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 (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, 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.