Understanding Employee Benefits and key developments in the employee benefits field and items of interest to our clients. MORE

The Affordable Care Act requires most health plans to cover certain women’s preventive services, including contraception, without charging a co-pay or deductible. On January 30, 2013, the Obama Administration released proposed rules that continue to implement provisions in the health care law providing women contraceptive coverage without cost sharing, while at the same time respond to religious objections to contraceptive services by certain religious organizations.

Exemption for Religious Employers

Group health plans of “religious employers” are exempted from having to provide contraceptive coverage, if they have religious objections to contraception. The proposed rule simplifies the existing definition of a “religious employer” as it relates to contraceptive coverage by eliminating criteria that a religious employer: (1) have the inculcation of religious values as its purpose; (2) primarily employ persons who share its religious tenets; and (3) primarily serve persons who share its religious tenets. The simple definition of “religious employer” for purposes of the exemption would primarily include churches, other houses of worship, and their affiliated organizations, including hospitals, schools and universities.

Accommodations for Non-Profit Religious Organizations 

The rule proposes accommodations for additional non-profit religious organizations, while also separately providing those organizations’ enrollees contraceptive coverage with no co-pays.  The proposed regulations define an eligible organization as an organization that: (1) opposes providing coverage for some or all of any contraceptive services required to be covered under Section 2713 of the Public Health Services Act, on account of religious objections; (2) is organized and operates as a nonprofit entity; (3) holds itself out as a religious organization; and (4) self-certifies that it meets these criteria and specifies the contraceptive services for which it objects to providing coverage. Under the proposed accommodations, such eligible organizations would not have to contract, arrange, pay or refer for any contraceptive coverage to which they object on religious grounds. Plan participants would receive contraceptive coverage through separate individual health insurance policies, without cost sharing or additional premiums.  The issuer would work to ensure a seamless process for plan participants to receive contraceptive coverage.

With respect to insured group health plans, the eligible organization would provide self-certification to the health insurance issuer, which in turn would provide separate, individual market contraceptive coverage at no cost for plan participants. The regulations state that issuers generally would find that providing such contraceptive coverage is cost neutral because they would be insuring the same set of individuals under both policies and would experience lower costs from improvements in women’s health and fewer childbirths. With respect to self-insured group health plans, the eligible organization would notify the third party administrator, which in turn would work with a health insurance issuer to provide separate, individual health insurance policies at no cost for participants. The regulations state that the costs of both the health insurance issuer and third party administrator would be offset by adjustments in federally-facilitated Exchange user fees that insurers pay.

The rule also proposes that eligible religious non-profit organizations that are institutions of higher education that arrange for student health insurance coverage may take advantage of an accommodation comparable to that for an eligible organization, and not provide contraceptive coverage if they object on religious grounds.

The proposed rule does not provide any exemptions or accommodations for secular organizations owned by individuals who object on religious grounds to providing employees with contraceptive coverage, so we should expect to see those court challenges continue.

My colleague, Jessica Kracl, has written an Alert  for our health care clients about the recently issued privacy and security regulations under the Health Insurance Portability and Accountability Act (HIPAA). Employer group health plans are covered entities under HIPAA and therefore must comply with the new regulations. Jessica’s Alert is a good summary of the HIPAA compliance issues now facing covered entities.

In early January, the Internal Revenue Service published proposed regulations on “Shared Responsibility for Employers Regarding Health Coverage.”  These regulations incorporate the provisions of many previous Notices with some modifications, and also propose guidance on additional issues under the Patient Protection and Affordable Care Act.  The regulations provide rules and examples for determining: status as an applicable large employer, full-time employees, assessable payments under the employer shared responsibility mandate, and the administration and assessment of assessable payments.

Applicable Large Employers. Applicable large employers (employers who employ 50 or more full-time equivalent employees) are subject to the employer mandate and must offer minimum essential health coverage to their full-time employees or pay a penalty. The proposed rules adopt the common law employee standard for the 50-employee threshold for applicable large employers. Leased employees are not treated as employees; nor are sole proprietors, partners in a partnership, or 2% S corporation shareholders. The identification of full-time employees for purposes of determining applicable large employer status is performed on a look-back basis using data from the prior year, taking into account the actual hours of service of all employees employed in the prior year (full-time and non full-time).  All employees in a controlled group or affiliated service group are taken into account when determining whether members of the controlled or affiliated service group together constitute an applicable large employer.

Watch for my upcoming blog post (I’m not an applicable large employer under the ACA…or am I?) for more information on how to determine if you are an applicable large employer.

Determining full-time employees who must be offered coverage. Once an employer has determined it is an applicable large employer, the next step is identifying which employees must be offered health coverage. A full-time employee, for this purpose, is an employee who was employed on average at least 30 hours of service/week.  Hours of service include each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer., including vacation, holiday, illness, layoff, jury duty, military duty or leave of absence.  For employees not paid on an hourly basis, employers can use one of three methods to count hours of service: counting actual hours of service, using a days-worked equivalency method, or using a weeks-worked equivalency method.  Hours of service generally do not include services performed outside of the United States.

The proposed regulations provide guidance on how to calculate hours of service for teachers and other employees of educational organizations, employees compensated on a commission basis and adjunct faculty.

The regulations adopt the look-back measurement method for determination of full-time employee status described in earlier guidance as an alternative to a month-by-month method of determining full-time employee status.  The regulations describe different look-back periods for ongoing and new employees. Watch for my upcoming blog post (Who must be offered health coverage under the pay or play rules?) for more in-depth information on how applicable large employers can identify which employees must be offered minimum essential health coverage.

If an applicable large employer does not offer health coverage, and at least one employee receives a premium tax credit on the exchange, the penalty is $2000 x number of full-time employees (less the first 30).  If an employer offers coverage but it is unaffordable or doesn’t provide minimum value and at least one employee receives a premium tax credit on the exchange, the penalty is $3000 x number of employees that receive a premium tax credit on the exchange. The Department of Health and Human Services will be developing a process whereby an employer will be notified if its employees purchase coverage on an exchange and receive a premium tax credit. Employers will be provided an opportunity to respond (for example to show that the employee is eligible for the employer’s affordable, minimum essential coverage), before the issuance of any notice and demand for payment.

The Affordable Care Act requires that employers offer minimum essential health coverage to substantially all of their full-time employees and dependents.  A dependent is defined in the proposed regulations as a child under age 26, and does not include a spouse. The regulations state that if an employer offers health coverage to all but 5% (or 5, if greater) of its full-time employees, they will be treated as offering coverage to all of its full-time employees.

Although common ownership is taken into account when determining whether an employer is an applicable large employer, shared responsibility requirements are applied separately to each member of the controlled group. Each member of the controlled group is also allocated its proportionate share of the 30 employees that can be deducted from the number of employees who lack coverage in computing the pay or play penalty.

Those of us who work in the benefits area understand that the distinction between employee and independent contractor is an important one, but one in which the determination is not always clear. In many cases, the IRS takes the position that a particular worker is an employee, rather than an independent contractor, thereby requiring the employer to pay its share of employment taxes and to withhold income taxes. The individual is also then often eligible for various employee benefits.

In a recent Tax Court decision, the positions of the parties were reversed, with a moonlighting police officer was claiming that he was an employee and the IRS claiming that the moonlighting jobs constituted self-employment so that the fees were subject to self-employment tax.

The individual was a police officer who provided security services during off duty hours. The businesses for which the officer performed the duties did not treat the officer as an employee. The police officer did not pay self-employment taxes on the fees received and instead claimed that he was an employee of the businesses and therefore not liable for self-employment taxes.

The Tax Court considered the same factors that are typically considered in determining whether a worker is an employee or independent contractor, namely, the degree of control exercised by the business over the details of the work, the extent to which the worker invests in the facilities used in the work, the opportunity of the worker for profit and loss, whether the business has the right to discharge the worker, whether the work is part of the business’s regular business, the permanency of the relationship, and the relationship the parties believe they are creating. The Tax Court considered each of these seven factors and concluded that some favored independent contractor status and some favored employee status. The court then weighed the factors, giving greatest weight to the right to control.

In a Tax Court decision such as this, the taxpayer generally has the burden of proving that the IRS’s determination is incorrect. That burden was on the police officer in this case. In other words, the IRS’s determination that the officer was not an employee was presumed to be correct.

After weighing the factors, the Tax Court concluded that the police officer had failed to meet his burden of proof to establish his status as an employee. Therefore, the IRS’ position was upheld.

Although the Tax Court opinion does not say this, it is certainly possible that if the police officer had been claiming independent contractor status and the IRS had disagreed, the Tax Court may well have upheld the IRS’s position in that situation too. Because the elements are considered in an independent contractor/employee dispute can often support either conclusion, the burden of proof can be the deciding factor.

My colleague, Blake Schofield, has sent an Alert to our health law clients regarding an enforcement action taken by the U.S. Department of Health and Human Services, Office of Civil Rights (OCR) against a hospice provider in Idaho relating to a stolen laptop. The number of affected patients was less than 500. The OCR fine was $50,000.

The Alert discusses the significance of this action and reminds covered entities of their HIPAA obligations. Since employer group health plans are HIPAA covered entities with HIPAA responsibilities, I commend the Alert to our employer clients as well.

The Patient Protection and Affordable Care Act requires employers who issue 250 or more W-2s in a year to report the aggregate cost of coverage under an employer-sponsored group health plan in Box 12 of each employee’s Form W-2, using code DD. In general, the amount reported should include both the employer and employee-paid portions of the group health coverage.  The IRS states this reporting is for information purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage.

 Most types of organizations are required to report, including businesses, tax-exempt organizations, and federal, state and local government entities.  Federally-recognized Indian tribal governments and employers contributing to a multi-employer plan are exempt from this requirement.  In addition, employers with self-insured group health plans not subject to federal continuation coverage requirements (COBRA, ERISA or the Public Health Services Act) and employers who issued fewer than 250 W-2s  for the preceding calendar year are not required to report for the 2012 calendar year.

 

The IRS website contains a helpful chart showing the types of coverage that must be reported. See http://www.irs.gov/uac/Form-W-2-Reporting-of-Employer-Sponsored-Health-Coverage.

In a recent decision of the United States District Court for the Eastern District of Oklahoma, a retiree who had begun work as a union employee and who during his employment was promoted to a salaried position, sued his employer for failing to take into account his service both as a union employee and as a salaried employee in determining his benefit under the salaried employees’ pension plan. The retiree claimed that at the time that he took the salaried position, the employer had promised that his service would be aggregated under the salaried plan, which would substantially increase his benefit under that plan.

When he retired, his service was not aggregated and he was awarded retirement benefits in part under the hourly plan and in part under the salaried plan. He sued claiming the higher benefits to which he could have been entitled had his service been aggregated under the salaried plan.

The employer filed a motion for summary judgment based on the fact that the retiree had not exhausted his administrative remedies before he brought his action under ERISA. Despite the fact that ERISA does not contain an explicit exhaustion requirement, courts have uniformly held that participants in ERISA plans must exhaust a plan’s claims procedure before bringing a court action unless an exception applies. Under Department of Labor regulations, ERISA plans are required to have such claims procedures. The retiree admitted that he had failed to exhaust his administrative remedies but relied on alleged exceptions to the exhaustion requirement for his failure to do so.

Although the court found against the retiree on three of his exceptions, it accepted one of his arguments, namely that the plan had waived the exhaustion requirement. The language of the plan’s claims procedure provided as follows: “In the case of a claim that is not appealed to the Claims Committee in a timely manner by the claimant, the decision of the Claims Administrator shall be the final and conclusive administrative proceeding under the Plan, and the decision of the Claims Administrator shall be given legal deference . . . in any subsequent legal proceeding.” According to the retiree, this plan language meant that if there was no appeal, the initial decision became final and binding for purposes of legal action.

The court agreed with the retiree. According to the court, the provision clearly provided that an adverse claim decision that was not appealed is final and conclusive and the equivalent of an appealed decision. Therefore, the retiree had properly exhausted the plan’s claims procedure and could proceed with his action.

Employers should review their claims procedures to make sure that they do not contain language implying that exhaustion of administrative remedies is not required. Employers may wish to add specific provisions to the effect that exhaustion is required before a lawsuit could be brought. Otherwise, language that the employer believes means that its claims decision be given legal deference is instead held to mean that an administrative appeal is unnecessary.

The Affordable Care Act establishes a Patient-Centered Outcomes Research Institute as a private nonprofit corporation to assist patients, clinicians, purchasers and policy makers in making informed health decisions using evidence based medicine. The Institute is to be funded through a trust fund called the Patient-Centered Outcomes Research Trust Fund. Under the Affordable Care Act, both health insurance issuers and sponsors of self-funded health plans are required to contribute to the trust fund. The IRS recently finalized regulations on those contributions or fees.

Generally speaking, the trust fund fee is $1.00 per covered life for a specified health insurance policy or self-funded medical plan for policy years ending on or after October 1, 2012 and $2.00 in the case of policy or plan years ending before October 1, 2013. Thereafter, the fee is increased based on increases in the projected per capita amount of national health expenditures. The fee expires after 2019. The fee is imposed per covered life so the fee will be paid with respect to each covered family member if a plan covers both the employee and dependents. Get paid to all these payments on our website online-casino österreich. 

The fee is not owed with respect to certain plans, including plans that cover only prescription drugs, dental, or vision benefits. In addition, health savings accounts (HSAs) and most flexible spending account (FSA) plans will be exempt from the fee. Employers who sponsor multiple self-funded plans with the same plan year ends can aggregate those plans and pay the fee once on overlapping lives. Note, however, that because the fee is imposed on the plan sponsor and not on the plan itself, the employer must pay the fee outside the plan. According to the Department of Labor, plan assets cannot be used to pay the fee.

Health reimbursement arrangements (HRAs) are considered medical plans on which the fee is imposed. Employers with self-funded high deductible health plans that are paired with self-funded HRAs can aggregate those plans and pay the fee once with respect to an individual covered by both the high deductible health plan and the HRA. In contrast, an employer that sponsors a fully insured high deductible health plan paired with a self-funded HRA will essentially be required to pay the fee twice on the same lives. The IRS concluded that because separate statutes impose the fee on plan sponsors of self-funded plans and insurance companies issuing fully insured policies, the IRS is unable to permit employers with both types of plans to combine them for purposes of determining the number of covered lives that they have.

Employers who sponsor self-funded HRAs with fully insured medical plans may wish to consider other plan designs to avoid this fee, such as self-funding the high deductible health plan or moving to a plan design that uses HSAs instead of HRAs. Alternatively, if there are relatively few people covered under the HRA and if the HRA has been an effective plan design, employers may simply decide to continue offering the plan and pay the additional fee.

Here’s a brief timeline highlighting important health care reform dates for employers…I expect some dates will change as 2014 draws nearer, and I will update the timeline accordingly.

9/23/12 – Group health plans must provide all eligible employees a standard Summary of Benefits and Coverage so members can compare medical plans.

12/31/12 – Form W-2 Reporting (2012 tax year). Most employers that issued 250 or more W-2’s in 2011 must report the value of health benefits in Box 12 (Code DD) on the 2012 Form W-2, issued in January, 2013. Certain organizations, such as churches, are excluded from this requirement for 2012.

1/1/13 – Maximum contribution limit of $2,500 for health care flexible spending accounts goes into effect for plan years beginning on or after this date.

1/1/13 – Additional Medicare tax of .9% assessed on an employee’s wages over $200,000 (the employee-paid Medicare tax increases from 1.45% to 2.35%).

3/1/13 – DELAYED UNTIL LATER IN 2013 Employer Provided Notice of Exchange. Employers must provide a notice to employees informing them of the availability of state health insurance exchanges and how such exchanges can be accessed.

1/1/14 –

–     Pay or Play/Employer Shared Responsibility goes into effect. Employers with 50 or more full-time equivalent employees must offer affordable, minimum essential health coverage to their full time employees or pay a penalty.

–     Enroll or Pay/Individual Mandate goes into effect. Most individual taxpayers must have health coverage or purchase health coverage through state or federal health insurance exchange or pay a penalty.

–     Wellness Incentives. Group health plans are allowed to increase permitted wellness incentives from 20 percent of premium costs to 30 percent of premium costs.

–     Pre-existing Conditions Exclusions. Group health plans cannot impose exclusions on coverage for pre-existing conditions.

–     Annual Dollar Limits. Group health plans cannot not impose annual dollar limits on essential health benefits (before 2014, restricted limits apply).

–     Non-discrimination. Fully-insured group health plans may not discriminate in favor of highly compensated employees (this already applies to self-insured health plans).

–     Automatic Enrollment. Large employers (those with 200 or more full-time employees) must automatically enroll new employees in their group health plan.

 

1/1/18 – “Cadillac Tax” goes into effect. Plans will be required to pay a 40 percent excise tax (the cost of which may be passed on to the employer) if they exceed annual inflation-adjusted cost thresholds beginning at $10,200 for individual coverage and $27,500 for family coverage.

Like a number of states, New York requires nonresidents to pay income taxes on wages earned in the state. Those rules extend to an allocable portion of deferred compensation and gain from the exercise of stock options earned while employed in the state. The state’s ability to tax a nonresident is limited to this extent: Federal law prohibits states from taxing nonresidents on distributions from qualified retirement plans or on distributions of nonqualified deferred compensation paid in installments over the recipient’s life expectancy or over a period of at least ten years.

A recent decision of the New York State Division of Tax Appeals upheld the determination of the New York Division of Taxation that a nonresident retiree had to allocate to New York a portion of the income he realized from exercising stock options and from receipt of deferred compensation after his retirement. The individual was a resident of Connecticut while he was employed by American Airlines and after his retirement. During his employment, he worked both within and without New York. He received stock options during the years 1996 through 2001 and again in 2003. He retired in 2005 at which time the options were in the aggregate underwater. He then exercised the stock options during 2006.

The state of New York allocated the stock option gain based upon the number of days worked in New York between the date of grant and the date of retirement, resulting in approximately two-thirds of the gain being allocated to New York. The state used the same allocation for the deferred compensation. The retiree challenged the allocation on various grounds, including that regulations describing the method of allocation were unfair and unworkable for nonresidents. The Division of Tax Appeals upheld both the regulations and the allocation of the income to New York.

Other states have similar requirements to allocate stock option gain and deferred compensation to the state where an employee worked during the time that options were granted and vested and that deferred compensation was earned. Minnesota, where I practice, is one such state. Sometimes those states look to judicial decisions in states with similar allocation provisions. This case from New York may be used by a state like Minnesota to support its laws mandating allocation of stock option gains and deferred compensation earned by an employee in Minnesota who receives the benefits after moving from the state.

Employees who move to a state without an income tax before exercising options or taking receipt of deferred compensation may be surprised to find that all or a portion of that income remains subject to taxation by the state where they worked during their careers. This New York decision shows that the states are able to collect taxes in that situation.