What s News in Tax Analysis That Matters from Washington National Tax

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1 What s News in Tax Analysis That Matters from Washington National Tax IRS Issues Final Regulations Concerning Reporting of Health Care Coverage by Plan Sponsors and Health Insurers Employers are required to provide health insurance coverage to employees in compliance with the Patient Protection and Affordable Care Act and to file information reports about the coverage. This article describes key aspects of the final regulations on information reporting, which is voluntary for 2014, but mandatory for I. Introduction Monday, June 23, 2014 by Laurence Shulman and Veena K. Murthy, Washington National Tax Laurence Shulman and Veena Murthy are directors in the WNT Compensation and Benefits Support group. The Patient Protection and Affordable Care Act (the ACA ) imposes many financial and reporting obligations on employers. Beginning in 2015, the ACA requires applicable large employers (generally, those with 100 or more full-time and full-time-equivalent employees in 2015, and 50 or more full-time and full-time-equivalent employees in 2016 and subsequent years) to offer minimum essential health coverage to their employees. The coverage must be both affordable and provide sufficient coverage in certain core areas (i.e., preventive care, obstetrics, hospitalization, etc.). If a single full-time employee becomes eligible for a tax credit or subsidy to purchase individual market coverage in a state exchange, the employer must pay a penalty if the employer does not offer coverage or offers coverage that does not meet certain affordability or minimum value requirements. 1 Employers that do provide health coverage are already required to report the total cost of this coverage to employees on their Form W-2, 2 and pay a fee to a trust fund that has been established to research effective treatments for numerous diseases and illnesses Section 4980H. See How Many Full-Time Employees Do I Have Under the ACA?, KPMG s What s News in Tax (July 1, 2013). Section 6051(a) (14); Notice See Recent IRS Guidance Concerning the Tax Provisions of The Patient Protection and Affordable Care Act, KPMG s What s News in Tax (July 1, 2013). See Health Insurance Companies and Employers: There s a New Fee to Consider, KPMG s What s News in Tax (Mar. 25, 2013). entity. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.

2 IRS Issues Final Regulations Concerning Reporting of Health Care Coverage by Plan Sponsors and Health Insurers page 2 The ACA also obligates individuals who are not otherwise exempt to obtain minimum essential health coverage, beginning in 2014, or pay a penalty. 4 The penalty could be as little as $95 a person ($285 for a family) in 2014, but increases in future years (for example, the family figure in 2016 is $695). 5 While the details on the calculation of the individual penalty are beyond the scope of this article, generally, the penalty cannot be greater than the national average premiums for bronze level coverage offered through state exchanges for the individual and family. The individual may obtain the coverage either in the individual market (within or outside the new health care exchanges), or through an employer-sponsored plan, or a government-sponsored plan. To assist the IRS in determining whether (1) individuals have obtained the required health coverage, and (2) employers are offering their employees the required health coverage, the ACA imposes additional reporting obligations on employers. Section 6055 requires all providers of minimum essential health insurance coverage, including employers who have selfinsured plans, to report that coverage on an information return to the IRS and to the covered individuals. Section 6056 requires applicable large employers to report to their employees and the IRS on an information return whether the employers are offering their full-time employees minimum essential coverage. In September 2013, the IRS issued proposed regulations to implement sections 6055 and Final regulations were issued in March The regulations describe the information and method of reporting, setting forth the IRS form on which the information should be provided. Reporting under both sections is optional and encouraged for 2014, but will be required for Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended (the Code ) or the applicable regulations promulgated pursuant to the Code (the regulations ). This article describes the key requirements of the final regulations, including the information to be reported and the timeframe for reporting, with an emphasis on the reporting obligations of employers or any other entities that offer the required coverage. 4 5 Section 5000A. Section 5000A(c).

3 IRS Issues Final Regulations Concerning Reporting of Health Care Coverage by Plan Sponsors and Health Insurers page 3 II. Section 6055 Section 6055 imposes the reporting obligation on the entity providing minimum essential coverage, as defined in section 5000A. For an insured plan, this entity would be the insurer, but for a self-insured plan, the employer that provides the self-insured minimum essential coverage is required to report. This may include, governmental and foreign employers. 6 In a multi-employer arrangement, in which members of one or more collective bargaining units participate,, the regulation deems the association or other representatives who establish or maintain the plan for a self-insured group to be the plan sponsor. 7 For participating employers in an arrangement maintained by a multiple employee welfare arrangement, or MEWA, in which members of one or more collective bargaining units participate, each participating employer in a self-insured health plan is deemed to be a plan sponsor with respect to its own employees. 8 The regulations require reporting of the following information: (1) the name, address, and employer identification number ( EIN ) of the entity required to file the return, (2) the name, address and taxpayer identification number ( TIN ) (or date of birth if the TIN is not available) of the person who applied for the coverage, (3) the name and TIN (or date of birth if the TIN is not available) of each individual covered under the policy and (4) the months each individual was covered for at least one day. 9 For coverage that is employer sponsored, the employer s name and EIN must be added, along with whether the coverage was provided through the Small Business Health Option Program. 10 No reporting is required under this section for coverage offered to individuals who do not enroll. 11 The purpose of reporting under section 6055 is to determine whether individuals need to pay the individual penalty for not having proper ACA health coverage. The items required to be reported help the IRS in making that determination See section (c). See section (c)(2)(B). See section (c)(2)(D). Section (e). Section (e)(2). See section (d)(3).

4 IRS Issues Final Regulations Concerning Reporting of Health Care Coverage by Plan Sponsors and Health Insurers page 4 In the annual filing, the employer must separately report coverage for each month, because the potential individual penalty is imposed on a monthly basis. 12 The employer is required to provide the social security number ( SSN ) of each covered individual, including an employee s dependents. However, if an employer makes reasonable efforts to collect SSNs but does not receive the information, the employer will not be subject to any penalties. 13 (The penalty for failing to file a correct return is determined under section 6721, and is currently up to $100 per return; the penalty for failing to furnish a correct payee statement is determined under section 6722, and also currently up to $100 per return). No penalties are imposed in 2016 on any entity that makes a good faith effort to comply with the reporting requirement, but the penalty is waived only for incorrect or incomplete information reported, including SSNs or dates of birth. 14 Applicable large employers (apparently using the same definition described above, generally employees with over 50 full-time and full timeequivalent employees) report the information required under section 6055 in combination with the information required to be reported by section Such employers will report on Form 1095-C. 15 Other entities, such as health insurance issuers or plan sponsors that are not applicable large employers, will report on Form 1095-B. 16 The form is due February 28 (March 31, if filed electronically) of the year following the year in which the coverage was provided. 17 Any reporting entity may file electronically (not only those entities that are required to file other returns electronically). Applicable large employers need to file a transmittal form, Form 1094-C, along with the required information. Other reporting entities file transmittal Form 1094-B. The employer must send essentially the same information to the employees (or certain other responsible individuals ). 18 A responsible individual is a primary insured, employee, parent or any other person who See section , 79 Fed. Reg (Mar. 10, 2014) (preamble). See section , 79 Fed. Reg (Mar. 10, 2014) (preamble). See section , 79 Fed. Reg (Mar. 10, 2014) (preamble). Section (f)(2)(i). Section (f)(2)(ii). Section (f)(1). Section (g)(1).

5 IRS Issues Final Regulations Concerning Reporting of Health Care Coverage by Plan Sponsors and Health Insurers page 5 enrolls one or more individuals, including himself or herself, in minimum essential coverage. 19 These regulations apply for calendars years beginning after December 31, The IRS has asked employers to voluntarily comply with these reporting requirements for the 2014 calendar year because the IRS needs this information to determine whether the individuals have the required coverage for individual tax purposes. Without this information, the IRS will be forced to rely upon individuals representations as to whether they have received offers to enroll in minimum essential health coverage. III. Section 6056 Under section 6056 an applicable large employer must provide the IRS with a list of each person who was a full-time employee for one or more months during the calendar year and provide information about the health care coverage the employer offered during the year. A related statement about that coverage must be furnished to the employee. While all entities within one controlled group 20 are treated as one employer for determining whether the employer is an applicable large employer, the section 6056 reporting requirements apply on an entity-byentity basis. The preamble to the regulation gives the following example: If an applicable larger employer is composed of a parent corporation and ten wholly owned subsidiaries, each corporation with full-time employees (those who average more than 30 hours of service per week in any month) must file the return and report with respect to its full-time employees. 21 Only entities within the controlled group that have full-time employees are required to report. An applicable large employer may use a third party to prepare and file the returns and employee statements required under section An applicable large employer that is one of a group of related entities under section 414 may file returns and furnish employee statements on behalf of other members of the same group (reporting the information Section (b)(11). See section 414 (b), (c), (m), and (o). 79 Fed. Reg (Mar. 10, 2014). 79 Fed Reg (Mar. 10, 2014)

6 IRS Issues Final Regulations Concerning Reporting of Health Care Coverage by Plan Sponsors and Health Insurers page 6 separately for each such employer, including each separate employer s EIN). 23 A. Information to be Included In addition to reporting the employer s identifying information, the employer must include a certified statement addressing whether it offered its full-time employees the opportunity to enroll in minimum essential coverage by calendar month. 24 The return must also contain: months during the calendar year for which coverage under the plan was available, the employee s share of the lowest cost monthly premium for self-only coverage, the number of full-time employees for each month during the calendar year, the months during that year in which the employee was covered, and identifying information, (name, address, identification number) about each covered employee. 25 B. Time and Manner of Filing Return This return must be filed on or before February 28 (March 31 if filed electronically) of the year following the calendar year for which the information is reported. 26 The return is required to be filed electronically unless the employer is filing less than 250 information returns during the calendar year. 27 Employers that file fewer than 250 section 6056 returns may file electronically or on a paper form. 28 C. Statements to Full-Time Employees Individual statements to employees, Form 1095-C, must contain the employer s identifying information (name, address, EIN), a certification as to whether the employee was offered an opportunity to enroll in minimum essential coverage under the employer s plan by calendar month, the months during which coverage was available under the plan, and the employee s share of the lowest cost monthly premium for self-only coverage during that month. 29 The employer may furnish the form to the employee electronically with employee consent. 30 The employee s consent to receive an electronic statement may be made either See section (d)(1)(iv). Section (d)(v)-(viii). Section (e). Proposed section (b). Section (f)(l). Section (a)(2).

7 IRS Issues Final Regulations Concerning Reporting of Health Care Coverage by Plan Sponsors and Health Insurers page 7 electronically or on paper, and the employee retains the right to withdraw consent. 31 D. Alternative Method of Reporting 6056 Information In response to regulation comments, the final regulations permit certain applicable large employers to certify they offered the coverage to one or more full-time employees and to report simplified information with respect to those employees. To be eligible, the employer must certify that for all months during the year in which the employee was a full-time employee (1) the employer offered minimum essential coverage providing minimum value, with employee-only coverage at a cost not more than 9.5 percent of the single federal poverty line, and (2) the employer offered minimum essential coverage to the employee s spouse and dependents. The employer will still be required to provide to the IRS identifying information about each employee who received an offer of the required coverage. 32 A copy of the Form 1095-C must be furnished to each employee. 33 Solely for 2015, an applicable large employer may certify that it offers the required coverage to 95 percent of its full-time employees, their spouses, and dependents. With this certification, the employer need not furnish a Form 1095-C to each covered employee. In lieu of providing each employee with the Form 1095-C, the employer may give each covered employee a statement reporting the months for which the employee was offered required coverage, and whether the employee will be eligible to claim a premium tax credit for one or more months during the year. 34 The employer must still file Form 1095-C with the IRS. 35 Employers that offer minimum essential coverage that is affordable and provides minimum value to almost all of their employees will be permitted to report without identifying or specifying the number of their full-time employees. To be eligible for this simplified method of reporting, an employer must certify that it offered the required coverage to 98 percent of the employees its reports on Form 1095-C. 36 However, under this Fed. Reg (Mar. 10, 2014) 79 Fed. Reg (Mar. 10, 2014)

8 IRS Issues Final Regulations Concerning Reporting of Health Care Coverage by Plan Sponsors and Health Insurers page 8 method, the employer must still report any full-time employee to whom it does not offer minimum essential coverage. 37 IV. Combined Reporting The final regulations allow employers to file a combined return and report the information required under both sections. 38 Applicable large employers that sponsor self-insured plans report on Form 1095-C, completing both sections. 39 Applicable large employers that provide coverage through an insured arrangement only have to complete the section of Form 1095-C that reports information required under section Entities that must report under section 6055, but which are not applicable large employers (such as insurers), report under section 6055 on Form 1095-B. (Draft Forms 1094 and 1095 have not been issued as of the date of this article.) KPMG s What's News in Tax is a publication from Washington National Tax that contains thoughtful analysis of new developments and practical, relevant discussions of existing rules and recurring tax issues. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author or authors only, and does not necessarily represent the views or professional advice of KPMG LLP Fed. Reg (Mar. 10, 2014)

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