Counting Employees Not as Easy as 1…2…3

Most children can count to 10 in preschool. The average child can count to 200 at age six. But, employee benefit professionals know that counting – when counting employees — is anything but easy.

The reason that counting employees isn’t easy is that it depends why they’re being counted. Different laws at the federal and state level count employees in different ways. This is particularly true for laws that impact employee benefits.

The Affordable Care Act (ACA) requires that employers count employees to determine whether an employer is an “applicable large employer” or ALE.  An ALE is subject to the employer shared responsibility requirements of the law. First an employer needs to consider if the firm is part of a controlled group. Then, an employer must determine the number of full-time and full-time equivalent employees. Employers must make this determination of ALE status each year. The IRS guidance on determining ALE status can be found here.

COBRA, the federal employee continuation law requires a different method of counting employees. COBRA requires that employers count full-time and part-time employees. A part-time employee is counted as a fraction equal to the number of hours worked divided by the hours an employee must work to be considered full-time. A more detailed explanation of counting employees for COBRA purposes can be found in An Employer’s Guide to Group Health Continuation Coverage Under COBRA.

State continuation laws may count employees differently than COBRA.

Medicare Secondary Payer (MSP) provisions require yet another counting method. The MSP provision applies to group health plans of employers with 20 or more employees. Generally speaking, MSP looks to employees on the payroll. But, the technical aspects of counting employees are more involved as Section 10.3 of the Medicare Secondary Payer (MSP) Manual Chapter 2 reveals.

Form 5500 filing requirements for welfare plans add yet another counting complication. A welfare benefit plan that covered fewer than 100 participants as of the beginning of the plan year may be exempt from the filing requirements. The instructions for Form 5500 provide the details.

Other laws or regulations that may require different counting methods include:

  • Family and Medical Leave Act (FMLA)
  • Pregnancy Discrimination Act (PDA)
  • Age Discrimination Employment Act (ADEA)
  • PCORI fee
  • Form W-2 cost of health benefits requirement
  • Numerous other federal and state laws.

IRS Releases New Employer Reporting Forms

First the “bad news”…

Employers hoping that the IRS will relax ACA employer requirements may find the recent release of the draft 2017 employer reporting forms disheartening.

Many had hoped that President Trump’s Executive Order directing the Department of the Treasury to review tax regulations to reduce the tax regulatory burdens would include ACA’s employer reporting requirements and attendant penalties. However, the Treasury Department’s Notice 2017-38 regarding the review of regulations to identify regulatory burdens notably did not include any reference to ACA compliance.

Now the “good news” (sort of)…

The draft 2017 reporting forms have few changes. Sections related to expired transition relief have been deleted. Consistency in the forms from last year is good news for employers who have figured out how to complete the forms from the prior years. Changes may still be in the offing once instructions for the forms are published and the forms are finalized.

The draft forms are:

Form 1094-B

Form 1095-B

Form 1094-C

Form 1095-C

And, the “no news”…

There still haven’t been any signs that the IRS is sending notices to employers that they owe penalties under the “pay or play” provisions of the ACA. Some pundits believe that employers may see any demands for payments before the close of 2017.

In the meantime…

Employers should continue to comply with the requirements of the ACA.

Caution — Affordability Percentage Declining for 2018

Employers who are beginning assessing their plans for 2018 may need to revisit their contribution strategy if they are subject to the employer responsibility requirements of the ACA. Employers who are “applicable large employers” (ALEs) must ensure that coverage is “affordable” in order to avoid the ACA’s employer penalty.

Employer sponsored coverage was initially defined as an employee contribution for self-only coverage of no more than 9.5% of  the employee’s household income. The safe harbor established by the IRS affirmed that employers don’t know an employee’s household income; substituting the use of Form W-2 wages.

The affordability percentage is indexed and, as such, has gradually increased reaching 9.69% in 2017. However, 2018’s limit will decrease to 9.56%. As a result, even if an employer’s health plan premium doesn’t increase, the employer may have to up the employer’s contribution to keep coverage affordable. See the simplified example below:

Year       Affordability %   Annual W-2     Affordability      Max. Contribution

2017      9.69%                   $45,000               4360.50               $363.38

2018      9.56%                   $45,000               4302.00               $358.50

Employers who use the federal poverty level safe harbor will benefit from an increase in the federal poverty level to offset the affordability percentage decrease. The maximum monthly contribution using the FPL safe harbor will increase as shown below.

Federal Poverty Level Safe Harbor

Year                  Prior Year FPL   Affordability %   Maximum Monthly Contribution

2017                     $11,880               9.69%                   $95.93

2018                     $12,060               9.56%                   $96.08

With the daily news of Congressional deliberations to “repeal and replace” the ACA, some wonder if compliance with the ACA is still required. Unless and until legislation is passed by the House and Senate and signed by the President, compliance with the provisions of the ACA is recommended.

The IRS Revenue Procedure announcing the 2018 affordability measure is here.

ACA Employer Reporting Compliance Still Required

Mark Twain has been quoted as saying, “The rumors of my death have been greatly exaggerated.” One could use this same phrase to describe the penalties that employers face for noncompliance with the ACA’s employer reporting requirements.

President Trump’s first executive order signed on January 20th may be the “rumor” that ACA compliance is stayed. The order includes the following statement:

“Sec. 2.  To the maximum extent permitted by law, the Secretary of Health and Human Services (Secretary) and the heads of all other executive departments and agencies (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.”

Despite this order, the law still stands, as well as the pages of regulations published to implement the law. Whether the order can be used by any federal agency to waive penalties is unclear and could result in legal action.

The recent release of a TIGTA report may indicate that the IRS is still moving forward in its efforts to assess penalties on noncompliant employers. TIGTA is the Treasury Inspector General for Tax Administration. TIGTA issued a final report on April 7, 2017 titled: Affordable Care Act: Assessment of Efforts to Implement the Employer Shared Responsibility Provision. The report can be read here.

The report found that the IRS has had difficulty processing the ACA-related forms that employers have filed. Despite these delays some of the needed systems are expected to come online in May 2017.

Much of the 43 page report focuses on technical review and analysis of IRS processes. But, it is clear that progress is being made to implement the penalty assessment capabilities of the IRS that will identify noncompliant Applicable Large Employers (ALEs).

Employers are advised to continue to comply with the requirements of the ACA unless and until President Trump signs a law that ends them. Anything else amounts to “rumors.”

 

Keep on Complying!

One would have to be in a deep sleep to avoid the barrage of “news” regarding Congressional action to repeal the Affordable Care Act (ACA). But, all of the drama does not mean that anything has changed… yet.

Health insurance brokers have been fielding calls from clients asking if they still have to file forms 1094-C and 1095-C  which are due to the IRS by March 31, 2017.

The answer is, yes!

Other brokers and accountants are being asked if individuals should complete their tax returns due in April including the information regarding health coverage.

Once again, the answer is, yes!

Complying with the provisions of the Affordable Care Act will be required until legislation has passed both houses of Congress and been signed into law. Even after President Trump takes action, it’s likely that some provisions of the new law will be phased in. As a result, compliance with provisions of the Affordable Care Act (ACA) may be part of the compliance landscape for some time to come.

IRS Missive Seeks Out Non-Filing ALEs

It seems that some employers are receiving requests from the IRS asking where their reports are! These letters appear to be one of the first efforts by the IRS to enforce the employer responsibility requirements of the ACA.

Employers who have 50 or more full-time and full-time equivalent employees are required to file Forms 1094-C and 1095-C with the IRS. Last year was the first year that employers were required to file these forms addressing coverage provided in 2015.

The letter requires a response from the employer within 30 days from the date on the letter.

Employers are directed to check a box indicating their status for 2015. Choices include:

  • An assertion that filing had already occurred
  • Acknowledgement that the employer is an ALE and that the forms are included along with the response to the IRS letter
  • Acknowledgement that the employer is an ALE and the date that the employer will file the required forms
  • An assertion that the employer was not an ALE for calendar year 2015.

The letter closes with a reminder that noncompliance with reporting requirements could result in an assessment of penalties.

Employers that have not yet filed these information returns for calendar year 2015 should do so as soon as possible, if they receive a letter or not. It would also be wise to memorialize the reason for the delay and steps taken to come into compliance so that an employer can provide these facts in any effort to claim they made a “good faith compliance” effort.

Employers should take this enforcement effort as a gentle nudge to comply with the upcoming filing deadlines for the 2016 returns. Reports are due to be filed with the IRS on the following dates:

  • February 28, 2017 for paper forms
  • March 31, 2017 for electronical filing.

 

Preparing for 2017 – Checking Status and Filing Forms

Santa may be making a list and checking it twice, but employers have to check their ALE status and prepare to file forms!

Employers of all sizes need to take stock by calculating the number of full-time and full-time equivalent employees for the year 2016. If the average meets or exceeds 50, the employer will be an applicable large employer, or ALE, for 2017.

Determination of ALE status is done on a calendar year basis. It is not done based on an employer’s health plan renewal date. Importantly, employers that don’t currently offer a health plan must make this assessment!

The end of the year also has employers assembling the information necessary to complete Forms W-2 for employees. And, effective with the New Year, employers have this one filing deadline for both employee and agency copies of this form. These are due to be distributed by January 31, 2017. More details on this filing change can be found here.

One crunch employers faced has been eased by a recent IRS delay in the filing deadline for ACA’s 1095-C forms. Notice 2016-70 provides a 30 day extension to the due date for furnishing the 1095-B and 1095-C forms to individuals. These must be provided by March 2, 2017 rather than January 31, 2017.

This delay is particularly helpful for employers who use the W-2 safe harbor to determine whether health coverage was affordable for employees. Without a delay, employers would have to gather the wage data for the Form W-2 and apply that information to the 1095-C reporting regarding the safe harbor so that the two forms – W-2 and 1095-C could be issued to meet the January 31 deadline.

 

IRS Notice Delays ACA Employer Reporting to Individuals

In a surprise pre-Thanksgiving Day notice, the IRS has given employers some breathing space to complete and provide ACA’s 1095-C forms to employees. Notice 2016-70 provides the following:

It extends the “good faith compliance” transition relief from penalties when there is a good-faith effort to comply with information reporting requirements under sections 6055 and 6056

  • It provides an automatic extension of 30 days for the due date to provide forms 1095-B and 1095-C, but only for providing forms to individuals
  • Due dates for reporting to the IRS are not extended
  • It reminds taxpayers that they do not need to have their forms 1095-B and 1095-C to complete their tax return. They can obtain needed information from other sources.

Employers who had already filed for a 30 day extension to provide notices to employees will not receive a response from the IRS due to this automatic extension.

The notice also states that the good-faith compliance recognition applies only to incorrect or incomplete information. It does not apply for a failure to file a statement or return or a failure to furnish statements on a timely basis.

Marketplace Appeals — The Results

At the risk of sounding like Nick Cannon on the television show  America’s Got Talent when they’re announcing performers advancing to the next round of competition, employers are beginning to see the results of appeals that they’ve filed when employees receive subsidies in the marketplace. Employers are finding some of these appeal decisions perplexing, especially when an appeal is denied. And, some employers fear that penalties will follow as a result of the lost appeal.

First, and of most importance, the marketplace appeal does not determine if an employer has to pay an employer shared responsibility penalty to the IRS. This point is made clear on both the appeals form and on the webpage that addresses employer appeals.

Second, an appeal that is denied may be due to the particular facts and circumstances of the employee and his/her family. In particular, even though an employer may have offered coverage that meets the minimum value and affordability safe harbors, the measure of affordability at the marketplace is based on household income. Household income may be quite different from an employee’s W-2 income. The marketplace’s decision regarding an employer’s appeal will not reveal personal and income information of the employee subject to the appeal.

The appeal decision letter explains that the marketplace will not consider whether an employee is a full-time employee or whether the employer employs 50 or more full-time employees and is subject to the employer shared responsibility payments. The reasoning cited in the letter is that “neither of these issues affect the employee’s eligibility for advance payments of the premium tax credit and cost-sharing reductions (if applicable).

Another employer found that the information which the employer sent to support their appeal did not go far enough. The employer submitted proof that the employer had offered coverage to the employee that met minimum value and was affordable. The hearing officer wanted proof of this offer in the form of the employee’s response to the offer. Employers that have been reluctant to require that employees sign waivers when they decline coverage may decide to require signed waivers or take other steps that can buttress the fact that an offer was made and rejected.

A review of several decision letters finds that decisions often cite “insufficient information” as the basis for the decision to reject the appeal. Employers may want to develop a checklist of materials that they will provide to ensure that appeals are not lost for want of more information.

Still other employers have received a letter while an appeal is under review that asks for more information to support the appeal. The types of information requested and documents that may contain the requisite information are shown below in a table copied from a letter asking for more information.

appeal-documents

While marketplace appeal decisions are not triggers for IRS penalties, a successful marketplace appeal may be helpful if the IRS does attempt to penalize an employer. The successful appeal would be another piece of information for an employer to include in the IRS appeal’s process. And, whether an appeal is successful at the marketplace level, or not, an employer will have already collected information that would be required to appeal an IRS penalty determination should one be received.

 

 

 

 

Cash-in-Lieu Options Face Compliance Hurdles in 2017

IRS rules further regulating cash-in-lieu (opt-out) programs are effective the first day of the plan year beginning on or after January 1, 2017. The rules provide for two different types of cash-in-lieu or opt-out arrangements: conditional and unconditional.

The easiest opt-out plan administratively is an “unconditional opt-out” arrangement. An unconditional opt-out doesn’t have strings such as requiring proof of other coverage for an employee waiving coverage. As such, the IRS guidance requires that the opt-out payment be calculated as a part of the employer’s affordability calculation for employer shared responsibility purposes.

The IRS described this unconditional opt-out arrangement in Notice 2015-87 where it said:

If an employer offers to an employee an amount that cannot be used to pay for coverage under the employer’s health plan and is available only if the employee declines coverage (which includes waiving coverage in which the employee would otherwise be enrolled) under the employer’s health plan (an opt-out payment), this choice between cash and coverage presented by the offer of an opt-out payment is analogous to the cash-or-coverage choice presented by the option to pay for coverage via salary reduction. In both cases, the employee may purchase the health plan coverage only at the price of forgoing a specified amount of cash compensation that the employee would otherwise receive – salary, in the case of a salary reduction, or other compensation, in the case of the opt-out payment.

In short, the amount available as an opt-out payment is added to the employee’s premium contribution amount when an employer is calculating affordability for the ACA’s employer shared responsibility requirements. Notice 2015-87 provides this example:

If an employer offers employees group health coverage through a Section  125 cafeteria plan, requiring employees who elect self-only coverage to contribute $200 per month toward the cost of that coverage, and offers an additional $100 per month in taxable wages to each employee who declines the coverage…the employee contribution for the group health plan effectively would be $300 ($200 + $100) per month, because an employee electing coverage under the health plan must forgo $100 per month in compensation in addition to the $200 per month in salary reduction.

To read Notice 2015-87 click here.

Importantly, this calculation of affordability applies to all employees whether they elect the opt-out arrangement or not.

 A conditional opt-out is excluded from the affordability calculation but, it is more administratively burdensome. The regulations deem a conditional opt-out arrangement to be an “eligible opt-out arrangement.”

The proposed regulations define an “eligible opt-out arrangement” as an arrangement under which the employee’s right to receive the opt-out payment is conditioned on:

(1) The employee declining to enroll in the employer-sponsored coverage and

(2) The employee providing reasonable evidence that the employee and all other individuals for whom the employee reasonably expects to claim a personal exemption deduction for the taxable year or years that begin or end in or with the employer’s plan year to which the opt-out arrangement applies (employee’s expected tax family) have or will have minimum essential coverage (other than coverage in the individual market, whether or not obtained through the Marketplace) during the period of coverage to which the opt-out arrangement applies.

Employers must obtain an employee’s attestation that other coverage is in place before the coverage period begins. If an employer “knows or has reason to know” that an employee or family member isn’t covered, then the employee cannot make an opt-out payment.

An employer is not required to ascertain that any alternative coverage is ongoing during the plan year. But, an employee must provide an attestation or evidence of coverage every plan year.

There are a number of other nuances to the opt-out rules including transition relief for collectively bargained plans. The text of the rules can be found here.

Employers may also wish to keep an eye on the courts. A recent court case found that opt-out payments must be included for overtime pay purposes under the FLSA (Fair Labor Standards Act). The court case is binding only in the state of: Alaska, Arizona, California, Guam, Hawaii, Idaho, Montana, Nevada, N. Mariana Islands, Oregon and Washington. Other courts in other jurisdictions may make similar judgments.

Employers who have adopted cash-in-lieu programs or who are considering such programs would be wise to seek legal guidance in advance of implementing or renewing these options. Employers who have been offering these types of arrangements on an informal basis should also seek legal advice.