Tech Flex. Topics Covered in this Issue:

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1 April 2011, Issue IV Tech Flex Topics Covered in this Issue: Benefits: Free Choice Voucher Program Repealed Grace Period for Internal Appeals Extended Further Grandfathered Plan Guidance Released Payroll: IRS Releases Further Guidance on Cost of Coverage Form W-2 Reporting Expanded 1099-MISC Reporting Repealed Additional States Conform to Amended Internal Revenue Code Further Guidance Released on New York Wage Theft Prevention Act

2 FREE CHOICE VOUCHER PROGRAM REPEALED Under the 2011 budget agreement passed by the United States House and Senate and signed by President Obama on April 15, 2011, Section of the Patient Protection and Affordable Care (PPACA) has been repealed. Section of PPACA, prior to being repealed, would have required that as of January 1, 2014, employers that contribute toward the cost of the coverage premium must provide free choice vouchers to eligible employees for the purchase of health insurance through the private market or health exchange. Employees would have qualified for a free choice voucher if their household income did not exceed 400 percent of the federal poverty level AND the required contribution under the employer s plan for the employee was between 8 and 9.8 percent of the employee s income. For more information on the free choice voucher and other PPACA provisions, please see the April 2010 Tech Flex [LINK] GRACE PERIOD FOR INTERNAL APPEALS EXTENDED On March 18, 2011, the DOL again extended the enforcement grace period via the release of Technical Release TR (TR ). This guidance extended the July 1, 2011 enforcement grace period provided under Technical Release (TR ) [LINK] for certain of the new requirements relating to internal claims and appeals that are imposed on group health plans and health insurers under the Patient Protection and Affordable Care Act (PPACA). In addition, TR relaxes in certain cases the prior requirement that plans and insurers must be working in good faith to implement the new requirements in order to take advantage of the grace period provided. Please note that no relief was provided in relation to external review requirements, however, the grace period does apply to the requirements that notices to claimant include a description of available external review processes and the steps necessary to initiate an appeal. TR generally extends the enforcement grace period provided under TR until plan years beginning on or after January 1, 2012 in relation to the following internal review requirements. 2

3 A plan or issuer must notify an urgent care claimant of a benefits determination (whether claim is approved or not) as soon as possible but not later than 24 hours after the receipt of the claim by the plan or issuer. Notices must be provided in a culturally and linguistically appropriate manner. Where a plan or issuer does not meet the requirements of the internal appeals regulations, the claimant is considered to have exhausted the plan s or issuer s internal claims and appeals processes and the claimant may begin any available external process or remedies available under the Employee Retirement Income Security Act (ERISA) or under state law. The inclusion of diagnosis and treatment codes and their corresponding meanings in claim denial notices. In addition, extended the enforcement grace period to plan years beginning on or after July 1, 2011 (e.g. January 1, 2012 for calendar years) for the following internal review requirements. Inclusion of specific information, including date of service, name of health care provider and claim amount in order to identify the claim involved in communications regarding an adverse benefit determination. Provision for a description to communicate an adverse benefits determination standard used in denying a claim for benefits. For example: Claim is denied as treatment is considered experimental. Inclusion of a discussion of the reasons for the denial decision in the final internal adverse benefit determination communication. Provision of a description of the internal appeals and external information regarding how to initiate an appeal. For a copy of TR , please click on the following link. 3

4 Background As a result of health care reform, effective for plan years beginning on or after September 23, 2010, group health plans (self and fully insured) offering group or individual health insurance coverage must enhance existing claims appeals or implement an internal process for appeals of coverage determinations and claims. The group health plan and/or health insurance issuer must at a minimum: (1) provide notice to enrollees, in a culturally and linguistically appropriate manner, of available internal appeals processes, and the availability of any applicable external office of health insurance consumer assistance or ombudsman established under health care reform to assist participants with appeals; and (2) allow an enrollee to review their file, to present evidence and testimony as part of the appeals process, and to receive continued coverage pending the outcome of the appeals process. Also effective for plan years beginning on or after September 23, 2010, a fully insured group health plan must establish an external review process that meets the requirements of the applicable state law and at a minimum affords the protections outlined under the Uniform External Review Model Act as created by the National Association of Insurance Commissioners. Self-insured plans must create an external review process that meets the mandates as required to be provided by Health and Human Services. It is important to note the internal claims and appeals and external review requirements do not apply to grandfathered plans. For more in depth information regarding the claims appeal and review mandate, please see the August 2010 Tech Flex. [LINK] FURTHER GRANDFATHERED PLAN GUIDANCE RELEASED On April 1, 2011, the Department of Labor (DOL), Heath and Human Services (HHS) and the Internal Revenue Services (IRS) jointly released guidance in the form of six frequently asked questions in relation to grandfathered plans. As a way of background, one of the provisions of the Patent Protection and Affordable Care Act (PPACA) and Health Care and Education Affordability Reconciliation Act (HCERA) commonly known as health care reform was the mandate that insurers and plan sponsors alter health coverage to meet the requirements of specified insurance market reforms. These insurance market reforms became effective as of the first plan year that commences on or after September 23, However, the health care reform legislation provided that a grandfathered plan would be exempt from certain provisions of the insurance market reform mandate. Generally a grandfathered plan is defined as a group health plan (self or fully insured) that is in effect on March 23, 2010 and does not make certain changes to the terms of the plan causing loss of grandfathered status. For more information on grandfathered plans, please see the June 2010 Tech Flex [LINK] and December 2010 Tech Flex [LINK]. 4

5 The guidance released on April 1, 2011, provides guidance on circumstances where plan actions will impact grandfathered plan status as follows. Clarifies situations where the transfer of employees from one grandfathered plan to another plan will not cause transferring plan to lose status as grandfathered plan. Provides that movement of a brand name drug into a higher-cost tier as result of a generic becoming available will not cause the plan to lose grandfathered plan status. Provides that status as grandfathered plan is not relinquished if a plan that did not originally require a co-payment for preventive services performed in either an in-network ambulatory surgery center or an in-network outpatient hospital to charge a co-payment for preventive services performed in the hospital setting. However, a waiver of the co-payment must be provided where the performance of the procedure in a hospital setting if it would be medically inappropriate to have these preventive services provided in the ambulatory setting. The loss of grandfathered plan status occurs on the effective date of the plan amendment causing the loss of grandfather plan status. Stipulates that where an employer s contribution rate to an retiree plan is based on a formula and the formula is not modified even though the employer s contribution rate will decrease, the plan will not lose grandfathered plan status even if the decrease exceeds the 5% decrease threshold for maintaining grandfathered status. For a copy of the six frequently asked questions, please click on the link below. 5

6 IRS RELEASES FURTHER GUIDANCE ON COST OF COVERAGE FORM W-2 REPORTING On March 29, 2011, the Internal Revenue Service (IRS) released further guidance via Notice in relation to the employer s responsibility to report the total cost of employer-provided health coverage on an employees Form W-2. As a way of background, Section 9002 of the Patient Protection and Affordable Care Act (PPACA), employers were required to report the total cost of employer-provided health coverage on employees Forms W-2, effective for tax years beginning after 2010 (Forms W-2 for 2011 filed in 2012). The cost of coverage will be determined by calculating the applicable premiums under the rules for COBRA continuation coverage. This means that the amount reported will incorporate both the employer and employee share of the premium. On October 12, 2010, the Internal Revenue Service (IRS) announced via Notice that reporting the cost of coverage under an employer-sponsored group health plan on Forms W-2 will not be mandatory for Forms W-2 issued for 2011 stating that this relief is appropriate to provide employers with additional time to make any necessary changes to their payroll systems or procedures in preparation for compliance with the reporting requirement. The Treasury Department and the IRS anticipate issuing guidance on the reporting requirement set forth in 6051(a)(14) before the end of this year. The anticipated guidance via Notice was released in the form of 31 frequently asked questions. Some of the highlights of this guidance include the following as summarized below. Transitional Relief The IRS stated that future guidance may limit the availability of some or all of the transitional relief provided in Notice For example, the IRS may change its position on not requiring Health Reimbursement Arrangements (HRA) contributions to be reported as part of the aggregate cost on Form W-2 or begin to require employers who file less than 250 Form W-2s to adhere to the W-2 reporting requirements which such employers are currently exempt. However, this guidance will be prospective only and will not be applicable earlier than January 1of the calendar year beginning at least six months after the date the guidance is issued. In no case will such guidance limit the availability of this transition relief for the 2012 Forms W-2. 6

7 In addition to the HRA and employers who file less than 250 Forms W-2 mentioned above, the transition relief also applies to the following: Multiemployer plans. Dental and vision plans that are not integrated into another group health plan. Self-insured plans of employers not subject to COBRA continuation coverage or similar requirements. Employers furnishing Forms W-2 to employees who terminate before the end of a calendar year and request a Form W-2 before the end of that year. General requirement. PPACA generally requires the aggregate cost of applicable employer-sponsored coverage to be reported on Form W-2. The reporting of the cost of employer provided coverage is generally required for tax years commencing on and after January 1, Employers are not required to report the cost of health care coverage on any forms required to be furnished to employees prior to January Taxability of reported aggregate cost of coverage. The information required is informational only and does not affect the amount includable in income or the amount reported in any other box on Form W-2. The guidance stated, The purpose of the reporting is to provide useful and comparable consumer information to employees on the cost of their health coverage. Nothing in [PPACA], this notice, or the additional guidance that is contemplated under [PPACA], causes or will cause otherwise excludable employer-provided health care coverage to become taxable. Where on Form W-2 is aggregate cost of coverage reported. The aggregate reportable cost is required to be reported in Box 12 Code DD of the Form W-2. Employers subject to W-2 reporting requirement: All employers, other than small employers, that provide applicable employer sponsored coverage during a calendar year are subject to the Form W-2 reporting requirement. This includes private employers, federal, state and local government entities, churches and other religious organizations but does not include Federally recognized Indian tribal governments. For employers filing less than 250 Forms W-2 (small employers), the reporting of the cost of employer provided coverage is optional for at least 2012 and continuing this optional treatment until further guidance is released. Terminated employees who request W-2 prior to end of year. An employer is not required to report any amount in Box 12 Code DD for an employee who has requested to receive a Form W-2 before the end of the calendar year during which the employee terminated employment. 7

8 Reporting cost of benefits to terminated employees. Any reasonable method of reporting the cost of coverage provided under a group health plan may be used by an employer as long as that method is consistently used for all employees. Example: An employee actively works for the employer for the first four months of the calendar year (January April) and is covered under an active plan costing $500 (includes employee and employer share) per month or $2,000. The employee terminates and then elects continuation coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA) for the last eight months of the year (May December) at a cost of $500 per month or $4,000. Note: The 2% administration fee if charged is not considered in the calculation. The employer may either report the cost of the active coverage only ($2,000) or the cost of the active cost of coverage ($2,000) plus the cost of COBRA coverage ($4,000) for a total of $6,000 reported. Reporting cost of coverage of individual not provided Form W-2. An employer is not required to issue a Form W-2 including the aggregate reportable cost to an individual to whom the employer is not otherwise required to issue a Form W-2. For example, a retiree or other former employee (e.g. COBRA participant) receiving no compensation required to be reported on Form W-2. Changes to coverage during year. If an employee changes coverage during the year, the reportable cost under the plan must take into account the change in coverage when calculating the reportable cost. If the change occurs during a monthly period of coverage (e.g. mid-month), an employer may use any reasonable method to determine the reportable cost for such period, such as using the reportable cost at the beginning of the period or at the end of the period, or averaging or prorating the reportable costs, provided that the same method is used for all employees covered under the plan. Similarly, if an employee commences coverage or terminates coverage during a period, an employer may use any reasonable method to calculate the reportable cost for that period, provided that the same method is used for all employees under the plan. For a copy of Notice please click on the link provided below. 8

9 EXPANDED 1099-MISC REPORTING REPEALED On April 14th, President Obama signed into law the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (H.R. 4). The House and Senate had previously approved H.R. 4 on votes of and respectively. The enactment of H.R. 4 resulted in the repeal of Section 9006 of the Patient Protection and Affordable Care Act (PPACA) which had provided that for payments made on or after January 1, 2012, Form 1099-MISC must be provided to all corporate service providers receiving more than $600 per year for services or property. Consequently, the exception for payments made to corporations was eliminated. Historically, the Form 1099-MISC distribution requirement has only applied to non-corporate service providers. President Obama made the following statement regarding the enactment of H.R. 4: Today, I was pleased to take another step to relieve unnecessary burdens on small businesses by signing H.R. 4 into law. Small business owners are the engine of our economy and because Democrats and Republicans worked together, we can ensure they spend their time and resources creating jobs and growing their business, not filling out more paperwork. I look forward to continuing to work with Congress to improve the tax credit policy in this legislation and I am eager to work with anyone with ideas about how we can make health care better or more affordable. For a copy of H.R. 4, please click on the link provided below: 9

10 ADDITIONAL STATES CONFORM TO AMENDED INTERNAL REVENUE CODE As reported in the March 2011 Tech Flex [LINK] the states of Arizona, Idaho, Maine, Virginia and West Virginia amended their state revenue code to conform to the amended Internal Revenue Code as effective March 30, Arkansas, California, Kentucky, Minnesota, Oregon and South Carolina have now joined the list of conforming states. Consequently if the value of employer provided coverage provided to the employee s child is excluded for federal income tax purposes, it will also be excluded in relation to state income tax. Background: As a result of health care reform, effective March 30, 2010, the Internal Revenue Code (IRC) was amended to provide that general exclusion from income in relation to federal income tax for medical expense reimbursements under an employer provided accident or health plan is extended to any child of an employee who has not attained age 27 as of the end of the taxable year. However, there are a number of states whose revenue code was not modified to conform to the amended IRC. Consequently, the value of the benefits provided by the employer to the employee s child could be taxable to the employee for state income tax purposes although excluded in relation to federal taxes. For more information on the latest conforming states, please refer to the summary below. Please note that Minnesota has only conformed through tax year 2010 and as of the time of the publication of this information, legislation was being considered in that state in relation to tax year Arkansas: Arkansas has made technical corrections to its corporate and personal income tax laws by adopting recent changes to particular Internal Revenue Code sections. (Act 787 (S.B. 364), Laws 2011, effective March 30, 2011, generally applicable to tax years beginning on or after January 1, 2011.) Arkansas Code (b)(14), concerning the exclusion from gross income of disability and health plan payments, is amended to delete the following: 14) Sections of the Internal Revenue Code of 1986, as in effect on January 1, 1999, regarding the exclusion from income of disability and health plan payments, are adopted for the purpose of computing Arkansas income tax liability; And replace with the following: 10

11 The following sections of the Internal Revenue Code of 1986 regarding the exclusion from income of disability and health plan payments, are adopted for the purpose of computing Arkansas income tax liability: (A) Sections 104 and 106 as in effect on January 1, 2011; (B) Section 105 as in effect on March 30, 2010; For a copy of Arkansas Act 787, please click on the link provided below: California: On Thursday April 7, 2011, Governor Jerry Brown signed California Assembly Bill 36 (AB 36) which results in the California Revenue Code conforming with 1004(d) of the federal Health Care and Education Reconciliation Act of 2010 (P.L ), related to tax implications for certain employer-provided health insurance. Section is added to the California Revenue and Taxation Code to read as follows: (a) Section 105(b) of the Internal Revenue Code, relating to amounts expended for medical care, as amended by Section 1004(d)(1) of the Health Care and Education Reconciliation Act of 2010 (Public Law ), shall apply, except as otherwise provided. (b) This section shall apply in the same manner and to the same periods as the federal amendments referred to in subdivision (a) apply for federal purposes, except as otherwise provided. For a copy of AB 36, please click on the link provided below: 11

12 Kentucky: Kentucky Governor Steven Beshear has signed H.B. 255, which conforms Kentucky tax law to the federal health care reform law. The federal law requires employers to extend health care coverage to employees adult children up to age 26. Before the new bill in Kentucky, an employee s child had to be younger than 19 or 24 if a full-time student, for the coverage to be provided on a tax-free basis. KRS has been amended in part to read: Exclude [for taxable years beginning after December 31, 1998], to the extent not already excluded from gross income, any amounts paid for health insurance, or the value of any voucher or similar instrument used to provide health insurance, which constitutes medical care coverage for the taxpayer, the taxpayer's spouse, and dependents, or for any person authorized to be provided excludable coverage by the taxpayer pursuant to the federal Patient Protection and Affordable Care Act of 2010, Pub. L , or the Health Care and Education Reconciliation Act of 2010 Pub. L , during the taxable year. Any amounts paid by the taxpayer for health insurance that are excluded pursuant to this paragraph shall not be allowed as a deduction in computing the taxpayer's net income under subsection (11) of this section; For a copy of H.B. 255, please click on the link provided below: Minnesota: Minnesota Governor Mark Dayton has signed into law H.F. 79 conforming Minnesota tax law to the Federal health care reform law for Minnesota now conforms to the Internal Revenue Code (IRC) as amended through December 31, 2010 for What this means is that Minnesota has adopted the Federal tax law changes in regards to the taxability of employer-provided health coverage for If the value of Employer- provided health coverage for an Employee s child was excluded for Federal income tax purposes in 2010, it is excluded for Minnesota income tax purposes in Under a change in tax law included in the Affordable Care Act, the value of any Employer-provided health coverage for an Employee s child is excluded from the Employee s income through the end of the taxable year in which the child turns 26. This tax benefit applies regardless of whether the child is a tax dependent. 12

13 This Federal tax benefit became effective March 30, Consequently, for Federal tax purposes, the exclusion from income applies to any coverage that is provided to an adult child from that date through the end of the taxable year in which the child turns Conformity H.F. 79 only conform Minnesota tax law to the IRC as amended through December 31, 2010 for 2010, only. As such unless Minnesota enacts conformity legislation stating otherwise beginning January 1, 2011, Minnesota law will revert back to conforming to the IRC as of March 18, And, once again, value of employer-provided health coverage provided to children who are not dependents for Federal income tax filing purposes, will be taxable for Minnesota State Income tax Forms W-2 In addition to providing conformity to the IRC as of December 31, 2010, Minnesota H.F. 79 includes a provision that does not require Employers to distribute corrected 2010 Forms W-2 if the amount of health coverage provided to adult children under age 27 was included as part of an Employee s Minnesota State Taxable Wages (as was previously required). For a summary of H.F. 79, please click on the link provided below: For a copy of H.F. 79, please click on the link provided below: 13

14 Oregon: Oregon Governor John Kitzhaber has signed legislation (OR SB 301) that conforms Oregon's corporate excise (income), personal income, and certain property tax laws to the federal law as amended on December 31, 2010 (formerly, December 31, 2009), which includes amendments made by the federal Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L ). For corporate and personal income tax purposes, Oregon law is applied in the same manner as under federal law. For all other taxes, the December 31, 2010 date applies to transactions and activities occurring after 2010 in tax years beginning after Consequently Oregon conforms to federal tax treatment of health care benefits for children of employees under the age of 27. ORS has been amended in part to read as follows: any reference to the laws of the United States or to the Internal Revenue Code means the laws of the United States relating to income taxes or the Internal Revenue Code as they are amended on or before December 31, even when the amendments take effect or become operative after that date. For a copy of OR SB 301, please click on the link provided below. South Carolina: On April 12, 2011, Governor Nikki Haley of South Carolina signed into law Senate Bill 522 (S 522) generally conforming the state s revenue code to the Internal Revenue Code in effect as of December 31, Consequently South Carolina conforms to federal tax treatment of health care benefits for children of employees under the age of 27. S 522 amended South Carolina Statute Section as follows: FROM: Except as otherwise provided, 'Internal Revenue Code' means the Internal Revenue Code of 1986, as amended through December 31, 2009, and includes the effective date provisions contained in it." 14

15 TO: Except as otherwise provided, 'Internal Revenue Code' means the Internal Revenue Code of 1986, as amended through December 31, 2010, and includes the effective date provisions contained in it." The effective date of S 522 was the date of the Governor s signature, specifically April 12, 2011 For a copy of S 522, please click on the link provided below: FURTHER GUIDANCE RELEASED ON NEW YORK WAGE THEFT PREVENTION ACT In the December 2010 Tech Flex [LINK] it was reported that Governor Patterson signed the New York State Wage Theft Prevention Act (Act) into law. The new statute provides further protection to employees and misclassified workers from minimum wage, off-theclock, and overtime violations, by requiring more stringent pay notice requirements and increasing penalties for wage payment, notice, and recordkeeping violations. Please Note: The New York Wage Theft Prevention Act was effective 120 days following signature by the governor. New York originally reported the signing date as December 13, 2010 which resulted in an effective date of April 12, Subsequently, New York announced that the actual signature date was December 10, 2010 (December 13, 2010 was the ceremonial signing date) which results in an actual effective date of April 9, The New York Department of Labor has now released additional guidance in the form of 41 frequently asked questions (FAQs). A small sampling of the FAQs as shown below includes information on whether notices can be provided electronically (Q/A 14), what rates of pay must appear on the pay period wage statement (Q/A 22) and the employer penalties for failing to provide a proper pay stub to the employee (Q/A 34). 15

16 14. Q: Can the notice be given electronically? A: Yes, but their needs to be a system where the worker can acknowledge the receipt of the notice and print out a copy of the notice. 22. Q: What should we do if the worker has multiple hourly or piece rates? A: The purpose of the notice is to inform workers of the wage rates that apply to them. Multiple rates need to be identified either on the notice or on a separate sheet attached to the notice. Only the rates used to determine a worker s pay need be shown on the wage statement for that period. 34. Q: What is the penalty for not providing a proper wage statement? A: Employers can be assessed charges by the Department of $ per week per worker if proper wage statements are not given. For a copy of the Wage Theft Prevention FAQs, please click on the link provided below: Please contact ADP National Account Services for further information at: th Drive SE Suite 200 Bothell, WA 98021Phone: (425) Fax: (425) ADP National Account Services does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter is provided solely as a courtesy and should not be construed as legal advice. The information in this newsletter represents informational highlights and should not be considered a comprehensive review of legal and compliance activity. Your legal counsel should be consulted for updates on law and guidance that may have an impact on your organization and the specific facts related to your business. **Please note that the information provided in this document is current as of the date it is originally published.** 16