What employees need to know now to file tax forms for PPACA
Original post benefitspro.com
The Patient Protection and Affordable Care Act (PPACA) reporting deadlines are rapidly approaching, presenting a major administrative burden for employers who face penalties for failing to report in a timely and accurate manner.
While there has been significant discussion of employer roles and responsibilities, employees have been largely left out of the equation.
However, many employees will soon be receiving new forms that are critical to their ability to file their tax returns and to their employers’ ability to accurately fulfill their own reporting requirements. Among these are Forms 1095-A, 1095-B, and 1095-C.
With this in mind, it is important for employers to educate individual taxpayers on what they are required to do and when and how to complete these requirements in the easiest and most efficient manner.
1095-C
The most commonly received form will be the new 1095-C, which millions of Americans will be receiving for the first time this year.
This new government form is used to tell the Internal Revenue Service that you were eligible for insurance coverage under the Affordable Care Act and whether you took advantage of or waived this coverage.
This form will be sent by employers no later than March 31 to all eligible full-time employees who worked for a company with a total of 100 or more full-time or full-time equivalent employees in 2015. For the purposes of this form, full-time is any employee working 30 or more hours per week or 130 hours in a calendar month.
According to the IRS guidance, Form 1095-C helps to determine whether both the employer and the employee have complied with the “shared responsibility” clause of the ACA.
The form also determines whether an individual or family qualifies for the Premium Tax Credit, which reduces the burden of purchasing health insurance.
Anyone who does not have coverage elsewhere and chose to decline employer-sponsored health care coverage will be required to pay a penalty for not carrying coverage--this penalty will be assessed on their tax return.
For 2015, the penalty for declining all health care coverage is $325 per uninsured adult and $162.50 per uninsured child or 2 percent of household income, whichever is greater up to a family maximum of $975.
The penalty will increase to $695 per uninsured adult and $347.50 per child or 2.5 percent of household income up to a family maximum of $2,085 in 2016, and will continue to rise with inflation year-over-year.
However, the IRS offers special exemptions based on income, circumstance and membership in certain groups, so those without coverage should research their options or consult a tax professional. (The most common exemption is for those who declined employer-sponsored coverage that would have cost more than 8 percent of their total household income.)
Health care exemptions can be claimed by filing IRS form 8965 with your taxes. As previously noted, the form also determines who may be eligible for premium credits to help defray the expense of coverage.
Employers are required to submit insurance coverage information, along with social security numbers and other identifying employee information to the IRS, and employee failure to disclose a waiver of coverage may result in an audit and penalties greater than the ACA individual mandate penalty.
1095-B
Form 1095-B essentially serves the same purpose as form 1095-c, but is used by and sent to employees of companies with fewer than 100 employees.
It may also be sent directly by an insurer to certify that individuals/families had non-employer sponsored coverage in place in 2015. This coverage may have come from:
- Government health care plans such as Medicare Part A, Medicare Advantage, Medicaid, the Children's Health Insurance Program, and Tricare for military members, veterans’ medical benefits and plans for Peace Corps volunteers.
- Health coverage purchased through the "Marketplace" -- Web-based federal and state insurance markets set up under the Affordable Care Act.
- Any individual health insurance policy in place before the Affordable Care Act took effect.
Depending on the way a health care plan is structured, some employees may receive both a 1095-B and a 1095-C.
1095-A
Form 1095-A is only applicable to those who purchased their health care coverage through ACA’s health care exchanges.
This form plays a critical role in reconciling the Advanced Premium Tax Credits (also known as APTCs)--a yearly stipend based on modified adjusted gross income designed to help lower-income individuals and families defray the cost of purchasing exchange-based health insurance--for 2015 and in determining future credits for 2016.
Per IRS and ACA requirements, any excess APTC received in the previous year must be repaid through income tax.
What to do with these forms
Like the more familiar W-2 or 1099 forms, the 1095-A, B, and C will be needed to file a 2015 tax return for anyone who receives it.
Those using a tax preparer will need to bring it with them along with their other filing documents, and those doing their own taxes or using tax preparation software will need to keep this document with their tax records in case of any further inquiry /audit by the IRS.
Help is available
Of course, this is just one important factor in gaining a more thorough understanding of the complexities of the ACA. While the IRS has worked to streamline the process as much as possible, many employers and employees are struggling to understand and keep pace with changing requirements.
However, for quick questions, there are many good resources available to both employers and employees. One of the best is the IRS website.
As in all tax-related issues, the most important factors in handling ACA reporting for all groups are to know what’s coming, prepare in advance, keep excellent records, take note of deadlines and avail yourself of helpful resources.
The Affordable Care Act's reporting requirements
These new reporting obligations require employers and other entities to report information to assist the IRS with enforcing the individual mandate (i.e., the requirement for individuals to maintain minimum essential health care coverage) as well as the employer mandate (i.e., penalties that are imposed on certain employers if minimum health insurance coverage is not offered by the employer).
In order to monitor compliance with both the individual and employer mandates, the ACA requires reporting by employers and insurers. To understand these reporting obligations, one must understand the general manner in which both the individual mandate and the employer mandate operate.
If an individual does not have minimum essential coverage, the IRS will collect a tax penalty from him or her. The monthly tax penalty is equal to 1/12th of the greater of:
- For 2015: $325 per uninsured adult in the household (capped at $975 per household) or 2.0 percent of the amount by which the household income exceeds the filing threshold (e.g., single person making more than $10,150 in 2015 must file a tax return).
- For 2016: $695 per uninsured adult in the household (capped at $2,085 per household) or 2.5 percent of the amount by which the household income exceeds the filing threshold.
- 9.5% of an employee’s W-2 wages (such wages amount being net of any salary reductions under a 401(k) plan or cafeteria plan)
- 9.5% of an employee’s monthly wages (hourly rate x 130 hours per month)
- 9.5% of the Federal Poverty Level for a single individual
- Name of each individual who has minimum essential coverage (including covered spouse and dependents);
- Name and address of the “responsible person” through whom the individual has coverage (generally the primary participant, employee, or applicant);
- Taxpayer identification number (TIN, which is generally the Social Security Number) for each covered individual, including covered spouse and dependents; and
- Calendar months for which each individual was covered during the calendar year.
- Name, address and employer identification number (EIN) of the ALE;
- Name and telephone number of a contact person;
- Calendar reporting year;
- Certification as to whether the ALE offered its full-time employees and their dependent children the opportunity to enroll in minimum essential coverage by calendar month;
- Number of full-time employees for each month in the calendar year;
- For each full-time employee, the months for which minimum essential coverage was made available;
- For each full-time employee, the employee’s share of the lowest-cost monthly premium for “employee-only” coverage providing minimum value, by calendar month; and
- Name, address and TIN for each full-time employee, and the months, if any, for which the full-time employee was covered under an employer-sponsored plan. (This information would be the same as data provided for Section 6055 reporting.)
- Information Technology – to ensure that all the required data is accessible;
- Finance – to budget and allocate compliance resources needed;
- Legal – to interpret and apply the regulations;
- Human Resources – to make decisions regarding employee scheduling and monitoring hours over 30 hours per week;
- Payroll – to track hours (to identify full-time employees) and calculate affordability; and
- Benefits – to develop plan design, eligibility, and communications to employee
IRS clarifies FSA carryover and HRA coverage issues
Original post by Stephen Miller, shrm.org
Confusion about carrying over unused funds from year to year in health care flexible spending accounts (FSAs) has received some clarification under IRS Notice 2015-87, issued in December. The guidance also limits the use of health reimbursement arrangements (HRAs), including by an employee’s family members who are not enrolled in the employer’s group health plan.
RELATED: IRS releases final rule on premium tax credits, notice addressing employer coverage
Flexibility for Flex Plans
Since 2013, there have been two options for health FSA extensions that employers can adopt:
- If a health FSA plan has a carryover feature, participants can roll over up to $500 of unused FSA dollars to the next year but will forfeit any excess over $500 at year-end.
- Alternatively, an optional grace period can give employees an additional two-and-a-half months to incur new expenses using prior-year FSA funds. At the end of the grace period, all unspent funds must be forfeited to the employer.
Plans can offer either the carryover or a grace period, but not both, or they can offer neither. These options apply to FSAs for general purpose health care including prescription drug expenses, and to limited-scope FSAs for dental and vision care. Dependent care FSAs may offer a grace period but not a carryover option.
“One of the key reasons the IRS issued new FSA guidance was to clarify that employers can place some restrictions on the carryover feature,” said Mary V. Bauman, a member of law firm Miller Johnson in Grand Rapids, Mich., and co-author of an analysis of Notice 2015-87.
“Employers were concerned that if they opted to provide the carryover, they might have to maintain small account balances over long periods of time, and that would raise their administrative fees,” added Bill Sweetnam, legislative and technical director at the Washington, D.C.-based Employers Council on Flexible Compensation, which represents employers that sponsor tax-advantaged benefit programs.
Notice 2015-87 gives employers two tools to address concerns over keeping an employee on the FSA plan books when that employee isn’t otherwise an active FSA participant, Bauman explained:
- Employers can limit the carryover feature to only those employees who elect to make their own contributions for the following plan year.
- The employer can limit the carryover to only one plan year. “For example, consider an employee with a carryover of $300 for plan year one who doesn’t elect to contribute for plan year two,” said Bauman. “At the end of plan year two, if the entire $300 isn’t used, the employer’s plan can provide that the balance will be forfeited.”
COBRA and Carryovers
The notice provides that a health FSA that allows employees to carry over amounts from one plan year to the next must also allow those who elect COBRA under the FSA to carry over amounts to the next year. Amounts carried over cannot be used by employers in determining the amount of the FSA plan premium charged to former employees who elect COBRA.
“What to charge former employers for the COBRA premium [on their FSA plan] had been questionable,” Sweetnam said. “The guidance makes clear that you can’t base the premium charge on the amount of funds carried over.”
HSAs and FSAs Can’t Overlap
The notice affirms prior guidance stating that employees are not allowed to contribute to a health savings account (HSA) if they contributed during the same year to a general-purpose health FSA, although they may contribute to both an HSA and a limited-scope FSA covering dental and vision care expenses.
“An employee enrolled in a high-deductible health plan who has a carryover at the beginning of that plan year will be HSA-ineligible for the entire year, even if he or she spends down the balance right away,” said Bauman.
“If you have an HSA, you cannot contribute new funds to a general-purpose health FSA in the same year,” and carrying over funds from the prior year is seen as a contribution, said Sweetnam.
HRA Coverage Restricted
Notice 2015-87 also affirms prior guidance holding that an HRA cannot reimburse active employees for the cost of premiums for nongroup health insurance they might purchase on their own, unless those purchased policies cover only “excepted benefits” (such as dental or vision insurance policies).
“Some third-party administrators were making tortured interpretations of the prior guidance and promoting arrangements that the IRS didn’t think were allowable,” Sweetnam noted. “The IRS here is addressing that and putting a stop to it.”
The guidance reiterates that retiree-only HRAs can still reimburse retirees for the cost of premiums for nongroup health insurance policies, whether bought through the private market or on an Affordable Care Act exchange.
“But there was one new issue [in the notice] that is key,” said Bauman. “If an employer provides an HRA with its group health plan, it can only reimburse the uninsured expenses of an employee’s spouse and children if they also are enrolled in the employer’s group health plan.”
Employers with HRAs in place as of Dec. 16, 2015, when Notice 2015-87 was issued, have until the first day of their 2017 plan year to amend the HRA to address this requirement, Bauman noted.
“Since family members not on the group health plan can’t be covered by the HRA, it will require employers to update their systems,” said Sweetnam. Beginning in 2017, “If a charge is made to the HRA for a prescription, for instance, you have to look to see who the prescription is for. If it’s for the employee’s spouse and the employee has self-only coverage, that’s no longer permitted under these rules. It adds a little bit of administrative complexity.”
The new guidance creates some complexity, while in other areas it gets rid of some complexity, Sweetnam said.
7 questions employees may ask about ACA 1095s
The 1095 forms are ready for employee distribution. While you may feel you've covered every base, youre employees will more than likely still have a few questions.
The International Foundation of Employee Benefit Plans offers a helping hand with 7 questions you're more than likely to hear, and a sample answer for each.
RELATED: IRS extends due dates for ACA information reporting
What is this form I’m receiving?
A 1095 form is a little bit like a W-2 form. Your employer or insurer sends one copy to the Internal Revenue Service (IRS) and one copy to you. A W-2 form reports your annual earnings. A 1095 form reports your health care coverage throughout the year.
Who is sending it to me, when, and how?
Your employer or health insurance company should send one to you either by mail or in person. They may send the form to you electronically if you gave them permission to do so. You should receive it by March 31, 2016. (Starting in 2017, you should receive it each year by January 31, just like your W-2.)
Why are you sending it to me?
The 1095 forms will show that you and your family members either did or did not have health coverage during each month of the past year. Because of the Affordable Care Act, every person must obtain health insurance or pay a penalty to the IRS.
What am I supposed to do with this form?
Keep it for your tax records. You don’t actually need this form in order to file your taxes, but when you do file, you’ll have to tell the IRS whether or not you had health insurance for each month of 2015. The Form 1095-B or 1095-C shows if you had health insurance through your employer. Since you don’t actually need this form to file your taxes, you don’t have to wait to receive it if you already know what months you did or didn’t have health insurance in 2015. When you do get the form, keep it with your other 2015 tax information in case you should need it in the future to help prove you had health insurance.
What if I get more than one 1095 form?
Someone who had health insurance through more than one employer during the year may receive a 1095-B or 1095-C from each employer. Some employees may receive a Form 1095-A and/or 1095-B reporting specific health coverage details. Just keep these—you do not need to send them in with your 2015 taxes.
What if I did not get a Form 1095-B or a 1095-C?
If you believe you should have received one but did not, contact the Benefits Department by phone or e-mail at this number or address.
I have more questions—who do I contact?
Please contact _____ at ____. You can also go to our website and find more detailed questions and answers. An IRS website called Questions and Answers about Health Care Information Forms for Individuals (Forms 1095-A, 1095-B, and 1095-C) covers most of what you need to know.
Employers advised to prepare for questions on ACA reporting forms
Original post by Andrea Davis, ebn.benefitnews.com
As employers prepare to distribute Forms 1095 to employees by the newly extended IRS deadline of March 31, they should brace for increased questions from employees about the new forms.
In Notice 2016-4, issued by the IRS on Dec. 28, the agency extended the deadlines for both providing individuals with the reporting forms required as part of the Affordable Care Act and for filing them with the IRS, although it also said “employers and other coverage providers are encouraged to furnish statements and file the information returns as soon as they are ready.”
In the year-end notice, “the IRS indicated to employers that there’s going to be no more extensions,” says Laura Kerekes, chief knowledge officer with ThinkHR Corporation. “This is already more generous than what the initial filing extension was. The feeling is that you better get these done and into the government.”
The IRS notice also provides guidance to those who might not receive a 1095-C by the time they file their 2015 tax returns, saying people can rely on information they’ve already received from their employer outlining whether they’re enrolled in employer-sponsored coverage or not.
“That’s pretty important for employers to just make note of and maybe get ahead of with communication to their employees to say the filing deadlines have been extended so the company will not have your 1095-C done,” says Kerekes, adding employers can let employees know “this is the information we've already provided you, you can rely on it when you're working on your taxes and filing by your April 15 deadline.”
And while employers with more than 50 full-time employees need to compile data for the new forms to demonstrate employee healthcare coverage offerings under the ACA, two-in-five employers say they are unfamiliar with these forms altogether, finds a recent study from ADP.
“The good news is that 60% were highly or very familiar with the 1094-C and were working on it,” says Vic Saliterman, senior vice president and general manager of ADP’s healthcare reform business. “The fact that, given the nature of the way the law is written and the penalty, 40% were not familiar [with the forms] was certainly concerning.”
More than half (52%) of midsized businesses and 45% of large employers are unsure if they’re at risk of violating ACA compliance requirements this year and nearly one-in-five employers think they are at risk of not complying with Form 1095-C requirements, according to the ADP report.
ACA compliance: What does the future hold?
Original post by Alden Bianchi, eba.benefitnews.com
The Affordable Care Act’s reporting requirements are challenging in thace extreme. Carriers and employers, and their vendors, service providers and strategic partners, have scrambled up a steep learning curve. And in a few short months — a few more than originally anticipated as a result of Notice 2016-4 — compliance will begin in earnest.
Here are some predictions about how we expect compliance to unfold:
1) MEC reporting will work as advertised — for the most part. For purposes of the reporting of minimum essential coverage (MEC) under Code 6055 on Forms 1094-B and 1095-B, carriers are largely relying on home-grown software. MEC reporting in the case of fully-insured plans has its challenges, principally relating to data collection. But the regulatory regime is not all that complex.
As a consequence, there is no reason to anticipate that these systems will not work, i.e., that the inputs and outputs will match the requirements of the law and applicable regulations even if the particulars of the “black box” vary from carrier-to-carrier. Expect a good deal of finger pointing over the timely collection of correct information, however, particularly as it relates to social security numbers. One hopes that the extensions of time provided by Notice 2016-4 will go a long way toward alleviating this problem.
2) Software solutions for applicable large employers may work and will converge. Where applicable large employers are concerned, the level of reporting complexity rises exponentially. (Just compare the Forms 1094-B and 1095-B to the Forms 1094-C and 1095-C to see why.) There are currently a good number of expert systems available to employers to assist with their reporting obligations. As best we can tell, vendors have generally been diligent in their efforts to beta test their products. But none of these products has yet been tested live and in real time with real data.
The software solutions for reporting by applicable large employers under Code 6056 have for the most part been developed by third parties, including payroll companies, brokers, venture-funded and other start-ups, industry-focused organizations, and interested tinkerers, among others.
In contrast to MEC reporting, these products are not at all uniform. Some favor particular compliance approaches. For example, it is not uncommon for vendors to strongly urge or require customers to use the Federal Poverty Line affordability safe harbor. This simplifies the reporting on Form 1095-C, Part II, Line 15, but at a cost to employers.
Others lack full functionality relating to transition rules. This will change as vendors gain experience and the industry consolidates. In time, these software products will converge such that the inputs and outputs will align seamlessly with all of the requirements of the law and applicable regulations.
3) For employers, the first year will be chaos. The run-up even to the now delayed reporting deadline will involve a good deal of frantic, last-minute effort. Employers have been asked to respond to detailed data requests from their vendors to provide information from disparate sources, e.g., payroll, HRIS, and the employer’s group health plan, among others.
Complicating matters is that some vendor requests ask for information that is not necessary to complete the reporting process. The biggest challenges will arise in cases where the data collection and collating cannot be automated. For companies of sufficient size, this could mean that timely compliance is out of the question, which will require a “Plan B” (i.e., late filing accompanied by a request for an abatement of penalties).
4) Also for employers, there will be some unwelcome surprises. The reporting process inevitably involves a detailed examination by a third party vendor of the approach that the applicable large employer adopted to comply with the ACA employer shared responsibility rules. This examination can reveal compliance problems and lapses.
For example, a vendor and employer might differ on the classification of a cohort of employees as variable hour by an employer that has adopted the look-back measurement method. If that cohort is sufficiently large, the employer could be facing penalties under Code 4980H(a).
IRS pinpoints ACA affordability percentage for safe harbor
Original post by Helen Karakoudas, shrm.org
The IRS has announced that the inflation-adjusted percentage used to determine what is “affordable” health coverage for individuals will also apply to the safe harbor for employers.
Under a safe harbor set forth in the Affordable Care Act’s (ACA’s) employer shared-responsibility provisions (also known as “pay or play”), health coverage has been deemed to satisfy the requirement to be affordable if the lowest-cost self-only coverage option available to employees does not exceed 9.5 percent of any one of the following:
- The employee’s W-2 wages.
- The employee’s rate of pay.
- The federal poverty level.
The three-pronged affordability safe harbor is used so that employers have penalty protection for what they declare as “affordable” on Line 16 of IRS Form 1095-C. The safe harbor concept is the standardized way IRS regulations address the fact that employers would not know their employees’ household incomes.
For 2015, the IRS increased the applicable threshold percentage for purposes of “household income” from 9.5 percent to 9.56 percent to account for increases in health insurance premiums and income growth, with a further increase to 9.66 percent announced for 2016. But the IRS did so with regard to the affordability percentage that marketplace exchanges can use to test compliance with the ACA individual mandate. The IRS did not explicitly increase the percentage for use in the employer safe harbor test above the statutory 9.5 percent. That led many benefit attorneys to advise their clients to continue using a contribution percentage of 9.5 percent to measure their plan’s affordability.
While the controversy over the affordability percentage has divided employee benefits attorneys and confused business owners and HR professionals, new guidance clarifying the issue was released on Dec. 16.
According to IRS Notice 2015-87:
Treasury and IRS intend to amend the regulations under § 4980H to reflect that the applicable percentage in the affordability safe harbors should be adjusted … so that employers may rely upon the 9.56 percent for plan years beginning in 2015 and 9.66 percent for plan years beginning in 2016.
Legal Significance for ACA Safe Harbors
The phrases “intend to amend” and “should be adjusted” are key. Before this guidance, there was no official connection between Section 4980H—the ACA regulations in the Internal Revenue Code that detail the employer shared responsibility requirements—and any percentage other than 9.5 percent, which remained the only rate given in ACA regulations for affordability testing.
Though official word about the syncing of the safe-harbor percentage with the marketplace percentage came bundled with end-of-year housekeeping items, hints about a clearing of the fog came this fall:
- In a September webinar of the ACA Information Returns (AIR), the monthly group call for software developers learning about the new IRS processing engine specific to the 1095 series of forms, attendees were told that hard coding for the 9.5 percent affordability percentage for employer returns was being undone and revised for specifications that could be changed from year to year. Further references to this reformatting were also made in the October and November calls.
- On page 11 of the instructions for IRS Forms 1095-C and 1094-C, which also came out in September, there was this paragraph: “References to 9.5 percent in the affordability safe harbors and alternative reporting methods may be subject to change if future IRS guidance provides that the percentage is indexed in the same manner as that percentage is indexed for purposes of applying the affordability thresholds under Internal Revenue Code section 36B (the premium tax credit). In general this should not affect reporting for 2015, but taxpayers may visit IRS.gov for any related updates.”
“Admittedly, the door was open to possible updates. But one would have thought that, by Dec. 16, nothing would change the result for 2015,” said Paul Hamburger, co-chair of the employee benefits and executive compensation practice center for Proskauer Rose in Washington, D.C.
“Now, the [Dec. 16] guidance allows employers, essentially, to [use the inflation-adjusted percentage] for 2015 in measuring affordability even though the instructions and forms are based on 9.5 percent,” he added. “However, with vendors already having programmed their systems with unadjusted numbers, I’m not sure how it will all play out. For example, if an IRS form was completed on the basis of unaffordability at 9.5 percent but it would have been affordable at 9.56 percent, will the IRS review cause a penalty to potentially be imposed, only to be negotiated away once the numbers are put forward? We will see,” Hamburger said.
Premium contribution strategies for 2016 were the concern of Ken Mason of Spencer Fane in Kansas City, Mo. “The recent guidance comes too late to affect ACA-compliance efforts for 2015,” Mason said. “Given the usual open enrollment periods of October or November for calendar-year plans, it’s probably also too late for most calendar-year plans to take advantage of the 9.66 percent figure when setting premiums designed to fall within the ACA safe harbors for 2016.”
The ‘Christmas Present’ Rule
Hamburger also widened the lens for perspective on this news: “Over the years, it seems that year-end IRS guidance with brand-new rules is part of the year-end tradition,” he remarked. “I remember a pension-related notice that came out at the end of 1987 where the IRS issued a somewhat lenient optional tax-related rule and we colloquially referred to it as the ‘Christmas present’ rule. Since then, the IRS seems to always remember the employee benefits community at this time of year.”
IRS releases final rule on premium tax credits, notice addressing employer coverage
Original post by Timothy Jost, healthaffairs.org
Implementing Health Reform. On December 16, 2015, the Internal Revenue Service (IRS) released a final regulation containing a number of premium tax credit eligibility provisions. Several of these concern the question of when an employer-sponsored health benefit plan offers affordable coverage that meets the minimum value requirement, but the rule also addresses other miscellaneous issues.
At the same time the IRS released a long and complicated notice addressing various issues that have arisen under the Affordable Care Act (ACA) with respect to employer-sponsored coverage, focusing particularly on account-based employee benefits such as section 125 cafeteria plans and health reimbursement arrangements.
Premium Tax Credit Final Rule
The rule finalizes a minimum value rule proposed over two years ago in May of 2013. The IRS had also recently proposed additional regulatory provisions relating to minimum value, while Department of Health and Human Services regulations address other issues related to minimum value. Parts of the earlier proposed rules are finalized in this rule, and other parts remain to be finalized later.
Premium Tax Credit Eligibility
The final rule begins by cleaning up one premium tax credit eligibility issue that has nothing to do with minimum value of employer-sponsored coverage. Eligibility for premium tax credits is based on household income, including the income of children or other members of the family who are required to file tax returns. Under certain circumstances parents are allowed to include their children’s income in their tax returns.
The regulatory language clarifies that when a parent does this, the household’s income includes the child’s gross income included on the parent’s return. The amount included for determining tax credit eligibility, however, is the child’s modified adjusted gross income (MAGI), which is not necessarily the amount reported as gross income on the tax return. MAGI would also include, for example, the child’s tax exempt interest and nontaxable Social Security income. The final rule clarifies how this is to be handled.
The rule next clarifies how wellness incentives are handled for determining the affordability of coverage for purposes of premium tax credit eligibility. Premium tax credits are not normally available to individuals who are offered health insurance coverage by their employer. Employees may, however, be eligible for premium tax credits if the employer coverage does not provide “minimum value” (MV) or if the employer coverage is “unaffordable.” Generally, a minimum value plan must have an actuarial value of at least 60 percent and cover substantial hospital and physician services. To be “affordable” a plan must cost no more than 9.56 percent (for 2015) of an employee’s MAGI. An employer that offers a health plan that fails to provide MV or that is unaffordable may also be assessed a penalty if one or more of its employees turns to the exchange for premium tax credits.
Under the ACA, employers can offer wellness incentives that reduce the cost of the employee contribution or cost-sharing for program participants. The question arises, therefore, whether affordability and minimum value should be determined with or without the application of wellness incentive premium and cost-sharing reductions. The final regulations provide that affordability and minimum value should be determined by assuming that employees fail to qualify for the wellness incentive premium or cost-sharing reductions with one exception — if the wellness incentive relates to tobacco use affordability will be determined based on the assumption that the employee qualifies for the incentive and is thus not subject to the tobacco use surcharge.
Extension Of The ‘Family Glitch’
The final regulation proceeds, however, to extend the “family glitch.” One of the most criticized IRS rules implementing the ACA provides that if an employer offers an employee affordable sole-employee coverage, the employee’s entire family is ineligible for premium tax credits even though employer-sponsored family coverage is unaffordable.
Under the minimum value final rule, if an employee uses tobacco and does not join a tobacco cessation program, and thus coverage is in fact unaffordable with the tobacco surcharge or does not offer minimum value, not only the employee, but also the employee’s entire family, is ineligible for premium tax credits as long as coverage would have been affordable or offer minimum value had the employee complied with the smoking cessation program. This is true even if no one else in the family smokes.
Health Reimbursement Arrangements
The final regulation next addresses the effect of health reimbursement arrangements (HRAs) on affordability. Amounts newly made available to an employee through an HRA that is integrated with ACA-compliant employer-sponsored health coverage when the employee may use the HRA to pay premiums are counted toward an employee’s required contribution to determine affordability. Amounts newly made available to an employee through an HRA that is integrated into with eligible employer-sponsored coverage that an employee may only use to reduce cost-sharing is counted toward determining minimum value. If HRA contributions may be used either to cover premiums or reduce cost-sharing, they are considered for determining affordability and not minimum value.
HRA contributions, however, are only taken into account if the HRA and the primary employer-sponsored coverage are offered by the same employer. They are also taken into account for determining affordability or minimum value if the amount of the annual contribution is determinable within a reasonable time before an employee must decide whether or not to enroll.
Cafeteria Plans
The final rule also provides that employer contributions to flex arrangements under section 125 cafeteria plans are considered for determining affordability and minimum value if 1) the employer contribution cannot be taken as a taxable benefit, 2) it may be used to pay for minimum essential employer coverage, and 3) it may only be used to pay for medical care, as opposed to other benefits like dependent care that can be paid for under a section 125 plan. The guidance also released on December 16 discusses HRAs and 125 plans in much greater detail, and is examined below.
Continuation Coverage Eligibility And Tax Credits
The rules next address the effect on eligibility of former employees and retirees for continuation coverage under federal or state law, such as Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage, on eligibility for premium tax credits. The rule provides that eligibility for continuation coverage does not disqualify former employees or retirees, or their dependents, from premium tax credit eligibility unless the individual actually enrolls in the coverage. If continuation coverage is offered to current employees because of a reduction in hours, however, it will disqualify the employee from premium tax credits if it is affordable and offers minimum value. Of course, continuation coverage offered current part-time employees will often not be affordable.
Tax Credits And Coverage For Partial Months
The final rule concludes by addressing premium tax credit issues that arise when an individual is enrolled in coverage for a partial month. When a child is born, adopted, or placed with a family for adoption or foster care, or placed by court order, that child can be covered as of the date of birth, adoption, placement, or the order. The rule clarifies that when this happens, the child is treated as enrolled from the first day of the month for purposes of determining premium tax credit eligibility, even though the child is enrolled during the middle of the month. The adjusted monthly premium is determined as if all members of the coverage family were enrolled as of the first of the month in this situation.
The rule next addresses how premium tax credits are calculated where there is a partial months of coverage, which can occur when a child joins the plan mid-month by birth, adoption, placement or court order or when coverage is terminated mid-month, for example by a death. In this situation, the premium tax credit covers the lesser of the actual amount of the pro-rated premium charged for the month (taking into account any premium refunds) or the excess of the benchmark plan premium for a full month of coverage over the full amount that the eligible household would be required to contribute for coverage given its income level.
Thus if a taxpayer has a $500 premium and would normally be entitled to a premium tax credit of $300 based on a $450 benchmark premium and a $150 contribution amount, and the taxpayer dies mid-month and is refunded $250, the taxpayer would be entitled to a $250 premium tax credit based on his or her actual expenditure, but if the taxpayer is refunded $150, the taxpayer would be entitled to a $300 tax credit based on the benchmark plan cost.
The final rule provides that if family members live in different states the benchmark plan premium is determined by summing the benchmark premiums for the different states as they apply to the family members in each state. The rule updates the table of percentages, which determines how much individuals must contribute of their own income toward the cost of premiums to be eligible for premium tax credits given their income. And, finally, the rule analyzes how qualified health plan premiums and benchmark plan premiums should be allocated for determining premium tax credit eligibility when either the premiums of a plan in which an individual is enrolled or a state’s benchmark plan covers services that are not essential health benefits and thus not eligible for premium tax credit payments.
IRS Notice 2015-87
The notice (IRS Notice 2015-87) addresses a range of issues relating to the ACA and employer coverage, elaborating on some issues addressed by the final rule. Many of the questions it raises elaborate on IRS Notice 2013-54, issued in 2013. The notice states that a number of these issues will be addressed by future rulemaking and requests comments. It clarifies existing requirements as to some issues and allows plans a grace period before employers must come into compliance. The notice also, however, allows employees to claim the benefit of some of the requirements even though employers have not yet come into compliance.
Health Reimbursement Arrangements
The notice begins by addressing a series of issues raised by health reimbursement arrangements (HRAs). It first clarifies that an HRA that covers only former employees or retirees is not required to be integrated with an employee-sponsored plan that meets ACA requirements. A former employee covered by such an HRA, however, is ineligible for premium tax credits as long as funds remain available in the HRA.
If an HRA covers current employees, a former employee who is no longer covered by the group health coverage that must be integrated with an HRA for the HRA to comply with ACA requirements may not use funds remaining in his or her HRA to purchase individual coverage. Amounts credited to an HRA prior to January 1, 2013, or during 2013 under terms in effect prior to January 1, 2013, may, however, be used for medical expenses under the terms then in effect even though those terms do not comply with ACA requirements that went into effect in 2014.
The notice provides that HRAs available to cover medical expenses of an employee’s spouse or children (family HRAs) may not be integrated with employee-only coverage but must be integrated with coverage in which the dependents are enrolled to comply with ACA requirements. Recognizing that many employer plans do not conform to this requirement, the IRS is allowing plans a grace period to come into compliance with this requirement.
Under earlier guidance, the IRS had made it clear that HRAs could not be used to purchase individual health insurance coverage. This guidance clarifies that HRAs can be used to pay the premiums for excepted benefit coverage, such as dental or vision plans. The notice further clarifies that section 125 cafeteria plans cannot be used to purchase individual coverage, even if the 125 plan is funded fully by employee contributions.
The Notice explains at great length and in detail how HRAs and flex contributions to a section 125 cafeteria plan are treated for determining affordability and minimum value of employer-sponsored coverage. This issue is also addressed by the rule and discussed above. The notice offers several examples of how these rules are applied.
Flex Plans And Opt-Out Payments
One of the requirements of the rule and notice is that employer contributions to flex plans will only be considered for determining affordability or minimum value of employer coverage if the flex plan can only be used for health spending. Solely for purposes of determining affordability for application of the employer mandate (which imposes a penalty of employers who do not offer affordable, minimum value coverage if their employees receive premium tax credits) and for employer reporting requirements, contributions to flex accounts that can be used for non-health as well as health purposes will be considered to reduce employee contributions for plan years beginning before January 1, 2017 for arrangements adopted on or before December 16, 2015. However, they will not be considered for determining affordability of employer coverage for an employee either for determining liability under the individual responsibility provision or eligibility for premium tax credits.
If an employer offers an employee payments that are available only to an employee if the employee declines health insurance coverage (an opt-out payment), the IRS will consider the opt-out payment as an additional charge for the coverage for determining its affordability for application of the employer mandate penalty. The employee has the option of receiving additional salary for foregoing coverage, and thus is being charged the amount of the additional salary if he or she accepts coverage.
The IRS intends to issue a rule on this issue, and might treat opt-out payments differently if they are subject to additional requirements, such as proof of coverage under a spouse’s plan. The IRS will offer a transitional period for plan years beginning before January 1, 2017 based on arrangements established on or before December 16, 2015, for purposes of the employer mandate penalty and employer reporting, but individual taxpayers may consider opt-out payments as increasing the cost of coverage for application of the individual mandate or premium tax credit eligibility requirements.
Complex issues are presented by the McNamara-O’Hara Service Contract Act and the Davis-Bacon and related acts, which require federal contractors to pay prevailing wages and fringe benefits or cash out fringe benefits for workers. Until these issues are resolved employers may for purposes of the employer mandate and reporting requirements consider cash payments in lieu of fringe benefits as increasing the affordability of coverage, although employees are not required to consider the payments as making coverage more affordable for purposes of the individual mandate affordability exemption or premium tax credit eligibility. Recognizing that the disconnect between employer reporting requirements and employee premium tax credit eligibility requirements during transitional periods for this and other requirements may cause difficulties for employees in establishing tax credit eligibility, the notice urges employers to work with employees to provide necessary information.
Affordability Under The Employer Mandate
For purposes of the employer mandate affordability requirement and related regulatory requirements, including affordability safe harbors, affordability of coverage is defined as costing no more than 9.5 percent of household income (or for safe harbors, 9.5 percent of W-2 or hourly wages or the poverty level). The 9.5 standard is adjusted annually and is set at 9.56 percent for 2015 and 9.66 percent for 2016. The notice makes clear that this adjustment applies to all provisions that use the 9.5 percent standard.
The notice also provides the inflation updates for the statutory penalties under the employer mandate. The $2,000 per full-time employee penalty that applies when an employer fails to offer minimum essential coverage and an employee receives premium tax credit will increase to $2,080 for 2015 and $2,160 for 2016; while the $3,000 penalty that applies on a per-employee basis for employees who receive premium tax credits when coverage does not meet affordability or minimum value standards will increase to $3,120 for 2015 and $3,240 for 2016.
The notice provides a complex analysis of when “hours of service” that would count for crediting hours for Department of Labor regulations do or do not count as “hours of service” for calculating whether an employee is a full-time employee for purposes of the employer mandate. This analysis is beyond the scope of this post.
Service Breaks
A number of ACA rules that apply to full-time employees assume that employees are continuously employed without long breaks in service. Special rules apply for employees of educational institutions who routinely have long breaks in service between school years. Under IRS rules, employees of educational institutions cannot be treated as having terminated employment and then been rehired unless they have a break in service of at least 26 consecutive weeks.
Some educational institutions have been attempting to get around this rule by claiming that their employees are actually employed by staffing agencies with which they contract, and thus, for example, terminated at the end of the school year and rehired in the fall. The IRS is considering a rule that would provide that the educational institution exception would also apply to employees who provide services primarily to educational institutions and are not offered a meaningful opportunity to provide service during the entire year. An individual who worked in a school cafeteria nominally employed by a staffing agency rather than the school, for example, would be protected by the break in service exception unless the staffing agency offered employment in another position throughout the summer.
The notice clarifies that AmeriCorps members are not employees for purposes of the employer mandate, but that individuals offered TRICARE coverage by virtue of their employment are offered minimum essential coverage. The notice discusses how employer aggregation rules apply to government employers. It requires each separate government employer entity to have an employer identification number. The notice also discusses special rules that apply to health savings accounts contributions for individuals eligible for VA coverage and the application of COBRA continuation coverage to flexible spending account carryovers, both topics beyond the scope of this post.
Finally, the notice reiterates that the IRS will not impose penalties on employers that provide incorrect or incomplete 1094-C and 1095-C reports to employees in 2016 for 2015 coverage if they can demonstrate good faith efforts to comply with requirements. Employers who fail to file reports on a timely basis will also be provided relief from penalties if they can show reasonable cause for their failing to do so.
IRS extends due dates for ACA information reporting
Original post by Stephen Miller, shrm.org
Employers subject to the Affordable Care Act’s 2015 information reporting requirements now have extra time to give forms to employees and to file them with the government.
In Notice 2016-4, issued by the IRS on Dec. 28, the agency extended these reporting deadlines:
| Previous IRS Due Date | New IRS Due Date |
| Forms 1095-B and 1095-C were due to employees by Feb. 1, 2016 | March 31, 2016 |
| Forms 1094-B, 1095-B, 1094-C and 1095-C were required to be filed with the IRS if filing on paper by Feb. 29, 2016 | May 31, 2016 |
| Forms 1094-B, 1095-B, 1094-C and 1095-C were required to be filed with the IRS if filing electronically by March 31, 2016 | June 30, 2016 |
| Source: ADP, based on IRS Notice 2016-4. | |
• For furnishing employees with the 2015 Form 1095-B (Health Coverage) and Form 1095-C (Employer-Provided Health Insurance Offer and Coverage), the deadline has been extended from Feb. 1, 2016, to March 31, 2016.
• For filing with the IRS the 2015 Form 1094-B (Transmittal of Health Coverage Information Returns), Form 1095-B, Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) and Form 1095-C, the deadline has been extended from Feb. 29, 2016, to May 31, 2016 if not filing electronically, and from March 31, 2016, to June 30, 2016 if filing electronically.
Any employer filing 250 or more information returns during the calendar year must file the returns electronically. For employers with fewer than 250 returns, electronic filing is voluntary.
“Earlier guidance would have been preferred, but the last-minute relief will still be helpful for employers that have been working to understand the complexities of compiling all the information needed and completing the forms, or gathering the information needed to work with their reporting vendors,” said Ann Marie Breheny, a senior legislative adviser at Towers Watson in Arlington, Va.
The notice also provides guidance to employees who might not receive a Form 1095-B or Form 1095-C by the time they file their 2015 tax returns.
Employers Sought Extension
Employer groups had been seeking filing extensions. Because instructions for filing the reporting forms were released late in the year, “employers have been struggling with logistical issues” related to reporting, said Chatrane Birbal, the Society for Human Resource Management’s senior advisor for government relations.
The IRS deadline extension “is appreciated and will provide employers relief,” she said. “The ACA reporting forms require specific information on each employee’s insurance coverage—and their spouse’s and dependents’, if applicable—such as employer identification number, taxpayer identification number, addresses, employee’s full-time status and length of full-time status, proof of minimal essential coverage offered, coverage dates, and employees’ share of coverage premium costs. Collecting required information to ensure accurate reporting is an administrative burden for employers.”
While HR professionals have the relevant data requested, she noted, “this information is not contained in a central repository. Most employers will have to use multiple sources to obtain the data necessary to complete the reporting forms, including their benefits carrier or broker, HR information system, payroll company, time-off tracking software and other sources.”
The administrative burden and penalties related to missed deadlines and incorrect filing “will inevitably add to the employer’s cost of providing benefits to employees,” she noted.
Similarly, the American Benefits Council, in a Dec. 24 letter to IRS Commissioner John Koskinen, wrote that employers “have expressed significant concerns about their ability to furnish accurate Forms 1095-C and Forms 1095-B to employees by the Feb. 1, 2016 deadline.”
“The data that needs to be reported—particularly on the Form 1095-C—relates to information that many employers did not previously maintain in a format that facilitated reporting,” said Kathryn Wilber, senior counsel for health policy at the council. “As a result, employers’ attempts to establish systems that can accommodate the reporting requirements have generated logistical complications and we continue to hear about new difficulties from employers on a regular basis.”.
Earlier Filing Encouraged
The IRS said it is still prepared to accept filings of the information returns on Forms 1094-B, 1095-B, 1094-C and 1095-C beginning in January 2016. “Following consultation with stakeholders, however, the Department of the Treasury and the [IRS] have determined that some employers, insurers, and other providers of minimum essential coverage need additional time to adapt and implement systems and procedures to gather, analyze and report this information,” the IRS said in its notice. “Notwithstanding the extensions provided in this notice, employers and other coverage providers are encouraged to furnish statements and file the information returns as soon as they are ready.”
Employers that don’t comply with these extended due dates will be subject to penalties under ACA section 6722 or 6721 for failure to timely furnish and file, the IRS said. The agency added that even if employers or other coverage providers miss the extended due dates, they are still encouraged to furnish and file, “and the service will take such furnishing and filing into consideration when determining whether to abate penalties for reasonable cause.”
“The IRS said it will take a good-faith enforcement approach to this first year of reporting,” said Breheny. “As the deadlines approach, there have been many questions from reporting entities about these complex requirements and the systems involved, so this is a welcome development.”
Stephen Miller, CEBS, is an online editor/manager for SHRM.
Don't forget to update benefit plan documents
Original post thinkhr.com
This year came with notable compliance changes that may require updating group health plan materials extending into the new year. Employers should review these requirements and make the necessary changes to materials offered to participants at plan renewal.
The Affordable Care Act’s (ACA) employer shared responsibility provision (§ 4980H), also referred to as “play or pay,” took effect January 1, 2015. Under the employer mandate, large employers may be assessed a penalty for failure to offer health coverage to full-time employees if at least one employee receives a government subsidy to buy individual coverage through an Exchange (Marketplace). However, some employers were able to take advantage of one or more transition relief provisions to avoid potential penalties for part or all of 2015 (and part of 2016, in some cases). This relief expires in 2016, along with transition relief impacting calculations of the possible assessable payment.
Applicable large employers (ALEs) must ensure their group health plans are designed to meet minimum value coverage and are deemed affordable to limit assessment of penalty. For plan years after 2015, the required contribution percentage under the affordability safe harbor is 9.5 percent, based on employee-only coverage. ALEs who have variable hour employees should establish and document their designated measurement periods for determination of “full-time” employees.
The employer shared responsibility provision also establishes employer reporting requirements. For calendar year 2015, the first reports are due February 1, 2016 and are required annually thereafter on January 31st. These reporting requirements include:
- Under I.R.C. § 6056, large employers must report information about health coverage offered to full-time employees.
- Under I.R.C. § 6055, large employers with self-funded plans must report information about the coverage provided to each individual.
ALEs should review their Summary Plan Descriptions (SPDs) to ensure measurement periods used in the determination of the employee counts are documented. To comply with the Employee Retirement Income Security Act (ERISA), the health plan’s SPD must describe the plan’s eligibility requirements. The SPD’s description of the measurement method should clearly define the measurement periods and plan eligibility requirements so that it is understandable to the average participant.
Employers should review their ability to maintain grandfathered status for 2016. While grandfathered plans can continue, ALEs will need to determine if offering these plans conforms to the play or pay rules to limit assessable payment. If the plan will lose its status, the plan should include all of the additional patient rights and benefits required by the ACA for nongrandfathered plans (e.g. coverage of preventive care without cost‐sharing requirements).
Several indexed inflation increases have been announced, which may require updates to Summary of Benefits and Coverage (SBC) documents and other participant plan materials, such as contributions to health savings accounts (HSAs), out-of-pocket spending under high deductible health plans (HDHPs), and essential health benefits (EHBs).
The annual cost-sharing and out-of-pocket maximums increase for plan years beginning on or after January 1, 2016. A health plan’s out‐of‐pocket maximum for EHBs may not exceed $6,850 for self‐only coverage, and $13,700 for family coverage.
The out‐of‐pocket maximum, however, continues to apply to all nongrandfathered group health plans, including self‐insured health plans and insured plans.
The minimum annual deductible and out-of-pocket expenses for HDHPs renewing on or after January 1, 2016 have increased in 2016:
- The minimum annual deductibles under an HDHP must be at least $1,300 for self-only coverage (no change from 2015) and $2,600 for family coverage (no change from 2015).
- The maximum out-of-pocket expense limit for self-only HDHP coverage for 2016 is $6,550, which is up from $6,450 in 2015. For family HDHP coverage, the maximum out-of-pocket expense limit for 2016 is $13,100, which is up from $12,900 in 2015.
The annual dollar limit on the combination of employer and employee contributions to HSAs remains at $3,350 for an individual with self-only coverage under a HDHP; however, this limit increases to $6,750 for an individual with family coverage under an HDHP (an increase of $100 dollars from 2015).
Note: The HDHP maximums for HSA-qualified HDHPs are lower than the ACA out-of-pocket maximums. Employers offering HSA-qualified plans will need to ensure they satisfy these lower HDHP out-of-pocket maximums.
The annual dollar limit on employee contributions to employer-sponsored healthcare flexible spending arrangements (FSAs) is $2,550 (no change from 2015).
Under the small business health care tax credit, the employer must employ fewer than 25 full-time equivalent employees (FTEs) whose average annual wages are less than $50,800 (indexed for 2015). The tax credit phases out for eligible small employers when the number of its FTEs exceeds 10 or when the average annual FTE wages exceeds $25,900 for tax year 2016 (up from $25,800 in 2015). Only qualified health plan coverage purchased through a Small Business Health Options Program (SHOP) marketplace is available for the tax credit, and it is available only for a two-consecutive year period.
Employers managing compliance with benefits-related mandates under the ACA and other benefits rules for coverage, documentation, and reporting requirements should be aware of applicable penalties that compliance failures may trigger. Potential fines and penalties vary depending upon the provision under the Internal Revenue Code, ERISA, or the Department of Health and Human Services and Department of Labor rules. While these agencies are working towards helping plan sponsors comply with the new rules, compliance failures can be costly. Take the best approach and make it a new year’s resolution to be aware of the compliance requirements and develop plans for meeting them!