Category Archives: Premium Tax Credits

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

Qualified Small Employer HRAs Face Steep Compliance Path

Co-authored by
Christine P. Roberts, Mullen & Henzell L.L.P and
Amy Evans of Colibri Insurance Services, Inc.

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Passed in December 2016, the 21st Century Cures Act backtracked in part on an abiding ACA principle – namely, that employers could not reimburse employees for their individual health insurance premiums through a “standalone” health reimbursement account (HRA) or employer payment plan (EPP).  Specifically, the Cures Act carves “Qualified Small Employer Health Reimbursement Arrangements” or QSE HRAs — out from the ACA definition of group health plan subject to coverage mandates, permitting their adoption by eligible small employers, subject to a number of conditions.  The provisions are effective for plan years beginning after December 31, 2016.

The compliance path for QSE HRAs is steep enough that they may not be adopted by a significant number of eligible employers. Below we list the top five compliance hurdles that small employers will face:

1.   Requirement that no group health plan be maintained.

In order to be eligible to maintain a QSE HRA an employer must not have more than 50 full-time employees, including full-time equivalents (measured over the preceding calendar year), and in addition it must not maintain any group health plan for employees.  Small businesses are more likely than not to offer some health coverage to employees, although eligibility may be limited as in a “management carve-out” arrangement.  Business owners may be reluctant to part with group coverage, such that QSE HRAs may have most appeal to small employers that never offered coverage at all.

2.  Confusion over impact on premium tax credits.

A significant amount of confusion exists as to whether QSE HRA benefits impact an employee’s eligibility for premium tax credits on a health exchange.  The confusion is natural as the applicable rules are quite confusing.  Fundamentally, if a QSE HRA benefit constitutes “affordable” coverage to an employee (which requires a fairly complicated calculation), then the employee will be disqualified from receiving premium tax credits.  If a QSE HRA is not affordable (that calculation again), then the QSE HRA benefit will reduce, dollar for dollar, the premium tax credit amount for which the employee qualified.  We have only statutory text at this point and regulations will no doubt provide more clarity, but small employers may still struggle to understand the interplay of these rules and may be even less equipped to assist employees with related questions.

3.  Annual notice requirement.

A small employer maintaining a QSE HRA must provide a written notice to each eligible employee 90 days before the beginning of the year that:

  • Sets forth the amount of permitted benefit, not to exceed annual dollar limits that are adjusted for inflation (currently $4,950 for individual and $10,000 for family coverage);
  • Instructs the employee to disclose the amount of their QSE HRA benefit when applying for premium tax credits on a health insurance exchange; and
  • Reminds the employee that, if he or she is not covered under minimum essential coverage (MEC) for any month a federal tax penalty may apply, and in addition contributions under the QSE HRA may be included in their taxable income. (The QSE HRA is not itself MEC.)

If compliance with the annual notice requirements under SEP and SIMPLE plans is any guide, small employers may find it difficult to consistently provide the required written notice. The Cures Act imposes a $50 per employee, per incident penalty for notice failures, up to $2,500 per person.  Penalty relief is available if the failure is demonstrated to have been due to reasonable cause and not willful neglect.

4.  Annual tax reporting duties.

Small employers must report the QSE HRA benefit amount on employees’ Forms W-2 as non-taxable income.   ACA tax reporting for providers of “minimum essential coverage” (MEC), namely, providing Form 1095-B to each eligible employee and transmitting  copies of all employee statements to the IRS under transmittal Form 1094-B  –would not appear to be required for sponsors of QSE HRAs, as MEC reporting will be done by the individual insurance carriers.  Clarity on this point would be welcome.

5.  Lack of financial incentive for benefit advisers.

Small employers will (reasonably) look to health insurance brokers for guidance and clarification on these complex issues. They will also need assistance with QSEHRA set-up, including shopping TPAs to compare services and fees, educating employees on enrollment and use, handling service issues during the year, and satisfying the annual notice requirement and annual tax reporting duties. Unfortunately, the benefit broker and adviser community has little financial incentive to recommend QSEHRAs, because commissions are based on a relatively low annual administrative fee and do not provide reasonable compensation for this work.  This in turn could result in low uptake by small employers.

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Filed under Affordable Care Act, Benefit Plan Design, Health Reimbursement Accounts, Health Reimbursement Arrangements, Plan Reporting and Disclosure Duties, PPACA, Premium Tax Credits, Qualified Small Employer HRAs

Post-Election ACA Prognosis

roadsignChange is the order of the day and that extends to the Affordable Care Act, arguably the signature legislative mark made by the Obama Administration.  In short, the ACA as we know it has a limited lifespan.  President-Elect Trump has pledged to repeal it and replace it with something better.  Even if we knew what that something better was, which we don’t, from a practical standpoint, a wholesale repeal of the law is unlikely as it would be subject to filibuster.  As an alternative, the law could be dismantled through the revenue reconciliation process, which is filibuster proof.  That process, however, is limited to provisions in the law that are revenue related such as the individual and employer mandates, premium tax credits, the insurer tax, and other measures meant to pay for the costs of the law, which include the insurance market reforms.  Those reforms, including most notably the prohibition on pre-existing condition exclusions, are not revenue-related but they are expensive for carriers to maintain.  So the Trump Administration and Congress will need to work together to find alternatives to the coverage mandates so that the popular market reforms remain financially viable for carriers.  In short, the legislative process of fixing and/or replacing the ACA will resemble a game of Jenga and like Jenga it will require time and patience.  In the short term, those subject to the law should be keeping their heads down and following the provisions of the law currently in place, including planning for ACA reporting for applicable large employers, due early in 2017.

Employers and the brokers and other benefit advisers who serve them will need more help in this environment than they would if the ACA just continued to unfold in its current form.  This blog remains committed to helping its audience weather the coming changes.

In the meantime, you can find more detailed information on the legislative measures described above, here and here.

 

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Filed under Applicable Large Employer Reporting, Employer Shared Responsibility, Individual Shared Responsibility, Post-Election ACA, PPACA, Pre-Existing Condition Exclusion, Premium Tax Credits

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

SCOTUS Rulings Highlight ACA Paradox

The two landmark rulings by the Supreme Court last week – one upholding the ability of the federal health exchange to award premium tax credits, and one upholding the right of same-sex couples to be married in all 50 states – would not appear to be interrelated.  However the back-to-back rulings highlight an unusual paradox in the ACA regarding access to premium tax credits.  Specifically, by marrying and forming “households” for income tax purposes, individuals may lose eligibility for premium tax credits that they qualified for based only on their individual income.  This has always been the case for married couples – both opposite-sex and same-sex — but it may come as news to same-sex couples now seeking to marry in states that prohibited such unions prior to the Supreme Court ruling.

To understand this ACA paradox – that married status may reduce or eliminate premium tax credit eligibility – some background is helpful.

Since January 1, 2014, state health exchanges and the federal exchange have made advance payments of premium tax credits to carriers on behalf of otherwise eligible individuals with household income between 100% and 400% of the federal poverty level (FPL).  For a single individual this translates to annual household income in 2015 between $11,770 – $47,080.  (For individuals in states that expanded Medicaid under the ACA, premium tax credit eligibility starts at 133% (effectively 138%) of FPL, which translates to $16,243.)

For these purposes, “household income” is the modified adjusted gross income of the taxpayer and his or her spouse, and spouses must file a joint return in order to qualify for premium tax credits except in cases of domestic abuse or spousal abandonment.  A taxpayer’s household income also includes amounts earned by claimed dependents who were required to file a personal income tax return (i.e., had earned income in 2015 exceeding $6,300 or passive income exceeding $1,000).   Generally speaking, same-sex adult partners will not qualify as “qualifying relative” tax dependents, in the absence of total and permanent disability.

Therefore, adult couples sharing a home in the absence of marriage or a dependent relationship will be their own individual households for tax purposes and for purposes of qualifying for advance payment of premium tax credits.  Conversely, adult couples who marry must file a joint tax return save for rare circumstances, and their individual incomes will be combined for purposes of premium tax credit eligibility.  By way of example, two cohabiting adults each earning 300% of FPL in 2015 ($35,310) will separately qualify for advance payment of premium tax credits in 2015, presuming their actual income matches what they estimated during enrollment.  However once the couple marries, their combined household income of $70,620 will exceed 400% of FPL for a household of two ($63,720), and they will lose eligibility for premium tax credits.

The rules for figuring tax credit eligibility for a year in which a couple marries or separates are quite complex.  The instructions to IRS Form 8962, Premium Tax Credit return, provide some guidance but the advice of a CPA or other tax professional may be required.

Before the Supreme Court’s ruling last week, the Department of Health and Human Services instructed the exchanges to follow IRS guidance recognizing persons in lawful same-sex marriages as “spouses” for purposes of federal tax law, in accordance with the Supreme Court’s 2013 ruling in United States v. Windsor.  That ruling recognized same-sex marriages under federal law provided that they were lawfully conducted in a state or other country, but fell short of declaring same-sex marriage as a Constitutional right that must be made available in all U.S. states.   It is likely that HHS will update guidance to the exchanges to reflect the recent, more expansive ruling on this issue.

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Filed under 401(k) Plans, Affordable Care Act, Employer Shared Responsibility, Federally Facilitated Exchange, Fringe Benefits, Health Care Reform, Health Insurance Marketplace, Premium Tax Credits, Same-Sex Marriage