The COBRA premium for a month's coverage cannot be more than 102 percent of the “applicable premium.” Please note that the applicable premium takes into account the total cost of coverage, including both employer-paid premiums and employee-paid premiums. For fully insured plans, the COBRA applicable premium is the insurance premium paid to the insurer. For a self-insured plan, the determination is a bit more complicated and is done using the actuarial method or the past-cost method.
Actuarial Method for determining applicable premium related to self-insured plans
Under the actuarial method for determining the applicable premium for a self-insured plan, the plan must identify which similarly situated beneficiaries are most closely related to the particular qualified beneficiary, and the plan must charge the qualified beneficiary an amount equal to a reasonable estimate of the cost of providing coverage to an individual in that group. This method requires the services of an actuary. Generally, the actuary will need the following information about the plan to conduct the analysis:
Plan claims include the amount of claims incurred and the amount of claims paid with respect to all individuals covered by the plan.
Past-Cost Method for determining applicable premium related to self-insured plans
This method is only available if there has been no significant change in either the coverage offered or the number of employees on the plan. Under the past-cost method, the applicable premium equals the cost to the plan for the preceding determination period adjusted for inflation. In general, the past cost method takes the total cost for the employer divided by the number of participants.
Changing COBRA rates mid-year
All plans must determine the applicable premium in advance for each 12-month determination period and are not allowed to increase the applicable premium during the determination period. The determination must be made before the beginning of the period. The final regulations do not permit an increase in the applicable premium during the 12-month determination period. In other words, plan sponsors that experience rate changes will not generally be able to pass rate increases on to COBRA participants during the determination period.
There are three instances in which a plan may increase the COBRA premium charged to a qualified beneficiary during the 12-month determination period:
For assistance with questions related to COBRA rates, please contact your advisor.
With every new year comes additional compliance requirements for employers and plan sponsors. There is also a long list of existing requirements that have been around for years. It can be overwhelming to be knowledgeable on all issues. That’s where your broker, NFP Benefits Compliance and the NFP Compliance Checklist can prove to be especially valuable. The checklist is a comprehensive tool to assist employers in conducting an internal audit of major compliance requirements under PPACA, ERISA, HIPAA, COBRA, FMLA, Section 125 and many other federal laws. If you’re interested in reviewing the checklist, please contact your advisor.
In regards to the most frequently occurring compliance failures, the following list represents four particularly challenging requirements that are frequently overlooked or misunderstood by employers.
If any of these issues sound uncomfortably too familiar, please contact your advisor to discuss a plan of action.
There are two PPACA provisions at play when discussing minimum participation requirements and the SHOP exchange. First, PPACA generally prohibits insurers from denying coverage for failure to meet minimum participation requirements. This is known as the ‘guaranteed availability’ provision, and it applies to employer groups of any size. The other PPACA provision actually allows a SHOP to have minimum participation requirements, so long as the requirements are based on the rate of participation in the SHOP and not on the rate of employee participation in any qualified health plan (QHP) of a particular insurer. In addition, a SHOP may only enforce its minimum participation requirements outside of an annual open enrollment period (which generally runs from November 15 through December 15), and will only check minimum participation rates at initial enrollment and again upon renewal the following year. Thus, so long as an employer is applying for SHOP coverage during annual open enrollment, the SHOP must honor the guaranteed availability provision and accept the employer’s application for coverage even if the employer cannot otherwise meet the SHOP’s minimum participation requirement.
This is an important distinction for smaller employers that may be subject to the employer mandate (i.e., the requirement to offer affordable coverage to all full-time employees and their dependents, or risk a penalty). While SHOP participation is generally limited to ‘small’ employer groups, some states have changed the definition of small from 1-50 employees to 1-100 employees. Thus, some employers with 51-100 employees may be subject to the employer mandate and yet be able to participate in a SHOP exchange. (Such employers should reach out to their state SHOP exchange for more information on eligibility and QHPs available in that particular state).
Lastly, employers should remember that the SHOP is the only means for a small employer to obtain a small business health care tax credit. Importantly, the calculation to determine if an employer meets the employee count eligibility requirements for the tax credit differs from the calculation relating to the employer mandate. Both CMS and NFP have resources to assist employers in determining eligibility for the tax credit. Please ask your advisor for details.
An employer who receives an MLR rebate check should consider their plan type and structure when deciding how to use the MLR rebate funds. As background, PPACA included minimum MLR provisions that require insurers to provide rebates to group health plans if the issuer does not spend a minimum percentage of the premium on medical claims and certain quality improvement initiatives. As a result of these rules, many employers received these rebates (either in the form of a premium credit or reduction or via cash or check) by Sept.30. Employers who received MLR rebate funds are tasked with determining the proper use of those funds, and should do so with the assistance of their service providers and outside legal counsel.
When it comes to ERISA-covered plans, it is helpful that the DOL published Technical Release No. 2011-04 which provides guidance on what should be done with MLR rebates. Based on the technical release, there are generally four steps an employer should consider when determining what to do with an MLR rebate.
Step 1: Determine the plan to which the MLR rebate applies.
Generally, rebates will only apply to a specific plan option (such as an HMO, PPO or an HDHP). So it’s important that the only participants who benefit from the rebate are those who contributed to the cost of coverage under that benefit option. If a rebate relates to two separate benefit options, then the rebate should be applied separately by the employer based on the separate calculations of the insurer. Using an MLR rebate generated by one plan for the benefit of another plan’s participants is a breach of ERISA’s fiduciary rules.
Step 2: Determine the portion of the rebate that relates to employer contributions versus employee contributions toward the plan’s premium.
The employer may keep the entire portion of the rebate that relates to employer contributions (i.e., the rebate is simply returned to the employer’s general assets). On the other hand, the portion of the rebate that relates to employee contributions is generally considered ERISA “plan assets,” and therefore may only be used for the benefit of plan participants (or any related administrative expenses). So, for example, if employees contribute 30 percent of the premium, then 30 percent of the rebate would need to be used for the benefit of plan participants.
Step 3: Determine the participants to whom to distribute the rebate.
The DOL largely leaves it up to the employer to determine how they will allocate the funds to the plan participants, as the allocation does not have to reflect the actual contribution cost of each employee. However, the allocation method chosen must be reasonable, fair and objective. So the employer could choose to provide a flat amount rebate to each participant or a percentage of actual contribution, so long as the method is reasonable, fair and objective.
Further, the DOL gave employers some leeway as it pertains to former participants. Specifically, if the cost of distributing rebates to former participants is approximately equal to or greater than the amount of the rebate, then the employer may decide to limit rebates to current participants.
Step 4: Determine the distribution method.
An employer can distribute the rebate to plan participants through cash or check refund, premium reductions, benefit enhancements or premium holiday. The regulations specifically allow an employer to consider the other options above if cash or check refund (and their tax consequences) are so small that it would not be cost-effective to distribute them.
With those four steps in mind, there are also a couple of issues ERISA plans should consider. First, the employer’s method for using an MLR rebate should be clearly outlined in the written plan document, and an employer should follow the plan terms when deciding how to proceed with the rebate. Second, the employer must use or distribute the rebate within three months of receipt, or else they will be required to establish an ERISA trust and hold the rebate (as plan assets) in that trust.
Employers who sponsor non-ERISA plans should consider some of the same issues as ERISA plan sponsors must consider. Specifically, those employers must use the employee-paid premium portion of the rebates they receive solely for the benefit of those participants by either providing a cash or check refund or reducing future premiums.
Employers will have likely received any MLR rebates by this time in the year. Deciding what to do with the rebates will require an analysis of the type and structure of the plan. Further, due to the legal and tax implications of distributing these rebates, we highly recommend that employers engage outside counsel to assist in the process of determining the appropriate use of MLR rebates.
There has been much confusion with respect to early renewals, insurance rating requirements and employer mandate transition relief for employers with 50-99 full-time employees (FTEs), including full-time equivalents. The confusion stems from federal guidance allowing early renewals as a strategy for delaying certain insurance mandates, carriers promoting the early renewal strategy without regard to the employer’s obligations under the employer mandate and the marketplace’s varied interpretations of the limited guidance relating to the 50-99 employer mandate transition relief.
As background, there are two PPACA rules that appear to be in conflict: Certain restrictions on insurer premium rate setting and the employer mandate. The rating restrictions generally apply Jan. 1, 2016, and likely increase premium rates. In addition, the restrictions apply only to small groups, as defined by each state. Prior to PPACA, most states defined ‘small employer’ as one with 1-50 employees. PPACA redefined that term to mean those with 1-100 employees, but Congress recently repealed that definition, leaving states to define the term for themselves. To help ease the transition into the new restrictions, CMS previously allowed non-PPACA-compliant small group policies to be renewed (at least until Oct. 1, 2016). (As a side note, the repeal of the PPACA definition of ‘small employer’ creates even more confusion as to how early renewals will work, and what advantages (if any) remain through an early renewal.)
Regarding the employer mandate, which is generally effective Jan. 1, 2015, the IRS created a type of ‘transitional relief’ —a delay in the effective date—for employers with between 50 and 99 FTEs (including equivalents) that meet certain conditions. If those conditions are met, the mandate is delayed until Jan. 1, 2016 (for employers with a calendar year plan) and until the renewal date in 2016 (for employers with a non-calendar year plan). One of those conditions is that the employer may not modify its plan year after Feb. 9, 2014, to begin on a later calendar date (e.g., changing the start date of the plan year from January 1 to December 1).
Based on informal guidance from the IRS, employers that early renew their policies in 2015 will become subject to the employer mandate on Jan. 1, 2016 (regardless of the new plan year). In other words, an employer that changes its plan year does not lose its ability to rely on the 50-99 transition relief for all months of 2015. For example, an employer with a calendar year plan that early renews on Nov. 1, 2015, will be subject to the employer mandate on Jan. 1, 2015. As another example, an employer that had a March 1 renewal that early renews on Oct. 1, 2015, will be subject to the employer mandate on Jan. 1, 2016 (they lose their transition relief that was previously available for January and February 2016).
Other challenges also await those employers that opt for an early renewal. For example, renewing early is generally considered a change to the plan year under both ERISA and the cafeteria plan rules, and such a change necessitates a valid business purpose and amendments to the plan itself. There are also factors to consider for participant elections, health FSA administration, Medicare Part D and COBRA.
Overall, while an employer may not lose 2015 transitional relief from employer mandate penalties, early renewal may result in a loss of such relief for some months in 2016. In addition, since states now control the definition of ‘small employer’ for purposes of the application of PPACA’s premium rate setting restrictions, and since a primary advantage of early renewal is to avoid premium hikes as a result of those restrictions, it’s unclear whether early renewal has any advantages. Considering the additional challenges employers might face, the early renewal strategy is not recommended. Employers that have already entered into an early renewal should work with their advisor to ensure appropriate compliance with the above compliance requirements, including appropriate compliance with the employer mandate.
First, as background, an employer mandate assessable payment (penalty) is triggered when an employee goes to the exchange, purchases a qualified health plan and qualifies for a premium tax credit. To qualify for the credit, taxpayers generally must have household income between 100 percent and 400 percent of the federal poverty line (FPL). However, if an individual either enrolls in an eligible employer-sponsored plan, or is eligible for affordable minimum value coverage, then the premium tax credit is unavailable for that individual. At the outset, the exchange will rely on applicant-provided information to determine whether coverage has been offered. Since the exchange is relying on the individual’s representations (which may include mistakes or misrepresentations), it’s possible that the information provided may be inaccurate, improperly qualifying the individual for a premium tax credit. Eventually, the IRS should reconcile various information returns (including Sections 6055 and 6056 returns) to ensure that premium tax credits are issued correctly. If it is later determined that a premium tax credit should not have been paid, the IRS will claw back the credit from the individual (it will have to be repaid).
Before the IRS reconciles the returns, though, the exchange is expected to send a notice to the employer identifying the employee as having qualified for a premium tax credit. This should happen shortly after the employee applies for coverage. The notice is required to include identifying information for the employee and is meant to alert the employer that the employee appears to be eligible for a premium tax credit, that such credit may trigger a penalty for the employer and that there is an opportunity for the employer to appeal the tax credit qualification to the exchange. Assuming the employer offered the individual coverage that was affordable, employers should promptly respond to the exchange’s notice. A prompt response helps the employer clarify that they are not responsible for an employer mandate penalty and helps the employee avoid the possibility of later paying the full premium tax credit amount back to the IRS (after the IRS reconciliation process and claw back). Since the exchange is also required to inform the federal government of an individual’s qualification for a premium tax credit, a prompt response may also help avoid potential IRS inquiries relating to the employer mandate.
After the IRS reconciles all of its information, they will contact employers to inform them of their potential employer mandate penalty. Those employers will then have an opportunity to respond and dispute the penalty. If the employer does not respond, then the penalty will be assessed and the IRS will issue a notice and demand for payment. If the employer disputes the penalty, they must respond to the IRS with information supporting why a penalty should not be owed. Such information might include a signed enrollment/waiver form or the marketplace notice that informed the employee that the coverage offered was affordable and of minimum value. Employer could also submit documentation on the employee’s hours of service (demonstrating part-time status or that an employee was in a look-back measurement period and therefore has not yet been determined to be full-time) or on affordability calculations. That information or documentation would help explain to the IRS why coverage was not offered or why coverage was actually affordable and therefore why the employer does not owe a penalty.
The bottom line is that mistakes will be made as to premium tax credit eligibility. Employers will have an opportunity to refute incorrect employer mandate penalties due to such mistakes. An employer’s documentation will be key in this process.
Yes. As background, under the employer mandate, the employer must offer at least one affordable, minimum value plan to all full-time employees, or risk a penalty. Affordability is based on the cost to the full-time employee for single-only coverage. Generally speaking, coverage is affordable if the cost of single-only coverage does not exceed 9.5 percent of that employee’s W2 wages or 9.5 percent of that employee’s rate-of-pay. (There is also a way to determine affordability based on the federal poverty line.)
The regulations on affordability, as well as general tax rules for similar benefit issues, seem to indicate that cashable flex credits in a Section 125 plan (i.e., those that can also be received as additional taxable compensation) should be treated as employee contributions toward coverage, meaning the credits would not count toward affordability. The cash-out amount is viewed in the same light as a flex credit. That means the cash-out amount would be added to the amount that the employee was paying toward coverage (making it more difficult to meet affordability, since the employee’s required contribution would increase).
To help explain the concept, if the employee can take the cash instead of the contribution/cash-out amount, there is no guarantee that the employee will use that cash to pay for medical care. The cash-out actually becomes the employee’s money, and therefore would be considered an ‘employee contribution’ towards coverage. Since it is possible the amount would not be used towards coverage, the amount would not count towards affordability. This appears to be the case even if the employee does not actually elect the cash-out option. Conversely, if the employer contribution or cash-out cannot be taken as cash and must be used toward coverage, the amount is viewed as an employer contribution (since there is no method by which the employee could take it as cash and spend it elsewhere) and would count towards affordability.
As an example, an employee whose required employee contribution for health coverage is $100 per month, but who is eligible for opt-out credits of $50 per month if coverage is waived, would be treated as having coverage with a required employee contribution of $150 per month when determining whether coverage is affordable. In other words, the cash-out option amount would be added to the employee premium cost when determining the cost of single-only coverage.
Based on the above, employers that are subject to the employer mandate should review their employer contribution strategies. If the employer offers a cash-out option, the option should be reviewed to ensure it is not adversely affecting the affordability calculation. Overall, employers should work with tax counsel and their advisor in devising contribution structures that yield affordable plans for their full-time employees.
Lastly, although not directly related to the employer mandate, employers should also remember that a cash-out option must be offered through a section 125 plan. That means the Section 125 rules apply, including the written plan document and irrevocable election rules (elections cannot be changed mid-plan-year absent a qualifying event). Many employers will already have a Section 125 plan in place, and will have to add the cash-out option to the list of benefits available through the Section 125 plan. In addition, the Section 125 nondiscrimination rules apply, meaning the cash-out option could not be offered in a way that discriminates in favor of highly compensated employees. Lastly, the cash-out option should not be offered only to those who can prove they have coverage elsewhere (e.g., through another employer, a spouse’s employer, Medicare, etc.). Such a design removes the requisite Section 125 ‘choice’ that is required for all employees to have in order to make an election between cash and non-taxable benefits, such as premium payments.
Generally speaking, where employers are part of what is called a ‘controlled group’ (also sometimes referred to as an ‘aggregated group’), the employers are viewed as one entity for purposes of determining applicability of the employer mandate and the associated information reporting requirements under IRC Sections 6055 and 6056. For purposes of the mandate and the reporting requirements, employers that are part of a controlled group are referred to as applicable large employer (ALE) “members.” All members of a controlled group are combined in determining if the mandate applies (i.e., whether the employers, counted together, meet the 50 full-time employee/equivalent threshold). That said, once it is determined that the mandate applies, the ALE members are separately liable for actual compliance with the mandate and the reporting.
Thus, if a controlled group exists, each employer reports separately. In other words, each employer entity within a controlled group is responsible for their own Forms 1094-C and 1095-C, and employer mandate penalties are determined on a single employer level (per Employer Identification Number (EIN)).
Based on that general information, the answer to the question depends on whether the small and large employers are part of the same controlled group. If so, the small employer (by virtue of its status as an ALE member with the large employer) would be subject to the employer mandate and the reporting on its own. Thus, the answer really boils down to the controlled group rules. Before getting into more detail on the controlled group rules, employers should be aware that the controlled group determination is important for more than just the employer mandate and reporting; it also applies for purposes of employment and labor laws, as well as employment taxes. In addition, the controlled group analysis is really a matter of taxation law. For those reasons, employers should engage outside tax counsel or a CPA to assist in the controlled group analysis. With that in mind, there are some general guidelines that can assist employers in understanding the basics of the controlled group rules. The general rules are found in IRC Section 414, which states that two or more employers are treated as a single employer for benefits purposes if there is sufficient common ownership.
There are several tests to determine whether sufficient common ownership exists. The test used would depend on the relationship between the employers (e.g., parent-subsidiary or brother-sister).
Under the parent-subsidiary test, which is the more common situation, two or more employers would be treated as a single employer if:
A common example of a parent-subsidiary controlled group is where a parent wholly owns one or more subsidiaries. The parent and the subsidiaries would be under common control. This would also be the case if the parent owned at least 80 percent of the subsidiary or subsidiaries.
Under the brother-sister test, two or more corporations are treated as a single employer if they are controlled (both actual control and effective control) by the same five or fewer persons (or estates or trusts).
“Control” means the five or fewer individuals own stock possessing 80 percent or more of the total combined voting power of all classes of stock entitled to vote of each corporation AND more than 50 percent of the total combined voting power of all classes of stock entitled to vote of each corporation, taking into account the stock ownership of each owner only to the extent that the level of ownership interest is identical with respect to each corporation.
The brother-sister test is much more complicated, so examples are harder to replicate. But the test is commonly applicable where five or fewer shareholders own at least 80 percent of each corporation within the group. The second part of the test looks at identical ownership in each corporation, and whether that identical ownership rises to 50 percent or more.
Applying that to the situation described in the question above, assuming the employers are under common control under IRC 414 (i.e., have common ownership under one of those two tests), the employer mandate would apply (since together their employee count is well above the 50-employee threshold). This means the smaller employer would be subject to both the employer mandate (beginning in 2015, unless they otherwise qualify for a delay) and the reporting requirements (beginning in 2016, reporting on 2015 compliance).
Specifically, each member of the controlled group is responsible for filing Forms 1094-C and 1095-C with the IRS (as well as distributing a 1095-C statement to each full-time employee). Further, each employer in the controlled group must identify the other employers in the group. (This is done on Part IV of Form 1094-C.) Members in a controlled group can identify one member of the group to file on behalf of all other members. However, that does not shift liability for a filing failure from the individual member to the identified filing member. Individual members remain exposed to IRS penalties if the filing member fails to actually file.
In summary, if an employer is part of a controlled group member by virtue of the IRC 414 controlled group rules, then it will have to file separately from the other employers in the controlled group and is liable for penalties if it does not. That said, one member of a controlled group could be designated to assume responsibility for filing for all members, but Forms 1094-C and 1095-C would have to be filed for each member in the controlled group (and liability for failures would still lie with each member).
ERISA requires that an SMM be distributed to participants any time there is a material modification in the terms of the plan or a change in the information required to be in the SPD. However, ERISA does not provide much guidance on what constitutes a ‘material’ change. So determining whether or not a change is ‘material’ will be based on facts and circumstances.
At a minimum, the courts have generally found that participants should be notified of provisions that change participants’ qualification for certain or all benefits. So if the plan changes or a switch in insurance carriers will change the participants’ benefits in a manner that adds, decreases or terminates any benefits, then it is likely that an SMM should be distributed.
Generally, a plan administrator is obligated to provide an SMM to participants no later than 210 days after the end of the plan year in which the change occurred. However, when the change is considered a ‘material reduction in covered services or benefits provided under the plan,’ then the SMM must be provided no later than 60 days after that material reduction. This is known as the accelerated SMM rule.
In further discussing the accelerated SMM rule, DOL regulations clarify that if the change to the plan will change the information provided in the SPD, and would be considered by the average participant to be an important reduction in services, then it would be considered a ‘material reduction.’ The regulations also provide examples of what constitutes a material reduction, including the elimination or reduction of benefits payable under the plan, an increase in premiums or other cost-sharing payments, a reduction in covered service area or new conditions or requirements.
Additionally, the ERISA SMM requirement was impacted by PPACA. Specifically, PPACA requires the employer to distribute a revised SBC when a plan makes a material modification in any terms of the plan that would affect the content of the SBC. When a change is made ‘other than in connection with renewal’ (or mid-year), the revised SBC must be distributed 60 days prior to the effective date of the change. If distributed correctly, the SBC would be used to satisfy the SMM requirement. As such, an employer who chose to make a change that affected the SBC in the middle of the plan year would have to give participants 60 days advance notice.
If the change is made at renewal, open enrollment materials including the SBC should be revised to reflect the changes—doing so satisfies both the SBC and SMM requirements.
Although the law may not always require advance notice of changes, we would caution employers that it is best practice to notify participants of any plan changes as soon as possible so that participants are aware of such changes before they incur claims based on the new provisions.
Also keep in mind that the failure to distribute an SMM can result in the plan sponsor being subjected to a $110 per day penalty if they do not provide the SMM within 30 days after an individual's written request. SBC failures can also result in penalties of up to $1,000 per failure. Willful ERISA violations can also carry up to 10 years in prison and a $100,000 fine for individuals and fines up to $500,000 for the company.
In addition to the reporting of active full-time employees, Section 6056 reporting (using Form 1095-C) is required for the remaining months of the calendar year in which the termination of coverage occurs. However, the reporting will differ depending on whether the former full-time employee elects the COBRA coverage, what type of COBRA coverage is elected (employee-only, employee plus spouse, family, etc.), and whether the termination of coverage was due to a termination of employment or simply a reduction of hours below the 30 hour FT threshold. It will also be reported differently for mid-month terminations of coverage where the individual elects COBRA. Lines 14, 15 and 16 on 1095-C is where the differences will occur, which is outlined below.
While employer mandate reporting focuses on coverage offered to employees and dependents, COBRA reporting is different. For COBRA, the actual coverage elected is reported for former full-time employees. If COBRA is declined, employers report no offer of coverage. If COBRA is elected, employers indicate the tier that is elected (employee only, employee plus spouse, family, etc.).
COBRA not elected
Termination of Employment
In the remaining months of the calendar year after termination of coverage, the employer will report the following:
Reduction in Hours
In the remaining months of the calendar year after the reduction in hours (with the individual still employed), the employer will report the following:
Mid-month termination example
If the employer terminates coverage mid-month (doesn’t continue coverage until the end of the month of termination), then the two examples above will be combined. The month of termination will be reported as though the employee went to part-time status and the remaining months will be reported as though the employee terminated employment:
Elected family COBRA coverage
In the remaining months of the calendar year after active employee coverage is lost, the employer will report the following:
Elected employee-only COBRA coverage
In the remaining months of the calendar year after active employee coverage is lost, the employer will report the following:
In both of examples directly above, we can assume that the same active coverage was offered to the employees, and therefore, the same COBRA offer was made. Yet, because the former employee in the first example elected family COBRA coverage while the former employee in the second example elected employee-only COBRA coverage, the reporting would be different, as indicated.
Note on Self-insured Plans
Please note that a self-funded plan is required, under Section 6055, to report any covered individual using Form 1095-B or Form 1095-C, if using combined reporting. This obligation exists for not only the active-employee plan, but for COBRA coverage, as well. The entire period of COBRA coverage would need to be reported. This is different than the Section 6056 requirement for fully insured applicable large employers who must report COBRA coverage elected by former full-time employees for only the months remaining in the calendar year following the COBRA election. It is different because the carrier will be completing Section 6055 reporting as to the COBRA enrollment for the entire period of COBRA coverage.
Generally speaking, all employers may design their plans as they see fit—they can choose who is and who is not eligible for benefits. However, there are some restrictions that may apply.
First, generally speaking, PPACA’s employer mandate (the requirement to offer coverage to all full-time employees—those working 30 hours or more per week) does not affect small groups. The mandate applies to employers with 50 or more full-time employees and full-time equivalent employees (total monthly hours worked by non-full-time employees, divided by 120). Smaller employers will want to ensure that they are not subject to the mandate. Assuming it does not apply, employers may proceed in their eligibility design without worrying about the mandate’s 30-hour-per week threshold.
Second, state law might apply. For smaller employers, state law sometimes mandates a definition of ‘eligible employee’ for health coverage purposes. These state laws generally apply to fully insured small group plans issued in a particular state. For example, New York law states that for employers with 50 or fewer employees an ‘eligible employee’ is one who works 20 hours per week or more. States generally don’t define “employee” further, so the definition will generally include most types of employees, including temporary, short-term or seasonal employees. While some states have exclusions, most allow employers to use some sort of waiting period under which an employer could exclude short-term or seasonal employees.
While most state small group laws apply to employers with 50 or fewer employees, beginning in 2016 the definition of ‘small group’ changes to 100 or fewer employees. Thus, it’s possible some state laws that previously restricted only employers in the 50 and under group will soon restrict employers in the 51-100 group. So, employers in the 51-100 group will not only be subject to the employer mandate (meaning they will have to offer coverage to all those working 30 hours per week), they may also be subject to broader state eligibility restrictions. We expect state insurance regulators to further clarify some of these points as they transition to the new definition of ‘small group’ in 2016. In the meantime, employers with questions on state law should work with outside counsel.
Third, employers with fully insured plans should work closely with the insurer in defining which individuals are eligible for the group health plan. Insurers may have their own requirements relating to eligibility, and the employer would want to be consistent with those requirements.
Lastly, whatever route the employer chooses on eligibility, the terms and conditions relating to eligibility should be clearly described in the plan’s written documents and SPDs. In other words, the eligibility terms should be documented and clearly communicated to employees.
To begin with, the employer plan sponsor is responsible for reporting and paying the PCOR fee for a self-insured plan. This includes any HRA and retiree-only plans sponsored by the employer.
The PCOR fee is treated as a tax. As such, it is generally assessed, collected and enforced in the same manner by the IRS as other taxes. We know of no amnesty or leniency for noncompliance with the PCOR fee filing.
Specifically, the fee is found in the excise tax portion of the IRC, and since the fee is reported on IRS Form 720, there are general penalties that apply for failure to file a return or pay a tax. Those are found in IRC Section 6651 and the penalties vary based on the amount failed to be reported or paid.
The general penalty would be up to 25 percent for a failure that is beyond five months. Like any other tax payment failures, there is also the risk of interest on top of the required amount. Finally, there are additional penalties if the failure was due to willful neglect, which means that the employer knew about the requirement but did nothing about it. So, there is definitely a risk involved. As a reminder, the 2014 fee is due July 31, 2015. See the announcement in this edition of Compliance Corner for more information.
There is no specific guidance on how to correct the failure. Ultimately the employer will want to consult their tax advisor as soon as the problem has been identified. However, as with other tax form and payment failures, it seems prudent and appropriate to come into compliance as soon as possible. Most likely, the employer could start by filing a Form 720 for past years as soon as possible, and then file a Form 720 for 2014 by July 31, 2015. Generally speaking, the employer needs to file a separate Form 720 for each year, but could file both at the same time. Ideally, the employer should consult their tax advisor for advice on precisely how to proceed.
A popular plan design is for deductibles to be “embedded” for individuals. This means that even if the participant is enrolled in family coverage, once the individual deductible is met, the plan will begin paying covered medical expenses or revert to co-payments/co-insurance. For plans with much higher family deductibles, this can result in significant cost savings for the participant.
However, in order for this plan design to be considered a qualified high deductible health plan (HDHP) and allow family members to make and receive contributions to an HSA, certain requirements must be met.
When an individual deductible is "embedded" within the family deductible, the individual deductible cannot be lower than the statutory minimum required family HDHP deductible, or else the individual is ineligible to make or receive contributions to an HSA. For 2015, the minimum required family deductible is $2,600. This amount is adjusted annually.
For example, if the individual deductible is $2,600 and the family deductible is $5,000, the plan may embed the individual deductible so that if one family member attains the deductible of $2,600, the plan may begin reimbursement of covered expenses at that time, for that individual, without jeopardizing the ability of the participants to make or receive contributions to an HSA.
However, if the plan instead had a $1,300 embedded individual deductible and the family deductible is $3,000, the plan would not be a qualified HDHP for 2015 because it would be possible for the plan to cover expenses when one family member attained the deductible of $1,300. Since this is lower than the statutory minimum annual deductible for family HDHP coverage of $2,600, this is not an HSA-compatible plan design.
In summary, the issue with setting an individual embedded deductible lower than the minimum required family HDHP deductible is the fact that one individual could have expenses paid before at least $2,600 in deductible (for 2015) has been reached. Thus, in order to retain its status as a qualified HDHP plan, the embedded individual deductible cannot be less than $2,600 for plan years beginning in 2015.
While we generally don’t advise on worker’s compensation issues as they are out of our scope, we can speak to the issues regarding how to deal with group health benefits during an unpaid leave related to worker’s compensation. There is no federal requirement to continue the group health insurance for an individual on leave due to a work related injury. However, depending on the state in which the employee is located, there are requirements through which an employer would need to provide medical care for job-related injuries, although this would be provided through the employer’s worker’s compensation policy, and not the group health plan.
The continuation of the group health plan during leave related to the worker’s compensation injury will differ depending on whether FMLA is applicable or not.
FMLA applies to private employers with 50 or more employees for each working day in 20 or more workweeks in the current or preceding calendar year. It also applies to all public agencies and local educational agencies no matter the size (including public school boards, and public as well as private elementary and secondary schools). You should be mindful of this when creating and implementing a leave policy. An eligible employee who is absent due to their own serious health condition is eligible for up to 12 weeks of unpaid leave. FMLA applies any time that an eligible employee is absent from work due to a serious health condition - even if that condition is work related. An eligible employee is one who has worked for the employer for at least 12 months, must have worked at least 1250 hours in the last 12 months, works for an employer who employs as least 50 employees within a 75-mile radius of the employee’s worksite, and has suffered a serious health condition.
While on FMLA, the employer must give the employee an opportunity to continue benefits under the same conditions as if the employee were still actively at work. An employee only has to pay their normal contribution amount. If active employees contribute to the cost of coverage, an employee on FMLA would as well. If the FMLA leave is paid, then the deduction would be taken as normal. If the leave is unpaid, other arrangements must be made for the premium. For employees who continue their coverage during an unpaid FMLA leave, the following payment options may be provided: “prepay,” “pay-as-you-go,” and “catch-up.” The employee may also choose to discontinue coverage during FMLA.
For an FMLA leave, the qualifying event for COBRA is if the employee does not return at the end of the 12 week FMLA leave period. It falls under the COBRA triggering event of reduction of hours. The event date is the last day of the FMLA leave. Even if the coverage was terminated during the leave (for failure to pay premiums), COBRA is still not offered until the end of the 12 week leave period.
If FMLA does not apply, then coverage should be terminated according to the employer’s and carrier’s policy for inactive employees on unpaid leave (typically 30 days). If active employees have to work a certain number of hours per week to remain eligible, and there is no special provision for inactive employees on non-FMLA leave, then someone on leave due to a work related injury should be terminated from coverage if that threshold is not met. Then, depending on the circumstances, COBRA or state continuation would be offered for reduction of hours.
When a divorce decree orders an employee to provide healthcare for an ex-spouse, this does not automatically obligate the employer to provide group health plan coverage for that ex-spouse. In fact, a divorce decree cannot obligate a group health plan unless federal or state law mandates it. While there is no federal law requiring that ex-spouses be provided health coverage through the group health plan, there are currently six states that require a plan to provide coverage for ex-spouses. Those states are Illinois, Maryland, Massachusetts, Minnesota, Missouri and Rhode Island, where an ex-spouse is entitled to non-COBRA continuation of health benefits under the group health plan.
If an employer’s group health plan is not subject to the insurance laws of any of those states, then the plan eligibility provisions will control for purposes of determining ex-spouse eligibility. If the plan and insurer allow for the continued coverage of ex-spouses, then the plan could allow the employee to keep their ex-spouse on the plan. However, this is rarely the case, as most plans do not include ex-spouses as eligible dependents. The employer would have to look to the plan document to determine when termination of an ex-spouse must take place.
If the plan terms allow ex-spouses to remain on the plan, one thing to keep in mind is that coverage for an ex-spouse would need to be paid for on an after-tax basis unless the ex-spouse is a tax dependent of the employee. If the ex-spouse is not a tax dependent of the employee, then the value of the coverage will be included in the employee’s gross income and subject to income tax withholding and employment taxes for federal and possibly state tax purposes.
If the plan or insurer do not allow for the continued coverage of ex-spouses on the plan, then the employee could likely pay the premiums to cover the ex-spouse through COBRA or an individual policy. Under COBRA, federal law requires that an ex-spouse be offered continuation coverage for 36 months from the date of the divorce. (There are also state continuation of coverage laws that may apply to ex-spouses.) Further, the ex-spouse whose coverage is terminated upon divorce would be losing minimum essential coverage, and would therefore have a special enrollment right to enroll in individual coverage on the exchange.
In closing, although a court order such as a divorce decree requires action on the part of the employee, it does not obligate the employer group health plan unless the law provides.
Employers should review plan eligibility and documents, COBRA and state continuation laws and tax laws before allowing an ex-spouse to continue on their plan.
No. If individuals are classified correctly as independent contractors, they are not included in the employer’s count of full-time equivalent employees determining size, are not offered coverage as full-time employees and not provided Forms 1095-C.
There are many factors to consider when determining whether an individual is an employee or independent contractor. Just because an individual’s compensation is reported using a 1099 rather than a W-2 does not automatically mean he/she is classified correctly as an independent contractor. Factors to consider include:
As the checklist shows, the nature of the position and the company’s level of control determine the worker’s status. An employer should not allow an individual to make the determination as to whether he/she wants to be an independent contractor or employee. A red flag would be an employer with two individuals performing the same exact job under the same terms and conditions, with one receiving Form W-2 compensation with employment taxes and benefits and the other receiving 1099 compensation with no employment taxes or benefits.
The determination is important as it impacts many employment-related issues including workers compensation benefits, unemployment benefits, employment taxes, health plan eligibility and employer mandate obligations.
With regard to health plan eligibility, ERISA states that only employees and former employees should be eligible for coverage. Thus, true independent contractors should not be eligible for the group health plan. There is an argument that if an employer offers coverage to an independent contractor under its group health plan, it is creating a multiple employer welfare arrangement (MEWA). In addition to the MEWA risk, if an employer offers coverage to an independent contractor, it is actually adding weight to the argument that the individual is an employee and is misclassified as a contractor.
Subsequently, when determining who is a full-time employee for employer mandate purposes, an employer should only include employees, not independent contractors. Independent contractors would not be offered coverage or provided a Form 1095-C regardless of the number of hours worked.
If an employer has a large number of independent contractors making up a significant percentage of its population, it should be particularly careful in determining whether its contractors are correctly classified. Let’s consider an employer with 90 full-time employees and ten independent contractors. It offers minimum value, affordable coverage to the full-time employees and does not offer coverage to the independent contractors. In 2016, Penalty A under the employer mandate requires that the employer offer coverage to at least 95 percent of its full-time employees. If it fails to do so, the employer is subject to a $2,000 annual penalty for each full-time employee (minus the first 30 full-time employees). Now, let’s say that the IRS reviews the employer’s employment relationships and determines that the independent contractors are misclassified and are actually employees. The employer would then fail Penalty A, because it only offered coverage to 90 percent of its full-time employees (which according to the IRS includes the misclassified contractors). The employer would be at risk for a penalty of $140,000.For more information on independent contractor classification, please see the following resources from the DOL:
PPACA’s employer mandate (the obligation for large employers to offer affordable, minimum value coverage to all full-time employees and their dependents, or risk a penalty) took effect for most employers Jan. 1, 2015. While there is transition relief that allows a delayed effective date for some employers, regardless of the effective date of the mandate, all large employers will have to begin reporting on their employer mandate responsibilities beginning in 2016. This reporting obligation is often referred to as Section 6056 reporting, and will be completed via IRS Forms 1094-C and 1095-C. (Some large employers that self-insure their plans may also be obligated to report under Section 6055—this FAQ does not address 6055 reporting.)
Although employers do not have any reporting obligations until 2016, the reporting obligations relate to the 2015 calendar year. As a result, employers should take steps in 2015 to ensure they have the necessary paperwork and information to prepare a sufficient and acceptable report. Necessary information includes anything relating to the employer’s obligations under the employer mandate, including tracking and maintaining records relating to employee work hours. Specifically, the employer should have gathered or be gathering information relating to employee count to determine whether the employer has 50 or more full-time employees and full-time equivalent employees (and is therefore subject to the employer mandate)—or between 50-99 full-time employees/equivalents such that they qualify for transition relief that delays the effective date of the employer mandate. This includes payroll or other tracking records that identify which employees are full-time employees (working 30 or more hours per week or 130 hours or more per month). If the employer has seasonal or variable hour workforces and is using the look-back measurement method to measure hours, the employer should be keeping detailed records relating to look-back measurement periods and which employees qualified for coverage via those periods.
In addition to information relating to employee full-time status, employers should be tracking information on offers of coverage (including waivers, if employees opt out or otherwise decline coverage). The employer will want to have sufficient records relating to affordability, including a monthly determination of whether the cost of coverage is affordable to each employee. This may require documentation of the employee’s pay or hourly rate as compared to their required contribution towards coverage.
Employers that take steps now to track and record employer mandate-related information will be in a much better position to complete their Section 6056 reporting obligations in 2016. Earlier this year, the IRS released Publication 5196, which is a helpful resource for employers as they prepare for reporting. In addition, NFP Benefits Compliance has resources to help employers prepare, including vendor relationships that might assist employers in tracking and reporting. Please reach out to your advisor for more information.
Yes, generally speaking, under the "use-or-lose" rule for health FSAs, any unused amounts are forfeited and cannot be carried over to the next year unless permitted under the plan.
As background, under IRC Section 125’s use-or-lose rule, contributions made to the health FSA that have not been used to reimburse expenses incurred during a plan year may not be carried over to a subsequent plan year and may not be returned to the participant. In other words, health FSA participants must use health FSA amounts in the current plan year or risk forfeiting those amounts. Plans may allow for a short "grace period" of up to two and a half months after the close of the plan year, during which a participant may also incur expenses reimbursable from the health FSA. So, if a health FSA plan document provides for a grace period, employees need to pay extra attention to the March 15 deadline for submitting expenses for reimbursement to use up the funds in their accounts.
It is important to also mention that employers have the option of allowing participants to roll (or carry) over to the next plan year up to $500 of unused health FSA contribution amounts that remain at the end of the plan year. The same carryover limit must apply to all plan participants and the employer may decide to permit a lesser amount. This means participants can carry over up to $500 to reimburse eligible medical expenses incurred during the following plan year. In addition, such carryovers will not count against the annual limit for the health FSA employee salary reductions, which is $2,550 in 2015. Importantly, employers that want to incorporate a carryover must include the carryover provision in the health FSA plan document and should communicate the carryover to those eligible for and participating in the health FSA plan.
Lastly, a health FSA plan that incorporates this carryover provision may not also provide for a grace period in the plan year to which unused amounts may be carried over. Thus, where a plan permits carryovers to the following plan year, the plan may not have a grace period in that following plan year. For example, a calendar-year plan permitting a carryover to 2016 of unused 2015 health FSA amounts would not be permitted to have a grace period in 2016.
Yes. Although an employer that sponsors a health plan for 50-99 full time employees and equivalents (FTEs) or an employer that sponsors a non-calendar year plan could qualify for a delay in complying with the employer mandate, there is no similar delay for reporting.
As background, the final regulations on the employer mandate announced an additional one-year delay for employers with 50–99 FTEs. Employers who meet four conditions prescribed by the regulations are generally exempt from an employer mandate penalty for any calendar month during 2015. Additionally, the final regulations also provide that employers who offer a non-calendar year plan will not be assessed a penalty under the employer mandate until the first day of the 2015 plan year. These delayed effective dates are referred to as "transition relief," which delay the employer mandate penalty for certain employers for all of 2015 (in the case of 50-99 employers) or for a portion of 2015 (in the case of a non-calendar year plan).
As a reminder, beginning in 2016, employers that sponsor group health plans are required under PPACA to report certain information to the IRS about health coverage provided during the prior calendar year (2015). Employers are also required to provide employees with individual statements that summarize the IRS report.
Pursuant to this requirement, there are two separate reporting and employee statement requirements found in two separate sections of the IRC: Sections 6055 and 6056. Section 6055 applies to all employers that sponsor self-insured plans and Section 6056 applies to all employers subject to the employer mandate.
Even if an employer is eligible for transition relief under either option outlined above, they are still required to report under Sections 6055 and 6056. So, all employers with 50 or more FTEs are subject to Section 6056 reporting (Forms 1094-C and 1095-C) beginning with 2015 year data (to be filed in 2016). There is a special code that the employer will indicate on the forms to certify that they qualify for the transition relief.
If the plan is fully insured, then the plan’s insurance carrier will also report under the Section 6055 reporting obligation (Forms 1094-B and 1095-B) based on 2015 plan data. Likewise, any self-insured plans eligible for transition relief are responsible for reporting under Section 6055.
The employer mandate requirements and related reporting obligations are very complex. NFP has resources to assist. Please see your advisor for more information.
This strategy is generally not recommended for several reasons. Renewing early is considered a change to the plan year under both ERISA and the cafeteria plan rules. There must be a valid business purpose for making this change and legal counsel should assist with drafting plan amendments. There are also factors to consider for participant elections, health FSA administration, Medicare Part D, and COBRA.
Changes to Open Enrollment Elections
A common question asked by plan participants when they have an off-cycle plan renewal is whether changes can be made to their cafeteria plan elections after the early renewal election is made. There are three common situations where this arises. Employers considering the early renewal strategy should be prepared to address these questions upfront and, depending on their current plan document, may also need to amend the plan document to permit these election changes going forward.
A plan's applicable COBRA premium must be determined in advance for each 12-month determination period and generally may not increase during that period. This would suggest that the plan could not change COBRA rates at the time of the renewal and would have to wait until the end of the 12 month COBRA determination period. However, there may be some flexibility where there is a business justification or significant plan amendment, so long as the employer intends to use the new 12-month determination period indefinitely.
The most conservative route would be to continue COBRA rates for a 12-month period. Plan sponsors wishing to increase the rates within the 12-month period to match up with the new policy period, should consult with counsel before changing a determination period since there is a lack of guidance and authority regarding making such a change. Of course, this assumes an increase to the COBRA premium. If the COBRA premium amount decreased, the same risk would not apply.
The IRS created a type of "transitional relief" under the employer mandate for fiscal year group health plans for coverage months in 2014 before the start of the 2014-2015 plan year. Groups that qualify for this relief will not be subject to the employer mandate with respect to those coverage months only if the fiscal year has been unchanged since at least Dec. 27, 2012. A large employer with a qualifying fiscal year plan could lose that transitional relief by changing its plan year with an early renewal.
If the plan is subject to Form 5500 filing, then the form would be due at the end of 7 months following the new plan year end date, as well as the short plan year end date. This may be surprising to some plan sponsors. In other words, a Dec. 31 year-end plan that normally files the Form 5500 by July 31 of the following year (or Oct. 15 when extended), would instead need to file by June 30 (or Sept. 15 as extended) if they moved their renewal to Nov. 30. Keep in mind that self-insured plan designs such as health FSAs and HRAs do not have an automatic exemption from the Form 5500 filing deadline, since they have to perform an analysis of how funding of the plan is occurring. This may be a consideration for plans that may traditionally consider themselves too small for the 5500 filing to apply.
13-month plan years (or any plan year longer than 12 months) are not permissible under ERISA. That is why a short plan year filing would be required.
Finally, having a short plan year in order to transition to a different plan year requires a plan amendment to the written ERISA plan document as well as the Section 125 cafeteria plan document. It is recommended to engage legal counsel any time a plan amendment is required. Remember, the plan amendment must be adopted prior to the first day of the "new" plan year.
Health FSA Considerations
Employers considering the off-plan year renewal should carefully think through the implications for plan participants who have a health FSA balance and will have fewer months to utilize the money set aside. If the plan already has a grace period in place, the employer should communicate to participants the timeframe to exhaust health FSA funds so that they are not lost.
If the employer does not have a grace period, or wishes to utilize the new rule for allowing a $500 rollover, this requires a plan amendment to remove any existing grace period and amend the plan for the $500 rollover. It also requires proper communication to plan participants so the change is as seamless as possible.
Medicare Part D
The Medicare Part D Disclosure Notice to CMS is due within 60 days of the new plan year start date, which creates a shift in compliance. Rather than a March 1 deadline (for a Dec. 31 plan year-end), this requirement will be due on or about Feb. 1 (for a Nov. 30 plan year-end).
A handful of states, including Illinois, Missouri, Montana, Vermont and New York, have restricted the early renewal strategy for small groups (1-50), While states have not yet clarified whether this prohibition will automatically extend to groups sized 50-100 when the definition of small group is expanded in 2016, this is certainly an area to watch for guidance going forward.
Valid Business Purpose under Cafeteria Plan Regulations
The 2007 proposed Section 125 regulations allow a cafeteria plan to have a short plan year, but it must be for a valid business purpose. A plan year may not be changed if a principal purpose of the change is to circumvent the requirements of Section 125 or the related regulations. Assuming that there is a valid business purpose, a plan could have a plan year of less than 12 months. Examples of a valid business purpose include:
Other circumstances that might meet this standard include corporate mergers, acquisitions, or other changes in business operations.
Employers should discuss the purported business purpose for a plan year change with legal counsel to ensure that it is valid and not merely an "end run" around Section 125 and its related regulations.
The take-away is that if the business is renewing early for reasons such as aligning their plan years with other policies, they would appear to be safer adopting the early renewal strategy. But merely renewing early as an end-run around compliance with PPACA mandates may be problematic if scrutinized by the IRS or DOL or even the state's Department of Insurance. The key question is whether a client wants to risk the scrutiny of HHS, the IRS or the state regulatory agency with an early renewal. If so, they should be prepared to defend their position, presumably by ensuring they have a valid business purpose for the early renewal.
The IRS and DOL have been very clear that an employer cannot pay for the cost of an individual policy for employees. An employer is permitted, however, to give employees a choice between taxable cash and nontaxable benefits. It would have to be structured as a cash in lieu of benefits option through a Section 125 plan. Specifically, a Section 125 plan is the exclusive means by which an employer can give employees a choice between non-taxable benefits and taxable cash. Thus, the cash-out option should be provided for in the Section 125 plan document. The option is not considered a health plan on its own, but a qualified benefit under a Section 125 cafeteria plan. Most employers with this type of design structure the payment on a pay period or monthly basis. The payment would be taxable and treated as income to the employee.
Under this arrangement, an employee must be permitted to waive employer-provided coverage for any reason, even if they do not have other coverage. If an employee can only opt out of the employer's plan (receive cash) if they can prove they have other coverage, the IRS takes the position that they do not have a choice. Thus, Section 125 does not apply and their premiums could not be taken pre-tax. Because of the statute and IRS position, an employer should permit all employees to waive coverage regardless of whether they have or provide proof of other coverage.
As a Section 125 plan, the arrangement itself would be subject to all of Section 125's rules and restrictions. Specifically, the employee's election to take additional salary (i.e., cash) instead of benefits would be subject to the Section 125 irrevocable election rule. This means the employee could not make a mid-plan-year election change to elect benefits unless the employee experiences a Section 125 qualifying event. In addition, Section 125 also requires the employer to maintain a written plan document and to adhere to the nondiscrimination rules (which prohibit the arrangement from favoring highly compensated individuals).
In addition to Section 125, PPACA's employer mandate requires only that the employer offer coverage to all full-time employees. Employees can always opt or waive out of coverage. Thus, a cash in lieu of benefits option would not violate the employer mandate, so long as employees have the option to elect coverage on an annual basis.
A 'skinny' plan (also referred to as a 'limited benefit plan') is one that includes a basic amount of benefits and services and usually excludes certain benefits, such as inpatient hospital or physician services. Many employers explored the idea of offering a skinny plan to lower-wage workers in an attempt to satisfy the employer mandate's requirement to offer minimum essential coverage to all full-time employees (FTEs—those working 30 hours or more per week).
According to recent DOL guidance, plans that do not provide coverage for substantial inpatient hospital or physician services will not be considered as providing minimum value. Therefore, while a skinny plan may be sufficient minimum essential coverage to excuse the employer from Penalty A ($2,000 times the total number of FTEs, minus 80 FTEs in 2015), it would not be sufficient minimum value coverage to exclude the employer from Penalty B ($3,000 times the number of FTEs that actually qualify for an advanced premium tax credit in a public health insurance exchange).
Therefore, if an employer offers a skinny plan to one class of employees and a PPO plan to another class of employees, the employer remains potentially liable for Penalty B on any of the employees in the class offered the skinny plan.
In addition to the employer mandate, employers that vary benefit offerings by class must consider the nondiscrimination rules, which generally prohibit an employer from favoring highly compensated individuals (HCIs) with respect to plan eligibility and benefits. For fully insured plans, the nondiscrimination rules are not yet effective (this is part of health care reform that has been delayed). However, for self-insured plans, and for employers that allow employees to pay related premiums pre-tax via salary reduction (even for fully insured plans), nondiscrimination rules are in place now. Those employers will need to review their plan designs and classifications to ensure that HCIs are not favored as a result of the variance in benefit plan offerings.
Under PPACA, employers are required to report the aggregate cost of applicable employer-sponsored group health plan coverage on each employee’s Form W-2. The employer must report the cost of coverage on a calendar-year basis, regardless of the plan year used for the health plan. The reporting is intended for informational purposes for the employee (to provide employees with the cost of their health care coverage). The W-2 reporting requirement does not cause the cost of such coverage to be included in the employee’s income or otherwise become subject to federal taxation.
Under transition relief and until the issuance of further guidance, an employer is not subject to the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. In other words, if the employer filed fewer than 250 Forms W-2 in 2013, the employer would not be required to report the cost of coverage on the 2014 Forms W-2.
The IRS has indicated that for purposes of this transition relief, the employer is determined without the application of any aggregation rules. Since the transition relief applies without the application of any aggregation rules, there is no requirement to use the controlled group rules under IRC Section 414. Thus, if Employer A was required to file 200 Forms W-2 in 2013 and its subsidiary, Employer B, was required to file 225 Forms W-2 in 2013, both employers will be exempt from reporting on the 2014 Forms W-2, since each was required to file fewer than 250 Forms W-2 for the preceding calendar year — even though Employer A and Employer B may be part of the same controlled group under IRC Section 414.
The W2 reporting mandate requires employers to report the aggregate cost of applicable employer-sponsored coverage on an employee’s Form W-2. The term “applicable employer-sponsored coverage” generally includes any employer-provided group health plan coverage under an insured or self-insured health plan that is excludable from the employee's gross income under IRC Section 106, or that would be excludable if it were paid for by the employer. There are exceptions to the reporting, including stand-alone dental or vision plans and HRA coverage, which are not reportable. Until further guidance is issued, the IRS stated that any coverage subject to the COBRA regulations' definition of group health plan would, in the absence of an exception or transition rule, be subject to the W-2 reporting requirement.
An employer is required to report the aggregate cost of applicable employer-sponsored coverage, including amounts paid by the employer and the employee, regardless of whether the employee’s contributions are made on a pre- or post-tax basis. This would include all contributions for covered individuals, including the employee’s spouse and dependents, and all amounts reported as income as a result of coverage.
The cost of coverage should reflect any changes in the employee’s coverage during the year. For example, if the employee switched plan options or tiers of coverage (employee only, employee plus spouse, etc.), the employer should account for the variance in cost.
The cost of coverage is reported in Box 12 of the Form W-2 with the code “DD.”