Category Archives: Health Care Reform

Court Upholds Exclusion of Surrogate Pregnancy Costs, But Pitfalls Remain

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In an unpublished opinion*, the 10th Circuit Court in Moon v. Tall Tree Administrators, LLC (10th Cir. May 19, 2020) upheld a self-insured group health plan’s exclusion of “pregnancy charges acting as a surrogate mother” as unambiguous and enforceable, even though that exclusion was nested within a larger exclusion of “[n]on-traditional medical services, treatments, and supplies.”

In the case, Moon, an employee of Mountain View Hospital in Utah and a participant in their self-insured group health plan, asked the third party administrator in 2011 whether surrogate maternity expenses were covered and was told that they were not.  Moon underwent a surrogate pregnancy in 2013 without notifying the plan and her expenses were covered.  She agreed to act as a surrogate again in 2015, but this time the plan denied coverage for her pregnancy expenses under the cited exclusion.  Moon argued that her expenses were conventional prenatal and childbirth expenses and that because the exclusion for surrogacy expenses was nested within a larger exclusion of “non-traditional” services and treatment, it was not applicable.  The district court disagreed, and granted summary judgement for the plan.

Because it was decided on summary judgment, the 10th Circuit reviewed the matter “de novo” – i.e., as a trial court would, rather than under the “abuse of discretion” standard of review applicable under Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989) when the plan document expressly accords discretion to the plan administrator to interpret the terms of the plan document.

The 10th Circuit affirmed enforcement of the exclusion on the grounds that “a reasonable person in the position of the participant would view ‘pregnancy charges acting as a surrogate mother’ as an example of a non-traditional medical expense” and hence as excluded care.  Perhaps illustrating the legal maxim that “bad facts make bad law,” it is impossible to tell whether the court’s conclusion was tainted by the fact that the plaintiff proceeded with two separate surrogate pregnancies after confirming that that the plan did not cover this type of expense.

In an earlier case, Roibas v. EBPA, LLC, 346 F. Supp. 3d, 164 (D. Maine 2018), the exclusion simply stated “[e]xpenses for surrogacy,” and a dispute arose as to whether that referred to the cost of hiring a surrogate, or the surrogate’s own pregnancy and childbirth expenses.  The plan had already covered some prenatal coverage before learning that it was a surrogate pregnancy and denying subsequent claims.  Acknowledging that the exclusion was ambiguous, the Maine District Court upheld it out of deference accorded to the plan administrator’s interpretation of the ambiguous plan term (the Firestone standard of review applied), and based on the conclusion that the plan administrator’s interpretation was reasonable.

For sponsors of self-insured health plans, these cases highlight the importance of careful drafting of plan exclusions, particularly in an area like surrogate births where medical advancements and social trends are evolving fairly rapidly.  They also provide an inflection point to examine some of the other legal pitfalls of excluding surrogate pregnancy costs from coverage.

First, there is a practical concern presented by not always being able to know when a participant or dependent’s pregnancy is for surrogacy purposes.  The plans in both the Moon and Roibas cases unwittingly reimbursed some surrogate pregnancy expenses before terminating coverage.  Because the facts of surrogacy are not always transparent, the plan sponsor may have difficulty consistently enforcing even unambiguous exclusions of surrogate pregnancy expenses.   This could potentially lead to fiduciary breach charges.  Plan sponsors may also be hard pressed to justify denying the costs of an intended surrogate pregnancy while covering the maternity expenses of a participant who intends to permit the child to be adopted.

As for legal concerns, there are two salient ones.  First, the Pregnancy Discrimination Act, applicable to employers with 15 or more employees, mandates that a group health plan cover pregnancy in the same manner as other medical conditions, making it difficult for a plan sponsor to justify excluding coverage of a pregnancy based on the way in which the mother became pregnant or on their plans for the child, once born.  Second, for non-grandfathered group health plans under the Affordable Care Act, the Act requires first-dollar coverage of preventive services including prenatal and post-natal care.  The ACA does not carve out surrogate pregnancies in this regard.  There are also potential tax consequences to providing surrogacy benefits, and fertility benefits, that are reviewed in some detail here.

As an alternative to a coverage exclusion, group health plan sponsors who want to limit the use of their plan benefits by individuals who may be compensated for a surrogate pregnancy may give thought to applying their plan’s right of reimbursement and subrogation to compensation that the participant receives.  Subject to state insurance law, this is generally how group health insurance carriers approach the issue, covering the cost of surrogate prenatal care and delivery but seeking reimbursement, or asserting subrogation rights, thereafter.**

To take this approach essentially equates the compensation paid to a surrogate by a couple struggling with infertility, to the recovery an injured participant receives from a third party tortfeasor.  Plan sponsors may have varying levels of comfort with this approach and should certainly seek ERISA counsel first, as well as counsel with expertise in surrogacy laws, as they vary significantly state to state.

*Unpublished opinions generally are not binding precedent but may be cited for persuasive value. The 10th Circuit covers the district courts of the states of six states of Oklahoma, Kansas, New Mexico, Colorado, Wyoming, and Utah, plus those portions of the Yellowstone National Park extending into Montana and Idaho.

**Effective January 1, 2020, Nevada is a notable exception to other states in this regard, banning carriers from denying coverage for surrogate pregnancies and from seeking reimbursement, subrogation, etc.

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: Christian Bowen, Unsplash.

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Filed under Affordable Care Act, ERISA, Fiduciary Issues, Health Care Reform, PPACA, Preventive Care, Self-Insured Health Plans, Surrogacy Expenses, Uncategorized

2020 Benefits Update

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This PowerPoint deck covers:

  • SECURE Act mandatory and optional changes for employers that currently sponsor 401(k) or other defined contribution plans,
  • Proposed Department of Labor Regulations creating a safe harbor for posting certain retirement plan disclosures online, and
  • A quick update on the statuses of ACA repeal and the CalSavers program, respectively.

It was originally presented on March 4, 2020 as part of my firm’s 24th annual Employment Law Conference, held at the Four Seasons Biltmore, Santa Barbara, California.  As with all information posted here, it is provided 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 by Lora Ohanessian on Unsplash

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Filed under 401(k) Plans, 403(b) Plans, ADP and ACP Testing, Affordable Care Act, Benefit Plan Design, California Insurance Laws, California Secure Choice Retirement Savings Program, CalSavers Program, ERISA, Health Care Reform, Profit Sharing Plan, Qualified Birth or Adoption Distribution, SECURE Act, State Auto-IRA Programs

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

Top 10 Questions re: Management Carve Outs in Group Health Plans

            Employers value flexibility in designing their group health benefits so as best to attract and retain qualified personnel. One issue that remains perpetually murky, in this regard, is the legality of management carve-outs, whereby an employer offers certain group health insurance options or classes of coverage only to management or other highly paid groups.   The following true or false discusses some of the rules that come into play.

  1. The ACA contains a rule that restricts employers’ ability to offer different insured group health benefits to highly compensated employees, than to other employees.

             TRUE:  Under Section 2716 of the Public Health Service Act, which was incorporated into the Affordable Care Act (ACA), non-grandfathered, insured group health plans generally must satisfy nondiscrimination rules similar to those that apply to self-insured group health plans under Section 105(h) of the Internal Revenue Code (“Code”). These rules generally require some measure of parity between higher-paid employees, and non-highly paid employees.  Limited scope dental or vision plans provided under policies separate from group medical coverage are excepted.

  1. However, the IRS is not currently enforcing the ACA nondiscrimination rules for insured group health plans.

             TRUE:  In 2011 the IRS postponed enforcement of these rules, pending publication of regulations that will guide employers as to how to comply. As we approach the ACA’s eighth anniversary in March 2018, regulations have yet to issue.  When regulations do issue they will apply on a prospective (going forward) basis.

  1. Therefore employers have free reign to offer different benefits to management employees or other highly-compensated groups of employees.

             FALSE:   Although there are some circumstances in which employers may offer different and/or better group health insurance to management or other highly-paid employee groupings, the Section 125 cafeteria plan rules do impose some design restrictions.  These rules will apply to employers that have any type of Section 125 cafeteria plan arrangement, including premium-only plans (e.g., employees’ share of premiums are paid on a pre-tax basis, with no other cafeteria plan features) and to employers with other cafeteria plan features such as a health flexible spending account or dependent care flexible spending account.  The rules are explained in the questions that follow.

  1. All management employees are “highly-compensated employees” for cafeteria plan testing purposes.

             FALSE: First, the technical term is “highly-compensated individuals,” and it includes the following groups, which will not necessarily overlap 100% with an employer’s management group population:

  • Officers during the prior plan year
  • Greater than 5% shareholders (in either the preceding or current plan year)
  • Highly compensated employees (those earning more than $120,000 in 2017 are highly compensated employees in 2018)
  • Spouses or dependents of any of the above.
  1. If I maintain just a premium-only plan and all employees can participate and elect the same salary reductions for the same benefits, the premium only plan is nondiscriminatory.

             TRUE.  Proposed cafeteria plan regulations that issued in 2007 provide this safe harbor rule. Employers may rely on the proposed rules.

  1. If I maintain just a premium-only plan and don’t meet the requirements of the safe harbor, the POP is automatically discriminatory.

            FALSE.  Under these circumstances your premium-only plan will not satisfy the safe harbor mentioned above, but it could still pass other applicable nondiscrimination tests.  There is some uncertainty, under the 2007 proposed regulations, as to whether the only applicable test applies to eligibility, or whether there is a benefits component of the test.  It may be best to consult a seasoned third party administrator, or benefits attorney, if you have questions.

  1. If my cafeteria plan fails all types of nondiscrimination testing, all is lost.

             FALSE. The 2007 proposed regulations permit “disaggregation” – breaking up one plan into separate component plans – one benefitting participants who have completed up to three years of employment, and another benefitting those with three or more years of employment.  Each component plan must separately pass cafeteria nondiscrimination rules applicable to eligibility, and contributions and benefits.  Plans that fail nondiscrimination testing as a whole may pass testing after permissive disaggregation.  The proposed regulations did not discuss whether plans may be disaggregated based on factors other than length of employment, and further guidance on this point would be welcome.

  1. The IRS does not audit cafeteria plans so it doesn’t matter anyway.

FALSE. Although audits specific to a cafeteria plan are seldom seen, the IRS could expand a payroll audit or other business or benefit plan audit to encompass operation of a cafeteria plan, even a premium-only plan.  Therefore it is important to comply with the cafeteria plan nondiscrimination rules.

  1. Our company pays 100% of health premiums for highly compensated individuals directly to the carrier (or the employees pay themselves on an after-tax basis), so there is no cafeteria plan nondiscrimination issue.

             TRUE.  However, any insured group health plan design that provides better treatment for higher paid employees may fall afoul of the ACA nondiscrimination regulations mentioned in questions 1 and 2, when they issue; although the regulations will apply prospectively, neither employers nor their highly compensation staff should assume that preferential health plan designs are more than temporary.

  1. A “Simple” Cafeteria Plan is exempt from Section 125 nondiscrimination rules.

             TRUE.  A nondiscrimination safe harbor applies to “simple” cafeteria plans under Code Section 125(j), however those plans are subject to other design restrictions that may prove unworkable for many employers, including mandated employer matching or non-elective contributions. They are also limited to employers with 100 or fewer employees on business days during either of the two preceding years.

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Filed under Affordable Care Act, Benefit Plan Design, Cafeteria Plans, Health Care Reform, Nondiscrimination Rules for Insured Health Plans, PPACA, Premium Only Plans

IRS Gifts Large Employers an ACA Reporting Extension

Under the ACA, Applicable Large Employers (ALEs) must comply with annual reporting and disclosure duties under Section 6056 of the Internal Revenue Code (“Code”). These include filing, with the IRS, a Form 1094-C transmittal form, together with copies of Form 1095-C individual statements that must also be furnished to full-time employees (and to part-time employees who enroll in self-insured group health plans).

In a holiday-time gift to ALEs, the IRS just extended the deadline to furnish Form 1095-Cs to employees by 30 days, from January 31, 2018, to March 2, 2018. ALEs must still file Form 1095-C employee statements with the IRS by the normal deadline of February 28, 2018 (paper) or April 2, 2018 (e-file). However, due to the across-the-board extension to March 2, 2018, the IRS will not be granting any permissive 30-day extensions to furnish Form 1095-C to employees. And, while granting the extension, the IRS still encourages ALEs to furnish the 2017 employee statements as soon as they are able, and also to file or furnish late rather than not file or furnish at all, where applicable. ALEs may still obtain an automatic extension on the filing deadlines by filing Form 8809, and may obtain an additional, permissive 30-day filing extension upon a showing of good cause. In summary, the deadlines for 2017 ACA reporting are as follows:

File 2017 Form 1094-C with IRS:           February 28, 2018 (paper); April 2, 2018, (e-file)

File 2017 Form 1095-Cs w/IRS:               February 28, 2018 (paper); April 2, 2018 (e-file)

Furnish 2017 Form 1095-Cs to Employees:       March 2, 2018

Additionally, the IRS extended, for another year, the transition relief that has been in place since ACA reporting duties first arose in 2015. Under the transition relief, the IRS will not impose penalties on employers who file Forms 1094-C or 1095-C for 2017 that have missing or inaccurate information (such as SSNs and dates of birth), so long as the employer can show that it made a good faith effort to fulfill information reporting duties. There is no relief granted for ALEs who fail to meet the deadlines (as extended) for filing or furnishing the ACA forms, or who fail to report altogether.

This news is be welcome given that all U.S. employers will be grappling with new income tax withholding tables early in 2018 given the passage of the Tax Cuts and Jobs Act of 2017, which President Trump signed in to law on December 22, 2018. We’ll be providing more information on the Act’s impact on employment benefits after the Christmas holiday.

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Health Care Reform, Minimum Essential Coverage Reporting, Payroll Issues, Post-Election ACA, PPACA, Tax Cuts and Jobs Act

IRS Rolls Out Collection Process for ACA Large Employer Penalty Tax

The IRS is rolling out enforcement of the large employer “pay or play” penalty tax for 2015, with preliminary penalty calculation letters anticipated to begin to be issued between now and the end of 2017.   This will potentially impact employers who, over 2014, averaged 100 or more full-time employees, plus full-time equivalents, and who in 2015 either did not offer group health coverage to at least 70% of its full-time employees, or offered coverage that was “unaffordable,” as defined under the ACA, and for whom at least one full-time employee qualified for premium tax credits on a health exchange.

The sample penalty summary table the IRS has just circulated leaves space for a six-figure annual penalty amount, so substantial amounts of business revenue could be at stake in the collection process. Below is a timeline beginning with receipt of a notice from the IRS of a preliminary penalty calculation (Letter 226J), which includes the penalty summary table; the timeline is based on recently-updated IRS FAQs on the penalty collection process.   Employers must respond by the date set forth in the Letter 226J, which generally will be 30 days from the date of the letter. However due to habitually slow IRS internal processing, employers may have less than two weeks from date of actual receipt, to prepare a response.  ACA reporting vendors may not be equipped to assist with responses to preliminary penalty assessments, so employers who receive a Letter 226J identifying a preliminary penalty amount should look to ERISA or other tax counsel, or an accountant with knowledge of the ACA, in order to best protect their interests.  Not all IRS communication forms referenced below had been released as of the date of this post but it will be updated as the forms become available.

  1. The start point is an employer who is an ALE for 2015 (based on 2014 headcount) and who has one or more FT employees who obtain premium tax credits for at least one month in 2015, as reflected in ACA reporting (and an affordability safe harbor or other relief was not available).
  2. The ALE receives Letter 226J with enclosures, including the penalty summary table, Form 14764 Employer Shared Responsibility Payment (ESRP) Response, and Form 14765 Premium Tax Credit (PTC) List, identifying employees who potentially trigger ACA penalties.
  3. The ALE has until the response date set forth on Letter 226J to submit Form 14764 ESRP Response and backup documentation. The deadline will generally be no more than 30 days from date of Letter 226J but internal IRS processing may cut in to that time budget.
  4. The IRS will acknowledge the ALE’s response, via one of five different versions of Letter 227.
  5. The ALE either takes the action outlined in Letter 227 (e.g., makes original or revised ESRP payment), or
  6. the ALE requests a pre-assessment conference with IRS Office of Appeals, in writing, within 30 days from the date of Letter 227, following instructions set forth in Letter 227 and in IRS Publication 5, Your Appeal Rights.
  7. If ALE fails to respond to Letter 226J or Letter 227, the IRS will assess the proposed ESRP payment amount and issue Notice CP 220J, notice and demand for payment.
  8. Notice CP 220J will include a summary of the ESR payment amount and reflect payments made, credits applied, and balance due, if any; it will instruct ALE how to make payment. Installment agreements may be reached per IRS Publication 594.

 

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Filed under Affordable Care Act, Applicable Large Employer Reporting, Health Care Reform, Minimum Essential Coverage Reporting, Post-Election ACA, PPACA, Premium Tax Credits

You Just Formed a New Business Entity. What Could Possibly Go Wrong?

What if a somewhat arcane area of tax law had potentially serious ramifications for attorneys and other tax advisors across a broad range of practices, but was not consistently identified and planned for in actual practice? That is an accurate description of the rules surrounding “controlled group” status between two or more businesses, which I have seen arise in business formation/transactions, estate planning, employment and family law settings.  The purpose of this overview is to briefly survey controlled group rules for non-ERISA practitioners, so that they can become aware of the potential complications that controlled group rules can create.

  1. Why Do Controlled Groups Matter?

The main reason they matter is because the IRS treats separate businesses within a controlled group as a single employer for almost all retirement and health benefit plan purposes. In fact, annual reporting for retirement plans (and for health and welfare plans with 100 or more participants) requires a statement under penalty of perjury as to whether the employer is part of a controlled group.  Therefore controlled groups are most frequently a concern where business entities have employees and particularly when they sponsor benefit plans, whether retirement/401(k), or health and welfare plans.  Note, however, that creation of a business entity that has no employees can still create a controlled group issue when it acts as a conduit to link ownership of two or more other entities that do have employees.

Being part of a controlled group does not always mean that all employees of the member companies have to participate in the same benefit plan (although it can sometimes mean that). However it generally means that separately maintained retirement plans have to perform nondiscrimination testing as if they were combined, which not infrequently means that one or more of the plans will fail nondiscrimination testing.  This is an event that usually requires the employer sponsoring the plan to add more money to the plan on behalf of some of the additional counted employees, or to pay penalty taxes in relation to same.  Similar complications can arise in Section 125 cafeteria or “flexible benefit plans,” and for self-insured group health plans, which are subject to nondiscrimination requirements under Code § 105(h).  Nondiscrimination rules are meant to apply to insured group health plans under the Affordable Care Act (“ACA”), so additional complications could arise in that context when and if the rules are enforced by the IRS, following publication of regulatory guidance.

Controlled group status can also mean that several small employers together comprise an “applicable large employer” subject to the ACA “pay or play rules,” and related annual IRS reporting duties. Small employer exceptions under other laws, including COBRA and the Medicare Secondary Payer Act, reference controlled group status when determining eligibility for the exception.

  1. How Do I Identify a Controlled Group?

 Determining controlled group status requires synthesizing regulations and other guidance across multiple Internal Revenue Code (“Code”) provisions and therefore is a task for a specialized ERISA or tax practitioner.  What follows are very simplified definitions aimed at helping advisors outside that specialized area flag potential controlled group issues for further analysis.

Strictly speaking, the term “controlled group” refers to shared ownership of two or more corporations, but this article uses the term generically as it is the more familiar term.  “Ownership” in this context means possession of the voting power or value of corporate stock (or a combination thereof).  Shared ownership among other types of business entities is described as “a group of trades or businesses under ‘common control.’”  Ownership in this context refers to ownership of a capital or profits interest in a partnership or LLC taxed as a partnership.   Controlled groups can also arise in relation to tax-exempt entities, for instance if they own 80% or more of a for-profit entity, or even between two tax-exempt entities where there is substantial overlap of board membership or board control.

Complex interest exclusion rules mean that not all ownership interests are counted towards common control; exclusion may turn on the nature of the interest held (e.g., treasury or non-voting preferred stock) or on the party holding the ownership interest (e.g, the trust of a tax-qualified retirement plan).

The two main sub-types of controlled group are: parent-subsidiary, and “brother-sister,” although a combination of the two may also exist.  A parent-subsidiary controlled group exists when one business owns 80% or more of another business, or where there is a chain of such ownership relationships. As that is a fairly straightforward test, I will focus on the lesser known, but more prevalent, brother-sister type of controlled group.

A brother-sister controlled group exists when the same five or fewer individuals, trusts, or estates (the “brother-sister” group) have a “controlling interest” in, and “effective control” of, two or more businesses.

  • A controlling interest exists when the brother-sister group members own, or are deemed to own under rules of attribution, at least 80% of each of the businesses in question.
  • Effective control exists when the brother-sister group owns or is deemed to own greater than 50% of the businesses in question, looking only at each member’s “lowest common denominator” ownership interest. (So, a group member that owed 20% of one business and 40% of another business would be credited only with 20% in the effective control test.)
  • In order to pass the 80% test, you must use the interests of the same five or fewer persons (or trusts or estates) used for purposes of the greater than 50% test.  See US v. Vogel Fertilizer, 455 US 16 (1982). Put otherwise, the two tests consider only owners with a greater-than-zero interest in each of the businesses under consideration. If, under this rule, you disregard shares adding up to more than 20% of a business, the 80% test won’t be met and that business generally won’t form part of the controlled group. (Although the remaining businesses may do so.)

The controlled group attribution rules are quite complex and can only be touched on here. Very generally speaking, an ownership interest may be attributed from a business entity to the entity’s owner, from trusts to trust beneficiaries (and to grantors of “grantor” trusts as defined under Code § 671-678), and among family members. Stock options can also create attributed ownership under some circumstances.  The attribution rules can have surprising consequences. For instance, a couple, each with his or her wholly-owned corporation, will be a controlled group if they have a child under age 21 together, regardless of their marital status, because the minor child is attributed with 100% of each parent’s interests under Code §1563(e)(6)(A).  Community property rights may also give rise to controlled group status. Careful pre-marital planning may be necessary to prevent unintended controlled group status among businesses owned separately by the partners to the marriage.

This is the first part of a two-part discussion that was first published as an article in the Santa Barbara Lawyer Magazine for October 2017.  The second half will address a variation of these rules that are specific to businesses formed by doctors, dentists, accountants, and other service providers.

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Filed under 401(k) Plans, ADP and ACP Testing, Affordable Care Act, Benefit Plan Design, Cafeteria Plans, COBRA, Common Control Issues, Employer Shared Responsibility, ERISA, Health Care Reform, Nondiscrimination Rules for Insured Health Plans, Nondiscrimination Testing for Qualified Retirement Plans, Plan Reporting and Disclosure Duties

ACA Cheat Sheet for 2017 & 2018

On Tuesday, September 26, 2017, Senate majority leader Mitch McConnell (R-Ky.) announced that Republicans would abandon efforts to pass ACA repeal and replace legislation, namely the much-amended American Health Care Act of 2017, and on September 30, 2017 their chance to pass any other version of repeal and replace this year as a budget reconciliation measure, requiring only 51 votes, also expires.  For the remainder of 2017, then, applicable large employers and their brokers and advisers should refresh their familiarity with employer shared responsibility rules under the ACA.  Below is a cheat sheet with affordability safe harbor thresholds, applicable large employer penalty tax amounts, and out-of-pocket maximums for 2017 and for fast-approaching 2018.  Sources are Revenue Procedures 2016-24 and 2017-36, and the Final Rule on Benefit and Payment Parameters for 2017 and 2018.

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Filed under Affordable Care Act, American Health Care Act, Employer Shared Responsibility, Health Care Reform, Post-Election ACA, PPACA

Offer Opt-Out Payments? Don’t Get Snared in Overtime Liability

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If you are an employer within the jurisdiction of the Ninth Circuit Court of Appeals and offer cash payments to employees who opt out of group health coverage (“opt-out payments”), what you don’t know about the court’s 2016 opinion in Flores v. City of San Gabriel may hurt you.

Specifically, the Ninth Circuit court held that opt-out payments had to be included in the regular rate of pay used to calculate overtime payments under the federal Fair Labor Standards Act (FLSA). In May 2017 the U.S. Supreme Court declined to review the opinion, making it controlling law within the Ninth Circuit, and hence in the states of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington.

The Flores case arose when a group of active and former police officers in the City of San Gabriel sought overtime compensation based on opt-out payments they received between 2009 and 2012 under a flexible benefits plan maintained by the City.  The plan required eligible employees to purchase dental and vision benefits with pre-tax dollars; they could also use the plan to purchase group health insurance.  Employees could elect to forgo medical benefits upon proof of alternative coverage; in exchange they received the unused portion of their benefits allotment as a cash payment added to their regular paycheck.  The opt-out payments were not insubstantial, ranging from $12,441 annually in 2009 to $15,659.40 in 2012.  The City’s total expenditure on opt-out payments exceeded $1.1 million dollars in 2009 and averaged about 45% of total contributions to the flexible benefits plan over the three years at issue.

The court held that the City had not properly excluded the opt-out payments from the regular rate of pay for overtime purposes under the FLSA, as they were items of compensation even though not tied directly to specific hours of work, and further that the “bona fide” benefit plan exception did not apply, because, inter alia, the cash opt-out payments received under the flex plan comprised far more than an “incidental” portion of the benefits received.

Despite the significant potential impact of getting this classification wrong, the City appears not to have sought a legal opinion on whether it could permissibly exclude the opt-out payments under the FLSA. Instead, a City employee testified that it followed its normal process of classifying the item of pay through joint decision by the payroll and human resources departments, without any further review of the classification or other due-diligence.  For this oversight, the court awarded liquidated damages against the City for failure to demonstrate that it acted in good faith and on the basis of “reasonable grounds” to believe it had correctly classified the opt-out payments under the FLSA.  Further, the court approved a three-year statute of limitations for a “willful” violation of the FLSA, rather than the normal two year period, on the grounds that the City was on notice of its FLSA requirements, yet took “’no affirmative action to ensure compliance with them.’”

Although Flores involved a benefit plan maintained by a public entity, there is nothing in the Ninth Circuit’s opinion that limits its scope to public entity employers.

Therefore employers within the Ninth Circuit who offer opt-out payments should review their payroll treatment of these amounts and seek legal counsel in the event there if potential overtime liability under the FLSA. They should also confirm that cash opt-out payments remain an “incidental” percentage of total flex benefits, which the Department of Labor has defined in a 2003 opinion letter as no more than 20% of total plan benefits.  In Flores the Ninth Circuit found the 20% threshold to be arbitrary, but suggested that it was likely lower than 40% of total benefits.  Finally, employers offering opt-out payments should also revisit the other legal compliance hurdles that these payments present under the ACA, which after its recent reprieve from repeal/replace legislation, remains, for now, the law of the land.

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Filed under Benefit Plan Design, Cafeteria Plans, FLSA, Fringe Benefits, Health Care Reform, Overtime, Post-Election ACA, PPACA, Uncategorized

5 Things California Employers Should Know About the Current State of Health Care Reform

by Amy Evans, HIP, President, Colibri Insurance Services and Christine P. Roberts, Mullen & Henzell L.L.P.

There is still a lot of debate going on at the federal and state levels about health care reform. In Washington, D.C., the Senate is working on a second round of revisions to the American Health Care Act (AHCA), but there is lack of alignment within the Republican party about the new plan, and the current administration is now occupied by other items. At the state level, a Senate bill proposing a state-wide single-payer health care system is making its way through the legislature and generating a lot of conversation about a complete overhaul of health care financing and delivery. With all of the uncertainty and political noise, it can be difficult for employers to know where to put their attention and resources. Here are five things California employers should know about the current state of health care reform.

1) California is leading the discussion about single-payer. California Senate Bill 562 is currently making its way through the state legislation. If enacted, SB 562 would eliminate the private health insurance system in California, including health insurance carriers, health insurance brokers and employer-sponsored health insurance benefits. It would replace them with a state-run, “single-payer” system called the Healthy California program, which would be governed by a 9-member executive board, and guided by a 22-member public advisory committee. At this juncture, funding measures for the bill are vague but include appropriation of existing federal funding for Medicare, Medi-Cal, CHIP and other health benefits provided to California residents, as well as an increase in payroll taxes. The estimated cost for this system is $400 billion annually, which is twice the size of the current budget for the entire state. SB 562 is widely popular in concept but also widely misunderstood, with many confusing it for a universal coverage system that would be supplemented by private and employer-sponsored coverage. The bill is currently in suspense with the Appropriations Committee in Sacramento. The committee chair (who is also the author of the bill) may wait for the results of a detailed study on the bill’s cost and impact, or he may choose to send it to the Senate for a vote. If the bill makes it through the Senate and the Assembly (which it is likely to do because it is such a popular concept), it is anticipated that it will be vetoed by Governor Jerry Brown, who has already expressed concerns about the bill’s financing. Alternatively, the legislature could vote on the bill and then table it until a new governor takes office in 2018. Either way, the bill would become a ballot measure to be approved by voters. Progress of the American Health Care Act in Washington, D.C. will impact SB 562 because the state bill would make use of state innovation waivers, which are slated to expand under the AHCA, but federal retooling of health care reform won’t impede SB 562’s progress to the Governor’s desk. Employers who offer health insurance as a benefit to attract and retain quality employees should be aware of the meaning and impact of this single-payer bill and should continue to track its progress.

 2) “Play or Pay” is still in play. The Affordable Care Act (ACA)’s “play or pay” penalties are still in place, so Applicable Large Employers are required to offer affordable, minimum value health insurance to eligible employees or pay a penalty. The current administration has suggested that they will reduce the penalties to $0 retroactive to 2016, but that has not happened yet. The 1094/1095 reporting requirements also remain in place. There has been some recent talk that penalty notices for 2015 and 2016 may be going out soon, perhaps first to the employers who have the largest penalty assessments.†  However, the Internal Revenue Service is also significantly understaffed so the availability of resources to enforce these penalties remains in doubt. Applicable Large Employers should continue to assess their play or pay options, track employee hours and offers of coverage, and complete 1094/1095 reporting for 2017. They should also address any penalty notifications from the IRS in a timely manner.

3) If there are no penalties, revenue has to come from another source. The extremely unpopular revenue-generating pieces of the ACA, including the individual mandate, the employer mandate, and the Cadillac Tax (currently delayed to 2020) are likely to be cut from the new AHCA, but that would create a shortfall in revenue that would need to made up elsewhere. The employer exclusion is a popular target in current discussions – this is the tax benefit that allows employer contributions to health insurance to be considered separate from employee income. If the employer exclusion is capped or eliminated, it will effectively increase taxes on the approximately 50% of U.S. residents who receive health insurance through their employers, and deliver a huge blow to the employer-sponsored health insurance system. Employers who offer health insurance as a benefit to attract and retain quality employees should be aware of the meaning and impact of capping or eliminating the employer exclusion.

4) 2018 Health insurance renewals will be business as usual. Insurance carriers filed their health insurance plan designs and rates with the regulatory agencies (Department of Insurance and Department of Managed Health Care) for 2018, so any substantive changes to plans (for example, removing Essential Health Benefits) won’t happen until 2019. For employers offering coverage, this means business as usual for 2018 health insurance renewals. Expect increases to premiums to average 10-15%. Also expect lots of plan changes – some plans may be discontinued and participants will be mapped to new plans; benefits many change even if plan names remain the same; carriers may reduce networks and pharmacy benefits and increase deductibles and out of pocket maximums to keep premiums in check.

5) Cost-containment tools are gaining in popularity. As out of pocket costs continue to increase for health insurance participants, we will continue to see a move towards consumer-driven health care, where participants are encouraged to be more involved in the spending of their health care dollars. Health Savings Accounts (HSAs) are growing in popularity again, carriers are providing tools to promote transparency for comparison shopping, and alternative delivery systems like telehealth, nurse on call, minute clinics, free-standing urgent care centers, and even flat-fee house calls are gaining in popularity. Health Reimbursement Arrangements (HRAs), self-funding arrangements and cash-benefit policies can also be effective tools for cost containment. Employers should work with their health insurance brokers and other benefit advisers to assess the value of these tools in their current employee benefits programs.

In closing, employer-provided health benefits rest on shifting legal sands and that is likely to remain the case for some time.   Planning opportunities, and pitfalls, will arise as the reform process moves forward and the informed employer will be in the best position to navigate the changes ahead.

†Hat tip to Ryan Moulder, Lead Counsel at Accord-ACA for this detail.

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Filed under Affordable Care Act, American Health Care Act, Applicable Large Employer Reporting, Benefit Plan Design, California Insurance Laws, California SB 562, Employer Shared Responsibility, Health Care Reform, Post-Election ACA, Single Payer Health Systems