Category Archives: Nondiscrimination Rules for Insured Health Plans

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

Automatic Enrollment: Another Bone in the ACA Graveyard?

UPDATE:  President Barack Obama signed into law H.R. 1314, the Bipartisan Budget Act of 2015 described below, on November 2, 2015.

In the five years since the Affordable Care Act was enacted, a number of its provisions have died the legislative death known as repeal.  If enacted, the Bipartisan Budget Act of 2015 currently pending in Congress would add another bone to the ACA graveyard, in that it would repeal Section 1511 of the Affordable Care Act, which, through amendment of the Fair Labor Standards Act, would have required employers with more than 200 full-time employees to automatically enroll new full-time employees in their group health plans, subject to later opt-out.  The original effective date of this provision was unclear, but the Department of Labor put its enforcement on hold until regulations issued.  No regulations were issued, and now it looks like this provision, which was never a high-priority ACA item for the government, may never go into effect.

Other ACA measures that have previously been repealed include the mandated expansion of the definition of a “small employer,” for small group market purposes, from 50 to 100 employees. Although originally slated to take effect nationally for plan or policy years beginning on or after January 1, 2016, the PACE Act of 2015 made expansion of the definition is now a state-by-state decision (and as we discussed earlier, California’s expansion is slated to go into effect for 2016).

Another prior ACA casualty of note to employers was repeal of the cap on annual deductible amounts for health plans in the small group market, which happened (essentially retroactively) under the Protecting Access to Medicare Act of 2014.   (The repealed limits would have been $2,000 for an individual and $4,000 for a family.)  The ACA continues to cap annual maximum out-of-pocket amounts, and further requires that, effective for 2016 plan years, that a separate individual out-of-pocket maximum (an “embedded” maximum) applies to each person covered under family coverage, even before the family maximum is reached.

In the ACA’s earlier days, legislators put a stake in the heart of the free choice voucher provisions, which would have required employers who offered a group health plan to provide vouchers to certain employees to enable them to purchase exchange coverage.  The first major ACA casualty was and the public long-term care insurance program for employees, (“CLASS Act”), which was repealed, without ever having gone into effect, in the American Taxpayer Relief Act of 2012.

The last two ACA provisions that employers would most like to see repealed are the Cadillac tax, slated to go into effect in 2018, and nondiscrimination rules for fully-insured group health plans. Plans to implement the Cadillac tax, set forth in Internal Revenue Code § 4980I, appear to be progressing forward, as the IRS has issued two pieces of guidance this year, in the form of Notices 2015-16 and  2015-52, proposing interpretations of the rule and soliciting public comments on a number of points.  The fate of the nondiscrimination rule for insured plans, codified at Public Health Service Act § 2716, and incorporated into the Code via Section 9815, is less certain.  The rule is intended to provide, for non-grandfathered insured plans, a parallel to the nondiscrimination rules applicable to self-insured plans under Code § 105(h). In general terms, such a rule may make certain plan designs, including many executive/management “carve outs” such as special coverage tiers and accelerated plan entry, difficult or impossible to sustain.  In 2011, the IRS delayed enforcement of the rule until regulations were issued and no regulations have issued to date.  And since then, it has not included the rule on its annual list of priority tax guidance projects, including the most recent version for the fiscal year ending June 30, 2016, as updated for the first quarter of that period.  The IRS could still issue nondiscrimination guidance any time, however, and employers with non-grandfathered, insured plans should not assume that repeal will rescue them from this additional compliance burden.

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Filed under Affordable Care Act, Benefit Plan Design, California AB 1083, California Insurance Laws, California SB 125, Health Care Reform, Health Insurance Marketplace, Nondiscrimination Rules for Insured Health Plans, Small Group Coverage, Small Group Expansion

Few Changes Are Made to 2016 Benefit Plan Limits

On October 21, 2015 the IRS announced 2016 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.   There are few changes to be noted, as the increase in the cost-of-living index stayed below many thresholds necessary to trigger adjustments. Citations below are to the Internal Revenue Code.

Limits That Remain the Same for 2016 Are As Follows:

–The annual Salary Deferral Limit for 401(k), 403(b), and most 457 plans, currently $18,000, stays the same.

–The age 50 and up catch-up limit, currently $6,000, also remains the same. For 2016 as in this year, the maximum plan deferral an individual age 50 or older may make is $24,000.

–Maximum total annual contributions to a 401(k) or other “defined contribution” plans under 415(c) remains at $53,000 ($59,000 for employees aged 50 and older).

–The maximum annual benefit under a defined benefit plan remained at $210,000.

–Maximum amount of compensation on which contributions may be based under 401(a)(17) remains at $265,000.

–The compensation threshold for determining a “highly compensated employee” remains unchanged at $120,000.

–The compensation dollar limit used to determine key employees in a top-heavy plan remains unchanged at $170,000.

–The compensation threshold for SEP participation remained the same at $600.

–The SIMPLE 401(k) and IRA contribution limit remained the same at $12,500.

–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.

–The Social Security Taxable Wage Base for 2016 remains at this year’s level, $118,500.

Limits That Changed for 2016 Are As Follows:

  • The deductibility of IRA contributions made by someone who is not covered by an employer’s retirement plan but is married to someone who is, phases out if their joint income is between $184,000 and $194,000, up from $183,000 and $193,000.
  • The deductibility of contributions to a Roth IRA phases out over the following adjusted gross income ranges:
    • $184,000 to $194,000 for married couples filing jointly, also up from $183,000 and $193,000;
    • $117,000 to $132,000 for singles and heads of households, up from $116,000 to $131,000.
  • The retirement savings contribution tax credit (saver’s credit) for low and moderate-income workers is limited to those whose adjusted gross income does not exceed:
    • $61,500 for married couples filing jointly, up from $61,000;
    • $46,125 for heads of households, up from $45,750; and
    • $30,750 for married filing separately and for singles, up from $30,500.

 

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Filed under 401(k) Plans, 403(b) Plans, COLA Increases, ERISA, IRA Issues, Nondiscrimination Rules for Insured Health Plans, Profit Sharing Plan

IRS Announces 2014 Benefit Limits

On October 31, 2013 the IRS announced 2014 cost-of-living adjustments for annual contribution and other dollar limits affecting 401(k) and other retirement plans.  The announcement had been delayed until the September 2013 Consumer Price Index for Urban Consumers (CPI-U) was available, which in turn was delayed by the government shutdown over the budget and debt ceiling debate.   A modest 1.2% rise in the September CPI-U over 2013 left a number of the dollar limits unchanged for 2014, although a few limits have increased (citations are to the Internal Revenue Code).
Some limits that did not change for 2014 are as follows:
–Salary Deferral Limit for 401(k), 403(b), and 457 plans remains unchanged at $17,500. The age 50 and up catch-up limit also remains unchanged at $5,500 for a total contribution limit of $23,000.
–The compensation threshold for “highly compensated employee” remained at $115,000 for a second year in a row.
–Traditional and Roth IRA contributions and catch-up amounts remain unchanged at $5,500 and $1,000, respectively.
–SIMPLE 401(k) and IRA contribution limits remain at $12,000.
Limits that did increase are as follows:
–Maximum total contribution to a 401(k) or other “defined contribution” plans under 415(c) increased from $51,000 to $52,000 ($57,500 for employees aged 50 and older).
–Maximum amount of compensation on which contributions may be based under 401(1)(17) increased from $255,000 to $260,000.
–Maximum annual benefit under a defined benefit plan increased from $205,000 to $210,000.
–Social Security Taxable Wage Base increased from $113,700 to $117,000.
–The dollar limit defining “key employee” in a top-heavy plan increased from $165,000 to $170,000.

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Filed under 401(k) Plans, 403(b) Plans, Benefit Plan Design, COLA Increases, ERISA, IRA Issues, Nondiscrimination Rules for Insured Health Plans, Profit Sharing Plan

ACA Developments: Individual Mandate Transitional Relief; Nondiscrimination Regulations Yet to Issue

The IRS recently issued Notice 2013-42, which grants transition relief from the individual shared responsibility penalty for persons whose employers offer group health coverage on a non-calendar year basis.  Specifically, individuals who are eligible under an employer’s non-calendar year plan with a plan year beginning in 2013 and ending in 2014 will not be liable for the individual shared responsibility for the period from January 1, 2014, through the month in which the employer’s 2013-2014 plan year ends.  This frees these individuals from the duty to enroll in the plan in 2013, simply in order to have secured minimum essential coverage as of January 1, 2014.  Examples set forth in the notice suggest that an employee whose plan is on a non-calendar year cycle can wait to enroll in the 2014-2015 plan year, even when the employee’s spouse is eligible for coverage under a calendar year plan.

Secondly, June 30, 2013 came and went without the Treasury Department publishing proposed regulations on nondiscrimination rules for insured health plans.  The ACA imposes these rules but the Treasury Department has suspended enforcement of them, pending issuance of regulatory guidance.  As tax regulations generally cannot go into effect earlier than 6 months after publication, they needed to have been published by June 30 in order to take effect January 1, 2014.  It now appears possible if not likely that the nondiscrimination rules will not take effect until 2015, to allow employers who must commit to insurance policies on a 12-month cycle adequate time in 2014 both to understand the new regulations and to make plan design changes as needed. in order to comply with them.

Both of these developments transpired before the Treasury Department announced that it would not enforce until 2015 employer shared responsibility tax penalties, or tax reporting duties related to the employer and individual mandates, originally required in 2014.   It is likely that the individual mandate will go into effect on January 1, 2014 as scheduled.  What is not clear at this point is whether nondiscrimination rules will go into effect concurrently with the delayed employer mandate penalties, in 2015, or will be delayed an additional year, to 2016.    Given the Treasury’s expressed goal, in its memo, of implementing the ACA in a “careful, thoughtful manner,” it is possible that more time for compliance will be provided.

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Filed under Affordable Care Act, Benefit Plan Design, Employer Shared Responsibility, Individual Shared Responsibility, Nondiscrimination Rules for Insured Health Plans, PPACA, Uncategorized

Employer Pay or Play Penalties Postponed Until 2015

This post was updated on July 14, 2013 to reference publication of IRS Notice 2013-45, Transition Relief for 2014 Under Secs. 6055 (Sec. 6055 Information Reporting), 6056 (Sec. 6056 Information Reporting) and 4980H (Employer Shared Responsibility Provisions).

In an online memo titled “Continuing to Implement the ACA in a Careful, Thoughtful Manner,” Mark Mazur, the Treasury Department’s Assistant Secretary for Tax Policy, announced July 2, 2013 that Treasury would not be enforcing “employer shared responsibility payments” – the pay or play penalty taxes – in 2014 as originally required under the ACA (now codified at Internal Revenue Code Section 4980H).  Instead, the penalties will apply to “applicable large employers” for the first time in 2015. (See end of post for definition of this term.)  In 2014, eligible employees will be able to obtain premium tax credits and cost-sharing payments under the state and federally facilitated health exchanges in 2014, but financial aid provided to full-time employees will not trigger tax penalties for applicable large employers during that year.

The same memo also postpones, for one year, tax reporting duties under Section 6055 of the Internal Revenue Code (relating to minimum essential coverage provided by insurers and self-funded employers), and Section 6056 (relating to minimum essential coverage provided by applicable large employers).

The IRS shortly thereafter published IRS Notice 2013-45 which provides formal transition relief for reporting under Code Sections 6055 and 6056 as well as for employer shared responsibility payments under Code Section 4980H.

The reporting duties under Code Sections 6055 and 6056 have not received nearly the level of attention as the pay or play penalties, but they are onerous.  (The reporting duties have not yet been described in proposed regulations.  What we know of them at this juncture is drawn from IRS Notices 2012-32 and 2012-33, which solicit public comments on the reporting regime.)  The burdensome nature of the reporting duties was the impetus for the Administration to postpone pay or play enforcement, as described below.

  • Code Section 6055 requires insurers, self-funded employers and certain other entities to report to the IRS information that will allow the IRS to track compliance with the individual mandate (individual shared responsibility duties).  The individual mandate requires individuals to obtain “minimum essential coverage” in 2014 and subsequent, or pay a penalty.  In addition to reporting to the IRS, providers of minimum essential coverage must provide individuals receiving the coverage with an annual written report that documents their compliance with the coverage requirement.  Reporting for coverage provided in 2014 was originally first required to be filed in 2015.  Once proposed reporting regulations issue later this summer, reporting likely will not be required until 2016 (for coverage provided in 2015).  However, the Treasury memo and IRS Notice 2013-45 both state that Treasury strongly will encourages voluntary compliance with reporting duties during 2014.
  • Code Section 6056 reporting will provide information to the IRS on compliance, by applicable large employers, with the employer shared responsibility/pay or play requirements.   It includes not only reporting to the IRS on the terms and conditions of coverage the employer offers to full-time employees, but also an annual written disclosure to full-time employees summarizing the information provided to the IRS.

These expansive reporting duties – and the significant administrative and other costs they will impose on employers –  generated considerable concern in the business community.  In the process of negotiating these issues with the Administration it apparently became clear that further work was needed to streamline and simplify the reporting process, and that without Treasury’s access to the information due to be reported in 2014, implementation of the pay or play penalty regime was unworkable.

The Treasury memo states that formal guidance describing the transition relief for tax reporting, and shared responsibility payments, will be published in the next week.  (And was published in the form of IRS Notice 2013-45).  It also states that more guidance on tax reporting duties will be published in the summer, after a “dialogue with stakeholders,” including employers already providing full-time employees with adequate coverage, that hopefully will result in some simplification if not reduction in the scope of reporting duties.  As mentioned, IRS Notice 2013-45 states that, once reporting guidance issues later this summer, voluntary compliance with reporting duties by self-funded employers, insurers, and applicable large employers is strongly encouraged.  It also clarifies that no other aspects of the Affordable Care Act will be affected by the delay, including individuals’ ability to obtain premium tax credit and other financial aid on the health care exchanges.

Although the memorandum is silent on the state of health exchange readiness (or, more accurately, non-readiness) across the nation, the decision to postpone pay or play penalties may result in some part from concerns about exchange implementation delays, particularly with regard to the 34 states that will either default to a federally-facilited exchange, or will partner with the federal government to establish an exchange.  Anemic carrier involvement in the exchanges may also be a factor.

It is too early to assess the full impact of the enforcement and reporting delay, but one possibility is that it will afford applicable large employers a opportunity to observe, in 2014, the degree to which employees not currently offered coverage seek exchange coverage, and qualify for premium tax credits and cost-sharing.  (The exchanges are supposed to report to applicable large employers when full-time employees qualify for financial aid starting in 2014, but it is not clear whether this can occur while employer and carrier reporting duties are suspended).  Employers may also anecdotally be able to observe the degree to which its non-benefited workforce obtains expanded Medicaid coverage, in those states that offer it beginning in 2014.  As a consequence the delay may allow applicable large employers to better design and tailor their health insurance coverage offerings, in 2015 and subsequent, to those full-time employees for whom employer-sponsored coverage is the best fit.

We will be posting updates as further guidance related to this significant ACA development becomes available.

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“Applicable large employer” means an employer that employed, on business days during the preceding calendar year, an average of at least 50 full-time employees, including full-time equivalent employees.  Full-time employee means someone working at least 30 hours per week or 130 per month.  (Sole proprietors, partners in a partnership, 2% or more S-corporation shareholder, and “leased employees” as defined in IRC Section 414(n) are not counted.)  Full-time equivalent employees are hypothetical employees counted by totaling all non-full-time employee hours worked per month (but crediting no one employee with more than 120 hours for the month), and dividing the total by 120.)

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Filed under Affordable Care Act, Benefit Plan Design, Employer Shared Responsibility, Individual Shared Responsibility, Nondiscrimination Rules for Insured Health Plans

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

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

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

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

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Filed under Affordable Care Act, Nondiscrimination Rules for Insured Health Plans, PPACA