The Consolidated Appropriations Act to fund the government through 2016 was passed and enacted on December 18. The law contains a number of benefits-related provisions, including a two-year delay of the 40-percent excise tax on high-cost health insurance (i.e., the Cadillac Plan Tax) and a suspension of the fee on health insurance issuers (i.e., the Health Insurance Premium Fee or the Section 9010 Fee). Both provisions come as welcome news to employers and health insurance issuers struggling to comply with these provisions, which Congress originally enacted as part of the Patient Protection and Affordable Care Act (the ACA).
In addition to the Cadillac Plan Tax delay and the Section 9010 Fee suspension, the Consolidated Appropriations Act included a host of other benefits-related changes of interest to our clients, including:
- Permanent parity between employer-sponsored mass transit and parking transportation fringe benefits;
- Permanent allowance of tax-free distributions from individual retirement plans (“IRAs”) for charitable purposes;
- A safe harbor for de minimis errors on information returns, payee statements and withholding;
- Relief for rollovers from retirement plans into SIMPLE retirement accounts; and
- Clarification of certain tax-related church plan provisions.
Cadillac Plan Tax Relief
The Cadillac Plan Tax is a non-deductible 40-percent excise tax that applies to the cost of employer-sponsored health coverage that exceeds certain limits—generally, $10,200 for self-only coverage and $27,500 for family coverage—starting in 2018. The Consolidated Appropriations Act makes the Cadillac Plan Tax effective in 2020 rather than 2018, and it clarifies how the dollar limits are indexed. Accordingly, starting in 2020 the dollar limits will be increased for most individuals to reflect increases in health care costs and inflation in years after 2018. In addition, the Consolidated Appropriations Act makes the Cadillac Plan Tax deductible as a business expense, which will significantly reduce the effective cost burden on issuers and employers subject to the tax. Finally, the Consolidated Appropriations Act also requires the Comptroller General of the United States to conduct a study of the appropriateness of the age and gender adjustments currently included in the Cadillac Plan Tax. Currently, the statute allows for increases of the dollar thresholds for specific employers based on the age and gender composition of the employers’ workforce. While the delay is not the full repeal that many employers and issuers were hoping for, employer groups lobbying for repeal see the delay as a first step in the right direction. According to some, the Cadillac Plan Tax delay will reduce the overall cost to the government associated with repeal, thus making full repeal more politically palatable. Employers that have already taken measures to adjust their health benefits in anticipation of the original 2018 effective date now have additional time to examine the efficacy of those adjustments and to make additional changes, if necessary. Employers who have not yet taken steps to analyze the impact of the Cadillac Plan Tax now have more time in which to consider what changes, if any, are appropriate for their plans. It is unclear, however, whether the delay will impact efforts to issue Cadillac Plan Tax regulatory guidance in 2016.
Section 9010 Fee Suspension
In addition to the Cadillac Plan Tax delay, the Consolidated Appropriations Act also includes a one-year moratorium on collection of the fee on health insurers imposed under section 9010 of the ACA. The Section 9010 Fee is an industry-wide fee on U.S. health insurance issuers slated to collect $8 billion in 2014, with total collections increasing each year, reaching $14.3 billion in 2018. After 2018, the amount of the fee will increase based on premium rate growth. The amount payable by each individual health insurance issuer is assessed in proportion to the issuer’s total health insurance premiums during the previous year. As a result of the moratorium, the fee will not be collected in 2017, but it is scheduled to resume in 2018. Like the Cadillac Plan Tax delay, the Section 9010 Fee moratorium is not the full repeal that many health insurance issuers had hoped for; however, it does signal potential progress toward full repeal.
Parity for Mass Transit and Parking Benefits
The Consolidated Appropriations Act also permanently equalizes the maximum monthly exclusion for pre-tax transportation fringe benefits by bringing mass transit pass and vanpool benefits on par with the exclusion for qualified parking benefits. The monthly exclusion limit for qualified parking benefits has generally been higher than the monthly exclusion limit for mass transit benefits, except for stopgap measures between 2009 and 2014, during which parity was mandated by legislation. In 2015, the maximum exclusion for mass transit pass and vanpool benefits dropped to $130 per month, while the maximum exclusion for qualified parking benefits remained $250 per month. With passage of the Consolidated Appropriations Act, Congress made parity permanent, so that the maximum income-adjusted exclusion for all transportation fringe benefits is $250 per month, retroactive to January 1, 2015.
Charitable IRA Distributions
Under Internal Revenue Code (Code) section 408(d)(8), taxable IRA distributions from a traditional or a Roth IRA is excluded from a taxpayer’s gross income if the distribution is taken on or after the date that the IRA owner attains age 70½ and the distribution meets the Code’s requirements for being a “qualified charitable distribution.” This exclusion was set to expire for distributions taken in 2015 or later. The Consolidated Appropriations Act permanently extends the exclusion for qualified charitable distributions from IRAs, up to $100,000 per taxpayer in any tax year.
Safe Harbor for De Minimis Reporting Errors
Any person or business that is required to file an IRS information return statement or furnish a payee statement, but who fails to do so in a timely manner, is subject to a penalty. The Trade Preferences Extension Act of 2015 increased the penalties related to information returns or payee statements due after December 31, 2015 to $50 per return for first-tier penalties (up to $500,000 per year), $100 per return for a second-tier penalty (up to $1.5 million per year), and $250 per return for a third-tier penalty (up to $3 million per year). Penalty tiers vary based on when the information return is filed or the notice is furnished. The Consolidated Appropriations Act includes a provision that establishes a safe harbor from penalties for failure to file correct information returns and for failure to furnish correct payee statements. Under this provision, if the amount on the return or statement is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer is not required to file a corrected return and no penalty is imposed. The de minimis provision is effective for returns and statements required to be filed after December 31, 2016.
Rollovers to SIMPLE Retirement Accounts
Under current law, a distribution from a SIMPLE IRA during the two-year period following an employee’s initial participation may only be rolled over to another SIMPLE IRA. In addition, distributions from employer-sponsored retirement plans and IRAs cannot be rolled over into a SIMPLE IRA. The Consolidated Appropriations Act contains a provision that will permit rollovers of distributions from employer-sponsored retirement plans and traditional IRAs into a SIMPLE IRA. This provision is effective for rollovers made after December 18, 2015.
Clarifications Regarding Church Plans
Most qualified retirement plans that are church plans are excepted from various requirements of the Code and ERISA, unless the sponsoring organization makes an affirmative election to be subject to these rules. The Consolidated Appropriations Act contains a number of clarifications regarding the application of certain IRS rules such plans:
- Controlled Group Rules: Treasury rules for determining common control of tax-exempt organizations currently do not apply to churches or qualified church-controlled organizations. To the extent that such organizations maintain Code section 403(b) plans, they rely on an existing safe harbor standard for determining the members of a controlled group. Under a new provision in the Consolidated Appropriations Act, effective January 1, 2016, organizations that are eligible to maintain church plans will not be treated as aggregated with another organization unless: (1) one of the organizations provides at least 80 percent of the operating funds for the other organization during the preceding taxable year, and (2) there is a degree of common management or supervision between the organizations, such that the organization providing the operating funds is directly involved in the day-to-day operations of the other organization. The provision also contains several corollary rules that would apply in addition to this general rule.
- Defined Benefit Plan Limits for Grandfathered Plans: Under the Tax Equity and Fiscal Responsibility Act of 1982, certain defined benefit arrangements established by church organizations before September 3, 1982 are treated as section 403(b) plans. Pursuant to related Treasury regulations, the present value of an employee’s annual accrual under a section 403(b) plan is subject to the limit on contributions to a defined contribution plan, and the benefits under the plan are subject to the limit on benefits under a defined benefit plan. However, under a clarification included in the Consolidated Appropriations Act, effective January 1, 2016, a grandfathered defined benefit church plan will be subject to the limit on benefits under a defined benefit plan, but it will not be subject to the limit on contributions to a defined contribution plan.
- Automatic Enrollment Rules: State laws that would otherwise prohibit a retirement plan sponsor from implementing an automatic enrollment feature are generally preempted by ERISA. However, because nonelecting church plans are not subject to ERISA, state laws prohibiting automatic enrollment are not preempted. The Consolidated Appropriations Act includes a provision that would preempt any state law that would prohibit or restrict the inclusion of an automatic contribution arrangement in a church plan.
- Plan Transfers and Mergers: Current law does not permit a transfer of a participant’s accrued benefit between a qualified retirement plan and a nonelecting church plan that is a section 403(b) plan. The Consolidated Appropriations Act includes a provision that would allow for such transfers made on or after December 19, 2015, if the same church or association of churches maintains both plans and certain other requirements are satisfied.
- Investments in Group Trusts: Under current law, retirement income accounts established or maintained by a church, or an association of churches, can be treated as 403(b) plans that may be invested in a group trust, and may be commingled in a common fund with assets of the church or church organization. However, assets of a church plan sponsor generally may not be combined with other types of retirement plan assets in a group trust. The Consolidated Appropriations Act contains a provision, effective for investments made on or after December 19, 2015, that would allow the collective trusts to accept pooled church plan assets.