’s power to tax because failure to comply with it would trigger a tax under the individual shared responsibility penalty provision of the ACA; and
  2. Congress’ passage of the Tax Cuts and Jobs Act of 2017 (“TCJA”) which reduced to zero (for tax years after 2018) the individual shared responsibility penalty otherwise triggered by failing to comply with the individual mandate.

What did the judge decide?

Judge O’Connor filled the plaintiffs’ stockings:  He held that the individual mandate could “no longer be fairly read as an exercise of Congress’s Tax Power” because Congress nullified its revenue raising potential by reducing the individual shared responsibility penalty amount to zero.  Thus, the only basis on which the Supreme Court upheld the individual mandate’s constitutionality in the 2012 case went up the chimney with the TCJA in 2017.

With visions of sugar plums dancing in plaintiffs’ heads, Judge O’Connor held that the individual mandate is “essential to and inseverable from the remainder of the ACA.”  This, he based on Congress’ own words about the individual mandate:  “The requirement is an essential part of this larger regulation of economic activity, and the absence of the requirement would undercut Federal regulation of the health insurance market.”  He pointed out also that Congress itself had explained in multiple contexts how the individual mandate was the keystone of the ACA.  He also reminded us that each of the nine Supreme Court justices in the 2012 case had agreed that the individual mandate was inseverable from at least some other ACA provisions (for example, the prohibition against pre-existing condition limitations).

In other words – the judge’s own words – with the individual mandate unconstitutional, the remaining provisions of the ACA “are INSEVERABLE and therefore INVALID.”

What happens now?

Most likely, the (for some) nightmare before Christmas case will not have immediate effect and will be appealed to the Supreme Court, making it the third case challenging the constitutionality of the ACA to reach the Supreme Court.  Although it’s unlikely that the government defendants will be the ones appealing.  Instead, it will be the states that intervened in the case when it became apparent that the United States Justice Department under President Trump would not defend the constitutionality of the individual mandate or its severability from other provisions like the prohibition against pre-existing condition limitations.

In response to the ruling on December 14, 2018, President Trump tweeted “As I predicted all along, Obamacare has been struck down as an UNCONSTITUTIONAL disaster! Now Congress must pass a STRONG law that provides GREAT healthcare and protects pre-existing conditions.”

We will continue to follow the court and legislative developments closely and post updated information on our blog.

As we advised was likely during our June 29, 2019 webinar, Association Health Plans—Are They Really an Option to Consider?, at least two states were likely to challenge the enforceability of the new regulations issued by the Department of Labor that expand the definition of “employer” for groups who are qualifying association health plans (“AHP’s”).  Today, the Attorney Generals of New York, Massachusetts, California, D.C. and six other states have now sued in the D.C. Federal District Court to enjoin the implementation of the AHP Final Rule and declare it invalid primarily because it directly conflicts with the express terms of the Affordable Care Act of 2010 (“ACA”) and increases the risk of fraud and harm to consumers who will lose coverages mandated under the ACA and jeopardize states’ efforts to protect their residents through stronger regulation.

It is far too soon to predict the outcome of this litigation but at the very least this litigation effort will likely cause insurers to move cautiously in the offering of new coverage options under the AHP model until greater clarity is provided, either through the courts or through new regulation issued within these and other states who perceive these types of programs as a threat to their constituents.  We will continue to keep you updated on any developments that continue to occur in this emerging area of focus.

This is the seventh article in our series covering various tax and employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

Once significant change made by the Act, summarized below, is the elimination of the Affordable Care Act’s individual mandate, effective 2019.

Background

Long an unpopular feature of the ACA, the individual mandate requires most Americans (other than those who qualify for a hardship exemption) to purchase a minimum level of health coverage. Those who fail to do so are liable for a penalty of $695 for an adult or 2.5 percent of household income, whichever is greater.

The Act accomplished the elimination of the individual mandated by reducing the penalty amounts to $0 and zero percent, respectively.

Although often cited as an egregious example of government over-reach, the individual mandate does not impact the majority of Americans, specifically those who receive their health coverage through their employers or through public programs such as Medicare and Medicaid.

Impact of Elimination

The nonpartisan Congressional Budget Office (“CBO”) projects that the elimination of the individual mandate will spare taxpayers $43 billion in penalties that they would otherwise have paid through 2027. The CBO also projects that the elimination will result in 4 million people dropping health insurance coverage in 2019, with 13 million more becoming uninsured by 2027.

The elimination is expected to save the government $300 billion over the next ten years, in the form of fewer people receiving insurance subsidies or Medicaid, according to the CBO.

The CBO estimates that marketplace premiums will rise 10 percent without the individual mandate.

Employer Mandate and Other ACA Features Still in Place

The Act leaves many aspects of the ACA intact, including the individual marketplace, premium subsidies for those earning between 100% and 400% of the federal poverty rate, the ban on insurers charging more or denying coverage based on health factors, and Medicaid expansion.

Most significantly for employers, however, is the employer mandate and reporting requirements, which remain in force. Accordingly, applicable large employers will need to plan around the Code section 4980H(a) (“A”) penalty — which can apply if an employer does not offer minimum essential coverage to at least 95% of its full-time employees and at least one full-time employee buys subsidized marketplace coverage — and the Code section 4980H(b) (“B”) penalty — which can apply if an employer offers full-time employees coverage that is not affordable or does not meet minimum value requirements.

In 2018, A penalty is $2,320 (or $193.33 per month) multiplied by the total number of full-time employees (minus 30). The B penalty is $3,480 (or $290 per month) for each full-time employee who buys subsidized marketplace coverage (capped by the amount of the A penalty).

Below is the second article in our series covering the employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.

As discussed below, the Act makes several changes to the taxability and deductibility of employee fringe benefits beginning January 1, 2018.

The changes are somewhat arbitrary and sporadic. Basically, employer payment or reimbursement of an employee’s business expenses (so-called working condition fringe benefits) will continue to be tax-free to the employee and tax deductible by the employer.  But certain fringe benefits that still can be provided tax-free to an employee will no longer be tax deductible by the employer.  On the other hand, if an employer chooses to provide the affected fringe benefits on a taxable basis to the employee (i.e., as W-2 wages), the employer will be able claim a tax deduction for the taxable benefits.

The following is a summary of the employee fringe benefits affected by the Act.

Employees Can No Longer Deduct Unreimbursed Business Expenses

Prior to the Act, an employee who itemized tax deductions could deduct unreimbursed employee business expenses as a miscellaneous itemized deduction (to the extent that the aggregate miscellaneous itemized deductions exceeded 2% of the employee’s adjusted gross income). However, beginning January 1, 2018 miscellaneous itemized deductions are no longer allowed.  That means that if an employer reimburses an employee for a business expense, the reimbursement is tax-free to the employee.  However, if the employer does not reimburse the employee’s business expense, the employee no longer will be able to claim a tax deduction for the expense.

Moving Expenses

Prior to the Act, an individual could claim an above-the-line deduction (a non-itemized deduction) for moving expenses paid in connection with commencement of work at a new principal place of work.  Alternatively, an employer could pay or reimburse an employee for moving expenses as a tax-free fringe benefit.

Beginning in 2018, an employee can no longer deduct moving expenses nor can an employer pay or reimburse an employee’s moving expenses on a tax-free basis. On the other hand, if an employer treats payment or reimbursement of an employee’s moving expenses as W-2 wages, the employer can deduct the payment as a compensation expense.

Qualified Transportation Benefits

Prior to the Act, the value of a “qualified transportation fringe” benefit provided by an employer to an employee was treated as tax-free, subject to monthly limits. A “qualified transportation fringe” is defined as:

  • transportation in a commuter highway vehicle for travel between the employee’s residence and place of employment;
  • transit passes;
  • qualified parking; and
  • qualified bicycle commuting reimbursement.

Employers can still provide tax-free qualified transportation fringe benefits to employees (although qualified bicycle commuting reimbursements cannot be provided tax-free). However, an employer cannot deduct the expenses for providing tax-free transportation fringe benefits.

  • On the other hand, if an employer treats the transportation fringe benefits as taxable W-2 wages to the employee, the employer can deduct the expenses of providing those benefits.

Commuting Benefits

The Act provides that an employer cannot deduct any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer for travel between the employee’s residence and place of employment, except as necessary for ensuring the employee’s safety.

In general, commuting expenses always have been treated as taxable to an employee.

Entertainment Expenses

The Act provides that an employer cannot claim a tax deduction for entertainment, amusement or recreation expenses or with respect to any facility used in connection with such activity. The Act also prohibits any deduction for amounts paid for membership in any club organized for business, pleasure, recreation or social purpose.  In contrast to prior law, it does not matter whether the expense is directly related to or associated with the active conduct of the employer’s trade or business.

Note that an employer can still fully deduct expenses for goods, services or facilities that are treated as W-2 wages to the employee. In addition, an employer can fully deduct expenses paid to reimburse an employee under a reimbursement or other expense allowance arrangement that can be treated as tax-free to the employee under the accountable plan rules.

Expenses for Employer-Operated Eating Facilities Only 50% Deductible

The Act does not change the rules for determining whether the value of meals provided to an employee at employer-operated eating facility can be treated as tax-free to the employee.

  • Section 132(e)(2) provides that the value of the meals can be tax-free if: (1) the facility is located on or near the employer’s business premises, (2) the facility’s annual revenue equals or exceeds its direct operating costs; and (3) for highly compensated employees, the facility is operated without discriminating in favor of such employees.
  • Section 119 provides the value of meals furnished to an employee can be tax-free if: the meals are provided on the employer’s business premises; and (2) are provided “for the convenience of the employer”.

However, the Act now imposes a 50% limit on deducting food or beverage expenses to employees at an employer-operated eating facility. These expenses are made fully nondeductible after Dec. 31, 2025.

Definition of Tangible Personal Property for Tax-Free Employee Achievement Awards

The Code permits an employer to make a tax-free award of tangible personal property to an employee for length-of-service or safety achievement subject to certain conditions and dollar limits.

The Act codifies the definition of “tangible personal property” (based on the proposed regulations issued in 1989) to state that tangible personal property does not include

  • cash, cash equivalents, gift cards, gift coupons, or gift certificates; or
  • vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.

However, arrangements that confer only the right to select and receive tangible personal property from a limited array of items pre-selected or pre-approved by the employer qualify as tangible personal property.

On more than one occasion since passing the Affordable Care Act (“ACA”), the IRS has given some type of early holiday “gift” to alleviate pending compliance concerns for employers. One of the most significant of these occurred in late December 2015, when the IRS extended the mandated filing periods for Forms 1094/1095, which gave employers more time to comply with the ACA’s new reporting obligations. Employers were still coming to grips with reporting health insurance coverages offered during the 2015 taxable year and the litany of new codes used to determine if the employer had adequately complied with Code Section 4980H’s employer shared responsibility requirements. At that same time, the IRS also communicated that employers would not be penalized for filing incorrect or incomplete Forms 1094/1095 if the forms were actually filed by the extended deadlines and filers could show they “made good faith efforts to comply with the information reporting requirements for 2015.”

It comes then as somewhat of a surprise to many that the IRS has not only moved forward with its efforts to review previously filed Forms 1094/1095, but actually has begun enforcement efforts against employers for the 2015 reporting period. However, as the IRS quietly announced would be happening through its updated Employer Shared Responsibility Question and Answer site, the IRS has now begun issuing Letter 226J (sample copy here), which is its official notification of a proposed Employer Shared Responsibility Payment (“ESRP”) assessment for alleged noncompliance with Code Section 4980H. We have now had several clients who have received their Form 226J notice and we are issuing this general response concerning what employers should do if they receive a Letter 226J for 2015 or any period thereafter.

What to Do if You Receive a Letter 226J:

• Breathe. Understand this is only a preliminary calculation of your proposed ESRP liability. Depending on the size of employer, the proposed ESRP can be significant (we have had one employer with an ESRP estimate of over $1.7 million for only 16 people who were listed as having been subject to the IRS assessment) but understand this is not an actual assessment of the amount you actually owe.
• Understand that the IRS gives each employer a full opportunity — using Form 14764 enclosed with the Letter 226J — to dispute the calculation and provide additional information for the IRS to review before issuing any further liability assessment. Given that 2015 was the first filing year for the Forms 1094/1095, it is entirely likely that one or more forms filed were not completed correctly based on IRS guidance issued thereafter.
• Don’t ignore or delay dealing with the Letter 226J you just received. Even though the IRS allows each employer to agree/disagree/or partially agree with the ESRP calculation (the employer can go ahead and make payment of any ESRP amount if it otherwise agrees to the calculated amount), the employer has a set period of time (generally 30 days) to respond or the calculated amount will be assumed correct and further assessment will be made thereafter.
• Review the list of employees included on Form 14765 to determine if they are all actually employees of your organization and gather previously filed Forms 1095-C for each individual to determine if the information provided is accurate, or if other changes need to be made in your IRS response. The IRS provides a process on the Form 14765 for further correction of any errors in original Form 1095-C filings.
• If you dispute the IRS’s ESRP calculation, prepare a Form 14764 with a statement to explain your reasons for disagreeing with the IRS ESRP calculation. Supporting documentation should be included to evidence the reasons for disputing the IRS calculation, such as any written documentation of any prior offer of qualifying coverage.
• Remember that if you filed Forms 1094/1095 for more than one entity (such as multiple subsidiaries or other controlled group members), it is entirely possible the IRS will issue separate Letter 226Js for each entity and you need to ensure that all organizations know and understand the timing and compliance responsibility owed to the IRS for each other entity.
• Understand that you can appoint Jackson Lewis or another representative to assist you in discussing the matter further with the IRS, including engaging in further discussions with the IRS without any admittance of liability on your part.

The vast majority of situations where ESRP liability will be assessed will be those situations where the IRS had incorrect or incomplete information to review. Our role is to ensure that our clients are adequately informed and represented to ensure that the IRS has correct information that evidences compliance with all employer shared responsibility requirements, or if not, to assist in mitigating the impact of any noncompliance in the manner necessary. Meanwhile, continue with efforts to comply with Form 1094/1095 filing requirements for the 2017 taxable year, as it appears the IRS will continue its current objective of holding employers accountable to their ACA shared responsibilities for the foreseeable future. We want to ensure our clients avoid receiving other Letter 226Js to the extent possible for those periods.

As of October 2017, Health Care Still Uncertain.

We already know the state of health care in the United States continues to whipsaw, as an October 25th ruling demonstrates: a federal district court confirmed that the Trump Administration need not fund the Affordable Care Act (“ACA”) subsidies that offset insurance copays and deductibles for some ACA shoppers. This outcome came over the entreaties of 19 state attorney generals who brought the request for an emergency injunction to compel the Trump Administration to reverse its position of choosing not to pay the October and future monthly cost-sharing reductions.

Health Care Costs Still on the Rise.

What remains certain is that premiums for general health insurance and ACA marketplace plans continue to rise. Accordingly, in order to help control health care costs and encourage wellness, employers might find it appealing to offer on-site health clinics for their employees.

On-Site Clinic Considerations.

Before an employer actually commits to an on-site clinic, however, several interrelated legal and operational issues should be evaluated:

• Whether the on-site clinic will be a group health plan covered under the Employee Retirement Income Security Act (“ERISA”) and thus will be subject to:

a. written disclosure requirements;

b. the Health Insurance Portability and Accountability Act’s (“HIPAA’s”) privacy and security regulations;

i. if HIPAA does not apply, consider state law privacy and security requirements;

c. non-discrimination issues under the Internal Revenue Code (where benefits that impermissibly favor highly-compensated individuals trigger adverse income tax consequences for those individuals and more burdensome tax reporting requirements); and

d. health plan continuation coverage rights for employees under the Consolidated Omnibus Budget Reconciliation Act (“COBRA”).

• Whether the employer sponsoring the on-site clinic can properly navigate issues if it also wants to offer employees high deductible health plans (“HDHPs”) paired with health savings accounts (“HSAs”).

Tax Benefits of HSAs.

For an employee, HSA benefits include pre-tax paycheck deductions, tax-free earnings on money in the HSA, and tax-free withdrawals for qualifying health expenses (and, after age 65, the employee can withdraw from an HSA for any purpose). According to the Internal Revenue Service guidance in Notice 2008-59 (the “IRS Notice”), however, having access to an on-site health clinic that provides significant medical benefits for free or at a reduced cost may prevent an employee from making HSA contributions. Indeed, such contributions – if improper – would be subject to income and excise taxes.

Permissible Benefits an On-Site Health Clinic Can Offer, if the Employer Offers HSAs.

An on-site health clinic may offer the following permissible medical benefits at no cost, without affecting HSA eligibility: “permitted” coverage (such as vision and dental care), “preventive care” (such as shots and screenings), and “insignificant” medical benefits (collectively, permissible benefits). The IRS Notice explains in an example that “insignificant” medical benefits include:

• physicals and immunizations;

• injecting antigens provided by employees (e.g., performing allergy injections);

• a variety of aspirin and other nonprescription pain relievers; and

• treatment of injuries caused by accidents at an employer’s location.

The IRS Notice concludes that an on-site clinic providing the above limited services would not interfere with employees’ HSA eligibility because the clinic would not be providing “significant benefits in the nature of medical care” other than the permitted coverage and preventive care.

“Significant Medical Benefits” Provided at Free or Reduced Cost will Affect HSA Eligibility.

If an on-site clinic provides “significant benefits” for free or at reduced-cost (i.e., below fair market value (“FMV”)), an employee may lose eligibility for an HSA. Indeed, the IRS Notice indicated that an employee who has mere access to (rather than one who actually uses) such an on-site clinic will not be an HSA-eligible individual. The IRS Notice concluded that an employer who permits its employees to receive care at its on-site facilities for all of their medical needs, provides medical care at no charge to uninsured employees, and waives all deductibles and co-payments for employees who have health insurance would be providing “significant benefits in the nature of medical service.”

As already stated, because of the rules for HSAs, an on-site clinic can provide only permissible benefits at no cost. Although there is no IRS guidance on whether an otherwise HSA-eligible employee may simply pay FMV, the IRS Notice suggests by negative implication that an employee might be able to preserve HSA eligibility by paying for the significant benefits that the on-site clinic provides.

TRICARE/Medicare/Medicaid Prevent HSA-Eligibility.

For reasons not relevant here, employees who receive TRICARE (the health benefits for active/retired members of the uniformed services) or Medicare/Medicaid (government-provided medical assistance for the aged and low income) cannot fund an HSA. Thus, an employer offering a paired HDHP with an HSA feature must be sure to flag TRICARE/Medicare/Medicaid employees as ineligible at the point of enrollment into the HSA. TRICARE/Medicare/Medicaid employees cannot have HSAs; it seems they may have HDHPs, however, if they are willing to bear costs out-of-pocket, rather than from an HSA. It is likely these employees will have to have health plan alternatives other than HDHPs.

Success in Having Both an On-Site Health Clinic and HSAs?

In order to successfully offer an on-site health clinic, with a HDHP/HSA in place, an employer will need to be able to:

• drill down on all of the medical benefits provided by the on-site clinic;

• delineate the clinic’s permissible benefits;

• delineate the clinic’s significant medical benefits;

• identify the procedure for calculating FMV of a significant benefit, if there are any;

• vet out which employees need to pay for any significant benefits;

• identify what the deductible is per employee;

• keep track of the employee payments towards annual deductible limits; and

• vet out TRICARE/Medicare/Medicaid employees.

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.

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.