Tag Archives: Compliance

Medicare Part D Notice Reminder

September 17, 2019


The Annual Notice Deadline is October 14, 2019

Employer group health plans that include prescription drug coverage must provide a Medicare Part D creditable and/or non-creditable coverage notice (“Notice”), as applicable, each year to all Medicare-eligible employees and dependents before the annual October 15th Medicare Part D enrollment period. The purpose of this annual Notice is to notify Medicare beneficiaries whether or not their employer’s prescription drug coverage is at least as good as Medicare’s prescription drug coverage, in order to help them decide whether to enroll in Medicare Part D.

Take Action

Employers should review their prescription drug coverage to determine creditable coverage status and distribute the appropriate Notice on or before October 14th. If a plan has multiple benefit options providing prescription drug coverage, the test must be applied separately for each benefit option.

Take Note and Give Notice

In order to assist employers with Notice requirements, the remainder of this alert provides additional background details including:

  • Which employers are subject to Medicare Part D Notice requirements;
  • Who is considered a “Medicare Part D eligible individual”;
  • Model Notices;
  • Notice deadlines;
  • Methods of delivery;

We will also address how to determine creditability when there is an account-based plan and creditable coverage reporting to CMS.

Employers Subject to Medicare Part D Notice Requirements
An employer is subject to the Notice requirements if it offers prescription drug coverage to its active employees and/or retirees, which includes Medicare Part D eligible individuals (including dependents). As a best practice, we recommend all employers sponsoring a prescription drug benefit to assume it is responsible for providing the Notice and notifying CMS, as discussed below.

Medicare Part D Eligible Individuals
All Medicare Part D eligible individuals who are applying for, or are covered by, the employer’s prescription drug benefits plan must receive the Notice. A “Medicare Part D eligible individual” is a person who:

  • Is entitled to benefits under Medicare Part A and/or is enrolled in Medicare Part B, as of the effective date of coverage under a Medicare Part D plan (active employees may have Medicare coverage); and
  • Resides in a “service area” of a Medicare Part D plan. A “service area” is defined as a location that meets certain pharmacy access standards. Most individuals live in a service area.

“Medicare Part D eligible individuals” may include active employees, employees who are disabled or on COBRA, retired employees, and their covered spouses and dependents. An employer may not know the Medicare eligibility status for all of these individuals, and we recommend employers provide the Notice to all covered individuals. Please see Method of Delivery below for delivery to covered families living at the same address.

Model Disclosure Notices
The Centers for Medicaid and Medicare Services (CMS) provides guidance and model creditable and non-creditable coverage disclosure Notices on its website. While the templates are dated April 2011, no changes have been made to the standard language since that time.

An employer may include multiple plan options in the same Notice, so long as the plans have the same creditable (or non-creditable) status.

Notice Deadlines
Although October 14th is the due date most associated with the Medicare Part D Notice, there are other times when Notice must be given to Medicare Part D eligible individuals.

  • Prior to an individual’s initial enrollment period for Medicare Part D;
  • Prior to the effective date of coverage for any Medicare-eligible individual that joins the employer’s plan;
  • Whenever prescription drug coverage ends or changes so that it is no longer creditable or becomes creditable; and,
  • Within a reasonable amount of time after an individual requests a copy.

Method of Delivery
Plans may provide the Notice with other member information materials (including new hire and open enrollment materials) or in a separate mailing. If the Notice is included in a separate packet of legal notices or in a benefits enrollment guide, the Notice must either appear on the first page (we interpret this to mean it is sufficient if it appears after the table of contents) or a call-out box must appear on the first page indicating this Notice is included in the materials, and a cross-reference to the page where it may be found. When the Notice is provided with other materials, the delivery guidance also indicates the initial disclosure portion of the Notice or the call-out box must appear in 14-point font. The delivery guidance provides the following sample call-out box:

If you (and/or your dependents) have Medicare or will become eligible for Medicare in the next 12 months, a Federal law gives you more choices about your prescription drug coverage.

The Notice may be hand-delivered, mailed (first-class) or sent electronically. For paper delivery, a single Notice can be provided to a family living at the same address. Employers providing the Notice electronically may rely upon this method as long as certain conditions from the Department of Labor (DOL) are satisfied. For electronic delivery without getting consent from the participants, the DOL requires that:

  • The employee has work-related computer access and use the computer as an integral part of their job;
  • The employee can access the documents in electronic format at their work site;
  • Appropriate measures are taken to ensure actual receipt by participants; and,
  • Participants must be notified in writing or electronically of their right to receive a paper copy of the Notice free of charge.

If an employee does not use a computer as an integral part of their job, or the employer cannot satisfy all of the above, an employer may rely on electronic delivery if the employee provides advance consent.

In addition, if an employer provides the Notice electronically, it must also notify participants that they are responsible for providing a copy of the disclosure to their Medicare-eligible dependents covered by the group health plan.

Determining Creditability When There is an Account-Based Plan

Health Reimbursement Accounts (HRAs)
Plan sponsors who offer HRAs in conjunction with a major medical plan or on a stand-alone basis must take the HRA into account for Medicare Part D creditable coverage purposes if the HRA can be used to reimburse for the cost of prescription drugs.

  • Participation in Medical Plan + HRA: If an individual participates in both the HRA and the major medical plan, creditable coverage is determined by increasing the expected prescription drug claims payable from the major medical plan by the amounts credited to the HRA.For HRAs that pay for both prescription drug costs and other medical claims, a reasonable portion of the year’s HRA contribution may be allocated to prescription drug coverage.Example 1: A medical plan has an annual deductible of $1,000. The employer makes an annual HRA contribution of $500. If the HRA can reimburse for both prescription drugs and other medical expenses, only a reasonable portion of the $500 should be allocated to prescription drug coverage for creditability determination purposes. This amount could be based on average reimbursement data and/or other facts and circumstances.

    If an HRA is limited to reimbursement for prescription drugs, the entire HRA contribution should be allocated to prescription drug coverage.

    Example 2: A medical plan has an annual deductible of $1,000. The employer makes an annual HRA contribution of $500. If the HRA can only reimburse prescription drug expenses, then the sponsor is considered to provide drug coverage with a $500 annual deductible

  • Stand-alone HRA: If the HRA is offered on a stand-alone basis without requiring participation in a medical plan,[1] creditable coverage is determined as if the HRA were a medical plan with no deductible and an annual limit equal to the amount of the credit for that year.[2]

Health Flexible Spending Accounts (FSAs)
Health FSAs are not included when determining the creditable coverage status of an underlying medical plan and are not independently subject to the Notice requirement.

Health Savings Accounts (HSAs)
HSAs are not included when determining the creditable coverage status of an underlying HDHP and are not independently subject to the Notice requirement.

Creditable Coverage Reporting to CMS

An often overlooked requirement for the employer is the obligation to report the creditable coverage status of its prescription drug plan(s) to CMS. The Online Disclosure to CMS Form should be completed (i) annually no later than 60 days from the beginning of a plan year (contract year, renewal year), (ii) within 30 days after termination of a prescription drug plan, and (iii) within 30 days after any change in creditable coverage status. Interestingly, there are no penalties for failing to provide this disclosure to CMS.

About the Authors:

Jennifer Stanley is a Compliance Consultant in the Employee Health & Benefits Compliance Center of Excellence for Marsh & McLennan.

Allie Waits is a Compliance Consultant for Marsh & McLennan Agency’s Upper Midwest Region.

[1] This can present certain compliance issues if the HRA is offered to current employees.

[2] CMS, Treatment of Account-Based Health Arrangements under the Medicare Modernization Act,” last updated December 28, 2005: https://www.cms.gov/Medicare/Prescription-Drug-Coverage/EmployerRetireeDrugSubsid/Downloads/AccountBasedPlansGuidanceRev1.pdf

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Association Health Plans (AHPs) – Update

April 2, 2019


Round One in the Fight over the new AHP Rules [Mostly] goes to the States
Last summer, eleven states and the District of Columbia (the “States”) sued the U.S. Department of Labor (DOL) over its final regulations intended to promote the expansion of AHPs (the “new rules”) on several grounds, including claims that the new rules conflict with both the Affordable Care Act and ERISA. On March 28, 2019, the U.S. District Court for the District of Columbia issued an opinion in favor of the States on certain key points while leaving other portions of the new rules intact.

In 30 Seconds or Less
Four key points from the Court’s ruling are:

  1. Related trades or businesses may still form AHPs across state lines under the new rules.
  2. Unrelated trades or businesses may not form AHPs at all.
  3. Associations cannot be formed for the primary purpose of offering an AHP.
  4. Self-employed individuals must remain limited in their ability to participate in an AHP, and independent contractors cannot participate.

And in More Detail…
There are two forms of permitted AHPs that we refer to as: (1) the Narrow Standard AHP created by prior guidance; and (2) the Relaxed Standard AHP created by the new rules.

The Final Regulations as Drafted
We provided an overview of the new rules and a side-by-side comparison of the two permitted forms of AHPs in an earlier article.

As Affected by the Court’s Ruling…
The Court’s ruling can be demonstrated by reproducing a portion of the side-by-side comparison from our earlier article in redlined form.

Narrow Standard AHP

Relaxed Standard AHP

Member employers must:

  1. Be within the same industry, trade, line of business or profession;
  2. Be located within the same geographic region (generally within the same state)
Member employers must:

  1. Be within the same industry, trade, line of business or profession;
  2. Their principal places of business must be located within the same state or metropolitan area (even if this crosses state lines)
The Association must already exist for a business purpose before it can provide the AHP to members The Association does not have to exist before providing the AHP to members, but it must have at least one other substantial business purpose

The requirement under the Narrow Standard AHP rule applies, meaning the Association must already exist for a business purpose before it can provide the AHP to members

Self-employed individuals are not eligible if running a business with no common law employees


Self-employed individuals who run a business with no common law employees may still be eligible under “Working Owner” test

“Working Owner” test:

  1. Works at least 20 hours/week or 80 hours/month for business
  2. Has earned income from the business at least equal to the cost of AHP coverage

The requirement under the Narrow Standard AHP rule applies, meaning self-employed individuals are not eligible if running a business with no common law employees

What’s next?
The Court’s opinion is missing an effective date, although this may be cleared up in the order that follows or through subsequent motions. The Court directed the DOL to consider how the new rules might operate with the overturned portions removed. The DOL could attempt to modify its new rules to better fit within the Court’s opinion instead, but this seems unlikely. This case was always headed for appeal, and the only surprise at this point might be which side is ahead after the first round.

The traditional appeal route would next move this case to the Circuit Court of Appeals for D.C. Whatever that outcome, it seems reasonable to believe the Circuit Court’s decision will also be appealed, meaning final resolution may need to come from the Supreme Court, which won’t occur in 2019. Although the Court’s opinion leaves open a path for related trades or business to form Relaxed Standard AHPs across state lines, we would not be surprised if interest cools in the interim.

All parties interested in or pursuing Relaxed Standard AHPs will need to evaluate whether to proceed or make modifications necessary to fit within the Court’s decision. This is a trickier proposition for an already operating Relaxed Standard AHP that is now in conflict with that decision. It may be reasonable for these AHPs to continue operating “as is” while the case is being appealed, but these AHPs should definitely consult with legal counsel first and may wish to suspend enrolling new member employers for the time being.

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Mistaken HSA Contributions

March 7, 2019


Health Savings Accounts (HSAs) have become increasingly popular over the past decade. When combined with a qualified high deductible health plan (HDHP), an HSA allows an individual to save money to be used on qualifying medical expenses at a later date. Employees may elect to contribute money to their HSA account on a pre-tax basis through their employer’s cafeteria plan. Employers aren’t required to contribute to employees’ HSA accounts, but many choose to do so as part of their health insurance program.

Unfortunately, mistakes can and do occur when administering HSA contributions. Employers may think mistakes are easy to fix, but the HSA regulations are very particular about when (or even if) a mistaken HSA contribution can be recovered. Employers frequently can’t recover the funds even if the HSA holder/employee agrees to the recoupment. However, the IRS does allow an employer is allowed to recover the mistaken contributions in certain situations.

Employee Was Never HSA Eligible

If HSA contributions are made to an employee who was never an HSA-eligible individual, the employer can recover the amounts. The employer may request the bank administering the HSA to return the funds. This option is not available if the employee was eligible for even one month during the year.

Administrative or Process Error

The IRS recently released General Information Letter 2018-0033 clarifying when and how to fix certain HSA contribution mistakes. If there is clear documentary evidence of an administrative or procedural error, the employer may request the HSA bank return the money to the employer so all parties are in the same position before the mistake was made. Examples of the types of mistakes that may be corrected include:

  • Withholding and contribution of amount in excess of the employee’s HSA salary reduction election;
  • Incorrect entries by payroll administrators;
  • Excess amount due to duplicate payroll files being accessed;
  • Employee payroll election change is not timely processed resulting in wrong amount being withheld;
  • Incorrect HSA contribution amount calculation;
  • Wrong decimal entry;
  • Incorrect spreadsheet being accessed; and
  • Employee name confusion.

The above list is not exhaustive and only contains examples of administrative and procedural errors that can be fixed. Employers should maintain documentation to support their decision to correct a mistaken contribution. Documentation should include details on the type of mistake, how it occurred, the impact and the steps the employer took to correct the mistake.

Employee Is No Longer HSA Eligible

Another common mistake is for an HSA holder to continue contributing to their HSA when they are no longer eligible. Individuals must be enrolled in a HDHP and have no disqualifying coverage (such as enrollment in Medicare/Medicaid or coverage under a general purpose FSA or HRA) to be able to contribute to an HSA account.

The 2019 annual HSA contribution limit for those with self-only HDHP coverage is $3,500 and $7,000 for those with family HDHP coverage. HSA holders who lose HSA eligibility during the year will
have their annual contribution maximum pro-rated for the months in which they were HSA eligible. HSA holders who are eligible as of December 1st may contribute up to the annual maximum, regardless of only being HSA eligible for part of the year, as long as they retain HSA eligibility through the end of the following calendar year.[1]

Corrective Distributions

If an individual makes or receives contributions in excess of their annual HSA contribution limit, including contributions received from an employer that the employer is unable to recoup as described earlier, they may be subject to a cumulative 6% excise tax for each year the impermissible contributions remain in the HSA.

To avoid this penalty, the excess contributions must be distributed to the account holder before the account holder’s federal income tax return filing deadline for that taxable year (typically April 15th). HSA holders must also be careful also include the net income attributable to such excess contributions in their gross income for the taxable year in which the distribution was received. This is done by notifying the HSA bank of a need for a corrective distribution. The HSA bank will provide the account holder with the necessary forms and information to make the corrective distribution. We recommend HSA holders work with a tax advisor to correct any HSA errors.

[1] This is described in more detail in “Frequently Misunderstood Health Savings Account Issues” appearing earlier in this newsletter.

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Frequently Misunderstood Health Savings Account Issues

March 7, 2019


Christopher Beinecke is the Employee Health & Benefits National Compliance Leader for Marsh & McLennan Agency. 
Jennifer Stanley is a Compliance Consultant in the Employee Health & Benefits Compliance Center of Excellence for Marsh & McLennan Agency.

The health savings account (HSA) eligibility and contribution rules are often misunderstood, which can result in potential adverse consequences for participating employees.[1] This article focuses on certain employer-provided benefits that may unexpectedly affect an employee’s ability to make or receive HSA contributions as well as certain rules that affect the contribution amounts a participant can make and/or receive during the year.

Unexpected Disqualifying Other Coverage and Potential Solutions

In order to be eligible to make or receive HSA contributions, an individual must participate in a qualified high deductible health plan (HDHP) and have no other disqualifying coverage. Some common employer-provided benefits may unexpectedly be disqualifying other coverage, and we’ll address three of the most common “gotcha’s” below.

1. Account-Based Plans (FSAs and HRAs)
General purpose health FSAs and HRAs that may be used to reimburse for a broad range of qualifying medical expenses are generally disqualifying other coverage and disqualify an individual from making or receiving HSA contributions for the entire plan year. This is also true if the FSA or HRA is your spouse’s and can be used to reimburse for your medical expenses (whether or not this actually happens).

HSA Eligibility Solutions for Account-Based Plans –
Employers should consider the following HSA compatible FSA plan design options when offering an account-based plan and an HDHP (these are often referred to as “HSA compatible FSAs”):

  • Offer a limited-purpose FSA or HRA that may only be used to reimburse for dental and vision expenses;
  • Offer a post-deductible FSA or HRA that may only be used to reimburse for general medical expenses after the individual has met their annual HDHP deductible; or
  • An employer can actually offer an FSA or HRA that combines both features by being limited to dental and vision expenses until the annual HDHP deductible is met and can then be used to reimburse for general medical expenses afterwards.

Run-Out Periods, Grace Periods, and Carryover Provisions – FSAs usually operate with a run-out period allowing participants to submit claims after a plan year ends and may also include either a grace period or carryover provision (but not both). We’ll describe how these can affect HSA eligibility when used in a general purpose FSA:

  1. Run-Out Period When we say run-out period, we mean a participant has some period of time after the end of the plan year to submit claims that were incurred during the plan year. For
    example, a calendar year FSA may allow participants until March 31st to submit claims incurred by or before December 31, 2018. If I enroll in an HDHP during annual enrollment, an FSA with a run-out period does not interfere with my ability to make or receive HSA contributions at the start of the next plan year. In this example, I am eligible to make or receive HSA contributions on January 1, 2019.
  2. Grace Period When we say grace period, we mean a participant has some period of time after the end of the plan year to submit claims that were incurred during the plan year OR during the grace period. For example, a calendar year FSA may allow participants until March 31st to submit claims incurred by or before March 15, 2019. If I enroll in an HDHP during annual enrollment, an FSA with a grace period can interfere with my ability to make or receive HSA contributions until the first of the month after the grace period is over. In this example, if I have an FSA balance as of December 31, 2018, I would not be eligible to make or receive HSA contributions until April 1, 2019.The issue is whether I have an FSA balance at plan year end. If I have a zero FSA balance at plan year end (December 31, 2018 in our example), I am HSA eligible at the start of the next plan year without regard to the FSA’s grace period.
  3. Carryover Provision An FSA might include a carryover provision permitting participants to carry over the lesser of: (i) their unspent FSA account balance as of the end of the plan year; or (ii) $500 as a contribution toward their FSA balance for the next plan year. Amounts carried over do not count toward an individual’s annual FSA contribution limit ($2,700 for 2019). If funds are carried over into the following year and can be used to reimburse for general medical expenses, an individual will be ineligible to make or receive HSA contributions for the entire year.An employer can provide employees with options to avoid losing HSA eligibility for the following year:
  • The rules allow FSA funds to carry over from a general purpose FSA into an HSA compatible FSA plan. An employer could design the carryover feature to automatically carry over a balance from a general purpose FSA into an HSA compatible FSA when an individual elects HDHP coverage. This option obviously requires the employer also maintain an HSA compatible FSA.
  • An employer could allow affected employees to decline or waive a carryover at the end of the FSA plan year. An employer that doesn’t provide an HSA compatible FSA might choose this option.

2. Clinics (both onsite and offsite clinics)

In terms of HSA compatibility, clinics can be divided into two categories:

HSA Conflict

A clinic will cause an HSA conflict if all of the following is true:

  • The clinic provides medical services other than first aid, dental or vision care, preventive services, or certain disease management or wellness services;
  • The clinic provides the general medical services before an individual has met their annual HDHP deductible; and
  • The individual does not pay for the fair market value (FMV) of the general medical services before meeting their annual HDHP deductible.

No HSA Conflict

A clinic does not cause an HSA conflict if any of the following is true:

  • The clinic’s services are limited to first aid, dental or vision care, preventive services, or certain disease management or wellness services;
  • The clinic does not provide other medical services before an individual has met their annual HDHP deductible; or
  • The individual pays for the FMV of other medical services before meeting their annual HDHP deductible.

3. Telemedicine

There is much debate over whether telemedicine is a group health plan that is disqualifying other coverage for the purposes of HSA eligibility. We believe most telemedicine programs are disqualifying other coverage despite claims by some that telemedicine benefits should qualify for an exception available to employee assistance programs (EAPs).

The Myth of the EAP Exception for Telemedicine – IRS Notice 2004-50, Q/A #10 indicates that coverage under an EAP, disease management program, or wellness program isn’t other disqualifying coverage if the benefits do not provide significant medical care and provides an example of short-term counseling available through an EAP as meeting this standard. We’ll ignore for now whether a telemedicine benefit can be considered an EAP and agree there may be some wiggle room to do so.

The EAP exception is not a blanket exception for all EAPs without regard to their plan designs, and the real issue is whether the telemedicine benefit offers significant medical care. Some believe the medical care or treatment provided by a telemedicine benefit should not be considered significant because of the narrow range of available services that might be performed within a single telemedicine visit. We disagree. We can infer that a determination of significant medical care or treatment shouldn’t be limited to a single episode of care or the example of the permissible EAP in IRS Notice 2004-50, Q/A #10 wouldn’t bother describing the available counseling as “short-term.” Instead, the language used by the IRS strongly suggests that an EAP providing many or an unlimited number of visits would be considered other disqualifying coverage.

EAPs generally provide for a limited number of visits per year. By contrast, telemedicine programs tend to provide for an unlimited number of participant visits. In addition, telemedicine programs can usually write prescriptions which are not available through most traditional EAPs.

This view is also consistent with statements made by the Departments of Labor, Treasury, and Health & Human Services during the rulemaking process creating the EAP exception under the Affordable Care Act in which the agencies suggested an EAP providing for many or an unlimited number of visits would not qualify.

Potential HSA Eligibility Solutions for Clinics and Telemedicine

It is reasonable to assume that many telemedicine and clinic benefits will be considered other disqualifying coverage and cause an HSA eligibility issue without some sort of solution to resolve the conflict:

  1. Limit the scope – The benefits could be limited in scope to services that do not interfere with HSA eligibility, such as preventive services, dental or vision care, first aid (in the case of the clinic), or other services deemed insignificant care by the IRS such as immunizations and providing non-prescription pain relievers.This solution falls into the category of legally correct but not particularly useful, as limiting the scope of telemedicine and/or onsite health clinic benefits in this manner can defeat the purpose of meaningfully lowering the cost of the employer’s medical plan.
  2. Provide only post-deductible benefits – If the benefits are restricted to an HDHP participant until after he or she has met their HDHP deductible, there is no HSA conflict. This solution also falls into the category of legally correct but not particularly useful and can be both difficult and impractical to administer.
  3. Charge fair market value for the services – If the HDHP participants pay the FMV for the services received, there is no HSA conflict. While unpleasant, this is often the most practical solution to implement. There is no guidance explicitly directing how to calculate FMV for these benefits, which should make several approaches reasonable:(a) Use the Medicare reimbursement rate for the given service;
    (b) Use the in-network usual, customary, and reasonable charge for the given service; and
    (c) Develop standard rates for services/bundles of services based on the expected cost of providing them through the telemedicine or clinic benefit.

Flat rates are very common for telemedicine and clinic visits with additional charges for labs, tests, or prescriptions. An employer (particularly a healthcare system) may determine a discount is appropriate when determining the appropriate rates to take into account the lower cost of providing the services through a clinic or via telemedicine compared to general medical facilities. It is also not unusual for third-party administrators to have developed standard rates for services using the methods described above that employers can implement. If there is a monthly cost for access to the telemedicine or clinic benefit, that could be factored into the FMV fee calculation.

HSA contributions can be used to offset the cost of services for the telemedicine and clinic benefits, and employers can provide HSA contributions to assist. No fee needs to be charged for limited scope services (e.g., preventive, dental, vision, etc.). Although it adds a layer of administrative complexity, it is also true that the clinic does not need to charge anything once the individual has met the HDHP deductible for the year.

If point-of-service charges are limited to HDHP participants, it does raise a potential nondiscrimination issue under the Tax Code. However, if there is a reasonable mix of both highly and non-highly compensated participants in the HDHP and other medical plan options, this should not present an issue.

Certain Rules Affecting Annual HSA Contribution Limits

In general, an individual’s annual HSA contribution limit is pro-rated based on the number of months an individual is eligible to make or receive HSA contributions with HSA eligibility determined as of the first of each given month. This general rule has a lot of moving parts and is subject to several modifications.

  1. Aggregation Under the health FSA rules, the annual contribution limit ($2,700 for 2019) is based solely on the employee’s own contributions, excluding carryovers. By contrast, all contributions made or received to an individual’s HSA count toward the individual’s annual HSA contribution limit ($3,500 self-only; $7,000 family for 2019), with the exception of rollovers.
  2. The Last Month Rule – While eligibility and contribution limits are generally pro-rated monthly, an individual who is HSA eligible on December 1st can make or receive HSA contributions up to their full annual limit provided he or she remains HSA eligible through the end of the following calendar year. If the individual does not remain eligible throughout this period, the individual’s annual HSA contribution limit for the year is retroactively determined using the pro-rata method and will usually lead to adverse tax consequences. An employer is not required to administer the last month rule for payroll deduction purposes. If an employer does not administer this, the employee is still free to take advantage by contributing the additional amounts to the HSA bank on an after-tax basis (usually by writing a check) and taking a deduction on their personal income tax return using IRS Form 8889.
  3. A Special Rule for Spouses A husband and wife cannot establish a joint HSA, but each spouse can set up their own HSA if eligible. If either spouse has family coverage in an HDHP, both spouses are treated as having family coverage and are limited to the annual HSA family contribution limit split between them. This limit is divided equally unless they agree on a different division. Spouses can demonstrate they’ve agreed to a different division by electing unequal contributions toward their HSAs.A break for domestic partners – This special rule for spouses does not apply to domestic partners. Each domestic partner could contribute up to the annual HSA family contribution limit in this instance, because the contribution limit is not tied to tax dependent status. That said, an individual cannot use their HSA to pay for the medical expenses of a domestic partner on a tax free basis (or without penalty) unless the domestic partner is also the individual’s tax dependent. The individual could avoid the penalty if the individual was already age 65 or older.
  4. Catch-up Contributions HSA eligible individuals who are age 55 or older by the end of the calendar year may contribute an additional $1,000 for that year and every year thereafter so long as they remain HSA eligible.[2] If both spouses are over age 55 or older and HSA eligible, both are able to make catch-up contributions to their separate HSAs.

Putting it all together Chris (56 years old) is married to Jennifer (50 years old). Jennifer has enrolled in employee + children HDHP coverage through her employer and Chris has enrolled in employee-only HDHP coverage through his employer. Jennifer’s employer makes an HSA contribution of $1,000 to her HSA on January 1, 2019. Chris’ employer does not make a contribution to his HSA.

  • For 2019, Jennifer could normally contribute up to $7,000 to her HSA and Chris could normally contribute up to $3,500 to his HSA. Due to the special rule for spouses, Jennifer and Chris begin with a combined annual HSA contribution limit of $7,000.
  • Chris can contribute up to $3,500 plus an additional $1,000 catch-up contribution.
  • Assuming Chris does contribute $4,500, Jennifer’s annual contribution limit is $3,500. Her employer has already contributed $1,000, meaning Jennifer can only contribute an additional $2,500 herself.
  • Alternatively, Chris could limit his HSA contribution to his $1,000 catch-up contribution and Jennifer would be free to contribute $6,000 to her HSA in addition to the $1,000 received from her employer.

[1] We address the consequences of ineligible contributions in the “Mistaken HSA Contributions” article appearing later in this newsletter.

[2] Remember that an individual enrolled in Medicare is not HSA eligible.

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Automatic Enrollment Given a Boost

February 5, 2019


U.S. Department of Labor (DOL) Issues Letter Indicating ERISA Preemption Applies to State Payroll Withholding Laws

On December 4, 2018, the DOL issued a letter in response to an inquiry from the American Council of Life Insurers (ACLI) about the interaction of ERISA and state wage withholding laws that require an affirmative written election before payroll deductions may be taken as contributions toward coverage in an employer-sponsored benefit plan.

ACLI’s inquiry related to employer-provided disability coverage, but the DOL responded more broadly and indicated that ERISA preempts (overrides) such a state law. This generally means that, unless an employee has waived coverage, an employer with an ERISA-covered benefit plan may automatically enroll employees in coverage and deduct the required contributions from employee paychecks. This letter does not actually represent a change in the DOL’s position or introduce any new guidance, but it is a welcome clarification that allows employers flexibility to increase group plan participation, spreading risk, and expanding protection for their workers.

ERISA Preemption Primer

Basically, the legal doctrine of ERISA preemption provides that a benefit plan subject to ERISA may generally ignore any conflicting state law that may relate to the benefit plan with certain limited exceptions. The most significant exception allows states to regulate insurance within their borders, and state laws regulating insurance are “saved” from ERISA preemption. This is why state insurance mandates apply to fully-insured ERISA plans while self-insured ERISA plans may choose to ignore them.

In support of its position for the preemption of state wage withholding laws in connection with enrollment in an ERISA plan, the DOL cited various court cases and previous Advisory Opinions addressing circumstances in which state laws have been found to relate to an ERISA benefit plan. To the extent an applicable state law is interpreted to regulate or limit an employer’s ability to enroll employees or to make plan-related payroll deductions, it is the DOL’s position that such state law will be preempted and will not apply to the employer’s ERISA plan.

Note: The DOL’s letter did not address any of the exceptions to ERISA preemption such as the exception saving state insurance laws. As a result, the letter shouldn’t be viewed as sanctioning other actions an employer might want to take with respect to a fully-insured benefit plan.

Notes and Practical Issues

If an employer wants to implement an automatic enrollment policy, there are a few additional considerations that should be taken into account. For example, ERISA imposes certain fiduciary obligations on an employer in its role as plan administrator. Among other things, this requires comprehensive communications pieces about any plan terms and conditions as well as a clear explanation of the employee’s right to decline coverage and the exact procedures and timeframes for doing so.

We realize that the inquiry dealt specifically with disability coverage and that many employers provide ancillary coverage such as basic life, AD&D, and disability at no cost to employees. It’s also worth noting that disability was a tricky example to use, as many self-insured short term disability programs may not actually be eligible for ERISA preemption.1 The DOL letter did not address whether the required contributions for benefits subject to automatic enrollment could be taken pre-tax or post-tax, which is really an IRS matter, but either should be permissible.2 This contribution approach should be included in the communication material described earlier.

The DOL’s response does support the use of an automatic enrollment approach with respect to medical/Rx coverage, although an employer may not wish to do so for various reasons including the higher required employee contributions for these benefits compared to ancillary coverage like life and disability coverage. Also, the Affordable Care Act’s employer shared responsibility requirement can be met merely by offering coverage without regard to whether an employee actually enrolls.  In any event, the employee must be given the opportunity to waive coverage.

1 Many employer-provided self-insured short term disability programs will fall within ERISA’s payroll practice exception, and ERISA’s preemption rules will not apply to them.
2 An employer may prefer disability contributions to be taken post-tax so that the disability benefits will be tax free when paid to participants.

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Slowly Filling in the Blanks

January 2, 2019


IRS Releases Guidance on Qualified Transportation Fringe Benefits for Tax-Exempt Organizations

The Tax Cuts and Jobs Act (the “Act”), enacted in December 2017, eliminated the business deduction employers received for providing qualified transportation fringe benefits (“fringe benefits”) to their employees beginning January 1, 2018. The Act did not affect the employee exclusion, which enables the amount of qualified transportation fringe benefits provided by employers to be excluded from employee gross income up to specified monthly limits ($260 in 2018; $265 in 2019). Since the loss of the business tax deduction would not affect a tax-exempt organization, Congress included a provision in the Act that requires tax-exempt organizations to add the amount of these fringe benefits provided to their employees to its unrelated business taxable income (UBTI). However, the Act didn’t specify exactly how to calculate the disallowed deduction or UBTI amount, particularly for qualified parking expenses.

The Internal Revenue Service released Notice 2018-99 that fills in this gap by describing how to calculate the disallowed deduction amount for taxable organizations or UBTI for tax-exempt organizations. The Department of the Treasury and the IRS will eventually publish proposed regulations but, in the meantime, IRS Notice 2018-99 may be relied upon for fringe benefit amounts paid or incurred after December 31, 2017. Essentially, the calculation will depend upon whether the employer pays a third party for parking, or if the employer owns or leases a parking facility.

We believe the ultimate result is that employers will move away from or limit providing reserved parking spaces to employees for reasons that will become clear later in this article.

Employer Pays a Third Party for Parking Space 

If an employer pays a third party so their employees may park in the third party’s garage or lot, the disallowed deduction or UBTI amount is generally the total annual cost paid to the third party. Keep in mind that if the amount exceeds the monthly exclusion limit ($260 in 2018; $265 in 2019), the excess amount must also be treated as taxable compensation to the employee. Fortunately, this excess amount will not be included in the UBTI calculation.

Employer Owns or Leases All or Part of a Parking Facility

Until further guidance is released, employers may use any reasonable method to calculate the disallowed deduction or UBTI amount if the employer owns or leases a portion of a parking facility. The IRS specifically noted that “using the value of employee parking to determine expenses allocable to employee parking in a parking facility owned or leased by the taxpayer is not a reasonable method.”

If the employer owns or leases more than one parking facility in a single geographic location, the employer may aggregate the number of spaces in those parking facilities using this process. If the parking facilities are in multiple geographic areas, the employer cannot aggregate the spaces. For those who prefer firmer guidance, Notice 2018-99 provided steps an employer may follow to calculate that amount. Yes, this is really what the guidance says.

Step 1: Reserved Employee Spaces

The employer must first calculate the amount attributable for reserved employee spaces. This is done by determining the percentage of reserved employee spaces in relation to total parking spaces and multiplying that by the employer’s total parking expenses for the parking facility. “Total parking expenses” is defined in the Notice and does not include a deduction for depreciation or expenses paid for items near the parking facility, such as landscaping or lighting. The resulting amount is the disallowed deduction or the amount that will be added to a tax-exempt organization’s UBTI. The IRS will allow employers that have reserved employee spots until March 31, 2019 to change their parking arrangements to decrease or eliminate the number of reserved employee spots retroactive to January 1, 2018.

Step 2: Primary Use Test

The employer must next identify the remaining spaces and determine whether they are primarily used for the general public or for its employees. The IRS defines “primary use” as greater than 50% of actual or estimated usage during normal hours on a typical work day. If parking space usage significantly varies, the employer can use any reasonable method to determine the average usage. The portion of expenses not attributable to the general public’s use is the disallowed deduction or amount included in a tax-exempt organization’s UBTI.

Step 3: Reserved Non-Employee Spots

If the primary use of the employer’s remaining parking spaces is not for the general public, the employer must identify the number of spaces exclusively reserved for non-employees (such as “Customer Only” parking). Spaces reserved for partners, sole proprietors and 2% shareholders are also included in this category. If the employer has reserved non-employee spaces, it needs to determine the percentage of reserved non-employee spaces in relation to the remaining total spaces. That amount is multiplied by the employer’s remaining total parking expenses. This is the amount of the disallowed deduction or amount included in a tax-exempt organization’s UBTI.

Step 4: Determine Remaining Use and Allocable Expenses

If there are any leftover parking expenses left over, the employer must reasonably determine employee use (either actual or estimated usage) of the remaining spaces during normal work hours and the related expenses for those spaces. The amount of expenses attributable to employee use is the disallowed deduction or amount included in in a tax-exempt organization’s UBTI.

IRS Notice 2018-99 does provide some helpful examples of this four step process illustrating how the calculation works in different situations. If tax-exempt organizations have $1,000 or more of UBTI they will need to report using Form 990-T.  Those tax-exempt organizations with less than $1,000 in UBTI are not required to file and are not subject to the tax.

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Navigating the Wellness Program Rules for 2019

September 17, 2018


What a difference a year can make. Dealing with the various and differing wellness program requirements under HIPAA, the ADA, and GINA remains challenging, but we finally had a regulatory framework to work with for all three laws in 2017 and 2018. That was apparently too easy as a federal court determined that the Equal Employment Opportunity Commission (EEOC) hadn’t done enough to justify its ADA and GINA wellness incentive limit rules and ordered the EEOC to try again.  After the EEOC indicated it would be unable to complete revising its rules before 2021, the court issued an order vacating the existing ADA and GINA wellness incentive rules as of January 1, 2019.

So now what?
This leaves employers with a few options to consider heading into 2019:

  1. Leave existing wellness programs that comply with the current HIPAA, ADA, and GINA regulations alone without making any design changes;
  2. Modify existing wellness programs by eliminating or reducing incentives for activities that are subject to the ADA and/or GINA; or
  3. Determine whether to implement new wellness program activities with incentives that are subject to the ADA and/or GINA.

We recommend employers discuss their wellness program design with their legal counsel before choosing a course of action, but leaving an existing compliant wellness program alone seems to be a reasonable course of action for now for reasons we will discuss below. We also recommend employers carefully consider whether to implement new or additional programs that rely on the soon-to-be-vacated wellness incentive limits until further guidance is available.

Recap of the existing wellness incentive rules
The three sets of wellness rules have much in common, such as a general requirement that a wellness program be reasonably designed to improve health and/or prevent disease without being overly burdensome or a subterfuge for discrimination against participants. A key difference between them is when and how their wellness incentive rules apply.

  • HIPAA – Only “activity-only” and “outcome-based” wellness programs are subject to HIPAA’s incentive limits. An activity-only program requires participants to complete an activity related to their health status without actually requiring a specific health outcome. Examples include walking and healthy eating challenges. An outcome-based program requires participants to actually achieve or maintain a specific health outcome. Examples include requirements for participants to be tobacco free or achieve biometric targets. The cumulative amount of all incentives cannot exceed 30% of the total cost of coverage (employee + employer contribution) or 50% of the total cost of coverage provided the excess over 30% is used toward tobacco cessation incentives. A wellness program could utilize the entire 50% limit for tobacco incentives. If spouses and/or dependents may participate, the incentive may be based on the total cost of coverage for the enrolled tier such as employee + spouse instead of employee-only. A program must include reasonable alternatives to qualify for incentives if it is medically inadvisable or unreasonably difficult for a participant to participate in an activity-only program or if a participant fails to achieve a required outcome in an outcome-based program.
  • ADA – Wellness programs are subject to the ADA’s rules if the program includes questions that may relate to whether the participant has a disability, such as family medical history questions, or requires the participant to undergo a medical examination. Participation must be voluntary. Under the ADA’s wellness regulations, participation is considered voluntary if the cumulative amount of all incentives does not exceed 30% of the total cost of employee-only coverage. There are no reasonable alternative requirements, but reasonable accommodations must be provided to enable participants with disabilities to participate. For example, an accommodation may be required to enable hearing and/or visually impaired participants to complete a health risk assessment. An employer cannot limit or deny access to health plan coverage based upon participation which prevents an employer from using participation as a gateway to a richer plan design.
  • GINA – GINA prohibits the use of genetic information for health plan underwriting. In today’s wellness program context, GINA primarily impacts health risk assessments as family medical history questions are considered genetic information. Participation must be voluntary and occur after enrollment. Under GINA’s wellness regulations, a spouse’s completion of a health risk assessment is considered voluntary if the incentive does not exceed 30% of the total cost of employee-only coverage. The GINA regulations do not address permitted incentives for employees to complete health risk assessments as these are already covered by the ADA’s rules. No incentives may be offered for dependent children to participate.

We’ll provide an example of how the existing wellness incentive limits under HIPAA and the ADA work at the end of this article.

Because, because, because
The court in AARP v. EEOC held that the EEOC failed to sufficiently justify the use of a 30% incentive limit to satisfy the voluntary requirement under the ADA and GINA because it largely relied on the use of the 30% limit standard from HIPAA without sufficient explanation for why this should be considered “voluntary” or addressing the differences between the laws. However, the court didn’t say that the EEOC’s wellness incentive limits were inappropriate. Instead, it merely indicated that the EEOC hasn’t provided enough guidance to justify the 30% limit yet. The court also didn’t vacate any other provisions of the ADA and GINA wellness regulations, so the rest of the rules remain in effect. There hasn’t been any indication from the EEOC that it intends to back down, so the EEOC’s next attempt may simply rehash the 30% limit with additional support (i.e. the 30% standard is voluntary “because, because, because”).

Be careful what you wish for
Was this a victory for the AARP and potential plaintiffs contemplating suing their employers in 2019 over wellness programs? We’re not so sure.

Potential plaintiffs generally have to file a charge with the EEOC before filing a lawsuit under the ADA or GINA. The EEOC investigates the claim and issues a right to sue at the conclusion of the investigation. It seems unlikely the EEOC will find discrimination and intervene if a wellness program complies with the EEOC’s existing final regulations as drafted, particularly if the EEOC intends to stick with its wellness incentive rules and provide greater justification for them later. Plaintiffs might anticipate this and choose to request a right to sue before the EEOC’s investigation is completed. A lack of support from the EEOC isn’t fatal to a plaintiff’s claims of discrimination in court, but it certainly doesn’t help.

It’s also worth a mention that employer wellness programs were faring pretty well under the ADA in court before the final regulations were issued.[1] The court in AARP v. EEOC vacated the existing wellness incentive rules under the ADA and GINA and ordered the EEOC to try again, but it did not explicitly reject the incentive limits or find that they couldn’t be justified. There’s no basis to assume a wellness program that relies on those incentive limits will automatically lose in court.

In the meantime…
For these reasons, it seems reasonable for employers to stick with existing wellness programs that comply with the HIPAA, ADA, and GINA wellness rules as currently drafted until further guidance becomes available. That said, employers may consider tapping the brakes and not implementing any new or additional programs that rely on the soon-to-be vacated wellness incentive rules. There will be lawsuits and with the current uncertainty, employers may wish to avoid potential trouble they do not already have.

Example under the existing wellness incentive rules:
In the example below, assume the total cost of employee-only coverage is $5,000/year and only employees are eligible to participate in the wellness program.

Wellness Activity and Incentive HIPAA ADA
$250 incentive for completing a health risk assessment with health-related questions N/A
(participatory-only activity)
$250 counts toward
incentive limit
$250 incentive for participating in biometric screening without regard to results N/A
(participatory-only activity)
$250 counts toward
incentive limit
$1,200 annual surcharge for using tobacco based solely on employee attestation $1,200 counts toward
incentive limit*
Total permitted incentives


$1,500 (30% * $5,000) or up to $2,500 (50% * $5,000) if excess over $1,500 used for tobacco incentives $1,500 (30% * $5,000)
Total incentives used $1,200 = compliant $500 = compliant

*HIPAA’s reasonable alternative standard rules apply.

[1] Remember, only the wellness incentive rules have been vacated. The EEOC specifically rejected the bona fide benefit plan safe harbor relied upon in Seff v. Broward County and EEOC v. Flambeau in the preamble to its final ADA regulations and attempted to strip this approach out, so this probably remains unavailable today.

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PCORI Fee Deadline Approaches

June 20, 2018


The annual Patient Centered Outcomes Research Institute (PCORI) fee is due by July 31, 2018. The fee was created by the Affordable Care Act to help fund the nonprofit Patient-Centered Outcomes Research Institute which supports clinical effectiveness research. Typically only employers with self-funded health plans, including health reimbursement arrangements (HRAs), must calculate and pay the fee. Health insurance companies will pay the fee on behalf of employers with fully-insured health plans.

Plan sponsors will use IRS Form 720 (Quarterly Federal Excise Tax Return) to report the fee. The fee amount changes annually and is tied to the plan year. The amount due each year is calculated by multiplying the applicable fee by the average number of covered lives in the plan. Employers have several methods available to calculate the average number of covered lives including the actual count method, snapshot method and Form 5500 method. For plan years ending in January 2017 through September 2017, the fee will be $2.26. For plans ending in October 2017 through December 2017, the fee will be $2.39.

For more information on how to calculate and pay the PCORI fee, please contact your service team.

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Upcoming 1094/1095 Deadline

February 22, 2018


Two 1094/1095 deadlines are quickly approaching for applicable employers. Employers filing paper copies of Forms 1094/1095 have until February 28, 2018 to mail them in to the IRS. Only those employers filing less than 250 informational returns are allowed to file paper copies and it must be sent via First-Class mail. The forms must be sent in a flat mailing (not folded) with no paperclips or staples. If sending the forms in multiple packages, write the employer’s name on each package, number them consecutively and place Form 1094-C in the first package. Where to send the forms depend on where the employer’s principal business office or agency is located.

The second deadline is on March 2, 2018. Employers have until then to distribute copies of Forms 1095-B or 1095-C to individuals. This deadline was originally January 31st but the IRS extended it in December 2017. Employers can provide these forms electronically (email or posting on employer’s website) but employees must specifically consent to the electronic distribution. Consent may be given on paper or electronically. If consent is given on paper, the individual must confirm the consent electronically.

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IRS Gives an Early Present to 1094/1095 Filers

December 22, 2017


Today the IRS announced in Notice 2018-06 they will be extending due dates and good faith filing relief to 2017’s 1094/1095 reporting requirement. Under the Affordable Care Act, Applicable Large Employers (ALEs) are required to complete Form 1095-C for each of their full-time employees. In addition, issuers of coverage must report on all those enrolled in their plans with Form 1095-B. The original deadline to provide a copy of these forms to individuals was January 31, 2018. The IRS extended the deadline to provide the 1095-C and 1095-B forms to March 2, 2018. However, employers will still need to send copies with the IRS by February 28, 2018 or by March 31, 2018 if filing electronically. In addition, the 30 day extension will not be available to the new March 2, 2018 deadline but it will still be available for the IRS filing deadlines by using Form 8809.

As we’ve previously mentioned, the IRS will not require tax filers to submit copies of their Form 1095-B or 1095-C with their tax returns. Instead, filers will certify health insurance coverage by checking certain boxes on their returns.

The notice also extended the good faith filing relief that was available last year. This means the IRS will not impose penalties on reporting entities if they can show they made a good-faith effort to comply with the information-reporting requirements. This relief applies to incorrect and incomplete information reported on the forms. No relief is available to employers who do not timely file the forms.


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Health Care Reform Update

December 19, 2017


If you were unable to attend the Health Care Reform Update Webinar last Friday, you can view a recording of the presentation here. You can access the presentation slides via this link.

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IRS Employer Mandate Penalties

December 6, 2017


The IRS recently updated the Questions and Answers section of its website which addressed the employer shared responsibility requirements of the Affordable Care Act (ACA). These requirements are commonly referred to as the employer mandate.

Beginning in 2015, the ACA required employers to offer full-time employees health coverage or face two different potential penalties:

  1. No Coverage – $2,080 per full-time employee minus 30 full-time employees (in 2015, 80 FT employees could be excluded). This penalty applies if the employer fails to offer substantially all of its full-time employees and their dependent children minimum essential coverage (MEC) and at least one full-time employee purchases subsidized Marketplace coverage.
  2. No Minimum Value or Unaffordable Coverage – $3,120 for each full-time employee who receives a premium tax credit for Marketplace coverage. This penalty only applies if the employer offered the wrong type of coverage (it did not meet the Minimum Value or Affordability requirements) and that employee subsequently purchases subsidized coverage in the Marketplace.

The exposure under the “no coverage” penalty is significantly greater to most employers because the penalty is applied to all full-time employees less the first 30 (80 in 2015).  The “wrong type of coverage” penalty only applies to the individual full-time employee who is not offered Minimum Value/Affordable coverage, and who subsequently purchases subsidized coverage in the Marketplace.

Recently, the IRS announced that it would begin sending letters to employers notifying them of employer mandate penalties for 2015. The IRS expected to begin sending those letters in late 2017. The letters are the first step in the process for assessing the penalties. Each step in the process is outlined below.

  1. Issuance of the penalty letter, called Letter 226J. It will include two additional forms:
    • Form 14765 – A table that indicates all of the employer’s full-time employees who purchased subsidized coverage in the Marketplace.
    • Form 14764 – The employer response form. This allows employers to affirm or dispute the penalties being assessed. Employers have 30 days to respond to Letter 226J with this Form.
  2. If an employer submits Form 14764, they will receive a response Letter 227 from the IRS. There will be several versions of Letter 227 that will indicate whether the IRS plans to assess a penalty against the ALE.
  3. If the employer disagrees with the IRS response in Letter 227, it can follow the instructions provided in Letter 227 and Publication 5 to request a pre-assessment conference with the IRS Office of Appeals. A conference should be requested in writing by the response date shown on Letter 227, which generally will be 30 days from the date of Letter 227.
  4. If the employer fails to respond to Letter 226J or Letter 227, the IRS will automatically assess the applicable proposed penalty against the employer. The IRS will issue a notice and demand for payment (Notice CP 220J). That Notice will include a summary of the penalty, and will reflect payments made, credits applied, and the balance due, if any. The Notice will instruct the employer on the process to make a payment. Employers are not required to include the penalty on any tax returns or make any payments before receiving Notice CP 220J. Employers may have the ability to make payment installments, as described in Publication 594.

Employers need to keep an eye out for Letter 226J. It will likely be sent to the contact listed on the 2015 1094-C the ALE submitted in 2016.

 Letter 226J

The IRS has posted a full sample copy of Letter 226J online.

The first page will look like this:


The Proposed ESRP is the penalty amount the IRS calculated for the 2015 ACA employer mandate. The letter provides a description of both potential penalties and Forms 14765 and 14764, which will be included with the letter. The letter recommends that an ALE have their 2015 Forms 1094-C and 1095-Cs available, to use as a reference when reviewing the letter and accompanying forms.

The letter also provides further instructions:

An employer that agrees with the proposed penalty can indicate their agreement on Form 14764 and include payment (full or partial) when returning the form to the IRS. An employer that doesn’t pay the entire amount will receive a bill in the form of a notice and demand for payment.

An employer that does not agree with the proposed penalty must complete Form 14764 and include a signed statement to dispute all or a portion of the penalty. If corrections to the Employee PTC listing (Form 14765) are necessary, those changes must be identified in the signed statement.  Also, changes should directly be made on the Employee PTC listing by using the indicator codes one would use on Forms1094-C or 1095-C.  There is no requirement to file corrected statements (i.e., Forms 1094-C or 1095-C) with the IRS. Instead, those corrections should be noted in the signed statement and made on the PTC list.

Letter 226J will also include a table called the ESRP Summary Table that shows the months in which penalties apply and explains the penalty calculation:

Letter 226J provides a detailed explanation of each column in the summary table to help employers understand how the penalty amounts were calculated. It will include a number of references to IRS publications to aid in the employer in understanding the penalty determination.

Form 14765

Every Letter 226J should include Form 14765, a sample of which can be found online.

This form is called the Employee Premium Tax Credit Listing:

It will include all full-time employees who received a tax credit to purchase subsidized coverage in the Marketplace, whose 1095-C Form did not include a safe harbor code or any other relief code from the tax penalty.

The Letter 226J includes instructions on how to make changes to the Employee PTC listing:

The IRS reminds employers to ensure that their statement is signed and that the tax year and EIN are entered at the top of the form.

 Form 14764

Letter 226J should include Form 14764. A sample of the Form 14764 can be found here.

Employers should complete the ESRP Response Form (Form 14764) and indicate if they agree or disagree with all or part of the proposed penalty. The first part of the form includes the due date of the response. If an employer needs more time to respond, they may call the IRS to request additional time.  Employers should include the contact information and best times to reach an individual responsible for discussing the matter with the IRS.

If an employer disagrees with the penalty amount, they should include the following when returning the form to the IRS:

  • A signed statement explaining why the employer disagrees with all or a portion of the penalty.
  • Any additional documentation that supports the employer’s contention that penalties should not apply.
  • If an employer made corrections to the Employee PTC listing (Form 14765), include an explanation of the changes in the signed statement.

The Form also permits employers to pay all or a part of the proposed penalty. An employer can select “no payment”. An employer may also choose “partial payment” and the IRS will issue a demand for payment to the employer if there is an agreement that at least a portion of the penalty applies.

Finally, the form allows an employer to designate another authorized contact on page 2. This is optional. An employer may want to designate an additional contact if the primary contract is difficult to reach via phone.

Letter 227

At this point, the IRS has not released a sample of Letter 227. However, the Questions and Answers posted on the IRS website indicate that there will be at least five versions of Letter 227.  Letter 227 will be used as a response to an employer who disagrees with any penalty assessed.  It may also request more information that supports the employer’s position. The IRS, in Letter 227, may also disagree with the employer’s response and indicate that the IRS intends to levy the penalty.

Request for Conference

If the employer maintains the position that the penalty should not apply despite the IRS explanation in Letter 227, the employer can request a pre-assessment conference with the IRS Office of Appeals.

Letter 227 will include instructions for requesting a conference. The employer can also reference IRS Publication 5 for more details. The IRS Publication 5 can be found via this link.

Employers will have 30 days from the date of Letter 227 to request the conference with the Office of Appeals.

Concluding Thoughts

These penalty notices could not come at a worse time for most employers. Many are working through open enrollment issues, getting ready to issue W-2s, and 1095-Cs and preparing for the holidays.

It is critical that employers address this letter shortly after receiving it. Timing is tight.  Employers will have only 30 days to respond and may need that time to make specific arguments as to why a certain penalty amount may not apply.

It is also important to remember that a significant amount of transitional relief was available in 2015. It is not clear if the IRS will take this into consideration when proposing penalties.  However, employers can reference the transitional relief when challenging the penalty determination.

Be prepared to respond to IRS Letter 226J. The IRS did not provide any further details on when these letters would be mailed, other than late 2017.  Employers may want to make sure that they have access to their Forms 1094-C and 1095-C submitted to the IRS in 2016. These forms will be necessary when investigating any proposed penalties.





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