On December 16, 2015, the IRS released Notice 2015-87. The IRS addressed 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, reporting and defining hour of service. In addition, IRS provided guidance regarding COBRA coverage and Heath FSA carryovers. The following is a summary of the important provisions.
Health Reimbursement Arrangements (HRA.) 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 until end of the plan year beginning before January 1, 2017 to come into compliance with this requirement.
Employer Flex Contributions. Employer contributions to flex plans will only be considered for determining affordability or minimum value of employer health coverage if such flex contribution can only be used for health spending. Employer flex contributions will be treated as being used for health spending if (1) the employee may not opt to receive the amount as a taxable benefit, (2) the employee may use the amount to pay for minimum essential coverage and (3) the employee may use the amount exclusively to pay for medical care.
Solely for purposes of determining affordability for application of the employer mandate for 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 until the end of plan year 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. These contributions will be deemed for non-health purposes if they can be distributed to the employee in cash or used for dependent care or group term life insurance premiums.
Treatment of Opt-Out Payments. If an employer offers an employee cash payments if he or she waives 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 guidance 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 until the end of the plan year 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.
Employer payments under McNamara-O'Hara Service Contract Act (SCA), the Davis-Bacon Act or the Davis Bacon Related Acts (DBRA). Under SCA and DBRA, federal contractors are required to either pay prevailing wages and fringe benefits or cash out fringe benefits for workers. Until the IRS issues guidance how to treat these cash payments, employers may, until the end of the plan year beginning before January 1, 2017, consider cash payments in lieu of fringe benefits as increasing the affordability of coverage for purposes of the employer mandate and reporting. Employees are not required to consider these cash payments as making coverage more affordable for purposes of the individual mandate affordability exemption or premium tax credit eligibility.
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 percent 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.
Adjusted Penalty Amounts under the Employer Mandate. Inflation updates for the statutory penalties under the employer mandate are also provided. 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.
Hours of Service Determination. The term "hour of service" means each hour for which an employee is paid, or entitled to payment, for the performance of duties for the employer, and each hour for which the employee is paid, or entitled to payment by the employer, for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence. The term does not include any hours after the individual terminates employment with the employer. It also does not include time while an individual is on workmen's compensation or unemployment or disability laws and an hour of services for payment which solely reimburses an employee for medical or medically related expenses incurred by the employee.
The term "hour of service" does include periods during which an individual is not performing services but is receiving payments due to short-term disability or long-term disability if the individual retains the status as an employee of the employer, unless the payments are made from an arrangement to which the employer did not contribute directly or indirectly. Any arrangements under which the individual paid with after-tax contributions would be treated as an arrangement to which the employer did not contribute and payments from the arrangement would not give rise to hours of service.
Service Breaks. Special rules apply for employees of educational institutions who have long breaks in service between school years. Under IRS regulations, 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 avoiding this rule by claiming that their employees are actually employed by staffing agencies with which they contract, by terminating 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.
Governmental Entity and Reporting. A separate employer identification number will be required for each governmental entity employer that is subject to a reporting requirement if employees are receiving self-insured health coverage. Separate Forms 1094-C must be filed by each employer that is an ALE member of an applicable large employer group.
COBRA Coverage and Health FSA Carryovers. The maximum amount that a Health FSA is permitted to require to be paid to COBRA coverage does not include unused amounts carried over from prior years. The applicable premium is based solely on the sum of the employee's salary reduction election of the plan year and any nonelective employer contribution.
A qualified beneficiary must be allowed to carryover on the same terms as non-COBRA beneficiaries. Such individual will not be allowed to elect additional salary reduction contributions. The carryover period is limited to the applicable COBRA continuation period (18 months 29 months or 36 months)
An employer may condition the ability to carryover unused amounts on participation in the health FSA for the next year. In addition, an employer can limit the length of the carryover period.
For a copy of Notice 2015-87, please click on the link: https://www.irs.gov/pub/irs-drop/n-15-87.pdf
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