In an ongoing effort to address question about how to treat the taxation of employee benefits for same-sex couple post-Windsor, the IRS has updated its FAQs for married same-sex couples with a couple of new questions and answers that further clarify how employers administer their plans. Both relate to the right to seek a refund of overpaid Social Security and Medicare taxes resulting from the change in tax treatment for health coverage provided to same-sex spouses under the Supreme Court’s Windsor decision.
This new FAQ 21 confirms that an employee should seek reimbursement of overpaid Social Security and Medicare taxes from his or her employer if included the value of employer provided health coverage for an employee’s same-sex spouse in the employee’s gross income. If the employer does not provide reimbursement, the employee may file a claim for refund by filing Form 843, Claim for Refund and Request for Abatement, and writing “Windsor Claim” across the top margin of the form.
FAQ 22 is a little more cumbersome. IRS Notice 2013-61 provided two special alternatives to employers that overpaid Social Security and Medicare taxes during the first three quarters of 2013 prior to Windsor. Under the option one, employers could repay the excess withholding to employees by December 31, 2013 and use the fourth quarter Form 941 to correct overpayments for all of 2013. Under option two, employers that do not repay the excess withholding to employees by December 31 can make adjustments by filing a single Form 941-X for the fourth quarter to correct overpayments for the entire year.
Now FAQ 22 provides the circumstances under which an employer seeking an adjustment for overpaid Social Security and Medicare taxes in 2013 must obtain written confirmation that an affected employee is not filing an individual refund claim. An employer that uses option one does not need to obtain any sort of written statement from the employee. But an employer that uses option two is required to obtain a written statement from each affected employee confirming that the employee did not and will not file a claim for refund of the overpaid taxes.
Since correcting for withholding post-Windsor can be confusing, plan sponsors and employers are encourage to consult with their tax professionals to make sure things are corrected retroactively and prospectively. As the IRS continues to issue guidance, employers may need to make further adjustments.
When considering what constitutes “affordable” coverage under PPACA, some employers have come to me and said “well, I will just charge everybody 9.5% of their pay.” And on its face, that seems to be what the rule permits. But as with other components of PPACA, Congress may have overlooked that our old friend ERISA already has a little something to say about what employees can be charged as a contribution.
Generally, ERISA does not require plans to provide the same benefit coverage to all employees. But the plan’s offerings have to be made in a manner that is non-discriminatory. HIPAA makes it illegal to charge different contributions to employees based on health factors. Specifically, an employer cannot charge some employees more than any other similarly situated individuals based on medical conditions, claims experience, receipt of health care services, genetic information or disability. But HIPAA does allow an employer to make other distinctions in benefits that are offered and in the cost to employees provided the distinctions are not “discriminatory.”
In order to avoid discrimination, plans have to limit their distinctions between employees to “bona fide employment-based classifications.” The most common examples are things like full-time or part-time status, geographic locations, and salaried versus hourly employees. In some instances, it may even be permissible to charge different rates based on time of service, but employers have to be wary of age discrimination rules. But what is clear is that the plan clearly has to define the rules and explain how the rules apply to each classification of employee.
What employers should be considering when as they prepare their compliance program for 2015 is how they define these job classifications. For example, two employees do the exact same job and one makes $10 an hour and the other makes $10.50 per hour simply because they have been employed a year longer. If the employer charges both of these employees 9.5% of their wages for health insurance contributions, there would be “discrimination” between them because they are similarly situated employees being charged two different rates for the same benefit coverage. Absent plan rules that explain the distinction, this difference in contributions would be discriminatory and arguably impermissible under ERISA.
So before assuming that everyone can be charged 9.5% of box 1 of their W-2s, consider what ERISA already has in place. It is not that it can’t be done per se, only that it has to be done properly, with the right plan language and with the correct limits in place. PPACA compliance is also ERISA compliance and employers should seek assistance for compliance with both.
In light of all the PPACA disclosure requirements, and with the year-distributions required for retirement plans, employers tend to want to distribute benefit plan notices electronically. Maybe companies want to post them on a company website or e-mail them to employees, but there is no question that mailing paper notices to employees is the least preferred method for employers. Unfortunately, it is the preferred method for plan communications from a regulatory perspective. ERISA does permit the electronic disclosure of certain plan communications under certain circumstances. But employers should be very careful to follow these rules.
Plans can distribute all manner of plan communications electronically, including SPDs, open enrollment materials, summaries of material modification, COBRA and HIPAA notices and even the summary of benefits coverage notice required under PPACA. But the rules for electronic distribution are difference depending on whether employees have work-related computer access. The primary difference is the requirement of obtaining consent.
For employees with work-related access to a computer and the company intranet, a notice can be delivered electronically if (1) the plan administrator uses appropriate means to ensure actual receipt of the notice, (2) the notices meet all of the requirements required for the notice (such as timing of distribution and content) and, (3) the recipient is provided with an explanation of the significance of the notice and is given the opportunity to obtain a hard copy of the notice (and any fee if applicable).
For employees without work-related computer access, an employer must get affirmative consent from the employee to receive notices electronically. The consent is only valid if, before obtaining the consent, the employer specifically identifies those documents that will be provided electronically and provides an ability to withdraw the consent at any time. Then all notices must satisfy the 3 requirements for employees who have work access. So unless your employee has regular work-related access to a computer, e-mailing a disclosure without prior consent is not an effective distribution.
By the way, a recent survey conducted about benefits communications revealed that 29% of employees preferred direct communications with HR, 19% said they preferred direct mail and only 17% said that preferred e-mail or website notices. This is not to suggest that electronic disclosures are not appropriate communications, but it does suggest that just sending notices via e-mail without some explanation of the purpose causes more confusion (which can lead to bigger headaches). So employers should be aware that if they are going to distribute benefit notices electronically, follow the disclosure rules carefully so that confusion is not compounded and compliance is assured. And make sure to ask your attorneys at Fox Rothschild for assistance if you have questions about required disclosures and their distributions.
As I make presentations to employers about PPACA compliance, I am frequently met with proposals from clients that they have been told that the solution to their problem is to reimburse employees for exchange premiums with pre-tax dollars. The thought is that by doing so they would avoid penalties and taxes as well. Unfortunately, it does not work that way.
Under Revenue Ruling 61-146, if an employer were to reimburse an employee for health insurance premiums for a non-employer sponsored plan (such as individual coverage), that payment would be exclude from gross income under Code Section 106. This exclusion would apply if the employee was reimburse based on a substantiated payment (like a copy of a bill) or if the payment as made directly to the insurance carrier. So that would seem like it is ok to pay for their exchange premiums for individual coverage.
However, along came IRS Notice 2013-54, which substantially limits the ways in which an employer can assist with individual premiums. In technical terms, this guidance provides that any employer payment plan that reimburses employees for an employee’s substantiated individual market insurance policy premiums must satisfy the market reforms for group health plans. But since the employer payment plan will fail to comply with the annual dollar limit prohibition because it will be considered to impose an annual dollar limit and cannot be integrated with any individual health insurance policy purchased under the arrangement, such an arrangement does not satisfy PPACA’s rules. The practical effect, then, is that a reimbursement plan does not work for exchange coverage. You cannot reimburse employees for exchange premiums with pre-tax dollars.
Now, small employers who participate in the SHOP Exchange can reimburse employees with pre-tax dollars, and pre-tax dollars can still be used for other benefits, like vision or dental. And even SHOP Exchange reimbursement programs are still subject to the Section 125 cafeteria plan rules. In any event, the idea that an employer outside of the SHOP can pay for coverage on the exchange with pre-tax (non-compensation) dollars is pretty much destroyed.
Plus, large employers reimbursing employees for premiums for other coverage does not constitute offering a health plan for purposes of avoiding the excise tax penalties. So large employers who chose reimburse employees for their exchange (individual policy) premiums have to do it on a post-tax basis (meaning the money is compensation) and also run the risk of failing to offer coverage to “substantially all” of their full-time employees if this is the only option the use. So employers should be careful when considering how they develop their PPACA compliance program over the next year. Lots of things have changed and will continue to change. Consult before you buy so that you don’t make a mistake.
Recently I was faced with a problem where a participant made an appeal of a retirement benefit determination. Factually, he had left employment with the company back in 1995, but his old employer had gone through 3 acquisitions and the new company had no idea what he was asking about. As we worked through the issue, it struck me that sometimes plan sponsors overlook a couple of the key recordkeeping requirements of ERISA so I thought I might address a couple.
Under ERISA Section 107, general plan records must be maintained for at least six years from the date the associated Form 5500 is filed. Depending on extensions for filing and additional time built in for safe compliance, most practitioners suggest retaining plan financial information for 7 or 8 years at least. Depending on the applicable statute of limitations for the state in which the plan resides, you may want to keep them for a longer period just to make sure you have them available if litigation is commenced. It is also important to remember that this obligation applies even when a Form 5500 is not required because of an exemption such as for certain small plans with under 100 participants.
Things are a little different in Section 209, which provides that an employer must “maintain benefit records with respect to each of [its] employees sufficient to determine the benefits due or which may become due to such employees.” The DOL has opined that this open-ended retention obligation suggests that records necessary to adjudicates claims must be maintained for “as long as they may be relevant to a determination of benefit entitlements.” For welfare plans, that might be less than the 7 or 8 years for plan documents, but you can imagine that for retirement plans, the obligation to retain individual records can well exceed the 6 years of Section 107.
With the advent of advanced data storage techniques, it is now certainly easier to retain records in an electronic format but some old claims data and plan records that exist only in paper files is probably hiding offsite in storage somewhere. Plan sponsors should give serious consideration to preserving that data in an electronic form before destroying any hard file materials. Preserving payroll records from 1994 may not seem like a good use of company resources, but if it is necessary to resolve a pension plan appeal, it is exactly the kind of thing Section 209 envisions being available for review.
Also, in a merge or acquisition where an employee benefit plan is involved, the due diligence done by the acquiring company should include a checklist of relevant plan information necessary for continued administration of the plan. This would include things like copies of past summary plan descriptions, plan documents, benefit statements and annual filings. Depending on how benefits are calculated, this might also include old payroll data. DOL and EBSA audits typically ask for plan data going back at least 3 years so don’t rely on representations that the plans are properly maintained. Make sure plan documents and records actually exist and can be retrieved if necessary. Of course there are penalties for failing to maintain sufficient records, so before disposing of those old boxes of plan information, check to make sure you will in fact never actually need them in the future.
As I am speaking to employers about PPACA compliance and developing their strategies for offering insurance to employees, I am struck by the disconnect between PPACA compliance and ERISA. Many employers fail to see that by offering health insurance to employees is actually the sponsoring of a welfare benefit plan governed by ERISA. Then, they fail to recognize that the coverage they are putting in place to satisfy the rules of PPACA also have to satisfy the rules ERISA already has in place.
Section 3(1) of ERISA defines an employee welfare benefit plan as something providing medical, surgical or hospital care benefits. Then it says “through the purchase of insurance or otherwise.” So it’s not the funding of the claims that makes the plan an ERISA plan, it is the employer sponsorship. And since PPACA requires employers to bear a share of the cost, you now have the quintessential definition of an ERISA plan: employer providing medical benefits to employee through the purchase of insurance.
ERISA has its own rules about eligibility, discrimination and continuation. It also has its own notice and documentation requirements. Things like summary plan descriptions, summaries of material modification and plan documents. It has rules about communications and notice requirements. When the Employee Benefits Security Administration conducts an audit of benefit plans, it asks to see all of this documentation. Not surprisingly, the EBSA audits being conducted now include requests that plan sponsors (that’s means employers) produce copies of all of the PPACA notices that were required over the last couple of years.
So PPACA compliance is not just about offering health insurance coverage to employees. It’s about accepting status as a sponsor of an ERISA benefit plan and undertaking to satisfy the role of a “fiduciary.” Employers who are in the process of developing a PPACA compliance strategy should also have benefits counsel looking over their shoulder. It would be painful to avoid the PPACA penalties only to face another set of penalties for failing to adhere to ERISA rules. Don’t trade one for the other; avoid them both by remembering ERISA still applies.
It’s that time of year again. The IRS has released its annual deferral and threshold limits for 2014 for various benefit plans and plan administrators (as well as HR professionals) should be aware of these changes. Below is a list of the most commonly used limits in benefits plans for 2014:
- Maximum employee elective deferral: $17,500 (same as 2013)
- Total maximum deferral limit (employer and employee): $52,000 (up $1,000 from 2013)
- Age-50 catch up contribution: $5,500 (same as 2013)
- Compensation limit for calculating contributions: $260,000 (up $5,000 from 2013)
- Compensation threshold for key employees: $170,000 (up $5,000 from 2013)
- HCE Threshold: $115,000 (same as 2013)
- HSA contribution limits: $3,300 (single), $6,550 (family)
- HDHP Out-of-Pocket Maximums: $6,350 (single), $12,700 (family)
Also, FSA contributions are limited to $2,500. In case you missed it, the IRS issued updated guidance permitting carryover of up to $500 of unused FSA balances at the end of a plan year. For an excellent summary of the guidance and for more information, please read this piece by Michelle McCarthy from our LA office.
Unless you have been living under a rock, you could not avoid stories about the calamitous rollout of ACA and the enrollment websites. Now, the cancellation of policies and the drastic increase in premiums has at least somewhat supplanted news stories about the difficulty in exchange enrollment. The frustration of consumers has risen to somewhat of a fever pitch and it was only a matter of time before lawsuits were filed.
Several media outlets are reporting on lawsuits filed by insured against insurance companies seeking to enjoin the cancellation of their policies, charging fraud and misrepresentation. Others have been filed suggesting that insurance companies should be required to continue to offer their lower-cost non-compliant coverages. Whether or not these suits have any merit, I think they should serve as a strong warning to employers looking at their 2015 compliance plan. Football may be America’s pastime, but filing lawsuits is a close second.
When we look at what is happening now, employers should anticipate in that the same thing will happen to them in October and November of 2014 when they roll out their compliance programs. Whatever changes, limitations or revisions are made to health benefits next year, if employers do it incorrectly, employees will sue. I expect lawsuit over improper computation of hours of eligibility, improper classifications of employees, failing to offer affordable coverage and all manners of claims on the basis of discrimination. I am not suggesting they will have merit, but I can almost guarantee they will be filed.
That is why the next 12 months are critical for employers. Insurance companies spent the last three years preparing for this day and still got sued. Employers should spend the next 12 month working with their lawyers, accountants and befits professionals developing a fully compliant program. While challenges can always be brought, the objective would be to develop a compliance strategy that minimizes the risk of a successful claim. People will always be mad about something, but employers can at least prepare for the challenge by improving communication, updating their practices and making sure all of their ducks are in a row.
Employers who wait until the last minute are going to be in trouble. They will be scrutinized by the federal government, subject to possible penalties and likely sued by their own employees. Employers who prepare now, with thoughtful insight from their professionals might be attacked in the same way, but at least they will have a better chance of fending off those attacks. Anybody with $350 can sue in federal court. Employers would be wise to plan their defense now by building a solid compliance platform.
With all of the discussion about the individual mandate, the failings of the PPACA enrollment sites and the general inability of the government to make the enrollment process work smoothly, small employers may have overlooked their own enrollment option. The Small Business Health Options Program (The SHOP Exchange or the SHOP Marketplace) or Small Business Health Options Program. Staring October 1, 2013, small employers can use the SHOP Exchange to provide health insurance for their employees.
For 2014, employers with fewer than 50 FTEs can purchase coverage through the exchange and, after 1/1/2014, the small business tax credit will only be available for coverage purchased through the exchange. So there is some incentive to look at it. On the other hand, employers should be aware that the individual carriers offering the exchange may have required participation rates (like 70% if your population) and coverage purchase through SHOP must be offered to all employees who work 30 or more hours per week. Plus, my favorite quote from the official SHOP website: “The SHOP exchange is as easy to access and use as the individual marketplace.” So you have to access it like everyone else, which has been tough.
Small employers may have assumed that because they were under 50 FTEs, the discussion about the mandates and affordable coverage was not relevant to them. However, things like the SHOP Exchange show that even small employer have to look at their coverage (or lack of coverage) and develop a compliance strategy. Remember, a small employer offering coverage is treated like a large employer offering coverage in many ways. There may not be the same penalties, but there are still some of the same responsibilities as it relates to what the plan does cover if you offer it and who can have it. Beware of the distinction.
Several news media outlets are reporting today that the White House has not foreclosed the possibility that the PPACA individual mandate that kicks in on January 1, 2014, might be extended. Perhaps this is because of the system “glitches” or perhaps it is over angst about the extension of the employer mandate until January 1, 2015 not being fair to individuals. Either way, employers should not read too much into this debate. They should be preparing for 2015 right now.
I had an employer contact me this morning and ask about the 30+ hour definition of full-time employee. Basically the question was “since the employer mandate does not kick in until January 1, 2015, do I have to be concerned about how many hours my employees work?” Well, as any good lawyer knows, my answer was yes and no. The no has to do with the fact that in 2014, you don’t have to offer coverage or face a penalty, so someone working 30+ hours a week is not automatically getting coverage in 2014 (unless they meet the current definition of eligibility in the employer’s health plan). But the yes answer has to do with the measurement period that we can’t forget about.
Eligibility for coverage in 2015 will be based on hours worked during the 2014 measurement period. So someone working 30+ in 2014 is going to be someone who gets coverage in 2015. If you want to avoid offering the coverage, you have to manage their hours worked in 2014. If you intend to make them a “variable hour” employee as opposed to a “fulltime” employee, 2014 is when you have to update your employee handbook to define those terms and when you have to manage the employee population to fit those descriptions. 2014 is when you update plan documentation to define eligibility. 2014 is when you work with your professionals to develop your full compliance plan.
Yes, the exchanges have had a rough first month and the rollout has been anything but smooth. The individual mandate might get extended. But from an employer’s perspective, 2014 is the action year. The one-year reprieve was good, but January 1, 2015 will be here sooner than you think. Don’t plan on extensions. Plan for compliance now.