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

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.

Beginning in 2014, the Affordable Care Act will require employers employing 50 or more full-time equivalent employees to offer full-time employees affordable, minimum essential health coverage. If such health coverage is not offered, and if at least one employee receives a premium tax credit on a state or federal exchange, the employer will be assessed a penalty. You may see this referred to as the employer mandate, employer shared responsibility, or the employer pay-or-play mandate.

Some definitions:

50 or more full-time equivalent employees – part-time employees’ hours are considered for the purpose of determining whether a company is above or below 50 employees. Calculating this number can be complex – IRS Notice 2012-58 explains in great detail the safe harbor methods, administrative periods, and look-back measurement periods, as well as how to count ongoing employees, new employees, and variable hour and seasonal employees.

Affordable – An employee’s share of the health plan premium for employee-only coverage does not exceed 9.5% of the employee’s household income.

Minimum essential coverage (also referred to as minimum value) – The health plan is designed to pay at least 60% of the covered health expenses for a typical person.

Premium tax credit – The Affordable Care Act creates subsidies for people with incomes of up to 400% of the federal poverty limit. For 2012, individuals whose adjusted gross income is less than $45,000 and families of 4 whose adjusted gross income is less than $92,000 would be eligible for these subsidies. The premium tax credit can be used on an exchange to purchase health coverage.

Employers are NOT required to offer health coverage to part-time employees (those working fewer than 30 hours/week). Employers with fewer than 50 full time equivalent employees are not subject to the employer mandate but still must provide certain notices to their employees and may need to comply with other specified requirements that will be detailed in additional guidance.

Options in 2014 for employers with 50 or more full time equivalent employees

Employers have choices to make before 2014. They can offer health coverage, or not offer coverage and pay the penalty.  Employers need to be aware that simply offering a health plan does not satisfy the employer mandate – as mentioned above, the health plan must be affordable and offer minimum essential coverage.  Employers can choose one of these four options:

Offer no health coverage.  If at least one full-time employee uses a premium tax credit to access coverage on the exchange (which means the employee has an income of less than 400% of the federal poverty level), the employer will be subject to a penalty of $2,000/year/full time employee, excluding the first 30 employees.

Offer minimum essential health coverage that is not affordable.  If any employee is required to pay more than 9.5% of his or her household income for health coverage, and if at least one full-time employee uses a premium tax credit to access coverage on the exchange, the employer will be subject to a penalty of $3,000/year for each full-time employee who accesses coverage through the exchange. The maximum penalty cannot be greater than what employer would be liable for if it did not offer coverage at all ($2,000/year/full time employee excluding the first 30 employees).

Offer affordable health coverage that doesn’t meet the minimum essential coverage definition.  If an employer’s health plan doesn’t pay at least 60% of the covered health expenses for a typical person, and if least one full-time employee uses a premium tax credit to access coverage on the exchange, the employer will be subject to a penalty of $3000/year for each full time employee who accesses health coverage through the exchange, up to a maximum amount of $2,000/year/full time employee excluding the first 30 employees.

Offer health coverage that is affordable and meets the minimum essential coverage definition. An employer meets its obligation under the Affordable Care Act, and no penalty will be assessed.

Controlled group rules. If an employer has multiple companies, each may or may not be considered separate employers under the Affordable Care Act. For purposes of health care reform, a single employer is defined by the “common control” test under Internal Revenue Code sections 414(b), (c), (m) and (o). In general, this test focuses on direct or overlapping ownership rather than actual control.  If a parent owns 80% or more of the equity in a subsidiary, or if the same 5 or fewer persons own 80% or more of the equity in another company or collectively own more than 50% of both companies, the companies will be considered controlled groups and all employees of the controlled group must be combined together for purposes of calculating whether an employer is above or below the 50 full-time equivalent employee threshold discussed earlier.

Employers need to determine if health coverage is a part of their organization’s value proposition – is offering health coverage important to the employer?  Does the employer need to offer a group health plan to attract and retain productive employees? Employers with 50 or more full-time equivalent employees must decide whether to continue offering group health coverage to their employees, or pay the penalty and have employees purchase coverage through the state or federal exchange. In addition to the penalty the employer would pay, employees might pay more on the exchange than they would for the employer’s group health coverage…if this is the case, will employers cover this additional cost by increasing their employees’ pay? 

I’ll be posting a timeline soon that should assist employers in understanding the due dates of upcoming health care reform requirements.

Many employers know that one benefit to an ERISA plan is the standard of review available when the participant brings a lawsuit for benefits under the plan. If the plan documents give the plan administrator discretion to decide claims, then the court will review the exercise of the plan administrator’s discretion under an arbitrary and capricious standard. Under that standard, the plan administrator’s decision will be upheld if the decision is supported by any reasonable interpretation of the plan. If the review standard is not arbitrary and capricious, then the court can determine for itself the most reasonable interpretation of the plan in deciding the claim. Because of that deference, plan administrators who can take advantage of the arbitrary and capricious standard are more likely to win lawsuits challenging their decisions.

Unlike the situation with retirement plans where employers typically have formal plan documents, the documentation associated with an employer’s health and welfare plan is often less formal. Employers may rely on their insurance company or third party administrator to provide the documents describing the welfare plan, such as medical, dental, life insurance or long term disability. If the plan is provided under an insurance contract, the insurer will often prepare a certificate of coverage. That certificate of coverage frequently does not contain all the provisions that an employer might like a plan document to contain. Among the missing provisions is sometimes a statement of the arbitrary and capricious standard of review.

Employers will sometimes adopt a “wrap” plan document, which is a plan document that wraps around underlying contracts and policies from an insurance company or third party administrator. Sometimes the wrap document applies to multiple benefits, creating a single plan with a single plan number that allows the employer to file a single Form 5500. Sometimes it is a document that wraps only around a single benefit.

A recent district court decision in Ohio considered the situation of a denial of accidental death and dismemberment (AD&D) benefits to beneficiaries of an employee who had died following a single car accident. Toxicology reports had shown a blood alcohol level in the driver well above the legal limit, and the insurance carrier denied AD&D coverage based on an exclusion for accidents occurring while operating a motor vehicle involving the illegal use of alcohol or controlled substances. The AD&D plan booklet did not grant discretion to the plan administrator or the insurance carrier to decide claims. However, the employer had adopted a wrap document that did contain such discretion. In addition, the summary plan description noted that the employer had discretion to decide claims.

The court concluded that the wrap document and the plan booklet together constituted the plan document so the grant of discretion applied to the AD&D claim denial. The court also said that because a summary plan description is supposed to describe the plan, the statement in the SPD about the grant of discretion was not sufficient to provide the discretion.  The court then upheld the decision denying the AD&D benefits, finding that the insurance company’s interpretation of the alcohol exclusion was reasonable.

The case highlights the importance of the abuse of discretion standard and reminds employers that it should check its plan documents to make sure they contain the appropriate discretionary language. If the documents provided by the insurance company do not contain that language, the employer should consider adopting a wrap plan document to add that provision and any other appropriate provisions missing from the insurance company documents.