ACA Reporting Costs Increase for Noncompliance

The Trade Promotion Authority bill signed into law the beginning of this month included provisions which increase the penalties related to employers’ Affordable Care Act (ACA) reporting (e.g., Forms 1094-C and 1095-C). The bill also reinstated the trade-related Health Coverage Tax Credit (the HCTC), which had expired on December 31, 2013.

The trade bill made increases in the penalties for IRS reporting failures. These increased penalties also apply to other information returns and filings, such as W-2s, and are effective for reporting required to be filed or furnished after 2015. So the increased penalties would apply to the first year’s filings under the ACA, which relate to 2015, but are due in early 2016.

The general penalty for failure to file a required information return with the IRS (which is subject to reduction, waiver or increase for various reasons) will increase from $100 per return to $250 per return.
The cap on the total amount of penalties for such failures during a calendar year will increase from $1,500,000 to $3,000,000.
If a failure relates to both an information return (e.g., a Form 1095-C required to be filed with the IRS) and a payee statement (e.g., that same Form 1095-C required to be furnished to the individual), these penalties are doubled.
If a failure is caused by intentional disregard, the new $250 penalty noted above is doubled to $500 for each failure, and no cap applies to limit the amount of penalties that can be applied with respect to that calendar year.

When looking at these increases, you should remember that these increases don’t affect the IRS’s enforcement policy for the first year of ACA filing. Specifically, the IRS won’t penalize employers that can show they make good faith efforts to comply with the ACA reporting requirements.

So, the “good faith efforts” standard is still in effect, but the penalties that will apply if that standard is not met are much more severe. If the employer attempts to complete the forms, but the information reported is incorrect or incomplete, that reporting failure would be considered a good faith effort and may be excused under the IRS enforcement policy. If, however, the employer does not file or provide a required form by the deadline, it seems that the good faith standard would not apply.

New IRS Guidance on Forms 1094 and 1095

The IRS has provided both new and updated Q&A guidance on the reporting requirements for applicable large employers under the federal tax code. As background, beginning in 2016, applicable large employers must file Forms 1094 and 1095 to provide information to the IRS and plan participants about health coverage provided in the prior year.

The forms are used by the IRS to enforce employer penalties according to the federal tax code, as well as individual mandate and tax credit eligibility rules. The latest guidance consists of an updated Q&A document covering basic reporting requirements and a new Q&A document addressing more specific issues that may arise while completing Forms 1094 and 1095.

Here are some highlights:

Clarifications on who must report. The guidance clarifies that an applicable large employer with no full-time employees for any month of the year is not obligated to report unless the employer sponsors a self-insured health plan in which any employee, spouse, or dependent is actually enrolled. In that case, it must still file Forms 1094-C and 1095-C even if it has no full-time employees. The guidance also confirms that an applicable large employer must file and provide Form 1095-C to all full-time employees regardless of whether they were offered coverage during the year.

Controlled groups. Examples show how reporting differs where an applicable large employer reports for separate divisions and where applicable large employers are part of a controlled group. In the former situation, employees working for multiple divisions must receive aggregated information on a single Form 1095-C. In the latter situation, employees will receive a separate Form 1095-C for full-time employment with each applicable large employer in the controlled group.

Qualifying offer method of reporting. The updated Q&As now address reporting under the qualifying offer method, which allows applicable large employers to furnish a simplified employee statement to employees receiving qualifying offers for all 12 months of the year. The Q&As emphasize that use of simplified statements is not available for employees who actually enroll in an applicable large employer’s self-insured health plan.

Note: No mention is made of the qualifying offer method transition relief available in 2015, which allows an applicable large employer to use a different simplified statement provided that it makes qualifying offers to at least 95% of its full-time employees.

Delivery to employees. The guidance confirms that a Form 1095-C may be delivered to employees in any manner permitted for delivery of Form W-2, including hand-delivery. However, unlike Form W-2, employers need not furnish a midyear Form 1095-C upon an employee’s request following termination of employment.

New hires and terminating employees. When reporting offers of coverage on Part II of Form 1095-C, applicable large employers may indicate that an offer of coverage was made for a month only if the offer would have provided coverage for every day of the month. Therefore, applicable large employers should report on Form 1095-C that no coverage was offered in the month an employee was hired (unless an offer of coverage extended to every day of that month). Similarly, if a terminating employee’s coverage ends before the end of the month of termination, the applicable large employer must report that no coverage was offered for the month. (In each case, the applicable large employer may be able to avoid liability for employer penalties under the federal code, even though coverage was not offered for the full month.) In contrast, when reporting coverage information under Part III of Form 1095-C, an employee should be reported as having coverage if the employee is enrolled on any day of the month.

Note: The disparate treatment of partial months of coverage highlights the multiple purposes of Form 1095-C. Under the federal tax code, applicable large employers generally get credit for offering coverage for a month only if the offer applies to the full month — but an individual avoids the individual mandate penalty for a month by having coverage on any day of the month.
Third-party reporting. The guidance verifies that applicable large employers may designate third parties to perform reporting on their behalf. The new Q&As confirm that a governmental applicable large employer may designate another governmental entity to accept reporting responsibility on its behalf; they also explain the allocation of responsibilities under various combinations of self-insured and fully insured coverage options.

Reporting offers of COBRA coverage. New Q&As illustrate reporting under various COBRA scenarios. The guidance explains how sponsors of self-insured plans should report enrollment information for non-employee COBRA beneficiaries, such as former spouses. Qualified beneficiaries electing COBRA independently from the employee must receive separate forms, while those who have COBRA due to an employee’s election should be included on the same form that is provided to the employee. (As previously noted in the instructions to the final forms, reporting may be made on either Form 1095-B or 1095-C for individuals who were not employees at any time during the year.)

Several examples illustrate how an applicable large employer should complete Form 1095-C for full-time employees who receive a COBRA offer due to termination of employment or a reduction of hours. In general, a COBRA offer made due to termination of employment is reported as an offer of coverage only if the former employee enrolls in COBRA coverage and the employee’s cost of coverage reflects the COBRA premium for the lowest-cost, self-only coverage providing minimum value. In contrast, a COBRA offer made to an active employee due to a reduction of hours would be reported as an offer of coverage on Form 1095-C even if the employee declines COBRA coverage.

Note: Unfortunately, the example used to illustrate this final point does not extend more than 60 days after the loss of eligibility, so it is unclear whether the applicable large employer would still report that coverage is offered after the employee’s COBRA election period has ended.

With mandatory reporting starting in early 2016 (for 2015 coverage), understanding the complexities of the reporting requirements is critical. While some of the Q&As contained in this IRS guidance were previously addressed in the instructions to Forms 1094 and 1095, others provide helpful clarifications and new information. Employers subject to the reporting requirements should give careful attention to this and future guidance as the reporting deadline draws nearer.

New FAQs Address Summary of Benefits and Coverage Template and Other Affordable Care Act Topics

New FAQs Address Summary of Benefits and Coverage Template and Other Affordable Care Act Topics

The U.S. Department of Labor has released its latest set of FAQs regarding implementation of various provisions of the Affordable Care Act. Highlights of the FAQs are presented below.

Summary of Benefits and Coverage (SBC)
Group health plans are required to provide, without charge, a standard SBC form explaining plan coverage and costs to employees at specified times during the enrollment process and upon request. (For insured group health plans, the notice requirement may be satisfied if the issuer furnishes recipients with a timely and complete SBC.)

The new FAQs provide that the updated SBC template (and sample completed SBC) made available in April 2013 continues to be authorized until further guidance is issued. The FAQs also confirm that certain safe harbors and other enforcement relief with respect to providing the SBC continue to apply.

Effect of Health FSA Carryovers on ‘Excepted Benefits’ Status
Excepted benefits provided under a group health plan generally are exempt from the Affordable Care Act’s market reforms. Health FSAs may constitute excepted benefits if, among other requirements, the arrangement is structured so that the maximum benefit payable to any employee participant in the class cannot exceed a certain amount.

The latest set of FAQs explains that unused carryover amounts remaining at the end of a plan year in a health FSA (permitted under the modified “use-or-lose” rule) should not be taken into account when determining if the health FSA satisfies the maximum benefit payable limit to constitute excepted benefits.

Other topics addressed in the FAQs include the application of cost-sharing limits to out-of-network items and services, and preventive coverage related to tobacco cessation interventions. For more on the Affordable Care Act, including previously released questions and answers, please visit our Health Care Reform section.

Employers Face Significant Penalties for Reimbursing Employees’ Individual Health Insurance Policy Premiums

Employers Face Significant Penalties for Reimbursing Employees’ Individual Health Insurance Policy Premiums

New guidance from the IRS explains the consequences when an employer does not establish a health insurance plan for its own employees, but instead chooses to reimburse those employees for some or all of the premiums they pay for individual health insurance, either inside or outside the Health Insurance Marketplace (Exchange).

Such arrangements are described as “employer payment plans,” which are considered group health plans subject to the Affordable Care Act’s market reforms (including the annual dollar limit prohibition and preventive services requirements). Employer payment plans also include arrangements under which an employer uses its funds to directly pay the premium for an individual health insurance policy covering an employee. The term generally does not include arrangements under which an employee may choose either cash or an after-tax amount to be applied toward health coverage.

Consistent with prior FAQs, the new guidance confirms that employer payment plans cannot be integrated with individual policies to satisfy the Affordable Care Act market reforms. Accordingly, such arrangements fail to satisfy the market reforms and may be subject to a $100 per day excise tax per applicable employee ($36,500 per year, per employee) under the federal tax code.

Visit our section on HSAs, FSAs, & Other Tax-Favored Accounts to learn about how these types of programs are affected by the Affordable Care Act.

Updated COBRA and CHIP Model Notices for Employers

Reminder: Updated COBRA and CHIP     Model Notices for Employers

Employers and group health plan     administrators who have not done so already will want to download the U.S.     Department of Labor’s revised COBRA Model General Notice, COBRA Model Election Notice, and CHIP     Model Notice. The updated model notices reflect that coverage is     now available through the Health Insurance Marketplace (Exchange) and     provide information on special enrollment rights.

COBRA Notice Requirements
Federal COBRA generally requires group health plans sponsored by employers     with 20 or more employees in the prior year to     offer employees, spouses, and dependents a temporary extension of health     coverage when group coverage would otherwise end due to certain qualifying events.

Plan administrators are required to distribute a number of specific notices     to comply with COBRA, including:

  • A general notice describing COBRA rights,          to be provided to an employee and his or her spouse who become covered          under the plan within 90 days after the date group health plan          coverage begins; and
  • An election notice informing eligible          employees, spouses, and dependents of the right to continue coverage          and how to elect COBRA, to be provided within 14 days after          receiving notice of a qualifying event.

                                                                         Required   CHIP Notice
Employers that provide coverage in states with premium assistance through   Medicaid or the Children’s Health Insurance Program (CHIP) must inform   employees of potential opportunities for assistance in obtaining health   coverage annually before the start of each plan year. The notice   may generally be provided concurrent with the furnishing of:

  • Materials notifying employees of health plan        eligibility;
  • Materials given to employees in connection with        an open season or election process conducted under the plan; or
  • The summary plan description (SPD).

For information on other federal   notice requirements, and to download additional model notices available for   employers and group health plans, check out our Benefits Notices Calendar.

Certificates Showing Prior Health Coverage for Employees No Longer Required Beginning December 31, 2014

Certificates Showing Prior Health Coverage for Employees No Longer Required Beginning December 31, 2014

Federal law currently requires employer-sponsored group health plans to issue documents demonstrating an employee’s prior health coverage (called “certificates of creditable coverage“) that can be used to reduce the pre-existing condition exclusion period that a plan can apply to the individual. However, these certificates are becoming unnecessary as the Affordable Care Act prohibits pre-existing condition exclusions for plan years beginning on or after January 1, 2014.

As a result, the requirement to issue certificates of creditable coverage will be eliminated as of December 31, 2014. This effective date accounts for individuals needing to offset a pre-existing condition exclusion under plans beginning December 31, 2013, so that they will still have access to the certificate for proof of coverage through December 30, 2014.

Employers must continue to provide certificates of creditable coverage until December 31, 2014. (Note: A health insurance issuer, rather than the employer, may be responsible for providing certificates of creditable coverage if there is an agreement between the two that makes the issuer responsible.) A certificate must be issued automatically and free of charge when an individual:

  • Loses coverage under a plan;
  • Becomes entitled to elect COBRA continuation coverage;
  • Loses COBRA continuation coverage; or
  • Makes a request for a certificate while the individual has health coverage or within 24 months after coverage ends.

Check out our Benefits Notices Calendar for other notices required to be provided by employers and group health plans.

Final Rules on 90-Day Waiting Period Limitation for Group Health Plans

Final Rules on 90-Day Waiting Period Limitation for Group Health Plans

Final rules address the requirement in the Affordable Care Act that group health plans limit any waiting period to 90 days beginning with plan years starting on or after January 1, 2014. A waiting period is the period of time that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective.

Key Highlights of the Final Rules
Under the final rules, eligibility conditions that are based solely on the lapse of a time period are permissible for no more than 90 days. Other conditions for eligibility are generally permissible, such as:

A requirement that employees complete a certain number of cumulative hours of service before becoming eligible for coverage is also generally allowed, as long as the requirement does not exceed 1,200 hours. Other highlights of the final rules include:

  • Employers are not required to offer coverage to any particular individual or class of individuals (including, for example, part-time employees).
  • All calendar days are counted for purposes of the 90-day limit, including weekends and holidays, beginning on the individual’s enrollment date.
  • A former employee who is rehired may be treated as newly eligible for coverage upon rehire and, therefore, may be required to meet the plan’s eligibility criteria and satisfy the waiting period anew, if reasonable under the circumstances.

For plan years beginning in 2014, plans may comply with either the previously proposed regulations or the final rules (effective for plan years beginning on or after January 1, 2015).

Be sure to review our Summary by Year for other key changes under the Affordable Care Act taking effect in 2014.

5 Must-Know Facts About ‘Pay or Play’

5 Must-Know Facts About ‘Pay or Play’

Recently issued final rules provide important guidance on the ‘pay or play‘ provisions under Health Care Reform. These provisions require large employers–generally those with at least 50 full-time employees, including full-time equivalents–to offer affordable health insurance that provides a minimum level of coverage to full-time employees (and their dependents), or pay a penalty tax if any full-time employee receives a premium tax credit for purchasing individual coverage on a Health Insurance Marketplace.

Below are five things employers should know about the ‘pay or play’ rules:

1. The requirements are delayed for certain large employers.
Employers with 100 or more full-time employees (including full-time equivalents) are subject to the ‘pay or play’ requirements starting in 2015. However, the rules will not apply until 2016 for employers with 50 to 99 full-time employees (including full-time equivalents) who certify that they meet certain eligibility criteria related to workforce size and maintenance of workforce, hours of service, and previously offered health coverage.

2. Affiliated employers are generally combined to determine their workforce size.
Companies that have a common owner or are otherwise related generally are combined and treated as a single employer, and so would be combined for purposes of determining whether or not they collectively employ at least 50 full-time employees (including full-time equivalents). If the combined total meets the threshold, then each separate company is subject to the ‘pay or play’ provisions, even those companies that individually do not employ enough employees to meet the threshold.

3. There are two methods employers may use to determine whether an employee is full-time.
An employee is considered full-time for a calendar month if he or she averages at least 30 hours of service per week (or 130 hours of service in a calendar month). The final rules provide two methods for determining whether an employee has sufficient hours of service to be a full-time employee:

  • One method is the monthly measurement method under which an employer determines each employee’s status by counting the employee’s hours of service for each month.
  • The second method is the look-back measurement method, under which an employer may determine the status of an employee during a future ‘stability period’ based upon the hours of service of the employee in a prior ‘measurement period.’ (This method may be used only for purposes of determining and computing liability, and not for determining whether the employer is subject to the ‘pay or play’ requirements.)

The final rules describe approaches that can be used for various circumstances, such as for employees who work variable hour schedules, seasonal employees, and employees of educational organizations.

4. An employer may be liable for a penalty for 2015 under two circumstances.
For 2015 (and for employers with non-calendar-year plans, any calendar months during the 2015 plan year that fall in 2016), an employer that is subject to the ‘pay or play’ requirements may be liable for a penalty if:

  • The employer does not offer health coverage or offers coverage to fewer than 70% of its full-time employees (and their dependents, unless transition relief applies), and at least one of the full-time employees receives a premium tax credit; or
  • The employer offers health coverage to at least 70% of its full-time employees (and their dependents, unless transition relief applies), but at least one full-time employee receives a premium tax credit, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value.

5. Transition relief may be available to certain employers subject to the rules for 2015.
The final rules extend to 2015 a package of limited transition rules that applied to 2014 under the proposed regulations, including:

  • Employers First Subject to Requirements: Employers can determine whether they had at least 100 full-time or full-time equivalent employees in the previous year by reference to a period of at least six consecutive months, instead of a full year.
  • Non-Calendar Year Plans: Employers with plan years that do not start on January 1 will be able to begin compliance at the start of their plan years in 2015 rather than on January 1, 2015, and the conditions for this relief are expanded to include more plan sponsors.
  • Dependent Coverage: The policy that employers offer coverage to their full-time employees’ dependents will generally not apply in 2015 to employers that are taking steps to arrange for such coverage to begin in 2016.
  • Look-Back Measurement Method: On a one-time basis, in 2014 preparing for 2015, plans may use a measurement period of six months even with respect to a stability period of up to 12 months.

Our Employer Shared Responsibility section features additional information regarding ‘pay or play.’ Questions and Answers are also available from the Internal Revenue Service.

PPACA Penalty Q&A

Employees Without Health Insurance May Face Penalties–5 Q&As

The individual mandate under Health Care Reform, which is expected to go into effect on January 1, 2014, requires individuals of all ages (including children) to have minimum essential health coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. Below are five important things to know about the requirement.

1. What counts as minimum essential coverage?
Minimum essential coverage includes employer-sponsored coverage (including COBRA coverage and retiree coverage), coverage purchased in the individual market, Medicare Part A coverage and Medicare Advantage, Children’s Health Insurance Program (CHIP) coverage, and certain other types of coverage.

Minimum essential coverage does not include coverage providing only limited benefits, such as coverage only for vision care or dental care, workers’ compensation, or disability policies.

2. If an employee receives coverage from a spouse’s employer, will that employee have minimum essential coverage?
Yes. Employer-sponsored coverage is generally minimum essential coverage. If an employee enrolls in employer-sponsored coverage for himself and his family, the employee and all of the covered family members have minimum essential coverage.

3. Do an employee’s spouse and dependent children have to be covered under the same policy or plan that covers the employee?
No. An employee, his or her spouse, and dependent children do not have to be covered under the same policy or plan. However, the employee, spouse, and each dependent child for whom the employee may claim a personal exemption on his or her federal income tax return must have minimum essential coverage or qualify for an exemption, or a payment will be owed.

4. A company’s health plan is “grandfathered.” Does the employer’s plan provide minimum essential coverage?
Yes. Grandfathered group health plans provide minimum essential coverage.

5. What is the amount of the individual mandate penalty?
The amount of any payment owed takes into account the number of months in a given year an individual is without minimal essential coverage or an exemption. For 2014, the penalty is the higher of:

  • 1% of the individual’s yearly household income (the maximum penalty is the national average yearly premium for a bronze plan); or
  • $95 per person for the year, or $47.50 per child under 18 (the maximum penalty per family using this method is $285).

The fee increases every year. In 2015, the penalty is 2% of income or $325 per person.

For more information, you may review additional questions and answers from the IRS. Be sure to visit our Summary by Year to review other key changes under Health Care Reform that are coming next year.

Changes to “Use-or-Lose” Rule for Health FSAs

Changes to “Use-or-Lose” Rule for Health FSAs

According to new agency guidance, employers may now allow employees to carryover up to $500 of unused amounts in a health flexible spending arrangement (FSA) to use in the following plan year.

The “use-or-lose” rule requires that amounts in an employee’s health FSA that are not spent by the end of a plan year be forfeited. However, an employer’s cafeteria plan can provide for a grace period, whereby an employee is permitted to use amounts remaining from the previous year to pay expenses incurred for certain qualified benefits during the period of up to 2 1/2 months immediately following the end of the plan year.

New Guidance Details Changes
The agency guidance explains that an employer may, at its option, amend its cafeteria plan document to provide for a carryover to the immediately following plan year of up to $500 of any amount remaining unused as of the end of the plan year in a health FSA. The carryover may be used to pay or reimburse medical expenses under the health FSA incurred during the entire plan year to which it is carried over.

The carryover of up to $500 does not count against or otherwise affect the indexed $2,500 salary reduction limit applicable to each plan year. A cafeteria plan that incorporates the carryover provision may not also provide for a grace period in the plan year to which unused amounts may be carried over.

An employer may adopt this carryover provision to health FSAs for the current cafeteria plan year and/or subsequent plan years by amending the plan document in the manner and within the time frames described in the agency guidance.