Category Archives: Covered California

Rust Never Sleeps: ACA Large Employer Tax Liability is Forever

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Ordinarily under the Internal Revenue Code (Code), when a taxpayer files a return reporting tax liability (or absence thereof), the filing of the return triggers a period of time during which the IRS can challenge the reported tax liability.  This period is referred to as a “statute of limitations” and the customary period under Section 6501(a) of the Code expires three years after the “return” is filed.  As is explained below, a form must meet certain criteria to be considered a “return” that, once filed, starts the statute of limitations running.

The IRS Office of Chief Counsel has stated, in a memorandum dated December 26, 2019, that because there is no actual return filed reporting ACA taxes owed by Applicable Large Employers (ALEs) under Code Section 4980H, the statute of limitations on the IRS’s ability to collect the taxes never begins to run, even though ALEs annually file Form 1094-C transmittal forms with IRS each year, along with copies of Form 1095-C statements furnished to full-time employees (and part-time employees covered under self-insured group health plans).  Therefore, ALEs remain potentially liable for Code Section 4980H excise taxes for an indefinite period.  The IRS has been actively collecting ACA taxes from Applicable Large Employers owed for calendar years since 2015 and presumably will continue to do so.  This significant amount of potential tax liability will only grow, not wear away, under the IRS stated policy.

Below we spell out how the IRS concluded that it has an open-ended ability to assess ACA penalties.

By way of background, the IRS uses the term “Employer Shared Responsibility Payments” or “ESRP” to refer to the excise tax imposed on Applicable Large Employers under Code § 4980H if they don’t meet their ACA duties to offer affordable, minimum value or higher coverage to full-time employees.

There are two different taxes:

  • The 4980H(a) tax which applies if at least one full-time employee qualifies for premium tax credits on an exchange, and the employer fails to offer minimum essential coverage to at least 95% of its full time employees (or all but 5 of its full-time employees, if 5 is greater than 5%). This tax, currently set at $2,570 annually, is calculated by multiplying that amount times all full-time employees, minus the first 30.  (The tax was $2,500 for 2019).  Depending on the number of full-time employees, this tax can mount quickly.
  • The 4980H(b) tax applies if the employer fails to offer affordable, minimum value or higher coverage to that employee. This tax, currently set at $3,860 annually, is calculated by multiplying that amount times only the number of those full-time employees who qualify for premium tax credits on the exchange.  (The tax was $3,750 for 2019).  This tax can never exceed in amount what the ALE would owe under the (a) tax if it did not offer minimum essential coverage.

It is important to note that Applicable Large Employers do not calculate or report ESRP amounts on corporate or other business tax returns or on any other type of “penalty” return, even though other types of excise taxes are reported on dedicated IRS forms (e.g., Form 5330, Return of Excise Taxes Related to Employee Benefit Plans).

Instead, ALEs annually file with the IRS Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, together with copies of the individual Form 1095-C Employer-Provided Offer and Coverage statements furnished to full-time employees.  Using this information, the IRS determines which full-time employees might have triggered an ESRP each month in a given year based on the reported offer of coverage (or lack thereof), their employment status for the month, and, among other factors, the cost of coverage offered for the month.  The IRS also receives reports from the exchanges (Form 1094-A Health Insurance Marketplace Statement) on advance payment of premium tax credits to individuals.  By checking the employees’ Form 1040 returns, the IRS then determines, based on household income, which of those full-time employees were entitled to retain some or all of the premium tax credits advanced to them by the exchanges.  Full-time employees’ retention of premium tax credits, teamed with the information reported on Forms 1094-C and 1095-C, triggers imposition of the ESRP on the Applicable Large Employer.  The IRS notifies the ALE of its intention to assess ACA penalties via Letter 226-J, related forms, and subsequent correspondence.

Applicable Large Employers have advocated that Form 1094-C and attached employee statements are returns that, when filed, trigger the three-year statute of limitations under Code Section 6501.  In its memorandum, the Office of Chief Counsel concludes that this is not the case, because the data disclosed on Forms 1094-C and 1095-C is insufficient to calculate tax liability – it only provides part of the information the IRS needs to calculate the tax, the rest of which is obtained from the exchanges, and from full-time employees’ tax returns.  Disclosure of information that is sufficient to calculate tax liability is one of four criteria used to determine when a tax form, when filed, is sufficient to trigger the running of the statute of limitations, as set forth in Beard v. Commissioner, 82 Tax Court 766, 777 (1984), aff’d. 793 F.2d 139 (6th Cir. 1986).[1]

Because the ACA forms do disclose sufficient information to calculate tax liability and thus do not trigger the “filed return” statute of limitations, any other applicable statute of limitations would have to be set forth by Congress in Section 4980H itself.  Citing numerous federal cases holding that no statute of limitations may be imposed absent Congressional intent, and noting that Section 4980H contains no statute of limitations, the memorandum concludes that the Service is not subject to any limitations period for assessing Section 4980H payment.

What this means to Applicable Large Employers is that they now have an added incentive, in the form of minimizing open ended potential tax liability, to ensure that they are offering affordable, minimum value or higher coverage to their full-time employees for so long as the ACA’s ESRP provisions remain in place.  They must also continue to timely and accurately file and furnish Forms 1094-C and 1095-C, respectively, as failing to do so triggers its own tax penalties, which were recently increased.  However, because these Forms do not trigger running of any statute of limitations on collection of the underlying Section 4980H excise tax, there is no “value add” in ongoing ACA reporting compliance.

[1]  The other criteria are that the document must purport to be a return, there must be an honest and reasonable attempt to satisfy the requirements of the tax law, and the taxpayer must execute the return under penalties of perjury.

The above information is provided for general informational purposes only and does not create an attorney-client relationship between the author and the reader.  Readers should not apply the information to any specific factual situation other than on the advice of an attorney engaged specifically for that or a related purpose.  © 2020 Christine P. Roberts, all rights reserved.

Photo credit:  Annie Spratt (Unsplash)

 

 

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Covered California, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace

Exchange Subsidy Notices: Prelude to ACA Tax Assessments

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:Flowchart for Handling Exchange Subsidy Notices

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.

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Filed under Affordable Care Act, Covered California, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace, Premium Tax Credits, State Exchange

California Scheduled to Expand Small Group Definition Despite PACE Act

On October 7, 2015, President Obama signed into law the Protecting Affordable Coverage for Employees (PACE) Act which repeals provisions of the Affordable Care Act, and the Public Health Service Act, that effective January 1, 2016 would otherwise mandate expansion of the definition of “small employer” subject to insurance market reforms, from employers with 1 to 50 employees, to those with up to 100 employees. (This is actually a “look-back” test based on employee headcounts over the prior calendar year).  As discussed in this prior post, the market reform provisions, including modified community rating to determine premiums, and prohibitions on dollar limits on essential health benefits, are expected to significantly increase the cost of coverage for employers with 51 to 100 employees who will be joining the small group market for the first time.

Although the PACE Act repeals the federally-mandated expansion of the “small employer” definition, it leaves states the discretion to expand the definition on their own schedule.  As previously reported, California already enacted legislation in 2012, A.B. 1083, that expands the definition of small employer to employers with 1 to 100 employees, effective for plan or policy years beginning on or after January 1, 2016.  And in S.B. 125, earlier this year, California also adopted the use of the ACA’s full-time and full-time equivalent method of counting employees towards the small employer threshold.  When enacting S.B. 125, California had the opportunity to postpone small group expansion but did not do so.  Therefore the California small group market expansion will occur in 2016 unless California legislators take quick action by the end of the year to repeal the expansion, now codified in the California Insurance and Health and Safety Codes, or extend its effective date.  Of course, if is possible that the California legislature will not make any changes to the small employer definition, and small group expansion will occur in 2016.

We will continue to monitor developments on this topic.

Please note that an additional provision of S.B. 125 – changing open enrollment under the California state health exchange – Covered California, to match the November 1 – January 31 open enrollment period used by the federally-facilitated exchange, is scheduled to take effect November 1, 2015.

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Filed under Affordable Care Act, Benefit Plan Design, California Insurance Laws, California SB 1034, California SB 125, Covered California, Federally Facilitated Exchange, Health Care Reform, Health Insurance Marketplace, PACE Act of 2015, PPACA, Small Group Coverage, Small Group Expansion, State Exchange

California Adopts FT/FTE Counting Method to Determine Small Group Market Eligibility

Update:  Governor Jerry Brown signed SB 125, discussed below, on June 17, 2015.

In 2016, when California’s small group insurance market expands to include employers of up to 100 employees, employers in the state will use the same method of counting full time and full-time equivalent employees towards that threshold, as is required under the ACA’s employer shared responsibility rules.  This will be the effect of Senate Bill 125, which has been enrolled and sent to Governor Brown for signature.  It is expected that he will sign the bill into law, and the bill is effective upon enactment.

Current California Insurance and Health and Safety Code provisions define a “small employer” as an employer that, on at least 50 percent of its working days during the preceding calendar quarter or preceding calendar year, employed at least one, but no more than 50, ‘eligible employees,’ the majority of whom were employed within California.”   An “eligible employee” is in turn defined as “any permanent employee who is actively engaged on a full-time basis  . . . with a normal workweek of an average of 30 hours per week [or at least 20, at the employer’s option] over the course of a month” at the employer’s regular place of business, and who has met any applicable waiting period requirements.”   When it first enacted ACA-compliant measures in the 2011-2012 legislative session (AB 1083), California opted to postpone expansion of this definition — from employers of up to 50, to up to 100 employees — until January 1, 2016, which is the latest expansion date that the ACA allows.

Notably, the current manner of counting employees towards the 100 employee threshold does not take into account full-time equivalent (FTE) employees, which are counted towards the definition of an Applicable Large Employer (ALE) subject to ACA employer shared responsibility (or “pay or play”) duties, as set forth in Internal Revenue Code § 4980H, and final regulations thereunder.  FTEs are determined by totaling hours of service worked in a month by employees (including seasonal workers) who average under 30 hours of service per week (but not exceeding 120 hours/month for any single employee), and dividing the total by 120, such that 10 employees averaging 15 hours per week would result in 5 FTEs.  ACA health exchange regulations require that the ACA definition apply for purposes of policies that are sold on the small group exchange (SHOP) but not with regard to non-exchange policies.  SB 125 makes the ACA counting method applicable to all small group market policies sold in the state, whether or not offered on SHOP:

“For plan years commencing on or after January 1, 2016, the definition of small employer, for purposes of determining employer eligibility in the small employer market, shall be determined using the method for counting full-time employees and full-time equivalent employees set forth in Section 4980H(c)(2) of the Internal Revenue Code.”

California Insurance Code § 10753(q)(3); California Health and Safety Code § 1357.500(k)(3), both as amended by SB 125.  Both measures apply only to nongrandfathered health plans.

As a result, and with one important exception noted below, California employers will only need to do one set of calculations to be able to determine their status as Applicable Large Employers subject to ACA pay or play rules, and their status with regard to California’s small or large group markets.

The exception is with regard to counting employees of related entities.  Both California Code provisions amended by SB 125 require employers to count employees employed by “affiliated companies” that are eligible to file a combined tax return for purposes of state taxation.  However, the test for joint filing under the California Revenue and Taxation Code is not the same as “controlled group” status under federal law, which is expressly incorporated into the employee counting rules in Code Section 4980H(c)(2).  It is possible that this was an unintended drafting discrepancy that future guidance will resolve, but in the meantime, California employers with related entities should consult their state and federal law tax advisors to make sure they are counting employees properly for California small group eligibility and ACA shared responsibility purposes.

This exception aside, SB 125 brings welcome simplification at a time when employers with between 51 and 100 employees are calculating the likely costs and complications of losing access to large group coverage, and entering a market subject to rating restrictions and mandated coverage of essential health benefits.  Although legislative measures are afoot to allow states to further postpone, past 2016, the expansion of the small employer definition, California is unlikely to adopt any such change, should it become available.

SB 125, which was sponsored by California Senator Ed Hernandez (D-West Covina) also changes the annual open enrollment period for California’ state health exchange, Covered California™ , from October 15-December 7 of the year preceding the coverage year, to November 1 of the year preceding the coverage year, through January 31 of the new coverage year.  This is also consistent with the ACA, specifically with the Final HHS Notice of Benefit and Payment Parameters for 2016.  The new open enrollment period will first apply on November 1, 2015 through January 31, 2016, for the 2016 coverage year.

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Filed under Affordable Care Act, California AB 1083, California Insurance Laws, Covered California, Employer Shared Responsibility

New Cafeteria Plan Guidance Eases Transitions to Exchange Coverage

IRS Notice 2014-55, issued September 18, 2014, permits two new types of mid-year changes in cafeteria plan elections (other than health flexible spending account elections) that will enable employees to drop employer group coverage in favor of individual coverage offered on state and federally-facilitated health exchanges (collectively, “the Exchange.”)  Making that transition primarily will appeal to employees with household incomes in ranges that qualify them for financial assistance on the Exchange, in the form of premium tax credits and cost sharing.  Those ranges are between 100% and 400% of federal poverty level in states that have not expanded Medicaid, and between 138% and 400% of federal poverty level in states that have expanded Medicare.

Recap of Existing Change in Status Rules

Under existing cafeteria plan regulations, a participant may make a mid-year change in their plan elections only in the event of a “change in status,” and only to the extent that the election change is both “on account of” and “corresponds with” the change in status.  This latter requirement is referred to as the “consistency rule.”  An example of a change in election that satisfies the consistency rule is removing a spouse from coverage as a result of a change in status that is a legal separation or divorce.  By contrast, the participant dropping his or her own coverage in that situation would not satisfy the consistency rule.

Existing regulations set forth a finite list of changes in status that trigger the right to a mid-year cafeteria plan election.  The list does not currently include a change in employment status – such as a transition from full-time to part-time status – that is not accompanied by a loss of group health plan eligibility. In addition, under special enrollment rights that were introduced with HIPAA, employees may enroll in their employer’s plan in the event they lose other coverage (for instance, through exhausting COBRA coverage), may add to their coverage a dependent newly acquired through birth, marriage, or adoption, and may make mid-year cafeteria plan changes that are consistent with these events.  HIPAA’s special enrollment rights do not contain provisions that relate to availability of individual coverage on the Exchange.

Please note that references below to “changing cafeteria plan elections” may more accurately be described as revoking an election to make pre-tax salary deferral elections towards the purchase of group health premiums.

Notice 2014-55

Effective immediately, although at the option of employers, Notice 2014-55 permits mid-year cafeteria plan election changes in two different situations that are related to Exchange coverage.

The first situation applies when an employee who has been classified as full-time for ACA coverage purposes (averaging 30 or more hours of service per week) has a change in status which is reasonably expected to result in the employee averaging below full-time hours, without resulting in a loss of their group health coverage.  Under the look-back measurement method, as set forth in final employer shared responsibility regulations, an employee who averages full-time hours during an initial (following hire) or standard (ongoing) look-back measurement period generally will be offered coverage for the entire related initial or standard stability period (and associated administrative period) without regard to the actual hours worked during the stability period, such that a schedule reduction would not impact coverage.

Now, under Notice 2014-55, full-time employees whose average weekly hours are “reasonably expected” to remain below 30 – and whose reduced earnings may now qualify them for premium assistance on an Exchange, or increased assistance –  may revoke group coverage for themselves and covered dependents, provided it is for the purpose of enrolling in Exchange coverage or other “minimum essential coverage” that will take effect no later than the first day of the second month following the revocation.   (Minimum essential coverage is not limited to exchange coverage and may, for instance, include group health coverage offered by a spouse’s employer.)  Employers may rely on employee’ representations regarding the purpose of the election change.  Changes to health FSA elections are not permitted in this situation.

The second situation has two variations.  The first applies when an employee has special Exchange enrollment rights, including as a result of marriage, birth or adoption.  Similar to HIPAA special enrollment rights, these permit purchase of Exchange coverage outside of Exchange open enrollment. The second applies under a non-calendar year cafeteria plan when an employee wants to enroll in Exchange coverage during the Exchange open enrollment period, effective as of the first of the following calendar year.

In either instance an employee may prospectively revoke group health coverage for him or herself and family members, provided it is for the purpose of enrolling in Exchange coverage that will take effect no later than the day immediately following the last day of the original coverage that is revoked.  Employers may rely on employee’ representations regarding the purpose of the election change.  Changes to health FSA elections are not permitted in this situation.

Plan Amendments and Effective Dates

The IRS intends to amend cafeteria plan regulations to reflect the guidance in Notice 2014-55.  Employers may rely on the terms of the Notice until new regulations issue.

Employers who want to incorporate the new election changes into their cafeteria plans must amend their plan documents in order to do so.   Employers who put the changes into effect between now and the end of 2014 may amend their plan documents any time on or before the last day of their 2015 plan year (December 31, 2015 for a calendar year plan).  The amendment may be retroactive to the date the change went into effect, provided that participants are informed of the amendment and provided that, in the interim, the employer operates its plan in accordance with Notice 2014-55, or with subsequent issued guidance.

Employer Shared Responsibility Considerations

As mentioned, the first permitted change primarily relates to applicable large employers who use the look-back measurement period to identify full-time employees.  To minimize “pay or play” liability, these employers should continue to monitor, over subsequent measurement periods, the average hours worked by employees who migrate to Exchange coverage, and offer affordable, minimum value coverage over corresponding stability periods to those whose hours average 30 or more per week, or 130 or more per month.

Interestingly, this portion of Notice 2014-55 refers to individuals who were “reasonably expected” to average 30 or more hours of service prior to the change, but who are “reasonably expected” to average below that after the change.  This “reasonably expected” language  – which implies a measure of employer discretion – appears in the final shared responsibility regulations only in connection with assessment of an employee’s likely status (full-time, part-time, seasonable or variable hour) upon initial hire.   After an employee has remained employed throughout an entire standard stability period (which generally corresponds to the plan or policy year), he or she is an “ongoing employee” and his or her status as full-time or not full-time is determined solely based on average hours worked over the preceding look-back measurement method, or, under the “monthly” measurement period, over the preceding calendar month.  In other words, employer discretion is removed from the ongoing measurement process.  Now, it is reintroduced by Notice 2014-55 in the limited context of a schedule reduction during a stability period.

If the second permitted change is adopted by an applicable large employer, presumably that employer will continue to monitor employees who have migrated to the Exchange using the measurement method under which the employee previously qualified for an offer of group health coverage.

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Filed under Affordable Care Act, Benefit Plan Design, Cafeteria Plans, Covered California, Employer Shared Responsibility, Federally Facilitated Exchange, Health Care Reform, Health FSA, Health Insurance Marketplace, PPACA, State Exchange