Last month, the IRS issued proposed changes to the ACA reporting and disclosure forms for 2016. As a reminder, Forms 1094-B and 1095-B are used by insurance providers to report on the number of individuals enrolled in health care coverage during a tax year, while Forms 1094-C and 1095-C are used by Applicable Large Employers (“ALEs”) to report on the health insurance coverage which they must offer to all their full-time employees during a tax year. We previously discussed the forms in depth here, here and here.
The drafts are subject to change, but we have provided some highlights of the proposed changes below.
- Line 22, Box B is now “Reserved.” The Qualifying Offer Method Transition Relief was only available for 2015 coverage and is not applicable for 2016.
- “Section 4980H” has been inserted before “Full-Time Employee Count for ALE Member” in Part III, column B in an apparent attempt to distinguish a “full-time employee” for ACA purposes from a “full-time employee” as defined in the plans and policies of an ALE.
- Line 9 is now “Reserved.” On the 2015 version of the form, this line was to report the Small Business Health Options Program (SHOP) Marketplace identifier, if applicable, but should have been left blank according to the 2015 instructions.
- The draft instructions provide that an individual who has received employer-sponsored coverage (i) may report such coverage on Form 1095-C (Part III) instead of Form 1095-B, (ii) does not have to fill in the information even if the individual had employer-sponsored health coverage during the year, and (iii) does not have to return the form to the employer or coverage provider.
- Form 1094-B remains unchanged for now.
- Two new codes, 1J and 1K, have been added to line 14 to report on conditional offers of coverage to an employee’s spouse.
- The language “Do not attach to your return. Keep for your records.” was inserted under the title of the form to alert individuals that they should not submit the forms to the IRS.
As we previously reported, the IRS had said last year that determination letter program for retirement plans would largely be going away. Rev. Proc. 2016-37 includes information with respect to the future of the determination letter program. As highlighted in a recent IRS webcast, a noteworthy development is that “subject to IRS resources” that post-initial determination letters may be available after 2017 in specified circumstances:
(1) significant law changes,
(2) new plan designs, and
(3) Plan types that can’t convert to a pre-approved format.
Number 3 means complex plans that do not fit on a pre-approved document may, ‘subject to IRS resources’ as published annually, be able to be submitted for a ruling under the determination letter program. Therefore, complex individually designed plans may still have hope that the IRS will continue to rule on their qualified status.
There were two other key points in the webcast. First, the IRS will publish a “required amendments” list and that employers will have until the end of the second calendar year after the date the list is published to amend their plans. Second, there will also be an operational compliance list issued annually that will be accessible on the IRS website, not published. The purpose of the operational list is to focus on the operation of the plan prior to the date of adoption of the amendment. These lists will include information that is prospective only and will not include information from prior annual lists.
The Affordable Care Act exchanges/marketplaces are required to notify employers of any employees who have been determined eligible for advance payments of the premium tax credit or cost-sharing reductions (i.e., subsidy) and enrolled in a qualified health plan through the exchange.
A few weeks ago the U.S. Department of Health and Human Services (HHS) began issuing these notices to employers for 2016. If you received such a notice, this means that at the time of applying for health care coverage through the exchange, the employee indicated that:
- you made no offer of health coverage;
- you offered health coverage, but it either wasn’t affordable or didn’t offer minimum value; or
- he or she was unable to enroll in the health coverage due to a waiting period.
Now, receipt of such a notice does not mean that you are liable for the play-or-pay employer mandate penalty. In fact, HHS is required to notify all employers, whether or not they are subject to the employer mandate, so small employers (i.e., less than a total of 50 full-time employee and full-time equivalents) have also received notices. The subsidy eligibility determination by an exchange and the IRS penalty assessment are entirely separate programs.
Employers do not have to appeal a determination of an employee’s eligibility for a subsidy and the grounds for an appeal are limited. As described in the HHS exchange subsidy notice, an employer should consider appealing if there is reason to believe the employee’s receipt of a subsidy is wrong. Therefore, an employer can only really appeal if the coverage it offered was affordable and provided minimum value or if the employee actually enrolled in the coverage. More information about appeals for the federally-facilitated exchanges (and the eight state exchanges utilizing the same appeal form as the federally-facilitated exchanges) is available here. For example, if the employee was offered affordable, minimum value coverage, the employee is actually enrolled in the employer’s plan.
If an appeal is appropriate, some employers may decide to submit an appeal in an effort to correct any misinformation and to potentially “head off” the imposition of the pay-or-play penalty tax by the IRS. Other employers may view an appeal as a way to help employees avoid an unexpected tax liability at year-end since any advanced premium tax credit that was erroneously received must be repaid. Regardless of the employer’s reason for appealing, the impacted employee may construe such action as adversarial. To minimize any potential resentment, an employer should consider notifying a current employee that it plans to submit an appeal and explain the potential adverse tax consequences to the employee if the employee receives a subsidy that he or she is not entitled to.
The IRS is not expected to start assessing play-or-pay penalties until after its receipt of employees’ individual tax returns for 2016 and employer information returns (i.e., Forms 1094-C and 1095-C). Since the details of the IRS penalty assessment and appeal processes have yet to be revealed, there is no guarantee that successfully appealing the HHS subsidy determination will automatically avoid the imposition of the penalty tax by the IRS. However, if you are an applicable large employer, the HHS appeal process affords you an opportunity to establish an administrative record of the correct facts. In addition, the information you submit as part of the HHS appeal process will likely be the same information and documents that will be necessary to challenge any IRS assessment of a play-or-pay penalty tax.
In some cases, an employer may choose not to appeal. Additionally, in other cases, the individual may have provided incorrect information to the exchange, but not of a type that an employer can appeal. For example, an individual may state that he or she was an employee of the employer, when in fact, he or she was an independent contractor. Employers who opt not to appeal the subsidy determination or for whom an appeal is not appropriate should consider gathering and retaining the necessary documentation showing why the individual was not offered coverage. That way, it will be readily accessible in the event the IRS subsequently seeks to impose the penalty tax.
Additional information on the subsidy notice program for the federally-facilitated exchanges is available here.
In Zubik v. Burwell, the justices vacated and remanded six federal appellate judgements on whether an accommodation (described below) for employers with religious objections to providing coverage for some or all contraception under the Affordable Care Act’s (ACA) preventive services coverage mandate violated the Religious Freedom Restoration Act (RFRA). The Court took no position on the merits and stated that the parties should have the opportunity to find an approach that accommodates the petitioners’ religious exercise and ensures that women covered by the petitioners’ health plans receive full coverage for preventive care. Essentially, as the Court awaits confirmation of a 9th justice they decided to kick the can down the proverbial road.
Enter the Departments of Health and Human Services (HHS), Labor, and Treasury, the agencies responsible for implementation of the ACA. On July 21, 2016, they released a “request for information” (RFI) intended to provide all interested stakeholders an opportunity to comment on several specific issues raised by the supplemental briefing and Supreme Court decision in Zubik v. Burwell. Broadly, the RFI asks for suggestions on ways to further accommodate objections by religious non-profits to furnishing their employees coverage for some or all contraceptive services in their health plans.
Under the current accommodation, employers that object to providing contraceptives to their employees for religious reasons may either:
- Self-certify their objection (EBSA Form 700) to their insurer or third-party administrator, or
- Inform HHS of their objection and identify their insurer or third-party administrator so the government can authorize the insurer or third-party administrator to provide coverage.
The petitioners argued that the accommodation made them parties to the provision of the objectionable contraceptive services and burdened their religious exercise in violation of RFRA.
The RFI seeks comments in three general areas:
- The procedure for invoking the accommodation, including whether using a particular form , stating that the employer is objecting on religious grounds, or giving a notice in writing raises any objections under RFRA.
- Procedures for insured plans, including whether the alternative procedure suggested by petitioners in their supplemental brief (upon a request for a plan without coverage for the objectionable contraceptives, the insurer would be required to provide the coverage separately) would resolve the issues under RFRA, what impact the approach would have on women’s ability to receive contraceptive coverage seamlessly, whether the approach raises issues under state insurance law, are there any other procedures that would not raise issues under RFRA.
- Procedures for self-insured plans, which both the government and the petitioners agree were not addressed in the Court’s order. Including whether there are reasonable means under existing law to ensure that women covered by self-insured plans can receive contraceptive coverage and whether there are alternative methods for a third party administrator to provide the coverage without raising issues under RFRA.
Responses to the RFI are due by September 20, 2016. Although HHS asserts that the current accommodation remains consistent with RFRA, responses for this RFI may support objecting employers’ claims that new regulations need to be proposed. Of course, there is always a possibility the RFI will not result in any movement and litigation will return again to the Supreme Court for resolution (by that time surely with a 9th justice).
On the TV show Futurama, the aged proprietor of the delivery company Planet Express, Professor Hubert J. Farnsworth, had a habit of entering a room where the other characters were gathered and sharing his trademark line, “Good news, everyone!” Of course, his news was rarely good. More often, it was the beginning of some misadventure through which the other characters would inevitably suffer, often to great comedic effect. So we can forgive you for thinking that we may be standing in his shoes when we tell you that new 409A regulations are good news, but really, hear us (read us?) out.
The IRS released proposed changes to both the existing final regulations and the proposed income inclusion regulations. And the news is mostly good. Additionally, taxpayers can rely on the proposed regulations.
The changes are legion, so we are breaking up our coverage into a series of blog posts. This last in our series is about the changes to the proposed income inclusion regulations and the other minor changes and clarifications made by the regulations. See our prior posts, “Firing Squad,” “Taking (and Giving) Stock,” “Don’t Fear the (409A) Reaper,” and “Getting Paid.”
Preventing Waste, Fraud, and Abuse (Okay, well, mostly just abuse). The only change to the proposed income inclusion regulations was to “fix” the anti-abuse rule that applied to correcting unvested amounts that violated 409A. “Why?” you might ask. Apparently, because people were abusing it.
Under the proposed income inclusion regulations, a broken (that’s a technical legal term) 409A arrangement could be fixed in any year before the year it would vest (what we will call “nonvested” amounts). The prior proposed regulations did not put many parameters on how the fix had to happen (other than it needed to, you know, comply with 409A).
Some hucksters (again, technical term) were apparently amending arrangements that complied with 409A to make them noncompliant. Then they would amend them again to “fix” them in the way they wanted. This would allow them to get around the change in election rules, as long as the amount would not vest that year. Clever, perhaps, but pretty clearly not within the spirit of the rules.
To prevent this kind of abuse, the IRS has revised this permitted correction rule. First, if there is no good faith basis for saying that the arrangement violates 409A, it cannot be fixed.
Second, the regulations provide a list of facts and circumstances for determining if a company has a pattern or practice of permitting impermissible changes. If they do, then they would not be able to fix a nonvested amount. The facts and circumstances include:
- Whether the service recipient has taken commercially reasonable measures to identify and correct substantially similar failures upon discovery;
- Whether substantially similar failures have occurred with respect to nonvested deferred amounts to a greater extent than with vested amounts;
- Whether substantially similar failures occur more frequently with respect to newly adopted plans; and
- Whether substantially similar failures appear intentional, are numerous, or repeat common past failures that have since been corrected.
Finally, the regulations require that a broken amount be fixed using a method provided in IRS correction guidance. This doesn’t mean that you have to use the correction guidance for unvested amounts. What it means is that, if a method is available and would apply if the amount was vested, then you have to use the mechanics of that correction (minus the tax reporting or paying any of the penalties). For example, under IRS Notice 2010-6, if a plan has two impermissible alternative times of payment for a payment event, it has to be corrected by providing for payment at the later of the two times. You would have to fix a nonvested amount in the same manner under these rules.
While these changes are intended to ferret out abusers of the rules, this does make it harder for well-intentioned companies who merely have failures to make changes.
Other Minor Changes and Clarifications. The proposed regulations also confirmed and clarified the following points of the current final regulations:
– 409A does apply to non-qualified arrangements of foreign entities that are also subject to 457A.
– Entities can be subject to 409A as service providers in the same way that individuals are.
– Payments can be accelerated for compliance with bona fide foreign ethics laws or conflicts of interest laws.
– On plan termination and liquidation outside a change in control, all plans of the same type (e.g., all account balance plans) have to be terminated. And no additional plans of that type can be adopted for three years. This is what the IRS always understood the rule to be, but they just made it clearer in these proposed regulations.
– Payments can also be accelerated, without limit, to comply with Federal debt collection laws.