Employers are generally free to determine eligibility as they see fit; so there is no requirement to offer dependent coverage at all (although an employer subject to the employer mandate would need to offer dependent coverage (not including spouses) in order to avoid a potential employer mandate penalty). The ability of employers to generally determine eligibility would lead one to believe that the employer may also verify dependent eligibility as they see fit. The major issues to consider would be what documentation the plan requires, how to avoid nondiscrimination issues, and whether COBRA needs to be offered to discovered ineligible dependents.
While it appears that a plan may design their verification processes (including documentation requirements) as they see fit, they should definitely include any such processes in the plan document. Some employers use employee certifications or affidavits to obtain representations that a dependent is truly a dependent, while other employers require specific documentation. Since employee certifications (signed affidavits) are sufficient for cafeteria plan purposes, they should be adequate to establish dependent eligibility under the plan as well. Employers that use employee certifications should ensure that employees have sufficient information to understand the applicable definitions and to make meaningful certifications to the employer. Yet, if the plan document provides for it and the plan sponsor desires, the plan may go further and request documentation of dependent status, such as marriage certificates, birth or adoption certificates and tax forms.
In determining what to require, the employer may want to consider the invasiveness of certain documents, like tax forms or other documents that would also contain information that is unrelated to the dependent status. The employer will also want to consider the administrative burden associated with collecting that documentation, and also employee satisfaction with respect to the documentation requirements.
We caution employers against running a partial or targeted audit due to the discrimination issues that may arise. HIPAA places restrictions on discrimination. Specifically, HIPAA prohibits plans from discriminating based on a disability, health status, claims history, medical condition, claims experience, receipt of health care, genetic information, evidence of insurability, race, color, religion, sex, national origin, age or political affiliation or belief. So if an eligibility audit is based on any of those factors, HIPAA would be implicated.
To avoid possible discrimination, we think the best plan of action for a dependent eligibility audit would be to audit all dependents that are covered under the plan. That is the most cautious approach to avoid any chance of implicating nondiscrimination. In addition, a general audit on all dependents would appear fair to employees (thus reducing any employee dissatisfaction relating to the audit) and would yield a higher accuracy level for the plan.
Generally, if someone is found to be ineligible during a dependent audit, then they will not need to be offered COBRA at the time their coverage is terminated. This is because they have not experienced a COBRA-qualifying event. The COBRA qualifying events include termination of employment (except for gross misconduct), reduction of hours, divorce/legal separation, death of the covered employee, dependent child ceases to be a dependent, entitlement to Medicare, and employer bankruptcy. Being discovered as an ineligible dependent is not one of those events.
Why is this only generally the case? There are always exceptions. One of these exceptions may occur if the plan didn’t properly distribute the initial COBRA notice. The initial COBRA notice is the notice that goes to covered employees and spouses informing them of their obligation to notify the plan if any COBRA-triggering event occurs (such as the child aging out of the plan). If that notice was not properly provided, then the covered employee/spouse is not on notice that there is an obligation to inform the plan upon the occurrence of a triggering event. Under those circumstances, the plan may have an obligation to extend COBRA to the discovered ineligible dependent.
Another exception could occur if the ineligible dependent had only recently aged off the plan and was still in the window in which the plan could be notified that the dependent had aged off. The COBRA regulations stipulate that this notification must happen within 60 days. If the dependent had aged out in the last 60 days, it would still be appropriate for the employee to notify the plan of the ageing-off event, which could require an extension of COBRA.
Plans choose to undertake dependent eligibility audits in order to ensure the administration of the plan is consistent with the plan terms and to help the plan run efficiently. Taking the above considerations into account will help ensure that any dependent eligibility audit solves more issues than it creates.
Yes, this would constitute a qualifying event if the plan document allows for it.
As background, when employees contribute to the cost of coverage on a pre-tax basis, then Section 125 of the IRC governs those elections. Employees may not change their elections mid-plan year unless they experience a qualifying event. Some of the identified qualifying events are not optional for an employer. They are called the HIPAA Special Enrollment Right events and an employer must allow employees to change elections following the occurrence of these events, which are birth, marriage, adoption, loss of eligibility for other coverage and becoming eligible for a state Medicaid/CHIP premium assistance program.
Other qualifying events are optional for an employer. If an employer wants to recognize them, they must amend their Section 125 Cafeteria Plan Document to provide for them. The optional Section 125 qualifying events include:
PPACA brought two additional optional qualifying events. The first allows employees to voluntarily drop coverage mid-plan year if they have experienced a reduction of hours that did not affect their eligibility under the plan. An example is an employee who is measured using the look-back measurement method and has been determined to be a full-time employee. If that employee experiences a change in status to a part-time position during the stability period, he/she would continue to be eligible through the end of the stability period regardless of hours worked. This new qualifying event would permit the employee to drop coverage under the employer’s plan if he/she intends to enroll in other minimum essential coverage.
Finally, the second PPACA related optional qualifying event is related to enrollment in marketplace coverage. If the employee intends to enroll in coverage through the marketplace during the marketplace’s annual open enrollment period or is eligible for a special enrollment period through the marketplace, the employee is permitted to drop the employer’s coverage. So, if the employer has included this optional qualifying event in their plan document terms, then the employee would be able to drop their coverage under the group health plan mid-year.
Yes, both the employee and the spouse must be ‘gainfully employed’ in order for the employee to utilize the employer’s DCAP under the Section 125 plan.
Specifically, a DCAP can only reimburse expenses incurred by a qualified individual, which includes a tax dependent of the employee who is incapable of caring for him/herself, a child under the age of 13, or a spouse who is incapable of caring for him/herself. Further, the DCAP rules require that the employer pay only for “dependent care assistance,” and dependent care assistance means “payment for, or provision of those services, which if paid for by the employee would be considered employment-related expenses under IRC Section 21(b)(2).”
If an employee is married, then expenses are only considered to be employment-related if the employee's spouse also is gainfully employed or is in active search of gainful employment (that is, working or looking for work). Even if a spouse is neither working nor looking for work, the spouse can be deemed to be gainfully employed in certain circumstances—specifically, for any month in which he or she is either a full-time student or mentally or physically incapable of self-care with the same principal place of abode as the employee for more than half of the year.
In summary, the employee’s spouse would also have to be gainfully employed, a full-time student, or incapable of self-care in order for the employee to participate in the employer’s DCAP.
As background, PPACA included 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 receive rebates (either in the form of a premium credit or reduction or via cash or check) by Sept. 30 each year. Employers who receive MLR rebate funds are tasked with determining the proper use of those funds and should do so with the assistance of outside legal counsel. We have, however, summarized various considerations employers should take into account below.
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). It is 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.
Review Plan Document.
An employer receiving a rebate should first review its plan document. Based on the guidance in DOL Technical Release No. 2011-04, the terms of a plan document may govern the treatment of a rebate received by the plan. If a plan document clearly states that a rebate is not plan assets, then the employer may retain the rebate, but certain conditions must be met. The employer must be the named policyholder (as opposed to the plan). The language in the plan document must be clear and unambiguous. Lastly, the employer cannot retain a rebate amount that exceeds the premiums actually paid by the employer for the respective year. If the rebate exceeds the employer's cost, the excess must be treated as plan assets and handled accordingly (placed in trust or distributed to participants, as discussed below).
If a plan document is silent or unclear, then other factors are considered in determining how to handle the rebate, such as the amount of employer vs. employee contributions, etc.
Determine whether any portion of the rebate is related to plan assets.
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). 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. Alternatively, if the employer contributes 100 percent of the premium (the plan is non-contributory for employees), then 100 percent of the rebate may be retained by the employer.
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. An employer could choose to provide a flat amount rebate to each participant or a percentage of actual contribution. The employer should keep documentation as to their methodology showing that it is reasonable, fair and objective.
In regards to former participants, the DOL’s expectation is that the employer plan sponsor will include former participants in the distribution of the rebate (i.e., those who were covered by the plan and contributed to the cost of the coverage for which the rebate is being issued). This would include all former participants (including COBRA participants) and even those no longer covered under the plan.
While DOL Technical Release 2011-04 contemplates employers distributing the plan asset portion of the rebate to former employees, there is an exception if the cost of distributing to former employees approximates the amount of rebate. It is unclear what can be taken into consideration in determining cost – while it may include the time to track down individuals, the more conservative view is that an employer should look only at “hard” costs – postage, cost of having check cut, locator fees, etc.
There is not a “de minimis” threshold. The only consideration is the one outlined above regarding the cost of including former employees compared to the distribution amount.
Determine the distribution method.
An employer can distribute the rebate to plan participants through cash or check refund, premium reductions, premium holiday or benefit enhancements. When choosing a distribution method, the employer should consider the fact that the rebate must be distributed within three months of receipt. Otherwise, they will be required to establish an ERISA trust and hold the rebate (as plan assets) in that trust. Thus, an employer wishing to use the rebate to reduce premiums in the upcoming plan year, would likely need to establish a trust.
Lastly, please note the tax implications if the employer chooses to distribute the rebate as a cash payment to employees. If the employee premiums were previously paid pre-tax, then the distribution would generally be taxable. However, if the employee premium contributions were taken on a post-tax basis, the cash distribution would not be subject to federal income tax.
If you would like additional information, please ask your advisor for a copy of the NFP whitepaper entitled “MLR Rebates: A Guide for Employers.”
FMLA would not likely provide job-protection for an employee to care for the serious health condition of a grandparent, unless the grandparent stood in loco parentis to the employee when the employee was a child. In loco parentis in this context means that the grandparent had day-to-day responsibilities to care for and financially support the child.
FMLA entitles an eligible employee to take up to 12 workweeks of job-protected unpaid leave to care for a spouse, son, daughter or parent with a serious health condition. The FMLA defines a “son or daughter” to include not only biological and adopted children, but also a foster child, a stepchild, a legal ward or a child of a person standing in loco parentis. The regulations further provide that the term “in loco parentis” includes those persons with day-to-day responsibilities to care for and financially support a child (the child must be under the age of 18).
Newer guidance also allows an employee to take FMLA leave for the serious health condition of a person who stood in loco parentis when the employee was a child. In other words, an employee may take leave to care for his/her grandmother with a serious health condition if the grandmother stood in loco parentis to the employee when they were a “son or daughter.”
So, FMLA would not entitle an eligible employee to take job-protected leave to care for the serious health condition of any non-parent, non-son, non-daughter or non-spouse unless an in loco parentis relationship exists or existed between them when the employee was a “son or daughter.”
However, an employer can choose to be more generous and offer the employee job-protected leave. The employer would want to ensure that doing so is consistent with their general leave policy. Specifically, offering unpaid, job protected leave to this employee when it is not for an immediate family member could set a precedent, by which other employees would also expect to receive the same treatment. Thus, the employer will want to carefully consider that when making such a decision. Please also note that providing job-protected leave under an exception may impact decisions beyond protecting the employee’s job. The eligibility provisions of the group health plan should be considered. If the plan document states that an employee is eligible for coverage only if he/she works x hours per month or is on FMLA, then this would generally dictate that coverage terminate once the employee is absent for a certain number of days.
Finally, while FMLA may not require providing job-protected leave for an employee to care for a grandparent, local laws may. Paid sick leave laws are becoming more prevalent and each one is administered differently. Some of them require employers to provide paid leave for an employee to care for a sick grandparent. Local laws should be considered when determining what type of leave needs to be provided to employees.
The answer depends on the type of submission error received by the employer. The IRS has several different error types, and those depend on the type of mistake or omission on the forms themselves. As a quick background, large employers (those subject to the employer mandate) were required to file Forms 1094-C and 1095-C with the IRS, and those with 250 or more Forms 1095-C were required to file electronically (and, for 2015 electronic reporting, had to do so by June 30, 2016). Many employers use a vendor to assist with the IRS electronic filing. After filing electronically, employers (or their vendors) should have received a confirmation from the IRS. The IRS has several different confirmations, and some are meant to notify the employer that there are errors or omissions in the electronic filing. Here is a list of the confirmations:
For “Accepted” filings, the employers has no further obligations relating to their returns—the IRS has accepted the filing (although the employer may still have employer mandate obligations/penalties if they did not offer affordable coverage to all full-time employees).
For anything other than an “Accepted” confirmation, the employer will need to take additional steps. For “Accepted with Errors” and “Partially Accepted” (which are very similar), the employer will need to re-file the forms that are incorrect (but will not need to re-file the entire submission). A common reason Forms 1095-C may be accepted with errors or partially accepted relate to inaccuracies within the forms themselves. For example, there may be inaccurate or missing values relating to lines 14, 15 and 16 on Form 1095-C (relating to the offer and enrollment in coverage for each month of the year). Another common example is a mismatched Social Security Number (SSN), which can result due to a data entry error, using a married name where the IRS has a record of a maiden name (or vice versa), or using a nickname or middle name. Employers should contact employees and review other employment records (such as Forms W-2 and other tax withholding documents) to try and track down the SSN inconsistency. If that doesn’t work, employers may need to reach out to the Social Security Administration to try and reconcile the SSN inconsistency). That is important for reasons beyond the reporting as well (such as labor, wage and federal/state income tax withholding). If employers need to re-file incorrect forms, they will need to use Form 1094-C as a submission form (and check the “CORRECTED” box on the corrected Forms 1094-C and 1095-C). For “Accepted with Errors” and “Partially Accepted”, the employer is treated as having timely filed all forms, although they should re-file the corrected forms as soon as possible.
For “Rejected” and “Not Found” confirmations, the employer will need to re-file the entire submission (i.e., a Form 1094-C and all Forms 1095-C). These submission errors are considered major, and usually relate to situations where there are uniform mistakes throughout the filing. For example, if all Forms 1095-C are missing employee information or are all using invalid codes on lines 14 through 16, the entire submission may be rejected. Similarly, if there were issues in the electronic filing itself (such as the employer or vendor has not been properly authenticated to file electronically), then the IRS may send back a “Not Found” error message. Importantly, if the corrected forms are filed within 60 days, the forms are treated as having been filed on the original date. Those filed beyond 60 days, though, will be treated as untimely filed.
An EAP may cause HSA eligibility issues, and so employers should use caution when they are implementing an EAP (and also offering an HDHP/HSA combination for the medical plan). That does not mean that all EAP coverage will cause a loss of HSA eligibility. The rules state that EAP coverage will not cause an individual to lose HSA eligibility as long as the program does not provide significant benefits in the nature of medical care or treatment. So, whether or not the EAP coverage will cause a loss of HSA eligibility comes down to whether the EAP is providing ‘significant’ medical care. Unfortunately, the rules do not define ‘significant’. That causes the analysis to be more difficult and more reliant upon specific facts and circumstances, which means it is harder to determine whether a particular EAP’s services would constitute significant medical care.
There is some guidance, though, on what will not be considered significant. First, screening and other preventive services are not considered ‘significant’. The related IRS guidance, discussed in IRS Notice 2004–50, Q&A–10, provides several examples that help clarify how the amount, scope and duration of covered services are taken into account in determining whether significant medical care or treatment is provided. The first example is an EAP. The second and third examples are disease-management and wellness programs, respectively. Although disease management and wellness are slightly different from EAPs, the analysis is parallel (they are all looking at whether the arrangement is providing significant medical care). Those examples are included below.
Example 1: EAP. An employer provides its employees with benefits under an EAP, regardless of employees' enrollment in a health plan. The EAP is specifically designed to assist the employer in improving productivity by helping employees identify and resolve personal and work concerns that affect job performance and the work environment. Benefits consist primarily of free or low-cost, confidential short-term counseling to identify problems that may affect job performance and, when appropriate, referrals to outside entities to assist employees in resolving their problems. Issues addressed during the short-term counseling include (but are not limited to) substance abuse, alcoholism, mental health or emotional disorders, financial or legal difficulties, and dependent care needs. The EAP is not a “health plan” under Code §223(c)(1) because it does not provide significant benefits in the nature of medical care or treatment.
Example 2: Disease Management Program. An employer's disease-management program identifies employees and their family members who have, or are at risk for, certain chronic conditions. The program provides evidence-based information, disease-specific support, case monitoring, and coordination of the care and treatment provided by a health plan. Typical interventions include monitoring laboratory or other test results, telephone contacts or web-based reminders of health care schedules, and providing information to minimize health risks. This disease-management program is not a “health plan” under Code §223(c)(1) because it does not provide significant benefits in the nature of medical care or treatment.
Example 3: Wellness Program. An employer offers a wellness program for all employees regardless of their participation in a health plan. The program provides a wide range of education and fitness services designed to improve overall health and to prevent illness. Typical services include education; fitness, sports, and recreation activities; stress management; and health screenings. Any costs charged to the individual for participating in the services are separate from the individual's coverage under the health plan. This wellness program is not a “health plan” under Code §223(c)(1) because it does not provide significant benefits in the nature of medical care or treatment.
So, based on these examples, the IRS does allow some EAPs to co-exist with an HSA even though the EAP provides limited forms of medical treatment for existing conditions. Specifically, Example 1 allows short-term counseling for substance abuse, alcoholism and mental health or emotional disorders, all of which would be considered medical care (if the advice is coming from a trained professional). That example permits such counseling, at least for a short term (although it’s not clear how long that would be) without adversely affecting HSA eligibility. Therefore, there certainly appears to be some wiggle room there for employers with EAPs. However, employers need to be cautious when adopting those plans—oftentimes those marketing the EAPs do not highlight the potential conflict with HSA eligibility (or the application of other laws, such as ERISA, COBRA and health care reform).
To summarize, it’s quite possible that an employer’s EAP does not adversely affect HSA eligibility. But, employers still need to be aware of the issue and should review plan designs with their advisors, as a best practice.
Although carriers may be open to granting employers a certain rate for an 18 month time period, employers should be mindful of their compliance requirements under Section 125, ERISA and the employer mandate. These obligations apply to employers and plan sponsors, not carriers. Thus, the responsibility is on the employer to understand the issues and potential consequences of extending a coverage period beyond 12 months.
Section 125/Cafeteria Plan
An extended coverage period could be problematic under the cafeteria plan rules, which are applicable if employees are able to contribute towards their premiums on a pre-tax basis. The Section 125 rules require employees to have the option to prospectively elect coverage for the 'coverage period' (also called the 'plan year'). The related rules state that a 'plan year' must be 12 consecutive months, although there is an exception for a shorter plan year (if it's justified by a business purpose). The plan year can begin on any day of any calendar month and must end on the preceding day in the immediately following year.
The Proposed Treasury Regulations state:
“The plan year of a cafeteria plan must be twelve consecutive months, unless a short plan year is allowed… Benefits elected pursuant to the employee's election for a plan year generally may not be carried forward to subsequent plan years.”
So, if the employer has a section 125/cafeteria plan, since Section 125 requires the election to be only for the period of coverage, the employer must allow employees to change that election at the end of the plan year (i.e., prospectively elect or not elect coverage for the following plan year). Thus, an open enrollment would be required annually.
Under ERISA, a plan year can be no longer than 12 months. The plan year must be identified in the SPD and the Form 5500 filing is based on a 12 month plan year (unless there is a shorter plan year). The Form 5500 Instructions state:
“All required forms, schedules, statements, and attachments must be filed by the last day of the 7th calendar month after the end of the plan or GIA year (not to exceed 12 months in length)...”
So, if the group health plan’s coverage period extended to 18 months, the employer would still be responsible for filing a Form 5500 after 12 months. This could complicate reporting as the coverage period/policy year would span over two ERISA plan year filings.
An extended coverage period would be an issue if you are an applicable large employer subject to the employer mandate. Generally, an employer is subject to the employer mandate” for a calendar year if it employed an average of at least 50 full-time employees including equivalents on business days during the preceding calendar year. To comply with the employer mandate, a large employer must offer a full-time employee minimum value, affordable coverage. An employer makes an offer of coverage to an employee if it provides the employee an effective opportunity to enroll in the health coverage (or to decline that coverage) at least once for each plan year. The employer mandate regulations state:
“An applicable large employer member will not be treated as having made an offer of coverage to a full-time employee for a plan year if the employee does not have an effective opportunity to elect to enroll in the coverage at least once with respect to the plan year.”
As discussed above, a plan year is 12 months. So, if an employee previously waived coverage and is not given an annual opportunity to enroll in coverage- the employer will be considered to have failed to make an offer of coverage to this employee under the employer mandate and be at risk for a penalty.
In summary, Section 125 requires employees have the option to make a prospective election for the coverage period (12 months), ERISA requires a plan year of no more than 12 months and the employer mandate requires an offer of coverage to be made at least annually.
As background, a summary annual report (SAR) is an annual summary of the latest Form 5500 for a group health plan. The SAR is basically an annual statement written in narrative form, so that plan participants can have access to plan information in a more easily understood form. So, to begin with, a SAR is required only where the plan is subject to Form 5500 filing requirements. If an employer or plan is exempt from the Form 5500 filing requirement, then there is no need to worry about the SAR requirement. In addition, totally unfunded welfare plans (regardless of size) need not worry about the SAR requirement. Thus, large self-insured plans that are unfunded do not need to concern themselves with a SAR (even though they may have had to file a Form 5500). On the other hand, large funded self-insured plans and large fully insured plans are subject to the SAR requirements. Employers with self-insured plans should work with outside counsel in determining if they are funded.
For those subject to the SAR requirement, the plan administrator must distribute a SAR to all plan participants covered under the plan (including COBRA participants). This is similar to the SPD rules. The SAR must be distributed within nine months of the end of the plan year—two months after the Form 5500 filing deadline. For calendar year plans with a July 31 Form 5500 deadline, the SAR must be distributed by September 30. If a plan administrator was granted an extension of time to file the Form 5500, then the SAR deadline is two months after the extension date.
As far as the method for distribution, the SAR rules are similar to other ERISA distribution rules. Mail is always an acceptable form of delivery. Email is also generally acceptable, so long as the employee has computer access (e.g., a work email or a work computer station) as an integral part of their job or has given the employee permission to receive communications at a separate email address. The employee also needs to have the ability to print the document without additional cost. Employers using email delivery should use return-receipt features and notify the employee of the importance of the document and the participant’s right to receive a free paper copy upon request.
Lastly, on content, the SAR is meant to summarize the information in the Form 5500. That includes basic information relating to the plan, including plan name and type, sponsoring employer name and contact information, insurance information (company, amount of premiums and benefit claims paid), basic financial information and the participant’s rights for additional information. More information is necessary if plan funds are held in trust or a separately maintained fund or account.
Simply because an individual is aged 65 or older and is eligible for Medicare does not mean that they are ineligible for an HSA (meaning the employer and employee can contribute). The key factor is whether the individual is enrolled in Medicare. If the individual has not enrolled in Medicare, he or she would still be eligible to make and receive HSA contributions.
So, the key is whether the employee is actually enrolled in Medicare. Medicare enrollment at age 65 is not automatic. It is only automatic for those that have filed to receive Social Security benefits or Railroad Retirement Board benefits. If an employee elects to receive Social Security benefits, then he or she is automatically enrolled in Medicare Part A, and would not be able to make or receive future contributions to an HSA. However, if the employee elects to delay Social Security benefits, then he or she is not automatically enrolled in Medicare Part A, and would be eligible to continue contributions to an HSA. To clarify, Social Security benefits are not automatic. An individual has the choice to delay benefits beyond age 65 if he is still working and desires to increase his later benefit.
Further, there is a six month rule to consider (although the rule does not apply in all cases). Specifically, the six month retroactive effective rule does not apply to those that apply for Medicare before or on their 65th birthday. It also doesn’t apply to those who pay a premium for Part A. If an individual applies for free Part A after six months of their 65th birthday, then this is when the six month rule applies. Thus, depending on when an individual enrolls in Medicare Part A and whether he is required to pay a premium, the coverage could be made effective retroactively six months. In this case, that individual would need to be mindful of the HSA contributions he made in the previous six months. If he did not stop contributing in those six months, he may be subject to a tax penalty. To avoid the penalty, he could work with the trustee to refund the excess contributions prior to the tax filing date.
In summary, at the point employees enroll in Medicare, they become ineligible for HSA contributions. They may continue participation in the HDHP. They also may continue to receive reimbursements from the existing balance.
First, it’s important to understand the purpose of this marketplace notice, which is being sent to employers indicating that they have had one or more employees receive a premium tax credit (PTC). The marketplace is trying to verify whether the listed individual is eligible for a PTC for an individual policy through the marketplace in 2016. It is NOT a notice from the IRS assessing a penalty on the employer. The IRS notices based on an employer’s failure under the employer mandate to offer affordable coverage in 2015 will presumably be coming later this year. The marketplace, who sent this notice, is not concerned with whether the employer complied with the employer mandate. They are only concerned with whether the identified employee is eligible for a subsidy.
Next, it is important to understand how an individual is eligible for a subsidy. An individual is eligible if:
It is these two middle bullets where the employer comes in. If the identified individual was offered affordable, minimum value coverage or is enrolled in coverage (even if the employer coverage enrolled in is not affordable or minimum vale), then eligibility for the subsidy is lost. The subsidy is for individuals who do not have other affordable coverage available to them. An employer should only respond to the marketplace appeal notice if the employee was enrolled in the employer’s plan, or the employee was offered minimum value, affordable coverage and waived the offer.
If you receive one of these notices as to an employee, whether you should respond will be influenced by whether and what type of coverage was offered or if the employee was enrolled in coverage.
If the identified employee:
|Was not offered coverage (for any reason during 2016)||Do not respond. The marketplace is not concerned with the reason that an employer did not offer coverage to an employee.|
|Was enrolled in the employer's plan from the start of 2016 through the date of the notification letter (regardless of whether the coverage was of minimum value or affordable)||Respond with a copy of the enrollment form or COBRA Election Form or Member ID Card; and dates of coverage.|
|Was offered minimum value coverage that was affordable, but the employee waived coverage||Respond with a signed employee waiver of coverage, or letters, emails, announcements or enrollment materials that were sent to the employee with the notification date.|
Later in the year, the IRS will start to send notices to employers with an estimated penalty assessment. There are many reasons that an employer may not offer coverage and would still not be assessed a penalty by the IRS (e.g., an employee was part-time or in an initial measurement period). After receiving the IRS penalty assessment form (which has not been released yet), the employer will have some time to appeal the assessment. That is when the employer would provide information on why it did not offer coverage to a specific employee. Specifically, that would be the appropriate time to provide the information related to the employee’s measurement periods, waiting period or other reason coverage was not provided. It is not appropriate to provide that information in response to this marketplace notice.
Yes. The PCOR fee is due Aug. 1, 2016, for all plans that ended in 2015. Usually, the fee is due on July 31 of the year following the plan year end date, but since July 31 is a Sunday this year, the due date moves to the following business day (Monday, Aug. 1, 2016). Insurers are generally responsible for the PCOR fee payment and filing for fully insured plans, whereas the employer is generally responsible for the PCOR fee payment and filing for self-insured plans. Special rules apply for determining who is responsible in the situation of an association plan, MEWA or VEBA. The IRS has a helpful chart to remind employers which types of plans are subject to the fee.
As far as calculating the fee amount, the general rule is that the PCOR fee is based on the average number of covered lives during the plan year. Importantly, this includes not only employees, but also dependents (spouses, children and others) as well as former employees still receiving coverage under the plan (former employees on disability who are still covered, retirees, COBRA participants, etc.). The IRS allows employers to use any one of four methods for calculating lives, as described below.
Actual Count Method: Calculate the sum of the lives covered for each day of the plan year and divide that sum by the number of days in the plan year.
Snapshot Method: Add the totals of lives covered on one date in each quarter, or an equal number of dates for each quarter, and divide the total by the number of dates on which a count was made.
Snapshot Factor Method: Add the total number of lives covered on any date (or more dates, if an equal number of dates are used for each quarter) during the same corresponding month in each of the four quarters of the benefit year (provided that the date used for the second, third and fourth quarters must fall within the same week of the quarter as the corresponding date used for the first quarter). Divide that total by the number of dates on which a count was made, except that the number of lives covered on a date is calculated by adding the number of participants with self-only coverage on the date to the product of the number of participants with coverage other than self-only coverage on the date and a factor of 2.35. For this purpose, the same months must be used for each quarter (for example, January, April, July and October).
Form 5500 Method: The plan may use the data reported on the most recent Form 5500. A plan may only use this method if it filed the Form 5500 by July 31. A plan filing an extension for the Form 5500 would have to use another calculation method. If a plan covers only employees, then the plan sponsor would add the number of participants at the beginning of the plan year and at the end of the plan year and divide by two. If the plan covers dependents, the plan sponsor would add the number of participants reported for the beginning of the plan year and the number of participants at the end of the plan year, and report this total.
Employers may switch methods from one year to the next, and should calculate the average number of lives under all four methods and choose the one that is most favorable. For example, a plan that has many covered dependents (employees generally cover 3 or more dependents) may find that the snapshot factor method is advantageous, since it allows employers to disregard actual dependent count and instead assume 2.35 lives per covered employee. Similarly, if the employer hires more individuals at the end of quarters, the snapshot method may allow an employer to use a date early in each quarter to make a count, which may be advantageous.
Finally, the PCOR fee is filed and paid via IRS Form 720, Quarterly Federal Excise Tax Return. The PCOR fee is reported in Part II of that form, which also includes the amount of the fee (based on when in 2015 the plan year ended). Employers should work with their advisors and outside counsel in ensuring proper filing and payment of the fee.
Here are some helpful IRS links:
Whether employer plan sponsors will have to file Form 5500 for these policies depends on their status as ERISA-covered plans. Group health and pension plans that are subject to ERISA are generally required to file a Form 5500, with a few exceptions.
Generally, ERISA only applies to the following benefits:
The ancillary products that would fit the definition of benefits that are subject to ERISA could require a Form 5500 filing unless some other exception applies.
The most notable exception is for small (<100 participants) unfunded or insured plans. However, certain payroll practices and voluntary plans are also exempt from ERISA, and would not have to file a form 5500 (or be included in the 5500 filed for major medical).
Payroll practices generally include sick-pay or other income replacement benefits and vacation, holiday, jury duty or similar pay. Such benefit payments must be solely paid by the employer out of the employer’s general assets to fall within the payroll practices exception. So, if an employer pays the total premium for any of the products above, and they do so out of their general assets, then the offering of the product could be considered a payroll practice that would exempt the benefit from ERISA.
The voluntary plan exemption is for voluntary insurance arrangements under which employees pay the full premium and the employer has minimal involvement. These arrangements can include both group and individual insurance policies.
Specifically, the term “employee benefit welfare plan” does not include group insurance if the sole functions of the employer are to permit an insurer to publicize a program to employees, to collect premiums through payroll deductions and to remit premiums to the insurer, and if the employer does not endorse the program, contribute premiums to the insurer or profit from the program. In addition, the plan must be completely voluntary, meaning that the employer cannot put any conditions on the election of the benefits. Benefits that fit these parameters would be considered voluntary and would not be subject to ERISA.
If these ancillary products do not satisfy any exception, the benefits would be subject to ERISA and the employer, as plan sponsor, would be required to file a Form 5500 for these plans. However, keep in mind that these benefits could be included in the major medical plan’s Form 5500 filing if the benefits have been bundled with the major medical plan for wrap/plan document purposes. Because the analysis is based on the specific facts and circumstances of each different situation, employers should work with their brokers and outside counsel in determining the application of ERISA and the Form 5500 requirements to their ancillary products.
To answer the question, employers will need to consider their plan document terms and the employer mandate requirements. For employer mandate purposes, applicable large employers are required to offer affordable, minimum value coverage under PPACA or risk a penalty. Under the employer mandate, the penalties are largely based on the individual employee and whether they are working full-time or not.
A full-time employee is one working 30 hours or more per week. Generally, even interns or temporary employees are considered full-time employees if they work 30 hours or more per week and if they are paid. So, those interns that will be working full-time and will be paid, would have to be offered health coverage by the first day of the fourth month or the employer risks a penalty under the employer mandate. However, there are two ways that this type of employee may be excluded from the requirement to offer coverage.
The first is under a 90-day limited non-assessment period. Generally, the employer mandate regulations state that no employer mandate penalty will be assessed for the first three months that an employee is employed—so long as the employee is offered coverage on the first day of the fourth month of employment. This means that employers could exclude paid interns under a limited non-assessment period, at least for the first three months (up to 90 days) of employment.
However, taking that approach can be problematic for two reasons. The first reason is that the intern may work longer than three months. If that is the case, then employers would be risking a penalty if they don’t offer the employee coverage for that fourth month (and that risk extends not only for the fourth month and beyond, but also for the first three months, since no coverage was offered). The second reason is that the group may offer benefits to other employees sooner (e.g., as of the first day of hire). If eligibility normally begins on the first day of hire, and yet the employer chooses to make interns wait until the fourth month, then it could be a violation of their plan document terms.
Another way to exclude paid interns would be to classify them as “seasonal employees”. The definition of “seasonal employee” is one whose customary annual employment does not exceed six months (and the period of work should begin each calendar year in approximately the same time of year). So, if interns are hired for work during the same period each year and the work lasts no more than six months, then employers may use measurement periods to measure whether they are working 30 hours or more per week over the measurement period. To exclude them, employers could have a measurement period of 12 months (the regulations allow anything between three and 12 months). An employee only working full-time for three to four months would not likely exceed 30 hours per week when measured over the entire 12 month measurement period (since their hours would be zero for the remaining eight to nine months). Thus, they would not be considered a full-time employee and would not have to be offered coverage.
Although classifying interns as seasonal appears very beneficial for an employer, the interns will still need to fit the definition of “seasonal” (i.e., hired at the same time of year every year for no more than 6 months). So, employers should be careful in referring to interns as seasonal, if interns are hired at different times of the year or if their employment extends beyond six months.
Switching gears, for purposes of the employer mandate, an unpaid intern would have zero hours of service, and therefore would not need to be offered coverage (i.e., they would not be considered a full-time employee). This is because an “hour of service” includes only hours worked for which an employee is actually paid. So, there would not be a requirement to offer coverage under the employer mandate, at least for the unpaid interns.
Note, there is also an exception if the interns are in positions that are subsidized through the federal work study program (or a substantially similar program of a state or political subdivision of a state). Essentially, even if interns are receiving some compensation/stipend through a federal work study program, then that would still not be enough to have their hours be considered “hours of service” under the employer mandate.
Lastly, employers need to review their plan documents to ensure that unpaid interns are not otherwise eligible for coverage. The eligibility conditions should be clear that they are not eligible, and employers should operate the plan accordingly. Employers that sponsor fully insured plans should also perform that review in conjunction with the carrier to ensure the employer and carrier are on the same page with respect to eligibility.
If employees contribute to the cost of coverage with pre-tax salary reductions, then Section 125 of the IRC limits when an employee may change his/her election. An employee may only change an election mid-year following a qualifying event. There are two types of qualifying events.
The first type of qualifying event is a HIPAA Special Enrollment Right. These include birth, adoption, marriage, loss of eligibility for Medicaid or CHIP, loss of eligibility for other group coverage and gain of eligibility for Medicaid/CHIP premium assistance. Following these events, an employer is obligated to accept the enrollment if the employee’s request is received in a timely manner. The employee is entitled to enroll:
Note, though, that the HIPAA special enrollment events do not allow the employee to disenroll from coverage following such an event.
The second type of qualifying event is the permissible events under Section 125. These are voluntary, meaning that the employer can choose whether to adopt these events in their plan, and generally relate to whether the employee can pay for coverage on a pre-tax basis. Among others, the section 125 qualifying events include change in cost, addition/significant improvement to benefit package option, change in coverage under other employer and entitlement to Medicare. Following these events, an employer would accept the enrollment if the employer provides for such changes in its written Section 125 plan document and the employee’s request is received in a timely manner. Further, the employee’s requested change must be on account of and correspond with the event. This is called the consistency rule. For example, under the Medicare entitlement event, coverage may only be dropped for the individual who has enrolled in Medicare. If a spouse enrolled in Medicare, the employee would be permitted to drop coverage on the spouse, but would not be permitted to drop coverage on him/herself.
Now, let’s consider an employee who has recently been married. Let’s say at the previous open enrollment (the most recent open enrollment prior to the marriage date), he waived coverage. Following the marriage, he wants to enroll himself only under the group health plan. He does not wish to enroll the spouse at this time. Some may argue that enrolling himself only does not meet the consistency rule if he is not also adding the spouse. Regardless of consistency, the Section 125 regulations provide that a cafeteria plan may permit an employee to make a new election that corresponds with a HIPAA special enrollment right. Thus, the employee would be permitted to enroll himself only following the marriage or add himself and the spouse.
Alternatively, if the employee was already enrolled in the group health plan and his new spouse enrolled him under her employer’s plan, he would be permitted to drop the employer’s coverage if the employer recognizes the Section 125 event of change in coverage under other employer plan.
Next, let’s consider an employee who has had or adopted a baby. Following the birth, the employee would be permitted to add:
If the employee has other children, the other children do not have a HIPAA special enrollment right to be added following the birth/adoption. However, if the employer recognizes the “tag along rule” under Section 125, they may permit the enrollment of other children.
Similar to marriage, the employee may drop coverage following the birth for herself, spouse or child(ren) if her spouse added coverage for that individual under his employer’s plan. This is permitted under the Section 125 event of change in coverage under other employer plan.
Qualifying events and associated election changes can be complicated. Please contact your advisor with questions or to request the NFP Section 125 Qualifying Events whitepaper.
This could be a circumstance where a mid-year election change is allowed. Section 125 restricts the ability of an employee who has made a pre-tax election to change that election mid-plan-year. Basically, an individual's election is irrevocable (unchangeable) during the plan year unless the individual experiences a Section 125 qualifying event (and even then, the plan document must allow the election change, and the election change must be on account of and consistent with the qualifying event).
In September 2014, the IRS introduced a permitted qualifying event where an employer could allow an election change if an employee goes from a status where they were reasonably expected to average at least 30 hours of service to one in which they are reasonably expected to average less than 30 hours of service, even if eligibility for the plan is not lost.
The employee would need to have the intention to enroll in minimum essential coverage elsewhere in coordination with the election change. For this event, employers may rely on a representation from the employee that they have enrolled or intend to enroll in new coverage. The employee does not actually have to provide proof of enrollment to drop coverage.
One example where this event may come into play is if the employer uses a look-back measurement period and the employee experiences a change in status resulting in less hours during a stability period where coverage must be offered (because it was “earned” during the prior measurement period).
Please note that this event allows employees to revoke coverage mid-year under an employer’s group health plan, but does not allow employees to revoke their health FSA elections. Further, allowing the reduction of hours qualifying event is optional and must be permitted in the plan document.
A multiple employer welfare arrangement, or MEWA, is defined as a single plan that covers the employees of two or more unrelated employers. MEWAs can be formed intentionally or unintentionally, and many employers may be unaware that they are actually participating in or otherwise involved with a MEWA arrangement. In determining whether a MEWA exists, it’s important to understand the relationships between the various businesses involved in the situation. The primary question is whether the businesses are part of a controlled group (as defined in IRC Section 414). If so, then the arrangement would not be viewed as a MEWA by the IRS or DOL, but as a single entity (since the businesses would have enough common control to be considered part of the same controlled group). If not, then the arrangement would be viewed as a MEWA, since a single plan would be covering employees of two or more unrelated (not part of the same controlled group) businesses.
Whether businesses are part of a controlled group under IRC Section 414 is a complicated calculation that should be made by outside counsel (particularly since it could be construed as legal advice and since it has implications outside of benefits compliance). Generally speaking, though, there are two ways a group of businesses might be part of a controlled group—a parent/subsidiary relationship or a brother/sister relationship. The parent/subsidiary relationship is fairly straightforward, and looks at whether a parent company owns at least 80 percent of the subsidiary. The brother/sister relationship is much more complicated, but generally looks at whether five or fewer individuals (or trusts) own at least 80 percent of the businesses, and also looks at their identical ownership (which again, can get quite complicated).
If one of those two relationships exists, then a plan covering employees of the various businesses would not be a MEWA, as the businesses would be related. On the other hand, if one of those two relationships does not exist, then a plan covering those employees would be viewed as a MEWA, as the businesses would be unrelated.
Importantly, a MEWA is not necessarily a prohibited arrangement. However, additional compliance obligations apply to a MEWA under ERISA. Specifically, a MEWA must file a Form M-1, which is an annual filing with the DOL that reports on the MEWA’s compliance with certain federal laws. In addition, the MEWA and its participating employers must closely examine whether ERISA applies to the MEWA itself or to each participating employer separately. That determination is dependent on the facts and circumstances surrounding the situation, and must be made by outside counsel. In most instances, though, ERISA applies at the participating employer level, meaning each participating employer must comply with ERISA’s plan document, SPD and Form 5500 requirements. That said, depending on the arrangement, participating employers may contract with the MEWA to assist with those compliance obligations.
In addition to ERISA, MEWAs must consider state insurance laws. States are generally allowed to regulate MEWAs, even if ERISA also applies. State regulation varies by state, with some states being very active and others being less active. Where present, state regulation may include filing, reporting and funding requirements, particularly for self-insured MEWAs.
Overall, employers that are part of a plan offering that may involve multiple employers should work with outside counsel in determining whether a MEWA exists, and in determining ERISA and state law impact on the MEWA.
Unfortunately, the IRS has not provided any guidance that directly addresses what an employer should do if Forms 1095-C return to the employer undeliverable. Under the section entitled “Furnishing Forms 1095-C to Employees”, page 5 of the IRS instructions to Form 1095-C, states:
“You will meet the requirement to furnish Form 1095-C to an employee if the form is properly addressed and mailed on or before the due date.”
The instructions go on to say:
“Statements must be furnished on paper by mail (or hand delivered), unless the recipient affirmatively consents to receive the statement in an electronic format. If mailed, the statement must be sent to the employee’s last known permanent address, or if no permanent address is known, to the employee’s temporary address.”
This essentially provides that Forms 1095-C can be sent by mail, hand delivered, or even sent electronically if the rules for electronic disclosure have been met. It does not directly address what to do in the event a Form 1095-C is returned undeliverable.
Although the IRS has not specifically said what should be done, there are a couple best practices.
First, if the employee still works for the employer, it would seem that the employer could feasibly hand deliver the Form 1095-C to the employee or at least contact the employee for an updated address to which to send the Form.
For employees who no longer work for the employer, a possible course of action would be following IRS instructions for undeliverable W-2 forms. Page 7 of the 2016 Form W-2 instructions states that employers should “keep for 4 years any employee copies of Forms W-2 that you tried to but could not deliver.”
In any case, after attempting to send the Form 1095-C and documenting the attempt, employers would be wise to keep evidence of the attempt and keep copies of each Form 1095-C available and accessible to provide to individuals who request it at a later date.
Before a legally separated spouse is removed from the benefit plan, the employer must consider state law, plan eligibility, Section 125 rules and COBRA.
First, it’s important to point out that the employer will need to look to state law to determine when there is actually a legal separation. Many states do not recognize legal separation, and only consider a couple married or divorced under the law. Other states recognize legal separation, but require that the couple file that separation with the court or go through other specific requirements before there is a legal separation in place. As such, the employee and employer will need to be knowledgeable about the state law in place where this employee lives before determining if there is even a legal separation.
Second, unless the plan makes legally separated spouses ineligible for coverage, the plan would have to continue to cover the legally separated spouse. In other words, the plan document must state that a legally separated spouse is no longer eligible for coverage by virtue of the legal separation occurring. We rarely see this in plan documents. Typically, a legally separated spouse is still eligible for coverage and would only lose eligibility upon divorce. If the spouse does not lose eligibility upon legal separation and the premiums are taken pre-tax (meaning that the Section 125 qualifying events apply), the employee would not be permitted to drop the spouse from coverage until the divorce is finalized or until the next open enrollment period.
On the other hand, if a legal separation actually occurs, and the plan document indicates that there is a loss of coverage due to legal separation, then the separation would trigger a Section 125 qualifying event, and the employee could remove the spouse from coverage mid-year. The legal separation and loss of coverage would also trigger a COBRA triggering event. If the legal separation does not result in a loss of eligibility, then COBRA would not be offered until the divorce is finalized.
However, the employer should be aware of another interaction with COBRA. Let's say that the employee does not drop the spouse mid-year because it is not a legal separation (or because there is no qualifying event or COBRA triggering event), but then drops the spouse later during open enrollment. COBRA regulations hold that in the event that an employee eliminates coverage for a spouse "in anticipation of a divorce or legal separation" then the spouse would be eligible for COBRA at the time the divorce or legal separation is finalized.
In summary, if there is actually a state-recognized legal separation, the plan would have to exclude eligibility for legally separated spouses in order for the spouse to be removed from the plan mid-year. Additionally, the spouse would be offered COBRA at the time of the legal separation. If there was no state-recognized legal separation, or if the plan does not exclude legally separated spouses, then the spouse could not be removed until the divorce occurred or until the employee removed the spouse during open enrollment. If the employee removes the spouse in anticipation of divorce, then the spouse would be entitled to COBRA at the time of the divorce.
For this year’s reporting, applicable large employers must distribute a copy of Form 1095-C to each full-time or covered employee by March 31, 2016. This date applies regardless of whether an employer sponsors a non-calendar-year plan. Employers may distribute paper or electronic forms, but there are a few things to consider.
First, employers will want to document their practice and, in some instances, obtain proof of receipt. For paper delivery, employers may distribute the forms by mail or by hand. If by hand, a best practice would be to obtain a signature or other confirmation from the employee that the form has been received. If by mail, employers should send the form to the employee’s last known permanent address, or if no permanent address is known, to the employee’s temporary address. Employers should also consider maintaining an internal record of the mailing itself, including the mailing date (either by hand via employee file or through some sort of software or other electronic record).
Additionally, employers may distribute the form electronically via email, but only if the employee affirmatively consents to receive the statement in an electronic format. The consent to receive the form electronically must be made in a manner that reasonably demonstrates that the recipient is actually able to access the statement in the electronic format in which it will be furnished. For example, if the employer wants to send the form via email, the consent should come via email. Finally, the consent must state that it relates specifically to the 1095-C.
Yes, depending on the type of disability benefits the employee is receiving.
As we all know, an employer with 50 or more full-time employees, including equivalents, is subject to the employer mandate. This means that the employer is required to offer full-time employees the opportunity to enroll in affordable coverage that meets minimum value. If not, the employer is at risk for an employer mandate penalty. A full-time employee is one who has 30 or more hours of service per week (or 130 hours of service per month). An hour of service is any one for which the employee is entitled to compensation, including wages, vacation pay or disability benefits. It does not include workers compensation benefits.
In December 2015, the IRS confirmed in IRS Notice 2015-87 that hours of service include hours for which the employee is receiving disability benefits. This is true regardless of whether the benefits are provided through an insurance policy or an employer’s salary continuation plan. If the cost of the disability coverage is paid by the employee with pre-tax dollars or paid in whole or in part by the employer, the employee is still considered to have hours of service while receiving benefit payments. However, please note that this guidance will not apply if the disability benefits are paid in connection to state mandated disability coverage.
This new guidance could have a significant impact on group health plan eligibility practices. Consider Joe who is on a non-FMLA leave of absence. Perhaps he is not eligible for FMLA because he has exhausted his entitled amount or he does not have the required service time. Under Joe’s employer’s group health plan, employees are no longer eligible for coverage if they do not work a certain number of hours per week and are not on FMLA. In compliance with its prior practices and plan documents, the employer terminates Joe’s coverage and offers him COBRA. Joe has experienced a special enrollment period, purchases coverage from the exchange and receives a premium tax credit. [Note- The fact that the employee is on non-FMLA is an important one. FMLA requires that employees have the opportunity to continue group health plan coverage while on leave, regardless of whether they are receiving salary continuation or disability benefits.]
Now, let’s consider the impact if Joe is receiving disability benefits under an employer paid short-term disability plan. Under the new guidance, Joe would still be considered to be a full-time employee while receiving disability payments. If his employer terminated his eligibility and failed to offer him coverage meeting minimum value and affordability standards, the employer could receive a penalty. Further, the employer would need to continue to report Joe as full-time on his Form 1095-C for the months in which he received disability payments.
Please note that this practice only affects current employees. A terminated employee would not have hours of service, even if they are receiving disability benefits. As a result, employers may be tempted to solve the eligibility issue by terminating the employment of employees on non-FMLA leave who are receiving disability benefits. An employer should first consider its obligations under federal and state discrimination laws. The Americans with Disabilities Act requires an employer to provide reasonable accommodation, including extended leave, to employees who are unable to perform work duties because of a disability. Further, the EEOC prohibits an employer from implementing an automatic termination policy where a disabled employee’s employment is terminated automatically after a certain period of time. An employer must engage in an interactive process with the employee to determine if a reasonable accommodation can be made.
The new guidance is significant because it could result in more disability plans being employee paid with post-tax dollars. Such benefits would not result in hours of service for employer mandate and reporting purposes.
In summary, employers who sponsor disability plans should review their plan documents and employment policies to determine how the new guidance impacts their current eligibility practices.
Please contact your advisor to discuss further.
While there are a number of lines on Forms 1094-C (and 1095-C) that are required, line 22 is not one of them. Line 22 of Form 1094-C is optional, and an answer is not required. It is only for employers who qualify for one of the Alternative Reporting Methods and who want to take advantage of it. In order to help you determine whether any of the options would be helpful to you, the four options are described below.
The first method (box A) is related to the Qualifying Offer Method. A qualified offer is one that provides minimum value to the employee at a cost 9.56 percent (for 2015) or less of the Federal Poverty Level (FPL). In other words, the employer must be using the FPL affordability safe harbor. Its lowest cost option for self-only coverage for an employee must be less than $93.77 per month (for 2015). The employer must also offer minimum essential coverage to the spouse and dependents. The offer must be made for all months in which the employee was full-time (and not in a limited non-assessment period, such as a measurement or waiting period). One benefit is that the employer would not have to put the cost of coverage on Line 15 of Form 1095-C. On Line 14 of Form 1095-C, they would use code 1A. The second benefit is that rather than supplying each full-time employee with a copy of the Form 1095-C, the employer may provide a general statement indicating that the employee and any dependents received a qualifying offer from the employer. The statement, which must meet certain formatting requirements, would let the employee know that they are not eligible for a premium tax credit. The practical benefit of this method is limited as the employer still has to complete and file Form 1095-C with the IRS for each full-time employee. If the employer is completing Form 1095-C for the IRS, it may be easier to send that form to the employee as opposed to creating a generic general statement.
The second method (box B) is the Qualifying Offer Method Transition Relief for 2015. This method is similar to above, but the employer may use it if they made a qualifying offer to at least 95 percent of all full-time employees. They could send the general statement (rather than Form 1095-C) to the employees, even if they had not made a qualifying offer to that employee for all 12 months. Similar to the method indicated above, the employer would not have to complete Line 15 with the cost of coverage, but would still need to complete and file the Form 1095-C with the IRS.
The third method (box C) is Section 4980H Transition Relief. If the employer had between 50 and 99 full-time (FT) employees (including full-time equivalents) (FTEs) in 2014 and qualify for relief, they would check box C and enter “A” on Line 23 of Part III. If they had 100 or more FTEs in 2014, they may also want to check box C and enter “B” on Line 23 of Part III. This indicates that they want to take advantage of the transition relief related to Penalty A. Penalty A requires employers to offer coverage to at least 70 percent of FT employees in 2015 (95 percent in 2016 and beyond). If an employer fails this standard, they will be subject to a $2,080 per FT employee penalty (minus an employee reduction). The reduction is the first 30 FT employees. For 2015, there is transition relief for the reduction to be equal to the first 80 FT employees. So, if there is a chance that an employer with 100 or more FTEs did not meet the 70 percent standard, they might want to check box C and enter “B” on Line 23 to take advantage of the lower penalty amount.
Lastly, there is the 98 percent Offer Rule (box D). This may be helpful to an employer who offers coverage to 98 percent or more of all their employees. It would also be helpful to an employer who offers coverage to employees working less than 30 hours per week. For example, ABC Company offers coverage to employees working 24 hours or more per week. It would not need to go through the work of identifying employees who work 30 hours or more per week. It would include all of the employees in the reporting. The benefit is that the employer would not need to report the number of FT employees by month (normally required under Column b in Part III of Form 1094-C). The employer would still be required to report the cost of coverage on Line 15 and provide a copy of Form 1095-C. If an employer can easily identify FT employees from part-time, this may not be helpful as it might require them to file unnecessary forms.
In summary, if you use the FPL affordability safe harbor, you might be able to use boxes A or B (Qualifying Offer). If you offer coverage to 98 percent of the employees, you could use box D (98 percent Offer Method). If you qualify for 50-99 relief, you would use box C (section 4980H Transition Relief). If you are an applicable large employer with 100+ FTEs and you want to cover yourself for a possible lower Penalty A penalty, you may want to use C (Section 4980H Transition Relief). Use of one of these methods would be indicated in line 22 accordingly. In the alternative, if none of the methods apply, you would leave line 22 blank.
As a quick background, under the employer mandate, employers are required to offer affordable coverage to all full-time employees and their dependents, or risk a penalty. “Full-time employee” is defined as one that has 30 hours of service during a week. Employers are also asked to report on their employer mandate compliance by filing a report (Forms 1094-C and 1095-C) with the IRS (and distributing a copy of that 1095-C, or a substitute statement, to the full-time employee). In completing the reports, some vendors (hired to help prepare and file those IRS forms) may be asking for additional information on pay coding, which naturally gives rise to questions on what constitutes an ‘hour of service’ under the mandate.
Generally, an hour of service includes any hour for which an employee is paid, or is entitled to payment, for the performance of duties for the employer. For most hours, the answer is straightforward: If the employee is paid for an hour of work, that hour counts as an hour of service. In addition, though, an hour of service includes hours for which an employee is paid, even if the employee is not actually working. This would include situations where the employee is being paid, even if they are not actually at work physically performing services. Examples of these situations include payment for periods of time where the employee is on disability, PTO, vacation or holiday, paid leave, layoff, jury duty, military duty and bereavement. Since the employee is entitled to payment for those hours, those hours would be included as hours of service for purposes of the mandate and reporting.
There are a few interesting twists, though, when it comes to certain types of pay. First, on disability pay, while short- and long-term disability generally result in credited hours of service for periods during which the recipient retains employee status and receives disability payments (either directly from the employer or indirectly via an insurer or trust), disability benefits from coverage purchased with after-tax employee dollars will not give rise to hours of service. If disability premiums are paid by the employee pre-tax (or by the employer and not included in the employee’s gross income), then the disability hours are generally included as an hour of service. Employers should review their disability premium payment arrangements and then properly determine whether a disability benefit will constitute an hour of service under the mandate and reporting requirements.
Next, on leaves of absence, generally speaking, if the leave of absence is paid, then the leave hours will be considered hours of service. This is true regardless of the type of leave (FMLA or not). Similarly, if the leave is unpaid, then the leave hours will not be considered hours of service. Importantly, employers should remember that under an FMLA-protected leave, the employer must maintain the coverage during the leave (even if the leave hours are not counted as hours of service under the employer mandate). In addition, there are special rules on counting FMLA leave hours for employers that are using the look-back measurement method. Without going into much detail, the general idea is that the employer must disregard the FMLA leave when averaging hours during the look-back measurement period.
On overtime, the general rule is that an overtime hour counts as an hour of service. However, the increase in pay for an overtime hour worked does not change the number of hours worked. So, the increased pay just results in additional pay, not additional hours of service.
Lastly, for on-call hours, employers are required to use a reasonable method for crediting hours of service in situations where an employee is on-call. Importantly, it is not reasonable for an employer to fail to credit an employee with an hour of service where the employee must remain on the employer’s premises during the on-call period. Similarly, if the employee’s activities are substantially restricted during the on-call hours, such that the employee cannot use that time effectively for their own purposes, then those on-call hours must be counted as hours of service. In addition, an employer may not credit partial hours for on-call hours. Employers with on-call employees will need to evaluate whether the employees’ hours are constrained to the extent that the hour must be included as an hour of service.
Overall, employers should be monitoring and counting hours of service appropriately. In addition to the above situations, there may be unique situations for employers when it comes to determining whether an employee has worked an hour of service. While employers should work with outside counsel on special situations, we have resources to assist with general questions. Please ask your advisor for more information.
The exemption for smaller employers still applies. Until further notice, employers with fewer than 250 Forms W-2 in the previous calendar year are exempt from the reporting requirement. At this time, the IRS has not issued further guidance.
Therefore, employers who filed fewer than 250 Forms W-2 in 2015, reporting 2014 information, may continue to take advantage of the transition rule to delay this requirement until the earlier of the date the IRS ends the transition rule, or the year following the first year the employer files 250 or more Forms W-2. Of course, such employers may choose to include the value of health coverage if they wish to comply voluntarily.
Conversely, this also means that if a small employer previously relied on the exemption, but filed 250 or more Forms W-2 in 2015, reporting 2014 information, they must comply with the reporting requirement in 2015 (reflected on Forms W-2 provided no later than Feb. 1, 2016). The test to determine how many Forms W-2 were filed in the previous year must be performed each year in order to qualify for the transition relief.
It’s important to remember that this requirement hinges on the actual number of Forms W-2 filed, and not how many employees the employer employed or how many participants are covered on the health plan.
While it is correct that individual statements required under Section 6055 and Section 6056 reporting could be used as documentation that substantiates an employee’s compliance with the individual mandate, it’s important to note that there isn’t a specific requirement to file any form with an individual’s federal income tax return. Specifically, the employee is not required to file Forms 1095-B or 1095-C with their tax return. Instead, the individual mandate simply requires that every U.S. citizen has to have health insurance or pay a tax penalty under the PPACA’s individual mandate.
Employees will, however, have to attest to their coverage in their filing. As such, employees should keep their Forms 1095-B and/or 1095-C to substantiate that coverage should the IRS ever audit their tax return or have other questions about their compliance with the individual mandate.
If an employee faces questions from the IRS before they receive the forms, then IRS guidance has indicated that the employee may rely on “other information” received from the employer or insurer. Although the IRS did not specify what this “other information” would include, it would seem that the term could encompass a wide range of documents such as enrollment verification documents, enrollment/benefits letters from the insurer or even pay stubs showing that money was deducted from the employee’s check for health benefits.
To assist employers in communicating with employees, we have created an employee-facing white paper that explains more about the 1095-C. Please see your advisor to obtain a copy.