ACA reporting deadlines for applicable large employers arrive early in 2017 and affected employers won’t enjoy the lengthy extensions that the IRS made available earlier this year, for 2015 reporting. this-brief-powerpoint-presentationsummarizes some changes in the final 2016 Forms 1094-C and 1095-c, from last year’s versions, and includes some helpful hints for accurate and timely reporting.
As group health coverage premiums soar ever higher, it has become increasingly popular for employers to offer employees cash in exchange for their opting out of group coverage. When the cash opt-out payments are provided outside of a Section 125 cafeteria plan, they may have the unintended consequence of reducing the affordability of employer group health coverage, because the IRS views the cash opt-out payment as compensation that the employee effectively forfeits by enrolling in coverage. Unaffordable coverage may entitle the employee to premium tax credits under IRC § 36, and may also exempt the employee from individual mandate duties under IRC § 5000A. This post focuses on the impact of opt-out payments on “applicable large employers” subject to employer shared responsibility duties under the ACA. For such employers, reduced affordability of coverage will impact how offers of coverage are reported under ACA reporting rules (IRC § 6056) and could trigger excise tax payments under IRC § 4980H(b).
By way of background, the IRS addressed opt-out payments last year in the form of Notice 2015-87, concluding that a “conditional” opt-out payment – one that requires that the employee meet a criterion in addition to declining employer group coverage, such as showing proof of other group coverage – would not affect affordability. The Notice also offered transition relief for unconditional offers (paid simply for declining employer coverage) that were in place as of December 16, 2015, the date the Notice was published. Unconditional opt-out arrangements adopted after December 16, 2015 do impact affordability.
Subsequently, in June 2015, the IRS addressed the affordability issue in proposed regulations under IRC § 36, governing individuals’ eligibility for premium tax credits. The proposed regulations refer to “eligible” opt-out arrangements rather than conditional ones. An eligible opt-out payment is one under which an employee’s right to receive payment is conditioned on the employee providing reasonable evidence that the employee and all his or her dependents (the employee’s “expected tax family”) have or will have minimum essential coverage other than individual coverage (whether purchased on or off the health exchange/Marketplace). Reasonable evidence may include the employee’s attestation to the fact of other coverage, or provision of proof of coverage, but in any event the opt-out payment cannot be made if employer knows or has reason to know that the employee/dependents does not have or will not have alternative coverage. Evidence of the alternative coverage must be provided no less frequently than every plan year, and no earlier than the open enrollment period for the plan year involved.
The proposed regulations are expected to be finalized this year and thus the “eligible opt-out arrangement” rules likely will apply to plan years beginning on or after January 1, 2017. In the meantime, the following provides guidance to applicable large employers on conditional and unconditional opt-out payments for purposes of 2016 ACA compliance, and ACA reporting due to be furnished to employees and filed with the IRS early in 2017:
Unconditional opt-out arrangement: opt-out payments increase employee contributions for purposes of the “affordability” safe harbor, and should be added to line 15 of Form 1095-C, unless the arrangement was already in effect on December 16, 2015. “In effect” for these purposes means that (i) the employer offered the arrangement (or a substantially similar arrangement) for a plan year that includes December 16, 2015; (ii) the employer’s board of directors or authorized officer specifically adopted the arrangement before December 16, 2015; or (iii) the employer communicated to employees in writing, on or before December 16, 2015, that it would offer the arrangement to employees at some time in the future.
Conditional opt-out arrangement: opt-out payments do not increase employee contributions whether or not the condition is met. Do not include the opt-out payment in line 15 of Form 1095-C.
Opt-out arrangement under a collective bargaining agreement (CBA): if the CBA was in effect before December 16, 2015, treat as a conditional opt-out arrangement, as above, and do not include in line 15 of Form 1095-C.
Medicare Secondary Payer Act/TRICARE Implications: An applicable large employer for ACA purposes will also be subject to provisions of the Medicare Secondary Payer Act (MSPA) that prohibit offering financial incentives to Medicare-eligible employees (and persons married to Medicare-eligible employees) in exchange for dropping or declining private group health coverage. In the official Medicare Secondary Payer (MSP) Manual, the Centers for Medicare and Medicaid Services (CMS) takes the position that a financial incentive is prohibited even if it is offered to all individuals who are eligible for coverage under a private group health plan, not just those who are Medicare-eligible. Traditionally the CMS has not actively enforced this rule, and has focused on incentives directed at Medicare-eligible populations. However, there are reports that the CMS may be retreating from its unofficial non-enforcement position with respect to opt-out payments. At stake is a potential civil monetary penalty of up to $5,000 for each violation. As a consequence, MSPA-covered employers with Medicare-eligible employees, or employees who are married to Medicare-eligible persons, should not put an opt-out arrangement in place, or continue an existing one, without first checking with their benefits attorney. Finally, please note that there are similar prohibitions on financial incentives to drop military coverage under TRICARE. TRICARE is administered by the Department of Defense, but along the same principles as apply to MSPA.
Note: This post was published on October 6, 2016 by Employee Benefit Adviser.
 Note: employer flex contributions to a cafeteria plan reduce affordability unless they are “health flex contributions,” meaning that (i) the employee cannot elect to receive the contribution in cash; and (ii) the employee may use the amount only to pay for health-related expenses, whether premiums for minimum essential coverage or for medical expense reimbursements permitted under Code § 213, and not for dependent care expenses or other non-health cafeteria plan options. See IRS Notice 2015-87, Q&A 8.
 An employer is covered by the MSPA if it employs 20 or more employees for each working day in at least 20 weeks in either the current or the preceding calendar year.
Webinar: Dept. of Labor 401(k) Audits – How Not to Get Selected (and How to Survive if You Do) UPDATED
Please join Christine Roberts and former DOL investigator David Kahn for a free, one-hour webinar on Wednesday, Aug 24, 2016 at 10:00 AM PDT which will provide tips on how to reduce the risk of audit, and how to survive an audit if one occurs. We will cover investigation triggers and issues that the DOL targets once an audit is underway. This no-charge webinar qualifies for continuing education credits for California CPAs and ASPPA. Join us for a webinar. Register now! https://lnkd.in/b-58niA
For those of you who missed the event, the PowerPoint and audio file are found here.
In June of this year the IRS issued proposed regulations under Section 457 of the Internal Revenue Code (“Code”) that primarily affect “ineligible” plans under Code § 457(f). These are plans for employees of governmental entities and tax-exempt employers, limited in the latter instance to a select group of management or highly compensated employees (the “top-hat” group), that permit deferral of compensation in excess of the limits that apply under Code § 457(b). Our prior post looked at some exceptions to these rules; this post focuses on when deferred amounts are subject to a substantial risk of forfeiture or “SROF.”
Amounts set aside under Section 457(f) plans must be included in the executive’s taxable compensation once the amounts are no longer subject to a “substantial risk of forfeiture,” for instance upon completion of a vesting schedule. Due to the requirement that income inclusion/taxation occur when the risk of forfeiture lapses, Section 457(f) plans generally work best when retirement is in the fairly near future (e.g., 2 to 7 years out), and where vesting occurs on or near the anticipated retirement date.
Traditionally it was not uncommon under Section 457(f) plans for organizations to push back a previously established vesting date, to allow the executive to work additional years for the organization without triggering taxation of their plan accounts. This practice of “rolling vesting” was popular for the planning flexibility it allowed. Another popular practice under Section 457(f) plans was to use a covenant not to compete to prolong the substantial risk of forfeiture (and hence postpone taxation) for several years after an executive’s departure.
Both of these practices – “rolling” vesting, and use of covenants not to compete, came under a cloud, however, when the Congress passed legislation in 2005 that included a comprehensive set of rules governing nonqualified compensation plans. The rules, codified at Section 409A of the Code, were passed due to perceived and actual abuses of deferred compensation plans (for instance, the Enron executives triggered acceleration clauses under their plans when they foresaw the company’s demise). Section 409A disallowed acceleration clauses and imposed a plethora of other design restrictions on nonqualified deferred compensation. Section 409A was expressly made applicable to Section 457(f) plans, but final regulations issued in 2007 did not fully explain the intersection of Sections 409A and 457(f). Separate guidance, in the form of Notice 2007-62, suggested that when formal guidance did issue, it would not recognize rolling vesting as a legitimate tax deferral measures. Final Section 409A regulations expressly disallowed covenants not to compete as means of creating a substantial risk of forfeiture. Therefore, for nine years, risk-averse sponsors of Section 457(f) plans have avoided rolling vesting and covenants not to compete, and have accustomed themselves to the stricter, post-Enron plan design rules.
As explained in the chart below, the proposed 457 regulations have resurrected rolling vesting, and also permit a covenant not to compete to create a substantial risk of forfeiture, subject in both instances to some tricky prerequisites. This added design flexibility for 457(f) plans is good news for non-profit organizations, which increasingly must compete for talent with for-profit organizations.
Also welcome is an updated definition of “substantial risk of forfeiture” which harmonizes with the Section 409A definition. Specifically, compensation is subject to a substantial risk of forfeiture under 457(f) when entitlement to it is conditioned upon:
- the performance of substantial services (generally at least 2 years, unless earlier terminated by death, disability, or involuntary termination, including for “good reason”), or
- the occurrence of a condition that is related to the purpose of the compensation, (such as a performance goal for the employee, or to the employer’s tax-exempt or governmental activities (such as completion of a funding campaign).
As under 409A, there is no SROF if the facts and circumstances suggest that the employer is unlikely to enforce the forfeiture condition. Relevant facts and circumstances include the employer’s past practices in enforcing (or not enforcing) forfeitures, the level of the benefitted executive’s control of or influence over the organization, and the likelihood that the conditions would be enforceable under applicable law.
The proposed 457 regulations may be relied upon until the effective date (the “applicability date”) of the final regulations, which will follow their publication in the Federal Register. Transition relief applies only to certain union and governmental plans, such that risk-averse plan sponsors should consider taking steps to voluntarily comply with the proposed regulations in advance of the applicability date.
Finally, compensation for the non-profit executive must meet reasonableness standards or it will potentially trigger excise taxes under Code Section 4958. This standard applies to deferred compensation amounts, and increases in those amounts, including, arguably, the minimum increase necessary under the new rolling risk of forfeiture rules.
The IRS recently announced proposed regulations under Internal Revenue Code (“Code”) Section 457 that update prior, final regulations issued in 2003 and other subsequent guidance from IRS. Section 457 governs deferred compensation rules for government employees, and for executives of private, tax-exempt organizations it permits deferrals from compensation over and above limits set forth in Code § 403(b). The proposed Section 457 regulations impact “ineligible” deferred compensation plans under Code § 457(f) more substantially than “eligible” deferred compensation plans under Code § 457(b) which were more comprehensively covered in the 2003 final regulations.
By contrast to eligible Section 457(b) plans, which limit annual contributions to $18,000, as adjusted for inflation (and without the age 50 catch-up for private non-profit executives), there is no dollar limit on annual contributions to a Section 457(f) plan (although as explained below other laws do set reasonableness limits upon nonprofit executive compensation in general). However, amounts set aside under Section 457(f) plans must be included in the executive’s taxable compensation once the amounts are no longer subject to a substantial risk of forfeiture, for instance upon completion of a vesting schedule, even if amounts are not physically paid out from the plan. Due to the requirement that income inclusion/taxation occur when the substantial risk of forfeiture lapses, Section 457(f) plans generally work best when retirement is in the fairly near future (e.g., 5 to 7 years out), and where vesting occurs on or near the anticipated retirement date.
As summarized in the chart, below, the proposed regulations clarify how certain pay arrangements are carved out from Section 457(f) compliance, either because the arrangement is not deemed to provide for a deferral of compensation, or because it defers compensation but not in a manner that does not fall under Code § 457(f). Where no deferral of compensation occurs, the pay arrangement generally is also exempt from the “Enron rules” applicable to for-profit deferred compensation plans under Code § 409A, and related regulations. (Final regulations under Code § 409A were published in 2007; the second of two sets of proposed regulations were published the same day as the proposed Section 457 regulations). The proposed Section 457 regulations clarify that Section 457(f) arrangements generally are also subject to Code § 409A, although there are some important distinctions between the two sets of rules which I will address in a future post.
Changes in the law and continued advances in technology have made benefits compliance a constantly shifting landscape. As one of many potential sources for your own path towards benefits compliance, E for ERISA would very much appreciate your participation in the following poll, which asks a few simple questions about where you currently get your benefits compliance services and what you may still need in that regard. Thank you in advance for (anonymously) sharing your thoughts and experiences.
After a one-year delay, the federally-facilitated exchange (www.healthcare.gov) has begun mailing Applicable Large Employers (ALEs) notices listing employees who qualified for and received advance payment of premium tax credits or cost sharing reductions (collectively, “exchange subsidies”) for one or more months to date in 2016. There is a model federal subsidy notice; state-facilitated health exchanges may use their own subsidy notices. In 2016, the notices will go to mailing addresses that employees supplied while enrolling on an exchange and hence may include worksite addresses rather than an employer’s administrative headquarters. For that reason, ALEs should track all work locations for receipt of the exchange notices.
Each notice will identify one or more employees who received subsidies in 2016, and if the names include those of full-time employees who were offered affordable, minimum value or higher coverage (or enrolled in coverage, even if unaffordable) for the period involved, an appeal is appropriate and must be made within 90 days of the date on the exchange subsidy notice. This Employer Appeal Request Form may be used for http://www.healthcare.gov as well as the following state-based exchanges: California, Colorado, D.C., Kentucky, Maryland, Massachusetts, New York and Vermont. The appeals process is carried out via mail or fax this year but will eventually convert to a digital format.
Remember, these exchange subsidy notices are not themselves assessments of ACA penalty taxes which is a separate process carried out by IRS. And the IRS will assess ACA penalty taxes for 2015 without benefit of subsidy notices for that year. However the subsidy notices now being released do provide a “heads up” regard to potential 2016 tax liability, and by filing an appeal an ALE can build the file it will need in the event of a later penalty tax assessment. Not only will a timely appeal document the fact that no ACA penalty tax should apply, it may also prevent the employee in question from later having to refund subsidy amounts to IRS, either through a reduced tax refund or with out-of-pocket funds.
In this regard, ALEs should keep in mind that coverage that is unaffordable for exchange purposes (i.e. entitles an individual to exchange subsidies) may be affordable for employer safe harbor/penalty assessment purposes (i.e., prevents assessment of an ACA employer penalty tax). They both use the same affordability percentage – 9.66% in 2016 – but apply it to different base amounts. The exchanges look at the employee’s modified adjusted gross income (MAGI), which may be higher than the employer’s safe harbor definition (for instance when the employee’s household includes other wage earners), or may be smaller than the employer’s safe harbor definition (for instance, when the employee has large student loan interest expenses and/or alimony payments, both of which are excluded from MAGI). Thus there will be instances in which an employer bears no ACA penalty liability with regard to coverage that is unaffordable for exchange purposes. The appeals process will make available to an employer information as to whether an employee’s household income exceeded the affordability threshold for exchange subsidies, along with other data used to establish eligibility for exchange subsidies. A flowchart of the exchange subsidy notice and appeals process follows:
We do not yet have details on how the IRS will go about assessing ACA penalties on ALEs for 2015 and subsequent years, other than that employers will have an opportunity to contest a tax assessment. All the more reason to engage in the appeal process, where appropriate, with regard to subsidy notices.