Rose & Kiernan, Inc. December, IRS Notice

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1 BENEFITS ALERT Rose & Kiernan, Inc. December, 2015 IRS Notice The Departments of Treasury (IRS), Labor (DOL) and Health and Human Services (HHS) jointly issued a notice on December 16 th to clarify various provisions of the Affordable Care Act. Many of the points are not applicable to the plans maintained by our clients so for clarity s sake, we ve highlighted just those portions which we feel are the most relevant. Non-integrated and Integrated Health Reimbursement Accounts (HRA) 1. A current-employee HRA (one that is not a retiree HRA) fails to meet the definition of an integrated HRA if the amounts credited to the HRA may be used to purchase individual market coverage even if the HRA terms provide that unused amounts previously credited to the HRA may be used to purchase individual market coverage in periods during which the participant is no longer covered by a group health plan. Accordingly, a current-employee HRA that includes terms permitting the purchase of individual market coverage will constitute a group health plan that fails to meet the market reforms because it is not integrated with another group health plan. 2. Rollover HRA s: if an employer maintains a non-integrated HRA for the purpose of running out unused amounts credited before January 1, 2014, including any amounts credited before January 1, 2013 and any amounts that were credited during 2013 under the terms of an HRA in effect on January 1, 2013, the employee may use those funds after December 31, 2013 to reimburse medical expenses in accordance with those terms without causing the HRA to fail to qualify as an integrated HRA. 3. An integrated HRA is permitted to be used to reimburse covered medical expenses only for the persons enrolled in the employer s group health plan. If the employee is enrolled as an individual, then no HRA funds can be used to pay the expenses of their spouse or dependent children. NOTE: If a plan is in violation of this section, there will be a period of transition for plan years beginning before 1/1/2017 meaning these plans need to be amended during Also, if the current plan allows the spouse and/or dependents to be reimbursed even if they are not covered by the employer s health plan, those dependents need to be reported pursuant to Section 6055, most likely on a 1095-B. Cafeteria Plans 1. Employer Contributions to Cafeteria Plans: If an employer contributes money to a flex plan, that contribution is considered to reduce the employee contribution if the amount constitutes a health flex contribution. An amount is a health flex contribution if: I. The employee may not opt to receive the amount as a taxable benefit (generally cash) and, II. The employee may use the amount to pay for minimum essential coverage and, III. The employee may use the amount exclusively to pay for medical care, within the meaning of 213.

2 BENEFITS ALERT Rose & Kiernan, Inc. Page 2 If an employer flex contribution that is available to pay for health care is also available to pay for any nonhealth care benefits under the 125 cafeteria plan (such as dependent care or group term life insurance), that contribution is not a health flex contribution and, as a result, does not reduce the required employee contribution. Similarly, an employer flex contribution that is available to pay for health care but also could be received as cash is not a health flex contribution and does not reduce the employee s required contribution. Note: this does not apply to contributions made by an employer subject to the Davis Bacon Act or the McNamara-O Hara Service Contract Act. Contact your client manager for clarification on these contributions. Transition Relief: Solely for purposes of the Employer Shared Responsibility and solely for coverage for plan years beginning before January 1, 2017, an employer flex contribution that is not a health flex contribution because it may be used for non-health benefits (including non-taxable benefits and/or cash or another taxable benefit), but that may be used by the employee towards the amount the employee is otherwise required to pay for the health coverage, will be treated as reducing the amount of an employee s required contribution. This relief is not available with respect to a flex contribution arrangement offering non-health benefits that is adopted after December 16, 2015 or that substantially increases the amount of the flex contribution after December 16, 2015 (a non-relief-eligible flex contribution arrangement ). A flex contribution arrangement will be treated as adopted after December 16, 2015 unless: I. The employer offered the flex contribution arrangement (or a substantially similar flex contribution arrangement) for a plan year including December 16, 2015; II. A board, committee, or similar body or an authorized officer of the employer specifically adopted the flex contribution arrangement before December 16, 2015; and III. The employer had provided written communications to employees on or before December 16, 2015 indicating that the flex contribution arrangement would be offered to employees at some time in the future. Reporting Employee Contributions on 1095-C: If an employer s contribution is not considered a health flex contribution (a non-health flex contribution), solely for coverage for plan years beginning before January 1, 2017, an employer may reduce the amount of the employee s required contribution by the amount of a non-health flex contribution (other than a flex contribution made under a non-relief-eligible flex contribution arrangement) for purposes of information reporting under 6056 (line 15 of Form 1095-C). However, treating a non-health flex contribution as reducing an employee s required contribution may affect the employee s eligibility for the premium tax credit. Therefore, employers are encouraged not to reduce the amount of the employee s required contribution by the amount of a non-health flex contribution for purposes of information reporting under If an employee s required contribution is reported in this manner (that is, without reduction for the amount of a non-health flex contribution) and the employer is contacted by the IRS concerning a potential assessable penalty under 4980H(b) relating to the employee s receipt of a premium tax credit, the employer will have an opportunity to respond and show that it is entitled to the relief described in this Q&A-8 to the extent that the employee would not have been eligible for the premium tax credit if the required employee contribution had been reduced by the amount of the non-health flex contribution or to the extent that the employer would have qualified for an affordability safe harbor under H-(4)(e)(2) if the required employee contribution had been reduced by the amount of the non-health flex contribution.

3 BENEFITS ALERT Rose & Kiernan, Inc. Page 3 2. Employee OPT-OUTS: Treasury and IRS have determined that it is generally appropriate to treat an unconditional opt-out arrangement (that is, an arrangement providing for a payment conditioned solely on an employee declining coverage under an employer s health plan and not on an employee satisfying any other meaningful requirement related to the provision of health care to employees, such as a requirement to provide proof of coverage provided by a spouse s employer) in the same manner as a salary reduction for purposes of determining an employee s required contribution under 36B and 5000A and any related consequences under 4980H(b). Therefore, opt out payments or at least those which are unconditional, will be added to an employee s contribution to determine affordability. Treasury and IRS anticipate that the regulations generally will apply only for periods after the issuance of final regulations. However, Treasury and IRS also anticipate that mandatory inclusion in the employee s required contribution of amounts offered or provided under an unconditional opt-out arrangement (as defined in the preceding paragraph) that is adopted after December 16, 2015 (a non-relief-eligible opt-out arrangement ) will apply for periods after December 16, For this purpose, an opt-out arrangement will be treated as adopted after December 16, 2015 unless: I. The employer offered the opt-out arrangement (or a substantially similar opt-out arrangement) with respect to health coverage provided for a plan year including December 16, 2015; II. A board, committee, or similar body or an authorized officer of the employer specifically adopted the opt-out arrangement before December 16, 2015; and III. The employer had provided written communications to employees on or before December 16, 2015 indicating that the opt-out arrangement would be offered to employees at some time in the future. For the period prior to the applicability date of regulations, employers are not required to increase the amount of an employee s required contribution by the amount of an opt-out payment (other than a payment made under a non-relief-eligible opt-out arrangement) for purposes of 6056 (Form 1095-C), and an opt-out payment (other than a payment made under a non-relief-eligible opt-out arrangement) will not be treated as increasing an employee s required contribution for purposes of any potential consequences under 4980H(b). However, until the applicability date of any further guidance (and in any event for plan years beginning before January 1, 2017), individual taxpayers may rely on the treatment of conditional or unconditional opt-out payments described in this Q&A-9 for purposes of eligibility for a tax credit in the Marketplace and treat these payments as increasing the employee s required contribution. Indexed Affordability Percentages and Employer Penalties 1. The Affordability percentage has been increased from 9.5% of household income to 9.56% for 2015 plan years and 9.66% for 2016 plan years; 2. Penalties for Applicable Large Employers who have employees receiving subsidies are indexed from $2000 for not providing MEC to substantially all full time employees or $3000 for individuals whose coverage is unaffordable to $2080 or $3120 respectively in 2015 and $2160 and $3240 respectively in Definition of an hour of service worked 1. The definition of an hour of service means each hour for which an employee is paid or entitled to payment for the performance of duties for the employer and each hour for which the employee is paid or entitled to payment by the employer for a period of time during which no duties are preformed due to vacation, holiday, illness, incapacity, layoff, jury duty, military duty or leave of absence. The definition is being clarified to eliminate confusion with the regulatory reference to 29 CFR An hour of service does not include:

4 BENEFITS ALERT Rose & Kiernan, Inc. Page 4 I. Any time after the individual terminates their employment relationship with the employer II. An hour for which an employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workmen s compensation, or unemployment or disability insurance laws III. An hour of service for a payment which solely reimburses an employee for medical or medically related expenses incurred by the employee. 2. An hour of service must be credited for periods during which an individual is not performing services but is receiving payments due to short-term disability or long-term disability as long as the recipient retains status as an employee of the employer, unless the payments are made from an arrangement to which the employer did not contribute directly or indirectly. Therefore, a disability arrangement for which the employee paid with after-tax contributions (so that the benefits received under the arrangement are excluded from income under 104(a)(3)) would be treated as an arrangement to which the employer did not contribute, and payments from the arrangement would not give rise to hours of service. 3. The hire/rehire rule sets a minimum length of no employment as 13 weeks in order to consider the employee a new hire. For employees of educational organizations, the length of time is 26 weeks. The 26 weeks will be extended by future regulation to also include any employee of a temporary staffing agency who provides services to an educational organization and who does not have a meaningful opportunity to provide services during one or more months of the year, such as summer recess. COBRA Continuation and Flexible Spending Account (FSA) Carryover Rules 1. The Q&A clarifies the carryover amount from a previous year should be considered when determining if COBRA is available. Prior guidance had indicated that COBRA is not required to be offered if the premium for the FSA exceeded the available funds the employee is entitled to. This notice confirms that the carryover funds should be counted when determining the total amount the employee is entitled to. 2. In determining the COBRA premium rate for an FSA, employers should add the employee salary reduction for the current year plus any applicable employer contribution to the FSA but exclude any carryover amounts from a prior year. 3. If a COBRA participant carries over funds into the next plan year, the applicable COBRA premium would be $0 since COBRA premiums can only be based on current year funds and the plan is not required to allow the beneficiary to elect additional salary reduction amounts during the carryover period into the FSA. 4. A health FSA may limit the availability of the carryover of unused amounts (subject to the $500 limit) to individuals who have elected to participate in the health FSA in the next year, even if the ability to participate in that next year requires a minimum salary reduction election to the health FSA for that next year. The employer can set a minimum contribution requirement such as $5. 5. Carryovers can be limited to a maximum period such as one year so that any carryover funds from Plan Year 2015 into Plan Year 2016 would not carry over into Plan Year 2017 and be forfeited by the employee.

5 BENEFITS ALERT Rose & Kiernan, Inc. Page 5 Employer Reporting 1. This notice confirms that relief from penalties for incomplete or incorrect reporting under IRC 6056 will be applied if the employer can demonstrate a good faith effort to be in compliance. Relief from penalties may also be available to the employers that fail to meet the time requirement of 6056 and This Summary is provided to you for general information purposes only and does not include references to other legal resources (e.g., supporting regulations, or formal or informal opinions) unless specifically noted. Please seek qualified and appropriate counsel for further information and/or advice regarding the application of the topics discussed herein to your employee benefits plan. Updated: December 23, 2015