New Rules Defined for “Results Based” Wellness Programs

Proposed regulations issued by the IRS, DOL and HHS (the “Agencies”) on November 20, 2012 increase, for plan years beginning on or after January 1, 2014, the maximum permitted reward that “health-contingent wellness programs” (i.e., “results-based” programs) may offer, from 20% of the total health insurance premium applicable to individual coverage, to 30%, with an additional 20% incentive permitted only in connection with programs to reduce or eliminate tobacco use.  The proposed regulations, which amend final regulations from 2006 on HIPAA’s nondiscrimination provisions, make other changes to the five “consumer-protection conditions” that such programs must satisfy.[1]  Below, I highlight key changes under the new regulations:

Financial Incentives

• As mentioned, the maximum financial incentive that a results-based wellness program may offer in 2014 is an amount equal to 30% of the total premium cost (employer and employee portions) for individual coverage under a group health insurance policy or self-funded plan.  (The percentage may be based on family or self plus one coverage costs only to the extent that the added spouse/dependents may participate in the results-based wellness program.)
• An additional 20% incentive is allowed (for a total incentive of 50%) but only if it is offered in connection with a program that reduces or stops tobacco use.
• Employers must be sure that their results-based wellness program incentives do not exceed the 30% and 50% thresholds either separately or when added together.
  • An example in the regulations describes a wellness program that offers an annual premium rebate of $600 to employees who attain goals under a program for reducing weight, blood sugar and other biometric measurements, and also imposes an annual $2,000 surcharge on employees who have used tobacco in the last 12 months and who are not enrolled in the plan’s tobacco cessation program.  The annual individual premium under the related group health plan is $6,000, of which the employer pays $4,500.  This program design meets the maximum incentive thresholds because the total of all rewards (including not imposing the tobacco use surcharge) is $2,600 ($600 + $2,000) which does not exceed 50% of the total cost of individual coverage, which is $3,000 ($6,000/2).  Also, tested separately, the $600 reward for the non-tobacco wellness program does not exceed 30% of the total annual cost of individual coverage, which is $1,800) ($6,000 x 30%).
  • The regulations make clear that rewards for participation-only wellness program components do not need to be factored in to the maximum reward calculation, even if the participation-only component (such as completion of a health risk assessment) is teamed with a results-based component (such as required smoking cessation).
  • The regulations reassert that permitted financial rewards may take the form of a premium rebate or contribution, a waiver of all or part of a cost-sharing mechanism (such as deductibles, co-insurance, or co-payments), the absence of a surcharge, the value of a benefit that would not otherwise be provided under the plan, or other financial or nonfinancial incentives or disincentives.
    • Compliance Note:  All wellness programs must be “voluntary” in order to meet the requirements of the Americans with Disabilities Act.  The Equal Employment Opportunity Commission (EEOC), which administers the ADA, has not clearly defined what makes a wellness program “voluntary” or not voluntary.  This remains a compliance grey area for employers.
  • The new rules apply to non-grandfathered and grandfathered plans under the Affordable Care Act (ACA), and to insured and self-funded group health plans, whether “small” or “large” plans.  They do not yet apply to individual insurance policies.  The uniformity among group plans will permit consistent coordination between the 50% wellness incentive that includes smoking cessation measures, and the tobacco use surcharge (up to 50% of the applicable premium).  That premium surcharge is set forth in proposed regulations on guaranteed availability and premium rating that HSS issued on the same day as the wellness regulations.[2]   (The HHS regulations cover other insurance market reform provisions under the ACA and will be the topic of a future post at http://www.EforERISA.com.)

Offers of Reasonable Alternative Standards

The regulations provide substantial new information on how employers and insurers may comply with the requirement of offering a “reasonable alternative standard” – or waiver of the otherwise applicable standard – to employees who cannot attain the results-based goals due to medical reasons.  (The specific criteria are that the goal either is “unreasonably difficult” to attain “due to a medical condition,” or that it is “medically inadvisable” for the employee to attempt to reach the goal.)  References below to “employers” apply equally to group insurance carriers where applicable.

• First, the regulations provide two examples of new model language notifying employees of the reasonable alternative standard concept.  The new language replaces the prior, more opaque notice, which may have a chilling effect on some employees.  The standard model language, and a permitted variation, both are repeated below:

 “Your health plan is committed to helping you achieve your best status.  Rewards for participating in a wellness program are available to all employees.  If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means.  Contact us at [insert contact information] and we will work with you to find a wellness program with the same reward that is right for you in light of your health status.”

“Fitness is Easy! Start Walking!  Your health plan cares about your health.  If you are overweight, our Start Walking program will help you lose weight and feel better.  We will help you enroll. (**If your doctor says that walking isn’t right for you, that’s okay too.  We will develop a wellness program that is.)”

• The notice of a reasonable alternative standard must be set forth in all written materials that describe the wellness program but does not need to be added to materials that simply make reference to the existence of the program.  For instance, it need not be set forth in the Summary of Benefits and Coverage document (which is provided by carriers to employers with insured plans).
• Employers do not need to “pre-design” reasonable alternative standards but instead may design them once an employee requests alternative standards.  As provided in the 2006 regulations, and in comparable language under the ACA, however, employers may design alternative standards for specific sub-populations, such as cholesterol reduction programs tailored to employees whose high cholesterol readings make it unreasonably difficult or medically inadvisable for them to attempt to attain lowered readings.
• If the reasonable alternative standard is completion of an educational program, the employer must make the educational program available, instead of requiring the employee to locate one, and may not require the employee to pay for the program.
• If the reasonable alternative standard is a diet program, the employer does not need to pay for the cost of food but must pay any membership or participation fee.
• If the reasonable alternative standard is compliance with the recommendations of a medical professional, and the medical professional is hired or employed by the employer, the employer must offer a reasonable alternative standard if the employee’s own physician determines that recommendations made by the employer’s physician are not medically advisable for that employee.  Regular insurance co-pays or costs will apply to medical items and services furnished in accordance with the physician’s recommendations.
• The new regulations provide that, only where it is “reasonable under the circumstances,” employers may request a written statement from an employee’s personal physician that the standard wellness goal presents unreasonable difficulties to the employee or that it is medically inadvisable for the employee to attempt to attain it.  When the medical problem or health status that is at issue is clearly apparent, for instance confinement to a wheelchair, the employer does not have a reasonable basis for requesting the physician’s note.
• An example in the regulation illustrates that “stacking” of reasonable alternative methods of attaining financial rewards may be necessary.  For instance if the wellness goal is reducing body mass index (BMI) to 26 or lower, a reasonable alternative method of attaining the same reward may be a program of walking 150 minutes a week.  An employee who cannot walk that much for health reasons could still attain the same financial reward by following recommendations set by his or her own physician.
• Finally, the preamble to the new regulations indicates that employers may not stop offering a reasonable alternative method simply because employees fail to attain the alternative goal, particularly where addictive behavior is involved.  Noting (as did the prior wellness regulations) the “cycle of failure and renewed effort” that addicts experience, the preamble states that employers must continue to offer the alternative standard despite a low success rate, or must offer a new reasonable alternative standard such as a different weight loss program or nicotine replacement therapy.

Developing Issues

The Agencies invited public comments on a number of topics that are on their radar screens but not yet defined enough to regulate, including the following:

• How to apportion financial rewards among family members where the health goal may not be applicable to all of them (for instance smoking cessation).
• How best to define “tobacco use” (comments on this topic actually are requested in the insurance market reform regulations issued by HHS).
• How the percentage limits apply to a financial reward whose amount may not be known initially (such as waiver of copayments, which will vary depending on the employee’s health during the course of the plan year).
• Whether evidence- or practice-based standards are needed to ensure that wellness programs are reasonably designed to promote health or prevent disease, and best practices regarding use of these strategies.
• Other suggestions for avoiding a “one size fits all” wellness program design.

Limited as they are to results-based programs, the regulations are not of pressing importance to employers and advisors who work with “participation-only” wellness programs, under which no health-related goal or result must be achieved in order to receive the financial reward.  To comply with HIPAA, these plans must only offer participation to all “similarly situated individuals,” with differences permitted among “bona fide employment-based classifications” such as work location, union versus non-union, etc.  (The “similarly situated” rule equally applies to results-based programs.)  Surveys cited in the preamble to the regulations indicate that participation-only programs comprise the vast majority of wellness programs, with the most prevalent design offering a three to 11% premium discount or other cash reward to employees who complete a health risk assessment.  However, the trend towards results-based wellness programs – particularly those for smoking cessation – likely will increase in tandem with rising premium costs for group HMO, PPO and even high-deductible insurance policies.  This trend is anticipated to continue through implementation in 2014 of the state exchanges, the individual mandate, and the employer shared responsibility rules (pay or play) under the ACA.  For that reason, employers and benefits advisors cannot afford to ignore rules governing results-based wellness programs.

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[1] The five criteria are:  (a) that employees be able to qualify for the reward at least annually; (b) that the financial reward not exceed the percentage thresholds outlined above, as applied to the total premium cost for individual coverage; (c) that the wellness program be reasonably designed to promote health or prevent disease; (d) that the wellness program be made available to all similarly situated individuals, including that a waiver of the health goal or a reasonable alternative means of attaining the health goal be offered to employees whose health factors present an obstacle; and (e) that all written plan materials disclose the availability of other means of qualifying for the reward.  These criteria are found in the 2006 HIPAA final regulations as well as in Section 2705(j) of the Public Health Service Act, which was incorporated into the Affordable Care Act (ACA § 1201(4)).

[2] The HHS proposed regulations would permit the tobacco use surcharge in the small group market only in connection with a wellness program that meets HIPAA nondiscrimination standards.

Thanksgiving Feast of Benefits Regulations Issued

On Tuesday, November 20, 2012 over 300 pages of proposed regulations were issued on the following key benefits topics: (1)  the definitions of “essential health benefits” and “actuarial value” applied to insurance products offered on the health exchanges; (2) nondiscriminatory incentives for wellness programs; and (3) a bundle of ACA insurance market reforms including guaranteed availability, restrictions on insurance premium rating differences, risk pools and catastrophic plans.

I will be reading and digesting these new regulations in the coming days and will have updates for you soon after, so stay tuned.

It is likely that the current guidance has been ready to go for some time but was held back to avoid any potential controversy prior to the November 6 presidential election. However, employers and advisers should ready themselves for a steady stream of ACA regulations and other guidance to be issued through the end of the year and throughout 2013.

IRS Comments on Timing of Nondiscrimination Regs. for Insured Health Plans

The IRS will not issue regulations on nondiscrimination rules applicable to insured health plans until after it has published regulations on employer “pay or play” (shared responsibility) duties, and if they have not issued nondiscrimination regulations by the end of June 2013 then, in keeping with the general requirement of at least six months’ advance notice of such changes, nondiscrimination rules likely will not apply in 2014.  In the meantime, the IRS non-enforcement policy set forth in Notice 2011-1 will remain in place. 

This was the gist of informal comments made on October 12, 2012 by Stephen Tackney, IRS Deputy Associate Chief Counsel (Employee Benefits), Tax Exempt and Government Entities Division, and Kevin Knopf, from the Treasury Department’s Office of Benefits Counsel, at a two-day conference on health and welfare benefit plans, sponsored by the American Bar Association’s Joint Committee on Employee Benefits.

I did not attend the conference but confirmed the nature of the statements with a Wolter Kluwers/CCH journalist whose summary of the statements is posted here.  I will continue to post updates on the progress of nondiscrimination regulations as they become available.

COLA Increases Raise 2013 Contribution Limits

An almost 3.3% cost of living increase in the Social Security wage base for 2013 has triggered increases in annual contribution and other dollar limits affecting 401(k) and other retirement plans, the Internal Revenue Service announced on October 18, 2012.  Here are some of the key changes for 2013 (citations are to the Internal Revenue Code):

–Salary Deferral Limit for 401(k), 403(b), and 457 plans increased from $17,000 to $17,500. (The age 50 and up catch-up limit remains unchanged at $5,500, however.)

–Maximum total contribution to a 401(k) or other “defined contribution” plans under 415(c) increased from $50,000 to 51,000 ($56,500 for employees aged 50 and older).

–Maximum amount of compensation on which contributions may be based under 401(1)(17) increased from $250,000 to $255,000.

–Maximum annual benefit under a defined benefit plan increased from $200,000 to $205,000.

–Social Security Taxable Wage Base increased almost 3.3% from $110,100 to $113,700.

–The IRA contribution limit increased from $5,000 to $5,500.  The catch-up limit remains at $1,000, however.

–Note also that the annual exclusion from gift taxes will increase in 2013 from $13,000 to $14,000.

Some limits that did not change for 2013 are as follows:

–The compensation threshold for “highly compensated employee” remained at $115,000.

–The dollar limit defining “key employee” in a top-heavy plan remained at $165,000.

Foreign Language Assistance Duties for SBCs and SPDs

Many of you are now aware that the Summary of Benefits and Coverage (SBC) required to be distributed under the Affordable Care Act must be provided in a “culturally and linguistically appropriate manner,” and that this standard encompasses offers of assistance in foreign languages as well as other language assistance duties.  Below is a brief guide on navigating these duties, which will be considerably lightened for employers with fully insured group health plans, as opposed to self-funded plans.  The foreign language assistance duties for Summary Plan Descriptions (SPDs) are also outlined. Distribution deadlines for SBCs are summarized in this prior post. 

The “culturally and linguistically appropriate” standard triggers foreign language assistance duties when SBCs are distributed to employees residing in a U.S. County in which, based on U.S. Census data, 10 percent or more of the population is literate only in the same non-English language.  

• A list of such counties is published annually by the Center for Consumer Information and Insurance Oversight (CCIIO)/Centers for Medicare and Medicaid Services (CMS) here. 

Of relevance to Southern California employers, the list shows that in Santa Barbara, Ventura, Los Angeles, Orange and San Diego Counties, at least 10% of the population is literate only in Spanish.  Thus, for SBCs distributed to participants in these counties, the employer (for a self-funded plan) or insurance carrier (for an insured plan) must do all of the following:

• Provide oral language services (such as a telephone customer assistance hotline) that include answering questions in Spanish and providing assistance with filing claims and appeals (including external review) in Spanish.
• Upon request, provide an SBC that has been translated to Spanish.
• Include, in the English-language version of the SBC, a prominently displayed statement in Spanish that clearly tells employees how to to access the language services provided by the employer or carrier.  

 On this last requirement, the template SBC published in May 2012 by HHS, DOL and IRS (the “agencies”) contains offers of assistance translated into Spanish, Tagalog, Chinese and Navajo, as shown below:

Language Access Services:

[Spanish (Español): Para obtener asistencia en Español, llame al [insert telephone number]. ]

[Tagalog (Tagalog): Kung kailangan ninyo ang tulong sa Tagalog tumawag sa [insert telephone number]. ]

[Chinese (中文): 如果需要中文的帮助，请拨打这个号码 [insert telephone number].]

[Navajo (Dine): Dinek'ehgo shika at'ohwol ninisingo, kwiijigo holne' [insert telephone number].]

A link to the English-language and translated SBC templates is found here; scroll down to the section on Summaries of Benefits and Coverage.

For employers with insured plans, the carriers will fulfill most if not all foreign language assistance responsibilities.  Anthem Blue Cross has stated that for its group policies it will offer foreign language assistance even outside counties with the threshold non-English reading populations.  Self-funded employers will need to get foreign language assistance services from their third party document providers or from carriers with whom they have formed an “ASO” (administrative services only) relationship.

Note that SBCs must notify recipients that, by visiting a website or calling a toll-free phone number, they may obtain a copy of a “Uniform Glossary” that explains certain insurance and medical terms used in the SBC.   Foreign language assitance for this document is also required, but the agencies have simplified compliance by providing template Uniform Glossaries in English, Spanish, Tagalog, Chinese, and Navajo here (scroll down for section on Summaries of Benefits and Coverage).

A review of foreign language assistance duties for SBCs is a good juncture at which to revisit such duties as they apply to SPDs.  SPDs are always provided to employers by retirement plan providers but group health insurance carriers generally provide only the “Explanation of Coverage” or “Explanation of Benefits” which are drafted to comply with state insurance laws, and which do not always contain all language required to be set forth in an SPD.  (A “wrap” document may be used to “fill the gap,” in which case the rules summarized below should be applied to the SPD summarizing the wrap document.)

Specifically, an SPD must contain a notice in a foreign language, prominently featured, informing participants of where they can obtain additional assistance in that language, under the following circumstances:

• For plans that cover fewer than 100 participants at the beginning of the plan year, when 25% or more are literate only in the same non-English language; or
• For plans that cover 100 or more participants at the beginning of the plan year, when the lesser of (a) 500 or more participants, or (b) 10% or more of all participants are literate only in the same non-English language. 

Example:  Cody’s Tool & Dye maintains a pension plan that covers 1,000 participants.  As of January 1, 2012, the first day of the plan year, 500 of Cody’s covered employees are literate only in Spanish, 101 are literate only in Vietnamese, and the remaining 399 employees are literate in English.  Cody will need to distribute to each employee an SPD that contains assistance notices in Spanish and in Vietnamese, offering further assistance in those languages to participants and beneficiaries who need it.

Department of Labor Regulations suggest the following text for the offer of assistance in a foreign language for SPDs:

“This booklet contains a summary in English of your plan rights and benefits under Employer [insert name of employer] Pension Plan.  If you have difficulty understanding any part of this booklet, contact [insert name of plan administrator], the plan administrator, at his [or her] office at [insert office address of plan administrator].  Office hours are from [insert office hours] Monday through Friday.  You may also call the plan administrator’s office at [insert plan administrator’s office telephone number] for assistance.”

(It would be also be appropriate to add the plan administrator’s email address to this offer of assistance.)  If requested, the employer must arrange for verbal or written translation of the SPD as is necessary to respond to the questions of a participant who is literate only in a foreign language. 

SPDs must be distributed to newly eligible participants within 90 days of their joining the plan, but distribution upon employment to someone who is likely to fulfill eligibility requirements is also common.

ACA Update: “Safe Harbor” Guidance on Full-time Employee Status and 90-Day Waiting Periods

In temporary guidance that will apply through 2014, the IRS has outlined several “safe harbor” methods for identifying “full-time employees” who must be offered group health coverage under employer “shared responsibility” or “pay or play” provisions, and has coordinated these methods with the maximum 90-day eligibility waiting period applicable, also in 2014, under group health plans and insurance policies.   The safe harbor guidance – which employers may but are not required to follow – is found in IRS Notices 2012-58 (on determining full-time employees) and 2012-59 (on the waiting period), both issued on August 31, 2012.  (Notice 2012-59 jointly was issued by the IRS, the Department of Health and Human Services and the Department of Labor.)  Any future, more restrictive guidance will apply prospectively beginning on or after January 1, 2015.

The guidance on determining full-time employees is primarily of importance to “applicable large employers” with significant cohorts of seasonal employees (such as in the retail and agricultural sectors), and employees who fluctuate between full- and part-time working schedules (called “variable hour employees” in the new guidance).    It will allow such employers to use all or part of calendar year 2013 as a “measuring period” to identify full-time employees for purposes of a “stability period” covering all or part of 2014, and thereby approximate their costs, in 2014, were they to “pay” excise taxes or “play” by offering those full-time employees group health coverage that is both “adequate” or “affordable” as defined under the ACA.

(Note:  the shared responsibility provisions – set forth in Internal Revenue Code (“Code”) § 4980H – go into effect on January 1, 2014 for “applicable large employers,” while the 90-day maximum waiting period provisions apply, also beginning in 2014, to all group health plans (including grandfathered plans) and to group and individual insurance policies.  “Applicable large employer” for these purposes means an employer with, on average, 50 or more full-time employees, including full-time equivalents, on business days during the preceding calendar year.)

A brief summary of the guidance, in FAQ format, follows.  Employers who anticipate using the safe harbors will want to study the numerous factual examples set forth in the Notices for additional detail.

Notice 2012-58:  Determining Full-Time Employee Status under Employer Shared Responsibility Rules

Q.1:  When must an applicable large employer offer group health coverage to an employee who it can classify as full-time upon hire?

A.1:  Notice 2012-58 confirms prior guidance, in Notice 2012-17, that if a newly-hired employee is reasonably expected to work full-time on an annual basis and does work full-time during the first three months of employment, the employee must be offered coverage under the employer’s group health plan as of the end of that initial three-month period.   This period coincides with the maximum 90-day waiting period addressed in Notice 2012-59.

Q.2:  What is a “full-time employee” for these purposes?

A.2:  A full-time employee is someone working, on average, at least 30 hours per week.  Regulations likely will expand this definition to include employees working at least 130 hours per calendar month.

Q.3:  What safe harbor methods may be used to classify newly hired “variable hour” and “seasonal employees” as full-time, or not full-time, for coverage purposes?

A.3:   These employees may be evaluated over a look-back “measurement period” of between three and 12 months, and their resulting classification as full-time (or not full-time) may be “locked in” for a subsequent “stability period,” regardless of their actual working schedule during the stability period.    No coverage need be offered to any such employees during the chosen measurement period, and, during the stability period, only to employees who average 30 hours a week or more during the measurement period.  This approach is consistent with the approach earlier outlined for “ongoing” (rather than newly hired) employees in IRS Notice 2011-36.   It differs from the three to six-month measurement period earlier proposed for newly hired, variable hour or seasonal employees in Notice 2012-17.

Q.4:  How is the stability period measured for newly hired, variable hour or seasonal employees?

A.4:  If the employee qualifies as full-time over the measurement period, coverage must be offered during a stability period that is at least six consecutive calendar months long, but no shorter than the initial measurement period.  If the employee fails to qualify as full-time, the stability period (during which coverage need not be offered) generally may last one month longer than the initial measurement period.   There is no minimum stability period in such instances.  The reason for this additional one-month period is described further in Q&A 6, below.

Q.5:  May employees who do not qualify for coverage during measurement and stability periods apply for and receive premium subsidies on the exchanges?

A.5:  Yes.  Notice 2012-58 makes clear that employees who do not meet the definition of full-time employee may apply for and receive premium assistance on a state exchange during any period when coverage is not offered under their employer’s plan, including applicable “measurement periods” or “administrative periods” – described below — occurring before coverage takes effect.

Q.6:  What is an administrative period?

A.6:  An administrative period is an interval, not to exceed 90 days, between the end of a measurement period and the beginning of a stability period.  Employers may use this time to identify full-time employees, notify them of eligibility, and enroll them in coverage.   The administrative period may not add to or subtract from measurement or stability periods (thus may be required to run concurrently with stability periods).  Nor may an initial measurement period and administrative period, combined, extend beyond the last day of the first calendar month beginning on or after the one-year anniversary of the employee’s date of hire.  This 13+ partial month period is meant to allow employers to combine a 12-month initial stability period for variable hour and seasonal employees, with a 1 + partial month an administrative period (or, for instance, an 11-month initial stability period with a two-month administrative period).

Q.7:  Must employers use the same measurement and stability periods for all employees, company-wide?

A.7:  Notice 2012-58 permits some variations.  Specifically, employers may use measurement periods and stability periods that differ either in length, or in their starting and ending dates, for the following categories of employees:  (1) collectively bargained employees and non-collectively bargained employees; (2) hourly and salaried employees; (3) employees of different entities (presumably within the same “controlled group” or “common control” group of affiliated entities); and (4) employees located in different States.

Q.8:  What is the safe harbor method for classifying ongoing, variable hour or seasonal employees (as opposed to new hires)?

A.8:  Notice 2012-58 describes methods that are consistent with those first outlined in IRS Notice 2011-36, including a “look-back” measurement period of between three and 12 months, a stability period for those classified as full-time employees that lasts at least six months but “not less than” the measurement period, and a stability period for non-full-time employees of no minimum period, but “not to exceed” the measurement period.  Notice 2012-58 adds to this earlier guidance by explaining how employers may transition variable hour or seasonal employees from initial (new hire) measurement periods to standard measurement periods applicable to ongoing employees.

Q.9:  How should an employer transition a variable hour or seasonal employee   from initial to standard measurement periods? 

A.9:  Specifically, once a new, variable hour or seasonal employee who has been employed for an initial measurement period has also remained employed for an entire standard measurement period, the employer must re-test the employee for full-time status, beginning with that standard measurement period, at the same time and under the same conditions as other ongoing employees.  So, for example, an employer whose standard measurement period is the calendar year, and who uses a one-year initial measurement period beginning on the date of hire, would evaluate a new variable hour employee hired February 12, 2013 over the 12-month initial measurement period ending February 11, 2014, and again based on the calendar year standard measurement period running from January 1 – December 31, 2014.  The length of the stability period depends upon whether the employee is determined to be full-time based on the initial or standard measurement period; Notice 2012-59 goes into significant detail on this point.

Q.10:  What does Notice 2012-58 say about the “affordability” safe harbor?

 A.10:  Notice 2012-58 affirms prior guidance, in Notice 2011-73, that employers may assess the affordability of the coverage they offer to employees based on employees’ Form W-2 wages (as opposed to their total household income).  “Affordable” for these purposes means that the employee’s portion of premiums does not exceed 9.5% of the employee’s Form W-2 wages.  Unfortunately, the Notice does not specify whether “affordability” will be based on the employee’s share of individual premiums, or premiums for dependent coverage.  This issue will be addressed in future proposed regulations.

Q.11:  On what related topics does the IRS seek public comments?

A.11   Public comment, due September 30, 2012, is sought on the following points:  (1) whether, and what types of safe harbor methods should apply to short-term assignment employees, temporary staffing employees, employees hired into high-turnover positions, and other “special issue” categories of employees; (2) whether further means should be developed to assist in classifying new employees as full-time or not-full-time, including further definition of variable hour employees; (3) rules for coordinating differing measurement and stability periods following a business merger or acquisition; and (4) how “seasonal worker” should be defined under shared responsibility rules (employers are permitted to use a “good faith” definition under the temporary guidance).

Notice 2012-59:  Application of the Maximum 90-Day Eligibility Waiting Period

Q.12:            How is “waiting period” defined for purposes of the maximum 90-day limit?

 A.12:            The definition that is most consistent with the new guidance is that found under a 2004 regulation from the IRS and DOL, as follows:  “the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of a group health plan can become effective.”

Q.13:            Can an employer still impose eligibility requirements that require a period of service longer than 90 days, such as attainment of full-time status or minimum periods of service?

 A:13:            Yes, on two conditions:  first, the eligibility requirement may not be designed to avoid compliance with the 90-day rule.  Second, the employee must be allowed to enter the plan by the 91^st day after satisfying the eligibility requirement.  An example in the Notice describes a plan that extends coverage to part-time employees who have worked a cumulative 1,200 hours of service, and states that coverage for an employee who meets that requirement must begin no later than the 91^st day after the employee works 1,200 hours.  The Notice specifically states that an eligibility service requirement exceeding 1,200 hours would be viewed as designed to avoid compliance with the 90-day rule.

Q.14:            If a plan requires a minimum period of service to participate, how should an employer apply the 90-day maximum to a “variable hour” employee?

 A.14:            Under the new guidance, the an employer may take “a reasonable period of time” over which to determine whether the employee meets the plan’s eligibility conditions, which may include a measurement period consistent with the guidance under Notice 2012-58.  However, coverage must be made effective (for employees determined to be full-time) no later than 13 months from the employee’s start date, plus, if the start date is not the first day of a calendar month, the period of time remaining until the first day of the next calendar month.   See Q&A 6, above.

Q.15:              May employers that are not subject to shared responsibility requirements still use the maximum evaluation period for variable employees?

 A.15:            Yes, Notice 2012-59 specifically states that this evaluation period is available even to employers that are not “applicable large employers” subject to shared responsibility payments.

Q.16:            What if an employee fails to complete enrollment materials within 90 days of meeting eligibility requirements?

 A.16:            The guidance makes it clear that, so long as an employee is permitted to enroll within 90 days, if the employee fails promptly to complete enrollment and does so after 90 days there is no violation of the maximum waiting period.

Popular Tuition Reimbursement Provision Set to Expire with Bush Tax Cuts

A popular tax code provision for employer tuition reimbursement is set to expire on December 31, 2012 along with other Bush-era tax provisions enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA).  

Specifically, Internal Revenue Code (“Code”) Section 127 currently permits employers to provide a tax-free reimbursement of up to $5,250 annually per employee, for the cost of tuition, books, and class supplies or equipment required for any undergraduate or graduate course of studies, whether or not the course of studies is related to the employee’s current job.   Thus, someone employed as an engineer could receive the maximum reimbursement amount towards law school tuition, for instance, or a registered nurse could be reimbursed for a portion of medical school costs. 

 This is contrasted with tuition expenses reimbursed as a “working condition fringe benefit” of employment under Code Section 132(d).  There is no dollar limit on such expenses however they are reimbursable only if the course or degree is related to the employee’s current job – e.g., it maintains or improves skills needed in the employee’s current job — or is expressly required by the employer or by law.   Unlike working condition fringe benefits, which need only be documented through proof of tuition payment, tuition reimbursement programs under Code Section 127 must be set forth in a written plan document, and must be designed so as not to discriminate in favor of highly compensated employees. 

 Section 127 was originally enacted in 1978 for a five-year period ending in 1983, but like a cat with nine lives its expiration date has been extended nine separate times, most recently under EGTRRA in 2001.  It is currently set to expire along with EGTRRA and JGTRRA tax cuts on December 31, 2012.  It is generally acknowledged that Congress will not act to extend the cuts before the presidential election in November.   It is possible that some agreement to extend the tax cuts will be reached after the election, particularly for popular, partisan-neutral provisions such as Code Section 127. 

Additionally, Representatives Sam Johnson (R-TX) and Richard Neal (D-MA) introduced a bill in March 2012 that would make Section 127 a permanent part of the tax code.  The bill, titled the “Employee Educational Assistance Act of 2012,”went to the House Ways and Means Committee back in March and has not surfaced on the legislative radar since then.  I am tracking the bill and will continue to keep readers posted with its progress, if any, and with any budget negotiations that may resuscitate Section 127 for another multi-year stint.