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The Rise of State Individual Mandates – March 2020

March 23, 2020

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As of 2019, the Tax Cut and Jobs Act of 2017 reduced the ACA’s individual mandate penalty to $0. In reaction, several states and the District of Columbia have enacted their own ACA-style individual mandates requiring taxpayers to provide proof of health coverage to avoid financial penalties. This article focuses on the obligations for employers sponsoring group medical coverage and summarizes what we know so far.

For more information, download here.

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A Coronavirus Update for Employers

March 20, 2020

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Just released:

Important information on the Families First Coronavirus Response Act (FFCRA)

The U.S. House of Representatives passed the Families First Coronavirus Response Act (FFCRA) Saturday morning, March 14, 2020. We expect the FFCRA will pass the Senate and be signed by the President into law later this week. For more information, download here.

Stay up-to-date on information and guidance about COVID-19 on MMA’s resource page: https://mma.marshmma.com/coronavirus-outbreak-resource-page.

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The Rise of State Individual Mandates

February 13, 2020

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Restoring an Affordable Care Act (ACA) Requirement

As of 2019, the Tax Cut and Jobs Act of 2017 reduced the ACA’s individual mandate penalty to $0. In reaction, several states and the District of Columbia have enacted their own ACA-style individual mandates requiring taxpayers to provide proof of health coverage to avoid financial penalties. This article focuses on the obligations for employers sponsoring group medical coverage and summarizes what we know so far.  

Note: We intend to update this article as new or additional state individual mandate guidance becomes available. This article is current as of the publication date appearing at the top of this page.

Quick Summary

More detailed information for each state/jurisdiction appears after this section. For the remainder of this article, our use of the word “state” includes the District of Columbia.

State Effective Plan Reporting Requirement Reporting Requirement Due Date
California 2020 Yes, to CA Franchise Tax Board March 31st of the following year
District of Columbia 2019 Yes, to D.C. Office of Tax and Revenue June 30, 2020 for 2019 reporting year For later years, 30 days after federal forms 1095 due to IRS
Massachusetts 2018 (current version) Yes, to MA Department of Revenue December 15th of the current year
New Jersey 2019 Yes, to NJ Department of Revenue and Enterprise Services March 31st of the following year
Rhode Island 2020 TBD, but to RI Department of Taxation TBD
Vermont 2020 TBD, but to VT Department of Taxes TBD

Effect on ACA Reporting Relief

In late 2019, the IRS granted penalty relief for failing to automatically distribute Forms 1095-B to covered individuals provided certain criteria is met. This relief is also available under very limited circumstances for distributing Forms 1095-C.

The state individual mandates generally[1] require Forms 1095 also be provided to the employees/covered individuals covered by the state individual mandate reporting requirement, which effectively defeats the IRS relief from automatically distributing forms.  

Excess Reporting and Data Privacy Issues

Federal and state data privacy rules (including HIPAA) generally provide exceptions for disclosing protected information if required by law.[2] These exceptions enable employers to report the information required under the state individual mandates without violating data privacy laws.

The reporting requirements for each of the state individual mandates is limited to covered individuals who are residents of that state, and employers should limit its reporting to those individuals. If an employer reports information for other non-resident individuals – which may occur if the employer simply files its entire Form 1095-C reporting file with the state – the additional disclosures may be violations of one or more data privacy laws. We realize it may be administratively difficult for an employer to separate and report only those records required by a state individual mandate.

California

Effective Date

California’s individual mandate is effective as of January 1, 2020.

Individual Mandate and Penalty

To avoid a penalty, California residents are required to maintain health coverage for themselves, any spouse or registered domestic partner, and any dependent(s) for each month of the calendar year unless an exemption applies.

Per Person Penalty Method Income Percentage Penalty Method Maximum Penalty Amount
$695 per adult   $347.50 per child under 18 2.5% of yearly household income above the applicable annual filing threshold[1] The lesser of: 1.    The greater of the per person or income percentage penalty method Or 2.    The state average premium for qualified health plans that have a bronze level of coverage for the applicable household size involved

Note:  The penalty amount is pro-rated by the number of months without coverage.

Example 1: A married couple both under age 65 have health coverage for eight months during 2020 but do not qualify for an exemption from California’s individual mandate for the first four months. The family’s household income for 2020 is $78,000. The applicable individual mandate penalty is calculated as follows: 

Per Person Penalty
= ($695 x 2)
= $1,390 x (4/12)
= $463.33                
Income Percentage Penalty
= ($78,000 – $36,4853)
= ($41,515 x 2.5%) x (4/12) 
= $345.96

The maximum penalty amount is $463.33 (assuming this is lower than the state average premium for bronze coverage for a married couple for four months).

Plan Reporting Requirement

Reporting is required for covered individuals who are California residents.

Employer-Sponsored Health Coverage Reporting Entity How Reported Due Date
Self-Insured Employer Duplicate IRS Forms 1095-B/1095-C will be filed with the CA Franchise Tax Board Reporting procedures are TBD March 31st of the following year (March 31, 2021 for the 2020 reporting year)
Fully Insured Insurance Carrier

Plan Reporting Penalty

Employers with self-insured coverage are subject to a $50 per covered individual penalty for failing to report.

Example 2: If an employer fails to file a duplicate IRS Form 1095-C with the CA Franchise Tax Board that reflects coverage for an employee, spouse, and two dependent children, the employer is subject to a $200 penalty ($50 x 4).

Additional Resources

California Franchise Tax Board Individual Mandate Information

California Individual Mandate (Code)

California Individual Mandate Penalty Estimator

District of Columbia

Effective Date

The District of Columbia’s individual mandate is effective as of January 1, 2019.

Individual Mandate and Penalty

To avoid a penalty, D.C. residents are required to maintain health coverage for themselves, any spouse, and any dependent(s) for each month of the year unless an exemption applies.

Per Person Penalty Method Income Percentage Penalty Method Maximum Penalty Amount
$695 per adult   $347.50 per child under 18 2.5% of yearly household income above the applicable federal annual filing threshold The lesser of:
1. The greater of the per person or income percentage penalty method Or
2. The state average premium for qualified health plans that have a bronze level of coverage for the applicable household size involved

Note:  The penalty amount is pro-rated by the number of months without coverage.

Example 1: A married couple both under age 65 have health coverage for eight months during 2020 but do not qualify for an exemption from D.C.’s individual mandate for the first four months. The family’s household income for 2020 is $78,000. The applicable individual mandate penalty is calculated as follows: 

Per Person Penalty
= ($695 x 2)
= $1,390 x (4/12)
= $463.33                     
Income Percentage Penalty
= ($78,000 – $24,400)
= ($53,600 x 2.5%) x (4/12)
 = $446.67

The maximum penalty amount is $463.33 (assuming this is lower than D.C.’s average premium for bronze coverage for a married couple for four months).

Plan Reporting Requirement

Reporting is required for covered individuals who are D.C. residents.

Employer-Sponsored Health Coverage Reporting Entity How Reported Due Date
Self-Insured Employer Duplicate IRS Forms 1095-B/1095-C will be filed with the D.C. Office of Tax and Revenue (OTR) Reporting is done electronically through MyTaxDC.gov and there is no paper reporting option (employers who pay D.C. taxes should already be registered) June 30, 2020 for 2019 reporting year For later years, 30 days after federal forms 1095 due to IRS
Fully Insured Insurance Carrier
(see note below)

Note:  It is unclear under existing D.C. guidance if an employer must report anything if coverage is solely fully insured, but this is implied since an employer would not have coverage information to report.

Guidance from OTR indicates an employer with fewer than 50 full-time employees (including at least one in D.C.) during the reporting year does not have a reporting requirement. This is not consistent with the D.C. statute which does not excuse smaller employers with self-insured coverage.[4] OTR is the enforcing agency, so smaller employers with self-insured coverage should not be subject to penalties for failing to report. This means employees of smaller employers with self-insured coverage may need to substantiate their own coverage to avoid a D.C. individual mandate penalty.

Plan Reporting Penalty

D.C. has not specified the applicable penalty to an employer for failing to report one or more Forms 1095 to OTR.

Additional Resources

D.C. Health Link Individual Mandate  

D.C. Office of Tax and Revenue Guidance

MyTaxDC.gov (for reporting)

D.C. Individual Mandate (Code)

Massachusetts

Massachusetts has long required residents to maintain health coverage that meets the Massachusetts Creditable Coverage (MCC) standard and required plans to report to covered individuals whether the plan met the MCC standard using Form MA 1099-HC.

Massachusetts also revived the health insurance responsibility disclosure (HIRD) in 2018. This HIRD is different from the version used from 2007 – 2013, and is used to provide information about employer-sponsored insurance to help the state administer the MassHealth Premium Assistance Program.  

Effective Date

Massachusetts has maintained an individual mandate requirement since July 1, 2007. The first revived HIRD was due November 30, 2018 (but note a different annual due date applies for later years). 

Individual Mandate and Penalty

To avoid a penalty, Massachusetts residents are required to maintain MCC for themselves, any spouse, and any dependent(s) for each month of the year unless an exemption applies. The penalties scale based on income and are indexed annually.

MCC Penalties for 2020
Individual
Income Category*
>150-200% FPL >200-250% FPL >250-300% FPL >300% FPL
Penalty $22/month $264/year $43/month $516/year $65/month $780/year $135/month $1,620/year
*Use the chart below to determine the applicable federal poverty level (FPL) based on family size
Schedule Reflects 2019 FPL Standards for 2020 Eligibility
Family Size 150% FPL 200% FPL 250% FPL 300% FPL
1 $18,210 $24,280 $30,350 $36,420
2 $24,690 $32,920 $41,150 $49,380
3 $31,170 $41,560 $51,950 $62,340
4 $37,650 $50,200 $62,750 $75,300
5 $44,130 $58,840 $73,550 $88,260
6 $50,610 $67,480 $84,350 $101,220
7 $57,090 $76,120 $95,150 $114,180
8 $63,570 $84,760 $105,950 $127,140
Each add’l person add: $6,480 $8,640 $10,800 $12,960

Plan Reporting Requirement

Different reporting requirements apply in Massachusetts.

Employer-Sponsored Health Coverage Reporting Entity for Form MA 1099-HC How Reported Due Date
Self-Insured Employer (or TPA on employer’s behalf) Mailed to primary enrollee or electronically with consent January 31st of the following year  
Fully Insured Insurance Carrier

Employer-Sponsored Health Coverage Reporting Entity for HIRD How Reported Due Date
Self-Insured Employer if employing 6 or more employees in Massachusetts Reporting is done electronically through MassTaxConnect to the MA Department of Revenue and there is no paper reporting option (employers who pay MA taxes should already be registered) December 15th of the current year
Fully Insured

Reporting Penalties

Employers with self-insured coverage are subject to a $50 penalty for each individual it failed to provide with a Form MA 1099-HC, capped at $50,000 per year.

Employers who fail to file or knowingly falsify a HIRD are subject to a penalty of $1,000 – $5,000 for each violation. There are no other penalties related to information provided by an employer in a HIRD.

Additional Resources

MMA Article on MCC and Form MA 1099-HC

Mass.gov Information on Form MA 1099-HC

2019 Form MA 1099-HC

MMA Article on HIRD Reporting

Mass.gov Information on HIRD Reporting

Massachusetts 2020 Individual Mandate Penalties

New Jersey

Effective Date

New Jersey’s individual mandate is effective as of January 1, 2019.

Individual Mandate and Penalty

To avoid a penalty, New Jersey residents are required to maintain health coverage for themselves, any spouse, and any dependent(s) for each month of the year unless an exemption applies.

Per Person Penalty Method Income Percentage Penalty Method Maximum Penalty Amount
$695 per adult   $347.50 per child under 18 2.5% of yearly household income above the applicable annual filing threshold The lesser of: 1.    The greater of the per person or income percentage penalty method Or 2.    The state average premium for qualified health plans that have a bronze level of coverage for the applicable household size involved

Note:  The penalty amount is pro-rated by the number of months without coverage.

Example 1: A married couple both under age 65 have health coverage for eight months during 2020 but do not qualify for an exemption from New Jersey’s individual mandate for the first four months. The family’s household income for 2020 is $78,000. The applicable individual mandate penalty is calculated as follows: 

Per Person Penalty
= ($695 x 2)
= $1,390 x (4/12)      
= $463.33                
Income Percentage Penalty
= ($78,000 – $20,000)
= ($58,000 x 2.5%) x (4/12)
 = $483.33

The maximum penalty amount is $483.33 (assuming this is lower than New Jersey’s average premium for bronze coverage for a married couple for four months).

Plan Reporting Requirement

Reporting is required for covered individuals who are New Jersey residents.

Employer-Sponsored Health Coverage Reporting Entity How Reported Due Date
Self-Insured Employer Duplicate IRS Forms 1095-B/1095-C will be filed with the NJ Department of Revenue and Enterprise Services (DORES) Reporting is done through the DORES MFT SecureTransport system used for reporting Forms W-2 and there is no paper reporting option (employers who pay NJ taxes should already have an account) Employers may request an account or a bulk filing account by contacting DORES March 31st of the following year (March 31, 2020 for the 2019 reporting year)
Fully Insured Insurance Carrier

Reporting Penalty

New Jersey has not specified the applicable penalty to an employer for failing to report one or more Forms 1095 to DORES. In draft regulations, employers with self-insured coverage are subject to a $50 penalty for each missed form that should have been reported to DORES.

Additional Resources

New Jersey Health Insurance Mandate Information for Employers

DORES MFT SecureTransport system (for reporting)

New Jersey Individual Mandate (Code)

NJ Individual Mandate Penalty Calculator

2019 NJ-1040 Excerpt (shared responsibility payment)

Rhode Island

Rhode Island enacted an individual mandate, but it remains a work-in-progress and guidance addressing plan reporting requirements and penalties has not been issued.

Effective Date

Rhode Island’s individual mandate is effective as of January 1, 2020.

Individual Mandate and Penalty

To avoid a penalty, Rhode Island residents are required to maintain health coverage for themselves, any spouse, and any dependent(s) for each month of the year unless an exemption applies.

Per Person Penalty Method Income Percentage Penalty Method Maximum Penalty Amount
$695 per adult   $347.50 per child under 18 2.5% of yearly household income above the applicable annual filing threshold*   *In Rhode Island, the filing threshold is the standard deduction plus the number of available exemptions for the taxpayer’s filing status. The lesser of: 1.    The greater of the per person or income percentage penalty method Or 2.    The state average premium for qualified health plans that have a bronze level of coverage for the applicable household size involved

Note:  The penalty amount is pro-rated by the number of months without coverage.

Example 1: A married couple both under age 65 have health coverage for eight months during 2020 but do not qualify for an exemption from Rhode Island’s individual mandate for the first four months. The family’s household income for 2020 is $78,000. The applicable individual mandate penalty is calculated as follows: 

Per Person Penalty
= ($695 x 2)
= $1,390 x (4/12) 
= $463.33                                            

Filing threshold
= $17,800 + ($4,150 x 2)
= $26,100

Income Percentage Penalty
= ($78,000 – $26,100)
= ($58,000 x 2.5%) x (4/12)
= $483.33

The maximum penalty amount is $483.33 (assuming this is lower than Rhode Island’s average premium for bronze coverage for a married couple for four months).

Plan Reporting Requirement

TBD, but we know reporting will be made to Rhode Island’s Department of Taxation.

Reporting Penalty

TBD

Additional Resources

Rhode Island Department of Taxation Health Coverage Mandate Page

Individual Mandate Information from HealthSource RI (RI Public Insurance Marketplace)

Rhode Island Individual Mandate (found in 2020 budget bill beginning on page 316)

Vermont

Vermont enacted an individual mandate, but it remains mostly a statement of intent.

Effective Date

Vermont’s individual mandate is effective as of January 1, 2020.

Individual Mandate and Penalty

There is no individual mandate penalty for 2020. Vermont intends to use the data to communicate coverage options to the uninsured. Penalties may apply in later years.

Plan Reporting Requirement

TBD, but we know reporting will be made to Vermont’s Department of Taxes.

Reporting Penalty

TBD

Additional Resources

Vermont Individual Mandate


[1] This does not apply to all of the states (e.g. Massachusetts), although further guidance and requirements are still pending.

[2] For example, 45 CFR §164.512(a) of the HIPAA regulations permits a HIPAA-covered entity to use or disclose protected health information to the extent that such use or disclosure is required by law and complies with and is limited to the relevant requirements of such law. A similar exception can be found in California’s Confidentiality of Medical Information law at California Civil Code Section 56.20(c)(1).

[3] This is the applicable 2019 threshold. The 2020 thresholds are not yet available.

[4] The ACA also requires small employers with self-insured coverage to report using IRS Forms 1094-B/1095-B

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Affordable Care Act Reporting Relief Extended for 2019

December 29, 2019

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The Internal Revenue Service just released Notice 2019-63, which extends the deadline for Affordable Care Act (ACA) Form 1095 reporting to individuals and the good faith compliance defense for reporting errors consistent with the relief that has been available in prior years. 

Relief Notes

  • Delivery of Forms 1095 to Individuals – The deadline to provide the 2019 Forms 1095 (B or C) to individuals is extended to March 2, 2020. No additional extension will be available for this obligation.
  • Filing Forms 1094/1095 with IRS – The deadline to file the 2019 Forms 1094/1095 with the IRS has not been extended.
    • Electronic filers – The deadline for entities filing electronically is March 31, 2020. Entities filing 250 or more forms must file electronically.
    • Paper filers – The deadline for entities filing by paper is February 28, 2020

An automatic 30-day extension of the deadline to file with the IRS may be requested using Form 8809.

  • Good faith relief extended – The IRS will not assess penalties for missing or inaccurate information if the 2019 forms are completed and filed in good faith. Entities who fail to provide and/or file forms altogether are not eligible for this relief.
  • Special limited transition relief related to the ACA Individual Mandate –

Form 1095-B

Form 1095-B is primarily used by insurance carriers to report fully insured coverage. Because individuals no longer need the information on Form 1095-B to avoid an individual mandate penalty (which is now $0), the IRS has announced it will not assess a penalty for failing to furnish Form 1095-B if both of the following are true:

  1. The reporting entity posts a notice prominently on its website stating that responsible individuals may receive a copy of their 2019 Form 1095-B upon request, accompanied by:
    • An email address and physical address to send requests to, and
    • A telephone number that individuals may contact with questions.
  2. The reporting entity furnished a 2019 Form 1095-B to any responsible individual upon request within 30 days of the date the request is received.

Note: Reporting entities are still required to file Forms 1095-B with the IRS. It’s unclear if insurance carriers will abandon automatically providing Forms 1095-B to covered participants for 2019. Please also see State Individual Mandates below.

Form 1095-C
Self-insured applicable large employers (ALEs) must continue to provide Forms 1095-C to their ACA full-time employees and report coverage on Part III. However, the IRS did grant special transition relief identical to the Form 1095-B relief described above when reporting coverage for an individual who was not an ACA full-time employee for any month during 2019. This can include part-time employees as well as COBRA participants and retirees (usually beginning the year after the COBRA qualifying event or retirement).

Note: It is unclear how much practical value this relief will provide to ALEs, who will continue to be required to file all Forms 1095-C with the IRS and provide Forms 1095-C to employees who were ACA full-time employees for at least one month during the calendar year. It may be administratively impractical for an ALE to try to fit within the special limited transition relief and not automatically provide Forms 1095-C to certain individuals who likely account for only a small number of the ALE’s Forms 1095-C. Please also see State Individual Mandates below.

State Individual Mandates
In response to reduction of the ACA’s individual mandate penalty to $0, several states recently passed their own ACA-style individual mandates requiring taxpayers to provide proof of coverage to avoid penalties. To date, these are California, the District of Columbia, New Jersey, Rhode Island, and Vermont. Form 1095-C can generally be used for this purpose which will pressure insurers and ALEs to deliver Forms 1095 to all covered individuals in at least those states. The individual mandates in New Jersey and the District of Columbia are effective for 2019 and require duplicate Forms 1095 be filed by the insurer or ALE with the state/district. The state individual mandates for California, Rhode Island, and Vermont become effective in 2020. Massachusetts has also long maintained a state individual mandate with its own form and reporting requirements. We’ll cover these individual mandates in detail in another December 2019 article.

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Repeal, Repeat, Remand – Ho Ho Hum?

December 27, 2019

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The year ended with a lot of activity in the health and welfare benefits space, although much of that activity results in things continuing as they were for 2019.

2020 Federal Spending Bill

Congress passed the fiscal year 2020 spending bill (the “Spending Bill”) last week, and it was signed by the President on December 20, 2019. The Spending Bill contains several provisions affecting health and welfare benefit plans, with certain key items summarized below:

Cadillac Tax

The Affordable Care Act’s (ACA) excise tax on high cost coverage (better known as the “Cadillac Tax”) was originally planned for 2018. It has been delayed twice – first to 2020 and again to 2022 – and will now never see the light of day. The Spending Bill permanently repeals the Cadillac Tax.

The Plot Thickens – A significant revenue raising mechanism under the ACA was the combination of the Cadillac Tax and the employer shared responsibility payments (ESRPs). As an employer’s Cadillac Tax liability [inevitably] increased, the employer would eventually find it less expensive to opt out of providing health coverage to its employees and pay an ESRP instead. With no Cadillac Tax to help drive employers toward the ESRPs, the ACA’s long-term funding has taken a significant hit.

Health Insurance Tax (HIT)

The ACA’s HIT requires fully insured medical, dental and vision plans to pay an annual fee, which is typically baked into the plan’s insurance premiums. The HIT has been suspended for roughly half the years it has been in effect. The Spending Bill repeals the HIT entirely as of January 1, 2021. The HIT is still in effect for 2020, mainly because the rates for 2020 were already approved by state departments of insurance and incorporated in 2020 insurance premiums. On average, the HIT has been responsible for an increase of 2.5 – 3% in premiums for the years it has been in effect. We believe premiums are unlikely to actually decrease with the HIT’s repeal, but the rate of premium increases should be reduced for 2021.

Medical Device Tax

The ACA’s medical device tax is repealed as of January 1, 2020. This was a tax on the sale of certain medical devices by the manufacturer or importer of the device and resulted in modest increases to plan costs.

Qualified Transportation Fringe Benefit for Non-Profits

The 2017 Tax Cuts and Jobs Act required nonprofit companies to include the cost of qualified transportation benefits in their unrelated business income (UBTI). The Spending Bill repeals this requirement retroactively for amounts paid or incurred after December 31, 2017.

Note:  We provided an overview of the status of qualified transportation fringe benefit plans earlier this year. It remains current minus the references to UBTI for nonprofits.

Patient-Centered Outcomes Research Institute (PCORI) Fee

This fee on fully insured and self-insured health coverage is due annually on July 31st and is calculated by multiplying the average number of covered lives for the policy year by an indexed dollar amount. The PCORI fee was scheduled to end in 2019 (2020 for many non-calendar year plans). In a surprise move, the Spending Bill extends the PCORI fee to 2029 (2030 for many non-calendar year plans).

Fifth Circuit Ruling in Texas v. U.S.

Also in December, the 5th Circuit Court of Appeals agreed that the ACA’s individual mandate is unconstitutional without a corresponding tax penalty. However, the 5th Circuit remanded the case back to the District Court to provide additional analysis on whether this provision is severable from the ACA without declaring the entire ACA unconstitutional. If the lower courts strike down the entire ACA, we are confident the U.S. Supreme Court will hear the case. This may not occur before 2021, since the case will first need to work its way back through the District Court and 5th Circuit. If these lower courts determine the individual mandate can be severed from the rest of the ACA, the Supreme Court may decline to hear the case which preserves the current status quo. 

Remember:  Although the Trump Administration has appointed two new justices, the five Supreme Court justices that initially saved the ACA in 2012 are still on the bench. 

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IRS Releases Draft 2019 Instructions for Forms 1094/1095

November 20, 2019

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After a lengthy and unexplained delay, the Internal Revenue Service released drafts of the 2019 Forms 1094-C1095-C and their corresponding instructions on November 13, 2019.  The forms and reporting obligations are basically unchanged from 2018.  There had been speculation that reporting might be streamlined due to the repeal of the individual mandate, but that is not the case.

Minor Changes Only

  • All references to the individual mandate were removed, although the reporting requirements tied to the individual mandate remain.  These are Form 1095-B and Form 1095-C, Part III.
  • Amounts that are annually indexed were adjusted:
    • Penalty amount for failing to file or furnish a correct information return cannot exceed $3,339,000 each in a calendar year.
    • Affordability percentage updated to 9.86%.
  • Due dates for forms:
    • Employers must provide Forms 1095-C to full-time employees (and other employees enrolled in self-insured health coverage) by January 31, 2020.  The IRS historically extends this deadline to early March, but this hasn’t occurred yet.
    • Employers filing less than 250 returns may file paper returns with the IRS by February 28, 2020.
    • Employers filing electronically must file with the IRS by March 31, 2020. An employer who files 250 or more returns must file electronically.

The IRS simultaneously released the drafts for the 2019 Forms 1094-B1095-B and their corresponding instructions. No major changes were made to the B Forms.

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IRS Releases 2020 Limits for FSAs and Other Benefits

November 8, 2019

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The Internal Revenue Service released Revenue Procedure 2019-44 earlier this week, which contains the 2020 cost-of-living adjustments for various employee benefit plans including employer sponsored health care flexible spending accounts, qualified transportation fringe benefits, and adoption assistance programs. The following provides a summary of the annual limits for these specific benefit programs along with a summary of the 2020 high deductible health plan and health savings accounts limits announced earlier this year.

Each of the limits described below are applicable for taxable years beginning in 2020. If you have any questions or need further details about the tax limits and how they will impact your employee benefit programs, please contact your account team.

Health Care Flexible Spending Accounts
Employees will be allowed to contribute up to $2,750 per plan year.

Qualified Transportation Fringe Benefit
The monthly dollar limit on employee contributions has increased to $270 per month for the value of transportation benefits provided to an employee for qualified parking. The combined transit pass and vanpooling expense limit will also increase to $270 per month.

Adoption Credit/Adoption Assistance Programs
In the case of an adoption of a child with special needs, the maximum credit allowed under Code Section 23 is increased to $14,300. The income threshold at which the credit begins to phase out is increased to $214,520. Similarly, the maximum amount that an employer can exclude under Code Section 137 from an employee’s income for adoption assistance benefits is increased to $14,300.

HDHP and Health Savings Account (HSA) Amounts
Earlier this year, the IRS released Revenue Procedure 2019-25 which included the 2020 minimum deductible and maximum out-of-pocket limits for high deductible health plans (HDHPs) and the maximum contribution levels for HSAs.

  • The minimum annual deductible for a plan to qualify as an HDHP will be $1,400 for self-only coverage and $2,800 for family coverage;
  • The maximum annual out-of-pocket limits allowable under an HDHP will increase to $6,900 for self-only coverage and $13,800 for family coverage; and
  • The 2020 maximum allowable annual contribution employees may make to their HSAs will increase to $3,550 for an individual with self-only coverage and increase to $7,100 for an individual with family coverage.

The HSA catch-up contribution limit for participants who are 55 or older on December 31, 2020, remains an additional $1,000 per year.

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All That Glitters in not Gold

October 28, 2019

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A Cautionary Tale about Certain Claimed Tax Savings Arrangements Disguised as Wellness Programs

Promoters have long pitched some variation of the following wellness program to employers:

  • Employees pay pre-tax contributions to participate in a self-insured group health plan;
  • During the course of the plan year, the plan returns most or all of the employee contributions to the employees for the completion of wellness-related activities[1]; and
  • The reimbursements are tax free to the participants.

This proposal obviously sounds amazing to prospective employers due to the potential payroll tax savings to the employer and the payroll and income tax savings to employees. Many promoters will even provide some sort of memorandum from the promoter’s legal counsel and/or other written articles supporting the arrangement’s compliance with applicable laws, such as the Internal Revenue Code (IRC).  

As the old saying goes, “If it sounds too good to be true, it usually is.”   

Buyer Beware

At least three of these types of arrangements have been either rejected outright or limited by the IRS for impermissible tax avoidance. 

  1. The Double Dip
    This arrangement is the oldest of the three and generally works as described above. Participants typically receive large reimbursements greatly exceeding any actual out-of-pocket medical expense and/or for completing pretty nominal wellness-related activities. These may include watching a webinar, attending a presentation providing general health information,  or attending general health counseling sessions. It may also include participating in more robust wellness activities such as biometric screening.

    The IRS has explicitly stated on several occasions that programs whose primary purpose is to refund pre-tax contributions as tax free reimbursements do not qualify for an income tax exclusion for the employee under IRC Sections 105 or 106 when the reimbursements are disproportionately larger than any actual out-of-pocket medical expense (please see Revenue Ruling 2002-3). Despite this clear position, the Double Dip continues to pop up. The U.S. Department of Justice recently convicted the promoters of a Double Dip known as the Classic 105.
  2. The Sleight of Hand
    Under the Sleight of Hand arrangement, employees pay a small contribution toward the self-insured group health plan on an after-tax basis. The arrangement may or may not also involve the employees paying significantly larger pre-tax contributions toward coverage. Similar to the Double Dip, participants typically receive large reimbursements greatly exceeding any actual out-of-pocket medical expense and/or for completing wellness-related activities.

    The Sleight of Hand is an attempt to move the tax exclusion away from IRC Sections 105 and 106 to IRC Section 104(a)(3) and avoid the IRS’ unfavorable Double Dip guidance on disproportionately large reimbursements. Under IRC Section 104(a)(3), benefits are not taxable to the recipient if the health insurance coverage (or an arrangement that operates like health insurance) is not paid for on a tax free basis. 

    In IRS Chief Counsel Memorandum 201719025 (released May 12, 2017), the IRS indicated that IRC Section 104(a)(3) does not apply to these arrangements, because the plan cannot qualify as health insurance (or an arrangement that operates like health insurance). This is because there is no actual insurance risk for the participants, all or nearly all of whom are virtually guaranteed to receive benefits far in excess of their after-tax contributions. In addition, the IRS believes this demonstrates a significant portion of the coverage is really being provided on a tax free basis. As a result, the excess of the benefits received over the amount of any after-tax contribution should be treated as taxable income to the employee.
  3. The Flex Credit Switch
    This arrangement is similar to the Double Dip or Sleight of Hand, but with a twist. Under the Flex Credit Switch, some or all of the benefits received from the self-insured group health plan are provided as flex credits that can be used to purchase other benefits on a pre-tax basis through the client’s IRC Section 125 cafeteria plan instead of being provided as direct reimbursements.   

    If the flex credits are used to purchase non-taxable benefits under the cafeteria plan, the flex credits are excluded from the employee’s taxable income. A “non-taxable benefit” is a benefit that can both be paid for on a pre-tax basis and provide tax free benefits to participants. In other words, the Flex Credit Switch works when the flex credits are used for non-taxable benefits.

    This makes sense, because the entire exercise amounts to the employee deferring otherwise taxable income to make pre-tax cafeteria plan elections. But…there’s a catch.

    Under many Flex Credit Switch arrangements, the benefits that can be purchased with the flex credits are actually taxable benefits. This means the benefits cannot both be paid for on a pre-tax basis and provide tax free benefits. When this is the case, the flex credits are included in the employee’s taxable income (please see IRS Chief Counsel Memorandum 201719025, Situation #2).

Examples of problematic taxable benefits include:

  • Most accident and disability benefit products;
  • Whole and variable life insurance products;
  • Supplemental term life insurance products in excess of $50,000;[1]
  • Most fixed indemnity products;[2] and
  • Gym memberships.[3]

ERISA Note

We believe permitting employees to pay pre-tax for many fixed indemnity products will also cause them to be considered ERISA plans sponsored by the employer if this wasn’t already the case.

Our Recommendation

We strongly recommend against relying on an opinion letter, memorandum, or articles provided by a promoter selling the claimed tax saving arrangement. We strongly recommend reviewing any claimed tax savings arrangement with your own legal counsel and/or tax advisor before signing up and offering the program to your employees.

[1] The difference, if any, tends to be used to compensate the promoter unless the promoter is paid through other means.

[2] The IRC and related rules only permit the first $50,000 of coverage to be paid for on a tax free basis.

[3] Most indemnity products can provide benefits in excess of unreimbursed medical expenses and are considered at least partially taxable benefits.

[4] We addressed the tax consequences for employer-provided gym memberships in an earlier article.

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California Mandates a Notice Requirement for Flexible Spending Accounts

October 28, 2019

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But California gets an incomplete

California recently enacted AB 1554, which requires employers sponsoring flexible spending accounts to notify employees of “any deadline to withdraw funds before the end of the plan year.” 

The law does not define the term “flexible spending account,” but it does indicate this term is intended to include dependent care flexible spending accounts (“DCFSAs”), health care flexible spending accounts (“HCFSAs”), and adoption assistance flexible spending accounts. We’ll refer to these collectively as FSAs in this article. It is not immediately clear what other benefits, if any, might be considered FSAs subject to this law.[1] As written, it does not appear this includes pre-tax transportation benefit plans.

The Bottom Line

We’ll address the rules in more depth later in this article, but the main takeaways are:

  1. Employers offering FSAs to employees working in California will be required to provide two forms of notification regarding forfeiture deadlines for unused funds.
  2. California will need to clarify certain items not addressed in the law.
  3. The notification requirements appear limited to mid-plan year forfeitures.
  4. Most HCFSAs should be exempt from the notification requirement due to ERISA preemption.

So, when exactly?

The notification requirement is effective January 1, 2020, apparently without regard to an FSA’s actual plan year.

The basics

Participants forfeit unused FSA funds at the end of the plan year. This is commonly referred to as the “use it or lose it” rule, and it is delayed and/or affected only by the FSA’s use of a run-out period, grace period, or a carryover (in the case of an HCFSA).

California’s new law requires employers to notify employees of an FSA forfeiture deadline, presumably to help the employees avoid forfeitures. Employers must communicate this notice in at least two different forms. The following is a non-exhaustive list of permitted forms of this notice:

  • Email,
  • Telephone,
  • Text message,
  • Postal mail, and
  • In-person notification.[2]

An employer can only satisfy one of the two forms of notification electronically, meaning the second form of notice must be verbal or printed. An FSA’s summary plan description (or comparable document) should describe the FSA’s forfeiture rules. Delivery through a web portal, email, or in printed form will satisfy one of the required forms of notification. While a variety of forms of alternative notices could be used to satisfy the second form of notification, we suspect FSA vendors will develop template notices that can be used for this purpose and will likely assist employers with delivery.

Missing pieces…

AB 1554 is only three sentences long and leaves several unanswered questions.

  1. Timing requirement?
    Although the law is effective beginning January 1, 2020, it does not include any specific timing requirement for notice delivery. As written, an employer could comply with the letter of the law by frontloading two forms of notification at the beginning of a plan year. The spirit of the law seems to be designed to provide a warning about an impending forfeiture. We believe later guidance will require one of the notifications to be closer in time to the forfeiture deadline.   
  2. Two forms of notice?
    The law specifies two forms of notice are required, but does this mean an employer can satisfy the law by delivering the same notice in two different ways? We believe later guidance will clarify that two separate types of notice are required.
  3. Consequences for non-compliance?
    The law doesn’t indicate what happens if an employer fails to comply. Is the employer subject to a fine? Do affected employees receive more time to submit claims before forfeiture occurs? This must be addressed in later guidance.

Appears limited to mid-plan year forfeitures

Again, the law requires employers sponsoring flexible spending accounts to notify employees of “any deadline to withdraw funds before the end of the plan year.” This appears intended to require employers to notify employees who may be subject to mid-plan year forfeitures of unused FSA funds.

Although technical, participants are not required to withdraw funds before the end of the plan year to avoid normal plan year end FSA forfeitures. Forfeiture could be avoided by withdrawing funds by or as of the end of the plan year. This may simply be a case of imprecise language, and California could certainly clarify one way or the other. In any event, this will usually be moot. The overwhelming majority of FSAs provide for run-out and/or grace periods that delay forfeiture until after the end of the plan year. As a result, California’s notice requirement wouldn’t apply to most plan year end FSA forfeitures anyway.[3]

Some FSAs do not accelerate forfeitures for mid-plan year losses of eligibility and should also avoid the notice requirements.[4] By contrast, mid-plan year losses of FSA eligibility usually can result in a need to use funds before the end of the plan year to avoid forfeitures. This appears to be the real target of California’s law. For example, an FSA might require a former employee to submit already incurred claims within 60 days of the loss of employment before the funds are forfeited.

It’s not clear how the notice requirement might apply to a short plan year as a result of a plan amendment or termination.

ERISA preemption

Most HCFSAs are self-insured ERISA plans, and ERISA preemption should apply to California’s notice requirement. It is a slam dunk that ERISA will preempt the law from any modification of the HCFSA’s forfeiture rules. California does not always automatically recognize ERISA preemption, and it may take a successful challenge before California backs off. An employer can always voluntarily comply with the notice requirements, and a conservative employer will want to comply until someone [else] is successful with an ERISA preemption challenge.

ERISA preemption is not available for the HCFSAs of governmental entities or church plans, DCFSAs, or adoption assistance flexible spending accounts. Employers should be ready to comply with the notice requirements for these FSAs by January 1, 2020.


[1] A health reimbursement arrangement (HRA) could theoretically qualify as an HCFSA, but most cannot due to an unrestricted carryover feature for unused funds. We will not discuss HRAs further in this article.

[2] Hand delivery of a printed document should qualify as in-person notification.

[3] Various FSA rules generally require some sort of notification to participants about the plan and its operations, so this just means the employer likely doesn’t have to provide a second form of notice.

[4] This should include DCFSAs with a permitted spend down feature for terminated participants.

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Medical Loss Ratio Rebates

October 28, 2019

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Show Me the Money

The Affordable Care Act’s (ACA) Medical Loss Ratio (MLR) standards require health insurance carriers to spend a specific percent of premium on health care services and activities that could improve quality of care. [1] If the carrier does not meet the MLR standards, it must provide rebates to the policyholders – the employer in the group market and the individuals in the individual market. Each year, insurance carriers calculates their MLR across the particular market segments’ books of business and issues rebates to policyholders if the money spent on health care and quality care activities is less than the required MLR standards.

When an employer receives a rebate, it has 90 days to determine what portion of the rebate is allocable to plan participants and distribute the rebate to participants or use the rebate for their benefit.

Who Gets the Money?

Step 1
Determine if any portion of the rebate is a “plan asset.” Plan assets belong to the participants and may not be kept by the sponsoring employer or used to pay its expenses. The relevant plan documents should indicate the source of the premiums paid to the insurance carrier and might describe the ownership interest in rebates or refunds of premiums received by the plan. 

In many instances, the plan documents will not resolve ownership interests, and the employer will need to rely on the sources and relative ratios of paid premiums in order to determine what portion of the rebate is a plan asset.

Step 2
If the plan documents do not resolve ownership interests, determine what portion of the rebate is a plan asset.

How Premiums are PaidPlan AssetWho Receives the Rebate
100% from the plan’s trust assetsYes100% belongs to the trust as a plan asset and must be used for the benefit of participants
100% by participantsYes100% belongs to the participants
100% by employerNo100% belongs to the employer and may be used for any purpose
Employer and participants each pay a fixed % of the premium (Example: Employer pays 70% and participants pay 30%)Yes, partiallyA % of the rebate belongs to the participants equal to the % of the total premium paid by the participants[2]The remainder of the rebate belongs to the employer and may be used for any purpose
Participants pay a fixed dollar amount and the employer pays the balancePossiblyThe portion of the rebate that exceeds the employer’s contributions is plan assetsThe remainder of the rebate belongs to the employer and may be used for any purpose

Step 3
Determine how to use the portion of the rebate allocated to plan participants.

Rebate Considerations 

  1. Plan Participants. For the MLR rebate, the employer may determine it is reasonable to use the rebate for current plan year participants and not the exact participants from the plan year for which the rebate applies. This includes current COBRA participants. Factors used to make this determination can include the cost and administrative difficulty of locating former employees and/or whether a large number of the same individuals are participants in both plan years.

    The available guidance prefers the rebate be used for participants in the same insurance policy (or policies) that generated the rebate, but it should be reasonable to share the rebate with participants in the employer’s other medical coverage depending upon the facts and circumstances.[3] For example, if the plan option that generated the rebate has been replaced, it should be reasonable to use the rebate for participants in the plan option(s) that replaced it.   
  2. Preferred Rebate Methods. The most common approaches are to pay the rebate in cash, use it to reduce future premiums in the current year (a full or partial “premium holiday”) or apply it to enhance benefits. Enhanced benefits might include HSA contributions or additional wellness benefits. For small rebates or small remainders of larger rebates, an employer could use the rebate to pay for flu shots or educational presentations.

    Note: We do not support the use of rebates to fund opportunities for a relatively few number of participants to win prizes such as through a raffle. This is contrary to the policy that employers should provide a reasonable, fair, and objective rebate allocation method that benefits the entire class of participants. 
  3. Tax Consequences. If the participant premiums were paid pre-tax through an Internal Revenue Code Section 125 cafeteria plan, a rebate paid as cash or as a cash equivalent will be treated as taxable income. This will also be the case when provided as a premium holiday as the employee’s taxable take-home pay will increase.
  4. Timing. The employer must distribute or use the participant’s portion of the rebate within ninety (90) days of receipt.

[1] These are 85% in the large group market and 80% in the small group market.

[2] If the fixed percentage of premiums paid vary by tier of coverage, an employer could choose to use a single average percentage rate for all tiers or determine a weighted average percentage rate for each tier.

[3] In theory, this could extend to all participants in benefits incorporated under the same ERISA plan number, but we generally recommend against this.

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The Affordable Care Act’s Employer Mandate: Part 3

October 28, 2019

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Offers of Coverage and Avoiding Penalties

This article is Part 3 in a series intended to provide an overview of the Employer Shared Responsibility provisions (also known as the “employer mandate”) under the Affordable Care Act (ACA). The employer mandate generally requires applicable large employers (ALEs) offer affordable, minimum value medical coverage to its full-time employees in order to avoid potential employer mandate penalties. These employer mandate penalties are better known as “employer shared responsibility payments” or ESRPs.

We covered how to determine whether an employer is and ALE in Part 1, and how to determine ACA full-time employees (FTEs) in Part 2. This article addresses the ESRPs and how to avoid them through offers of coverage to FTEs.

Remember Why We Care

The employer mandate has two potential penalties, each indexed annually and assessed monthly on a pro-rated basis.

Plan year beginning
on or after
Section 4980H(a)
Annual Penalty
Section 4980H(b)
Annual Penalty
January 1,
2019
$2,500$3,750
January 1, 2020$2,580 (projected)$3,870 (projected)

The Section 4980H(a) penalty (the “no offer” penalty) is triggered when an ALE fails to offer minimum essential coverage to at least 95% of its FTEs, and at least one FTE qualifies for a subsidy in the public health insurance exchange.

The Section 4980H(b) penalty (the “inadequate offer” penalty) is triggered when an ALE offers minimum essential coverage to at least 95% of its FTEs but fails to offer affordable, minimum value coverage to an FTE who qualifies for a subsidy in the public health insurance exchange.

Aggregated ALE Groups

ALE status is also determined in the aggregate for certain groups of related legal entities identified under the Internal Revenue Code, and each member employer of an aggregated ALE group is known as an “applicable large employer member” or ALEM. An ESRP triggered by one ALEM does not affect the other ALEMs within the aggregated ALE group. In other words, if one ALEM triggers a penalty it does not “poison the well” for the others.

Avoiding the No Offer Penalty

Coverage is shorthand for “minimum essential coverage” or MEC.  In general, MEC is any employer-sponsored medical plan, including the new individual coverage HRA (ICHRA).[1] 

In order to avoid ESRPs, an offer of MEC must be made to FTEs at least annually. Active or passive enrollment can be used provided the FTEs have an effective opportunity to elect or decline coverage.[2] An ALE does not have to provide FTEs with the ability to decline coverage if the coverage provides minimum value and employee-only coverage is either 100% employer paid or the employee’s required contribution toward employee-only coverage meets the federal poverty level affordability safe harbor (addressed under Federal Poverty Level Safe Harbor later in this article).

The Offer Must be Made for the Entire Month to Most FTEs
An ALE only receives credit for offering coverage to an FTE for a given month if the offer of coverage includes every day of the month. For example, if coverage begins on the date of hire, FTEs who are hired on any day after the 1st of the month do not count as having received an offer for that month. This is relevant when determining if the ALE offered coverage to at least 95% of its FTEs for that particular month. 

Note: If an FTE is hired after the first of the month and is offered coverage effective as of the date of hire or is in a permitted waiting period before coverage is effective, the ALE may exclude the FTE from the 95% calculation for the applicable month or months. On the FTE’s corresponding IRS Form 1095-C for that year, the ALE would reflect Code 2D (limited non-assessment period) in Part II, Line #16. This would avoid a potential ESRP.

Similarly, an ALE may exclude an FTE who loses coverage mid-month from the 95% calculation. The Form 1094-C/1095-C instructions indicate an ALE should reflect Code 2B (not full-time) in Part II, Line #16 in this situation. This would also avoid a potential ESRP. 

Believe it or not, an ALE does not receive credit for making an offer of coverage to an FTE unless the FTE can also enroll his or her natural and adopted children up to age 26, if any. In other words, an ALE that limits its offers of coverage to employee-only coverage cannot meet the 95% offer standard. This special rule does not include spouses, stepchildren, or foster children.

Reminder: Within an aggregated ALE group, the 95% standard and any applicable ESRP penalties are determined on an ALEM-by-ALEM basis.

The Offer May be Made by Another Employer

  1. Aggregated ALE Groups. If one ALEM makes an offer of coverage to an employee, that offer of coverage is considered to be made by every ALEM in the aggregated ALE group. If an individual is employed by two or more ALEMs, only one ALEM needs to offer coverage for all of the ALEMs to receive credit.
  2. Professional Employer Organizations and Staffing Firms. Employers often use professional employer organizations (PEOs) and staffing agencies to outsource staffing, human resources, and payroll duties. The IRS allows the client-employer to take credit for an offer of coverage made to the worker by the PEO/staffing agency so long as the client-employer pays a higher fee in exchange for the PEO/staffing firm assuming the responsibility to provide health insurance. We recommend this be reflected as a line-item in the amount billed by the PEO/staffing agency and paid by the client-employer.
  3. MEWAs. Multiple employer welfare arrangements (MEWAs) are formed when two or more unrelated employers join together to sponsor a health plan. Similar to the ALEMs above, an offer of coverage made to an employee by a MEWA will count as an offer of coverage made by the employer participating in the MEWA.

Calculating the No Offer Penalty

An ALE that fails to make an offer of coverage to 95% of its FTEs is vulnerable to the no offer penalty, which is triggered if a single FTE qualifies for subsidized coverage in the public health insurance exchange.

This no offer penalty amount is calculated by multiplying the applicable penalty amount by all of the ALE’s FTEs, but the ALE gets to subtract 30 FTEs from this total (“free FTEs”). This 30 free FTEs exclusion applies at the aggregated ALE group level, and each ALEM is assigned a share based on its proportion of all FTEs in the aggregated ALE group.

Example 1: This example uses the projected 2020 no offer penalty. Pro-rated monthly, the penalty is $215/month ($2,580 / 12).  

WiseCorp has 65 total employees, 50 of whom are FTEs for the year. WiseCorp fails to offer MEC to at least 95% of its FTEs (48 FTEs). Bob, an FTE, enrolls in coverage in the public health insurance exchange and receives a subsidy for 8 months during 2020.

WiseCorp’s no offer penalty is calculated as follows:

$215 x (50 FTEs – 30 “free FTEs”) = $4,300/month

$4,300 x 8 months = $34,400

Example 2: The same facts as in Example 1, except that WiseCorp is an ALEM in an aggregated ALE group with 300 total FTEs. 

WiseCorp may exclude 5 free FTEs from its no offer penalty calculation.

50 WiseCorp FTEs / 300 total FTEs = 16.67%

30 free FTEs x 16.67% = 5 free FTEs

WiseCorp’s no offer penalty is calculated as follows:

$215 x (50 FTEs – 5 “free FTEs”) = $9,675/month

$9,675 x 8 months = $77,400

Avoiding the Inadequate Offer Penalty

Just because an ALE makes an offer of coverage does not mean it has avoided all potential ESRPs. Even if an ALE offers MEC to at least 95% of its FTEs, an FTE can still trigger an inadequate offer penalty if the IRS finds that the offer of coverage does not provide minimum value AND/OR is unaffordable.

Minimum Value
Coverage is considered to provide minimum value (MV) if the plan covers at least 60% of the total allowed cost of covered services that are expected to be incurred by a standard population. The plan must also include coverage for hospital and physician services.[3] MV can be determined by an actuarial valuation or by using an MV calculatorjointly developed by the IRS and Department of Health and Human Services.

Affordability
A plan is deemed affordable if the employee’s portion of the premium does not exceed an annually indexed amount of their household income.

Plan year
beginning
on or after
Section 4980H(b)
Annual Penalty
Employer Affordability
Safe Harbor
January 1, 2019$3,7509.86 %
January 1, 2020$3,870 (projected)9.78 %

Remember, the penalties are actually pro-rated monthly

Note: If wellness incentives can affect the employee’s contribution toward the cost of coverage, employees must be treated as satisfying any tobacco-related incentive and failing all other incentives no matter what the employee actually does.

Since it’s generally impossible for an employer to know an employee’s household income, the IRS created three affordability safe harbors. Each safe harbor is based on the employee’s required contribution toward the cost of employee-only coverage for the lowest cost, MV plan the employee could have elected for that plan year.  It doesn’t matter if the employee waived coverage, elected a more expensive plan option, or enrolled a spouse or dependent(s).

  1. Form W-2 Safe Harbor. Under the Form W-2 safe harbor, coverage is deemed affordable if the employee’s share does not exceed 9.86% (9.78% in 2020) of wages reported in Box 1 of the employee’s W-2. Box 1 does not include pre-tax payroll deductions, such as 401(k) contributions and many other benefit elections. Employers can reasonably estimate employee W-2 earnings when pricing coverage, but affordability may not be certain until the end of the year. This safe harbor method cannot be combined with another safe harbor method during the same calendar reporting year. This might affect some employers with non-calendar year plans whose premiums change during the calendar year.
  2. Rate of Pay Safe Harbor. The rate of pay safe harbor is a formula that operates differently for salaried and hourly employees:
    • For salaried employees, coverage is deemed affordable if it does not exceed 9.86% (9.78% in 2020) of the employee’s gross monthly salary as of the first day of the plan year.[4]
    • For hourly employees, coverage is deemed affordable if it does not exceed 9.86% (9.78% in 2020) of 130 paid hours multiplied by the lower of the employee’s rate of pay as of the first day of the plan year or the employee’s rate of pay at the beginning of a given month.
  3. Federal Poverty Level Safe Harbor. Under the Federal Poverty Level (FPL) safe harbor, coverage will be deemed affordable if the employee’s share of the premium does not exceed 9.86% (9.78% in 2020) of the mainland FPL for a single individual. For 2019, the FPL safe harbor is $102.62 (($12,490 / 12) x 9.86%). This safe harbor ignores an employee’s actual compensation.This safe harbor does not exclude pre-tax benefit deductions, but it misses bonuses, commissions, and tips.

Calculating the Inadequate Offer Penalty

The inadequate offer penalty is triggered if the coverage offered doesn’t provide minimum value and/or was unaffordable, and an FTE qualifies for a subsidy in the public health insurance marketplace. The employer would be assessed an inadequate offer penalty for each FTE who receives a subsidy. For 2020, the maximum [projected] annual inadequate offer penalty is $3,870 per FTE. This penalty is pro-rated monthly.

Intentional Strategy

The inadequate offer penalty only applies to FTEs who waive coverage and actually receive a subsidy in the public health insurance exchange. For 2020, this penalty is approximately $322.50 per FTE per month, which may be less than the employer’s cost to offer affordable, minimum value coverage (and absorb additional claims experience). As a result, some employers might make a business decision to willingly accept potential inadequate offer penalties.


[1] MEC does not include HIPAA-excepted benefits, such as dental and/or vision only coverage, spending accounts (FSAs, HRAs) limited to dental and/or vision only coverage, and many types of fixed indemnity and supplemental coverage.

[2] Whatever election approach is used, we recommend employers maintain some sort of record in order to be able to demonstrate that the offer was made.

[3] This prevents many benefits from meeting the MV standard including “skinny” MEC plans, telemedicine, and onsite/offsite clinics.

[4] The rate of pay safe harbor cannot be used for an employee whose salary decreased during the year.

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New Health Reimbursement Arrangements Allowed Under Final Rules

September 30, 2019

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Updated: September 30th, 2019

The President signed an Executive Order on October 12, 2017, directing the U.S. Departments of Labor, Treasury, and Health and Human Services (collectively, the “Agencies”) to consider rules expanding the availability and permitted uses for Health Reimbursement Arrangements (HRAs). The clear intent was to ultimately enable employers to offer HRAs to employees that can be used to purchase individual insurance policies. The Agencies issued a set of final regulations addressing this and related issues on June 13, 2019. Treasury issued additional proposed regulations on September 27, 2019.

Note: This is an update to our earlier article that addressed the June 13, 2019 final regulations. We have incorporated the additional information provided by Treasury in its September 27, 2019 proposed regulations. This new information is identified under Details about Individual Coverage HRAs by marking affected Items with an asterisk (*). Marked items with guidance may be relied upon as a safe harbor until further notice.

The Bottom Line

We’ll address the rules in more depth under Details about Individual Coverage HRAs below, but the main takeaways are:

  • Premiums – Employers will be able to offer HRAs to employees that can be used to pay for individual health insurance coverage and Medicare premiums. These will be referred to as “Individual Coverage HRAs” or “ICHRAs” in this article.
  • Employer mandate – ICHRAs can be used to avoid the Employer Shared Responsibility provisions (also known as the “employer mandate”) penalties under the Affordable Care Act (ACA).

However

  • It’s one or the other – An employer can offer traditional group health coverage to a class of employees or an ICHRA, but not both (with a very limited exception).

So, when exactly?

The effective date is for plan years beginning on or after January 1, 2020, which is unchanged from the earlier proposed rules. There is every indication that both the federal and state-run public insurance exchanges will not be ready to handle the anticipated increase in enrollment, adjust product offerings, or make accurate eligibility determinations until much later, so 2020 may prove chaotic for individuals covered by ICHRAs and the employers offering them. 

Details about Individual Coverage HRAs

ITEM

GUIDANCE

Eligibility

 

Employees (including former employees) and dependents enrolled in major medical coverage purchased in the public insurance exchange, individual insurance market, or Medicare[1] are eligible to participate.

Coverage for any part of a month for which a premium is due qualifies.

Employees who are enrolled in coverage consisting solely of excepted benefits,[2] short-term limited duration insurance, TRICARE, or health care sharing ministry coverage are ineligible.

Reimbursements

The ICHRA may be designed to limit reimbursements solely for individual insurance premiums, or it can be designed to also allow reimbursements for qualified medical expenses (so long as the expenses are not limited to medical expenses not covered by Medicare).

Classes of Employees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employers may divide their workforces into the following classes of employees:

  1. Full-time employees
  2. Part-time employees
  3. Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region)
  4. Salaried workers
  5. Non-salaried workers (such as hourly employees)
  6. Seasonal employees
  7. Employees covered by a collective bargaining agreement
  8. Employees eligible for the employer’s traditional group health coverage who are in a waiting period
  9. Non-resident aliens with no U.S.-based income
  10. Temporary employees of staffing firms
  11. Any group formed by combining two or more of the above classes (Example:  Full-time, salaried employees).

If an ICHRA is offered to a class, it must be offered on the same terms to all employees within the class.[3] Benefit levels can vary only based on age[4] and family size within a class.

If an employer offers an ICHRA to a class, it cannot offer its traditional group health coverage to that class, except that an employer may offer traditional coverage to grandfathered members of a class and limit new hires of that class to ICHRAs after a date chosen by the employer.

Employee Class Size

If an employer offers traditional group health coverage to some of its employees, a minimum employee class size applies to ICHRAs offered to classes (1) – (5) described above or any combination that includes one of those classes.

The minimum class size is:

  • 10 employees for an employer with < 100 employees,
  • 10% of the total number of employees, for an employer with 100 to 200 employees, and
  • 20 employees for an employer with > 200 employees.

Special Enrollment Period

Individuals who gain access to an ICHRA qualify for a 60-day special enrollment period in the public insurance exchange and individual market.

ACA and the Employer Mandate*

 

An ICHRA automatically qualifies as “minimum essential coverage” and is an “offer of coverage” for the purposes of meeting the ACA’s employer mandate to offer coverage to at least 95% of full-time employees (FTEs).

An ICHRA is deemed “affordable coverage” if the difference between the monthly premium for the lowest cost available silver plan and 1/12th of the annual ICHRA contribution is equal to or less than the applicable affordability safe harbor percentage.

There are three factors used to determine the applicable lowest cost available silver plan for an FTE:  (1) The FTE’s location; (2) the FTE’s age; and (3) a silver plan cost look-back safe harbor.

(1) FTE’s Location

An employer may use an FTE’s primary worksite as a safe harbor for the FTE’s location. In general, an FTE’s primary worksite is where the employer reasonably expects the FTE to perform services on the first day of the ICHRA plan year (or the coverage effective date for new hires).[5]

If the FTE’s primary worksite changes during the year, the location of the applicable lowest cost available silver plan must also change no later than the 1st day of the 2nd month following the change in primary worksite.

For remote employees (e.g. telecommuters):

  • If the remote employee reports to a work location when not working remotely, this work location is the primary worksite.
  • If the employee is only expected to work remotely, the employee’s primary residence is the primary worksite.

Note: It is possible for a multi-site employer to have more than one FTE primary worksite in the same geographic rating area with different applicable lowest cost available silver plan options as a result.

(2) FTE’s Age

An employer may use the silver plan with the lowest premium cost at the lowest age bracket as the applicable lowest cost silver plan for all ages at a given location. An employer may also use the FTE’s age as of the first day of the ICHRA plan year (or the coverage effective date for new hires) for the entire ICHRA plan year. There are no other special rules related to FTE age.[6]  

(3) Silver Plan Cost Look-Back Safe Harbor

To address employer planning concerns:

  • A calendar year ICHRA may use the premium from the lowest cost silver plan in a given location as of January from the prior calendar year.
  • A non-calendar year ICHRA may use the premium from the lowest cost silver plan in a given location as of January from the current calendar year.

Affordable Coverage Example

In 2020, an employer makes an annual contribution of $6,000 to an FTE’s calendar year ICHRA. As of January 2019, the monthly premium for the lowest cost available silver plan for the FTE’s primary worksite and age was $600.  

$600 – ($6,000/12) = $100/month

The ICHRA is an affordable offer of coverage for the employee if $100/month is within an affordability safe harbor for that employee in 2020. Under the Rate of Pay safe harbor, this is affordable for an employee whose Rate of Pay income is at least $1,022/month ($100 / 9.78% = $1,022). Under the W-2 safe harbor, this is affordable for an employee who worked the entire calendar year and has Box 1 reportable W-2 wages of at least $12,264 ($1,022 x 12 = $12,264).

Consistent with other guidance, if a silver plan bases its premium cost on the completion of certain wellness activities, enrollees are deemed to automatically satisfy all tobacco-based requirements and fail all other requirements. In other words, the applicable premium to use is the premium for non-tobacco users who do not meet any other wellness standard.

An ICHRA deemed affordable coverage is automatically deemed to satisfy the ACA’s minimum value requirement paired with its individual major medical insurance policy.

An employer may vary the use of the ICHRA affordability rules across classes of employees but not within a class of employees.

Silver Plan Database*

The federal agencies intend to provide a national database of lowest cost silver plan information at a later date.

Waiver

 

Employees must be permitted to waive participation annually at the beginning of the plan year or effective date of coverage.

Exchange Subsidies

An individual who enrolls in an ICHRA is ineligible for subsidies through the public insurance exchange. An individual who waives coverage may be eligible for subsidies if the HRA is not considered an offer of affordable, minimum value coverage by the employer.

Substantiation

 

Employers are required to adopt reasonable substantiation procedures to confirm participants are enrolled in eligible medical coverage and communicate these to eligible employees no later than the first day of the plan year or effective date of coverage.

The rules indicate an employer may rely on the employee’s attestation of coverage or require reasonable proof of enrollment (such as an ID card).[7] A model attestation is available.

Employees are required to substantiate enrollment in eligible medical coverage (including for any dependents) each time a request for reimbursement is submitted.

ERISA Status, etc.

 

The ICHRA is itself an employer-sponsored group health plan.

The individual insurance coverage reimbursed by the ICHRA will not be considered an ERISA plan offered by the employer so long as the employer does not sponsor it or play a role in its selection.

HSA Eligibility

An individual who uses the ICHRA to purchase qualified high deductible health plan coverage is eligible to contribute to a health savings account unless the ICHRA can also be used to pay for general medical expenses.

Cafeteria Plan Option

 

An employer may allow employees within a class to pay for any remaining premium for eligible medical coverage through the employer’s cafeteria plan, but this is not available for coverage purchased through the public insurance exchange.[8]

Nondiscrimination*

A compliant ICHRA will generally be deemed to satisfy the applicable nondiscrimination rules under Section 105(h) of the Internal Revenue Code (IRC). However, an ICHRA that disproportionally benefits highly compensated employees may still be found to be discriminatory in actual operation.

Notice Requirements

 

Employers must provide eligible employees with a notice describing:

  1. The terms of the ICHRA,
  2. Contact information for assistance,
  3. The availability of a special enrollment right for individual coverage, and
  4. The effect the ICHRA may have on the employee’s eligibility for a subsidy in the public insurance exchange.

The notice must be provided at least 90 days before the beginning of the plan year. A model notice is available.

ACA Reporting*

The IRS will release guidance addressing ACA reporting on Form 1095-C for ICHRAs at a later date.

The employee class and class size limitations should make it difficult for an employer to simply shift its highest cost claimants to the individual market. That said, some classes of employees may incur higher medical expenses than others, and an employer could still shift a more expensive class to the individual market. The ICHRA may also provide employers with a lower, fixed cost coverage alternative to provide to certain classes of employees that present less significant attraction and retention challenges than others.

And for Good Measure…

The Agencies also created another category of HRA known as an “Excepted Benefit HRA” that may be offered on a standalone basis exempt from the ACA’s mandates if all of the following are true:

  • The employer offers traditional group health coverage to the employee whether or not the employee elects it (this means the employee cannot also be offered an ICHRA);
  • The maximum annual contribution is $1,800 (indexed);
  • Reimbursements are limited to general medical expenses and premiums for COBRA, short-term limited duration insurance, and other excepted benefits coverage (this can include many types of non-major medical health coverage); and
  • The Excepted Benefit HRA is available on a uniform basis to all similarly situated employees and is not designed to get high cost claimants to waive coverage.[9]

An Excepted Benefit HRA does not interfere with an individual’s eligibility for subsidies in the public insurance exchange. This form of HRA may be an interesting alternative to a traditional opt-out credit. It does not require the employee to actually enroll in other group health coverage to avoid impacting affordability calculations for the employer’s traditional group health coverage, and the HRA contributions aren’t subject to payroll taxes.[10]


[1] Oddly, fully insured student health insurance also qualifies.

[2] This is based on HIPAA’s “excepted benefits” rule.

[3] An employer can offer an ICHRA to some former employees within a class and not others so long as the terms are uniform for those offered coverage.

[4] ICHRA contributions for older employees are limited to a maximum of three times the contributions provided to younger employees.

[5] An employer could use an FTE’s primary residence. However, the employee class rules will require the employer to use the lowest cost available silver plan with the highest premium applicable to any FTE in the class across the entire class.

[6] An employer could rely on the age of the oldest FTE in an employee class as a sort of age-based safe harbor. This may result in a windfall for younger employees paying lower premiums for silver plan coverage.

[7] This may make the ICHRAs vulnerable to being used to pay for premiums for ineligible coverage.

[8] Employers are not required to permit this, and it might prove complex to administer.

[9] This is based on HIPAA’s “similarly situated groups” rule and is not tied to the permitted classes of employees under the Individual Insurance HRA.

[10] The IRC Section 105(h) nondiscrimination rules apply to Excepted Benefit HRAs.

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