New ACA guidance for a new year: last-minute gifts for employers

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1 January 7, 2016 New ACA guidance for a new year: last-minute gifts for employers By Kate Ulrich Saracene, Yelena Fertman Gray, Sarah K. Ranni As we wrapped up the holiday season and rang in the new year of Affordable Care Act ( ACA ) reporting and compliance challenges, the IRS came bearing some last minute gifts in the form of IRS Notices and (the Notices ), including a welcome two-month delay of the ACA reporting requirements. Even more exciting for many employers, however, was Congress s twoyear delay of the Cadillac Tax in the Consolidated Appropriations Act, 2016 (the Act ). Notice : a grab bag of good news Notice , a grab bag of 26 Q&A ACA-related gifts, offers employers some welcome clarification and relief (and a few white elephants as well). Employers who sponsor HRAs, or who offer flex arrangements or cash opt-out payments, should definitely take a peek into the bag. In this alert, we highlight a few of our favorites. HRA integration: spouses and dependents In the Notice, the IRS clarified a position regarding the integration status of Health Reimbursement Arrangements ( HRAs ), which it previously discussed only informally. To be integrated, and thus comply with ACA market reforms, an HRA may only reimburse the medical expenses of individuals who are enrolled in the employer s primary health plan. In other words, if an employee elects self-only coverage under the employer s primary health plan, the HRA may not reimburse medical expenses of family members who are not also enrolled in the employer s primary health plan. Notably, the Notice did not contemplate a scenario where an HRA is used to reimburse expenses incurred by a spouse or dependent who is enrolled in another primary health plan (for example, a primary health plan sponsored by the spouse s employer or the dependent s employer). Since the IRS has issued prior guidance stating that an HRA may be integrated with another primary health plan, we assume that an HRA that reimburses the expenses of a spouse or dependent who is enrolled in another primary health plan will also be treated as integrated (but see below regarding additional reporting requirements that may apply in such case). Recognizing that many HRAs are currently structured to reimburse employees for expenses incurred by spouses and dependents regardless of whether such spouses or dependents are enrolled in the employer s primary health plan, the Notice provides employers an extra year to restructure This newsletter is intended as an information source for the clients and friends of Nixon Peabody LLP. The content should not be construed as legal advice, and readers should not act upon information in the publication without professional counsel. This material may be considered advertising under certain rules of professional conduct. Copyright 2016 Nixon Peabody LLP. All rights reserved.

2 their HRAs. Specifically, any HRA which, before December 16, 2015, reimbursed employees for expenses incurred by family members who were not enrolled in the employer s primary health plan will still be treated as integrated for plan years beginning before January 1, For plan years beginning on or after January 1, 2017, employers will need to ensure their HRA is restructured to limit reimbursement for expenses incurred by the employee and only those family members who are enrolled in the employer s primary health plan (or, presumably, that of the spouse s or dependent s employer). Failure to do so will mean the HRA is not integrated, which can trigger an excise tax of $100 per day per affected individual. Notwithstanding the transition relief described above, employers that allow reimbursements for dependents not enrolled in the employer s primary medical plan will be required to report the HRA coverage of such spouse or dependent, even if the spouse or dependent is enrolled in another primary health plan. This information may be reported in Part III of Form 1095-C or on Form 1095-B. This reporting will apply regardless of whether the employer is otherwise required to file Form 1095-C (i.e., a small employer that is not subject to the ACA employer mandate will still need to do this reporting). Affordability Health coverage affordability is a concept important for both employers and their employees (as well spouses and dependents). Employees who are offered affordable health coverage (that also meets minimum value requirements) through their employment will not qualify for premium tax credits through a federal or state health insurance exchange. Large employers that offer affordable health coverage meeting minimum value requirements to all of their full-time employees (and their dependent children) will avoid ACA employer mandate penalties. For this purpose, coverage is affordable if the employee s required contribution for the lowest-cost option of minimum value self-only health coverage (the Employee Contribution ) does not exceed a certain percentage of the employee s household income (the percentage is discussed below). Because employers may not know an employee s household income amount, the IRS allows them to rely on affordability safe harbors. Employers may need to report the safe harbor affordability method relied upon and the amount of the Employee Contribution in Form 1095-C. The Notice confirms our take in our prior alert, Ringing in the new ACA health coverage reporting, that an employer s contributions toward HRAs, flex arrangements and opt-out arrangements may impact the Employee Contribution. Thankfully, the Notice offers some transition relief for employers who offer these types of arrangements, provided that the arrangements were in place prior to December 16, HRA contributions Expanding on prior guidance, the Notice provides that an employer s contributions to an employee s HRA operate to reduce the Employee Contributions if the HRA satisfies all of the following requirements: Employees can use the HRA to pay premiums under the employer s primary health plan (the HRA may be used for other permissible expenses as well); By its terms, the HRA requires employer contributions or the employer contribution amount will be determined by the employer within a reasonable time before the employee must decide whether to enroll in the employer s primary health plan; and

3 The HRA is integrated with the employer s primary health plan in accordance with prior IRS guidance. For purposes of reporting the Employee Contribution on line 15 of Form 1095-C, amounts that the employer contributes to an HRA for a plan year apply to each month ratably. For example, where an employer requires employees to pay $200 per month for the lowest-cost self-only health coverage and makes a $1,200 contribution to the employee s HRA for the plan year, the Employee Contribution should be reported as $100 per month ($200 [$1,200 12]). Flex contributions In recent years, employers have gravitated toward a defined contribution model of offering health and welfare benefits to employees. This is often accomplished through the use of private benefit exchanges where employees can shop for a variety of health and welfare benefits, including life insurance, disability insurance and pet insurance. Employers fund these arrangements through a cafeteria plan, and the employee receives a defined contribution (often referred to as a flex credit or a flex dollars ) to offset the cost of the health and welfare benefits they choose. It may seem logical that any amounts an employer makes available for purchase of health coverage should count as an employer contribution toward the cost of that coverage (in other words, that it should reduce the Employee Contribution reported on Form 1095-C). Not so fast. The Notice confirms that employer flex contributions do not reduce the Employee Contribution unless (i) the employee can use the flex contribution to pay for medical coverage, (ii) the employee may not receive the contribution as a taxable benefit, and (iii) the employee can only use the contribution to pay for medical care (as defined by Internal Revenue Code Section 213(d)). For example, if an employer requires an employee to pay $200 per month for self-only health coverage and makes a flex contribution of $100 per month, the Employee Contribution will still be $200 per month if the employee can use the flex contribution to purchase any non-medical care benefits (e.g., life insurance). We arrive at the same result if the employee can cash out the flex contribution. But if the employee can only use the flex contribution for medical care (e.g., primary medical plan, dental/vision insurance premiums, health FSA) and it cannot be cashed out, the Employee Contribution will be $100 per month ($200 $100). Despite some informal comments by the IRS that they were leaning toward this outcome, we suspect most employers have had flex contribution arrangements in place for years and gave little thought to their potential impact on Employee Contributions. Acknowledging this predicament, the Notice provides temporary relief for plan years that begin before January 1, 2017, but only for those flex contribution arrangements in existence on or before December 16, During the transition period employers may treat non-health flex contributions as reducing the Employee Contribution. As such, the employer would be able to report the reduced Employee Contribution on Form 1095-C when reporting coverage falling within the transition period. However, the Notice encourages employers not to reduce the Employee Contributions they report on Form 1095-C in this manner, since doing so may prevent their employees from qualifying for a premium tax credit through a federal or state exchange. To that end, the Notice states that employers that do not reduce their reported Employee Contribution by the amount of the flex credit would not be penalized, and that they would still benefit from the transition relief if the IRS later contacts the employer in connection with the potential assessment of ACA employer mandate penalties.

4 Opt-out arrangements The IRS also takes aim at opt-out arrangements, which the Notice describes as an employer s agreement to pay cash compensation to employees who waive the employer s primary health plan. The Notice confirms that such cash payment will increase the Employee Contribution reported on Form 1095-C. For example, if an employer requires employees to pay $200 per month for self-only health coverage and offers $100 per month to those employees who waive the employer s primary health coverage, the Employee Contribution reported on line 15 would be $300 per month ($200 + $100). The IRS hinted that this result could be different if the employer conditions the cash payment on more than just the employee s waiver of the employer s primary health plan (e.g., if the employer requires proof of other insurance). But for now, the IRS does not distinguish between such conditional opt-out arrangements and non-conditional opt-out arrangements. The Notice indicates that the IRS intends to issue regulations addressing opt-out arrangements and their impact on Employee Contributions, including any distinction which should be made between conditional opt-out arrangements and non-conditional opt-out arrangements. In the interim, the Notice states that employers are not required to increase Employee Contributions by the amount of any opt-out payments until final regulations are issued (and in any event, no earlier than plan years beginning before January 1, 2017), as long as the opt-out arrangement was in effect prior to December 16, Accordingly, employers should think carefully before adopting a new opt-out arrangement, unless they are confident that the cost of their primary health plan coverage would still be affordable when the cash payment is included in the Employee Contributions. For example, if an employer pays the entire cost of self-only coverage, an opt-out arrangement that pays $50 per month would not make the cost of such coverage unaffordable (in such case, the Employee Contribution would only be $50 per month). Furthermore, like the transition relief for flex credits, the transition relief for opt-outs indicates that grandfathered opt-out payments will not trigger the employer affordability penalties. Fringe benefit contributions Certain employers are required to make fringe benefit contributions as required by the prevailing wage provisions for federal contracts under the McNamara-O Hara Service Contract Act and the Davis-Bacon Act. These fringe benefit contributions often resemble flex contributions or opt-out payments. The Notice states that the IRS is still considering how such fringe benefit contributions should impact Employee Contributions. Until further guidance is issued (and in any event no earlier than plan years beginning before January 1, 2017), such fringe benefit contributions may be treated as reducing Employee Contributions. Affordability threshold As discussed generally above, health coverage is affordable if the Employee Contribution does not exceed a certain percentage of the employee s household income. For purposes of the ACA employer mandate, and specifically, an employer s use of a safe harbor affordability method, this percentage was set by regulation at 9.5%. However, for purposes of an individual s ability to qualify for a premium tax credit through a federal or state marketplace, this percentage was set by regulation at 9.5% but subject to indexed increases for inflation. The Notice clarified that its intent was for the 9.5% to be indexed for all purposes, and as such, the IRS will amend the ACA employer mandate regulations to provide for indexed increases for the affordability safe harbors. This means that for 2015, the 9.5% percentage is adjusted to 9.56%, and for 2016, it is adjusted to 9.66%. An employer who met a safe harbor affordability method using 9.5% rather than the indexed percentage will still meet such safe harbor affordability method.

5 To the extent employers use the transition relief described above (for flex credits, opt-outs or fringe benefit contributions) to report a lower Employee Contribution on Form 1095-C, the IRS encourages employers to notify employees that they are using this relief and that employees may obtain accurate information about the Employee Contribution for purposes of filing their personal income tax return by using the employer contact telephone number provided on Form 1095-C. Regardless of what number is reported on Form 1095-C, if the Employee Contribution would be unaffordable when applying the new rules for flex credits, opt-outs and fringe benefit contributions, the employee may still claim the premium tax credit on Form 8692, which is filed with the employee s personal income tax return. Miscellaneous guidance on ACA, HRAs, FSAs and COBRA The Notice also addressed a smattering of other issues the IRS felt needed clarification, including the following: Retiree-only HRAs, unlike HRAs for active employees, may be used to purchase individual health insurance policies; Active-employee HRAs may be used to purchase individual dental and vision policies that qualify as excepted benefits, but not individual health insurance policies; A Section 125 Cafeteria Plan may not be used to purchase individual health insurance policies; Employees who are receiving short-term or long-term disability benefits, whose employment has not been terminated, continue to accrue hours of service for purposes of determining full-time status under the ACA, even if the benefits are paid by a third party, such as an insurance company. The exception would be if the disability benefits are required by law (e.g., statutory workers compensation or temporary disability benefits), or if the insurance is paid for solely with employee after-tax contributions; and The Notice clarified how the $500 rollover permitted for health Flexible Spending Accounts (FSAs) interacts with COBRA. The Notice wrapped up with confirmation that the IRS had no intention of delaying the ACA reporting requirements, a position that it would abruptly change with the issuance of Notice a little more than a week later. Notice : the delay we were all hoping for Notice announced a two-month extension of the due dates for the 2015 ACA information reporting requirements, both with respect to the 1095-series returns issued to individuals, and the 1094-series returns transmitted to the IRS, for employers, insurers and other providers of health coverage. Specifically, the notices extended the due dates: for furnishing Forms 1095-B ( Health Coverage ) and 1095-C ( Employer-Provided Health Insurance Offer and Coverage ) to individuals from February 1, 2016 to March 31, 2016; and for transmitting the above returns to the IRS along with Form 1094-B ( Transmittal of Health Coverage Information Returns ) or Form 1094-C ( Transmittal of Employer-

6 Provided Health Insurance Offer and Coverage Information Returns ), from February 29, 2016 to May 31, 2016 for paper filers, and from March 31, 2016 to June 30, 2016 for electronic filers. Notwithstanding the new deadlines, the IRS encourages employers to furnish these returns as soon as they are ready to enable individuals to file accurate income tax returns. In light of these extensions, the IRS also announced that it would not be providing any further extensions and that its regular rules regarding permissive or automatic extensions will not apply. To the extent employers miss even the new deadlines, they are encouraged to file as soon as possible; the IRS has indicated it will take such actions into account when deciding whether to abate penalties for late filing. The IRS will also take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting, such as gathering and transmitting the necessary data to an agent to prepare the IRS submission. In other words, the IRS might not hold employers responsible for their reporting agents delays and missed deadlines, so long as the employer transmitted the information to their vendor on time. For 2015 only, individuals who do not wait to receive these returns before filing their personal income taxes, and who instead rely on information from their employers regarding offers of employer-based coverage, are not required to amend their income tax returns once they receive their Form 1095-C or a corrected Form 1095-C. Likewise, individuals who rely on other information from their coverage providers about their health coverage for purposes of the individual mandate do not need to amend their returns once they receive Form 1095-B or 1095-C (including any corrected forms). Delay of the dreaded Cadillac Tax Congress also came through with some good news for employers at year-end in the form of a twoyear delay for the Tax on High-Cost Health Coverage or Cadillac Tax. The tax, originally scheduled to take effect in 2018, would have imposed a non-deductible 40% excise tax on the value of health coverage in excess of $10,200 for individual coverage and $27,500 for family coverage (indexed for inflation). The delay came packaged within the Act (also known as the 2016 omnibus spending bill), which delays the start of the tax until January 1, The Act also makes the tax deductible for employers. For more information on the content of this alert, please contact your Nixon Peabody attorney or: Kate Ulrich Saracene at ksaracene@nixonpeabody.com or Tonie Bitseff at tbitseff@nixonpeabody.com or Yelena Fertman Gray at yfgray@nixonpeabody.com or Darcie A. Falsioni at dfalsioni@nixonpeabody.com or Sarah K. Ranni at sranni@nixonpeabody.com or