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  • BC Network
    Thursday, June 21, 2018

    Over the last few months, the Internal Revenue Service (IRS) has been replying to responses to their Letter 226-J, which notifies employers of a proposed Employer Shared Responsibility Payment (ESRP). The IRS has recently updated its website to include additional information on its Letter 227 series. The various letters either close the ESRP case or provide the employer with next steps.

    If you responded to a Letter 226-J, the reply from the IRS will come in the form of one of the following four 227 letters:

    • Letter 227-J. If you submitted a completed Form 14764, ESRP Response agreeing to the ESRP amount proposed in your Letter 226-J, the IRS will acknowledge its receipt using Letter 227-J and provide instructions for making the ESRP. If full payment is not received within 10 days, the IRS will issue a Notice and Demand for the outstanding balance.
    • Letter 227-K. You want this letter. Letter 227-K acknowledges acceptance of the information you provided disputing the proposed ESRP amount and renders a determination that no ESRP is due. The case is closed and no further action is required.
    • Letter 227-L. The IRS acknowledges receipt of your response to Letter 226-J and notifies you of the revised ESRP amount using Letter 227-L. An updated ESRP Summary Table and Form 14765 (PTC Listing) will be included. If you agree with the revised ESRP amount, you must submit a completed Form 14764, ESRP Response with the required payment. If you disagree with the revised ESRP amount, you may either request a meeting or telephone conference with an IRS manager or request a conference with the IRS Office of Appeals. If you fail to respond in a timely manner to the Letter 227-L, the IRS will issue a Notice and Demand for the specified ESRP amount.
    • Letter 227-M. This letter acknowledges receipt of the information you provided disputing the proposed ESRP amount in Letter 226-J but provides that the amount of the ESRP remains unchanged. If applicable, the letter will be accompanied with an updated ESRP Summary Table and Form 14765 (PTC Listing). At this point, you may either agree with the calculated ESRP amount by submitting a completed Form 14764 with the required payment or if you disagree, request a meeting or telephone conference with an IRS manager or a conference with the IRS Office of Appeals. If you fail to respond to the Letter 227-M in a timely manner, the IRS will issue a Notice and Demand for the specified ESRP amount.

    The series also includes a Letter 227-N, which indicates the ESRP amount that will be assessed based on an Appeals conference and closes the case.

    To read our prior post on the Letter 226-J, click here.

    Wednesday, June 13, 2018

    On October 12, 2017, President Trump signed a “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”) to “facilitate the purchase of insurance across state lines and the development and operation of a healthcare system that provides high-quality care at affordable prices for the American people.”  One of the stated goals in the Executive Order is to expand access to and allow more employers to form Association Health Plans (“AHPs”).  In furtherance of this goal, the Executive Order directed the Department of Labor to consider proposing new rules to expand the definition of “employer” under Section 3(5) of the Employee Retirement Income Security Act of 1974 (“ERISA”).  The Department of Labor issued its proposed rule on January 5, 2018.

    In Part 1 of this “Deep Dive” series, we examined the history of AHPs and the effects of the changes proposed by the Trump Administration by providing a high-level, summary overview of the three types of arrangements that fall under the umbrella of health arrangements sponsored by associations, which include Affinity Arrangements, Group Insurance Arrangements and AHPs.  In Part 2 of this “Deep Dive” series, we compared plan features of the three types of arrangements under current law.  In Part 3 of this “Deep Dive” series, we examined the qualification requirements for AHPs under current law.  In this installment of the “Deep Dive” series, we will examine the qualification requirements for AHPs under the proposed rule, then explain why the new requirements, if enacted in their current form, would result in the polar opposite outcome from the intended result enunciated in the Executive Order.  Rather than facilitate the expansion of AHPs, the proposed rule would result in their decline and ultimate demise.

    Proposed Qualification Requirements for AHPs

    ERISA provides that an employee benefit plan may be maintained by an association of employers that effectively operates like a single employer.  Under the current statutory and regulatory scheme, to be a bona fide association of employers, the members of the association must:

    • have a commonality of interest unrelated to the provision of benefits;
    • exercise control over the benefit plan; and
    • consist of employers with at least one employee.

    In addition, the association itself must

    • be a pre-existing organization; and
    • exist for a purpose other than providing health coverage to its members.

    The proposed rule would retain some of the current AHP requirements and modify or eliminate other existing requirements, as follows:

    • The commonality of interest requirement would be significantly expanded to allow employers who are either in the same line of business or industry or in the same geographic area to join together for the purpose of providing health insurance to their employees. As a result, many more organizations would be permitted to sponsor association health plans than is the case under existing law.
    • The requirement that the AHP consist solely of employers with at least one employee would be eliminated. As a result, sole proprietors and other self-employed individuals would be allowed to participate in AHPs for their own benefit.
    • The requirement that the association be a pre-existing organization would be eliminated.
    • The requirement that the association exist for a purpose other than providing health coverage to its members would be eliminated.
    • The proposed rule would retain the requirement that the employer-members control the AHP and would also require that the AHP have a formal organizational structure with a governing body and bylaws (or similar indication of formality).

    The New Nondiscrimination Requirement – A Death Sentence for AHPs

    While the provisions of the proposed rule discussed above would relax the existing requirements associated with forming an AHP, a new requirement added by the proposed rule would result in a virtual death knell for most existing AHPs and significantly inhibit the formation of new AHPs.

    In a significant and unwarranted departure from current law, the proposed rule prohibits AHPs from varying premiums across groups of employers except in very narrow circumstances.  However, commercial insurance carriers would not be so limited except to the extent of state and federal community rating requirements applicable to small groups.  If the proposed rule were issued in its current form, AHPs would be forced to quote basically the same rates for all member employers, and commercial carriers would quote unhealthy large employer groups at higher rates than healthy groups, ultimately resulting in adverse selection in the AHP market.  Large employer groups with higher-than-average claims would have a financial incentive to join AHPs, and healthier-than-average-groups with lower costs would inevitably choose to purchase health insurance from commercial carriers.  This dynamic would result in AHPs enrolling, on average, more costly groups than commercial carriers in the non-AHP market.  As a result, AHPs would then be required to increase premiums across the board, diminishing the ability to attract even moderately healthy groups, resulting in further market segmentation and destabilizing the AHP marketplace.

    The DOL states in the preamble to the proposed rule that its purpose is to encourage the establishment and growth of AHPs and to expand access of employers and their employees to more affordable health coverage by relaxing the regulatory requirements applicable to AHPs.  It is anticipated that the final AHP rule will be issued soon.  Given the avowed purposed of the rule, we expect the DOL to significantly modify, if not eliminate, the nondiscrimination requirement so that this purpose may be achieved.

    Monday, March 26, 2018

    On August 10, 2017, in In re Mathias, the United States Court of Appeals for the Seventh Circuit held ERISA Section 502(e)(2) venue provisions do not invalidate a forum-selection clause contained in plan documents, in a 2-1 split decision.

    Case Background

    George Mathias sued his employer Caterpillar and its ERISA-governed health plan in the United States District Court for the Eastern District of Pennsylvania, where he resided. The plan documents, however, required any suit to be brought in federal court in the Central District of Illinois, so Caterpillar moved to transfer the case.  Mathias opposed the motion, arguing that ERISA’s venue provision invalidated the plan’s forum-selection clause.  His argument was rejected and Caterpillar’s motion to transfer the case was granted in a decision relying on a Sixth Circuit decision in Smith v. Aegon Cos. Pension Plan, which held that forum-selection clauses in ERISA plans are enforceable and not inconsistent with the text of ERISA’s venue provision.  When the case arrived in the Central District of Illinois, Mathias moved to transfer it back to Pennsylvania with the same argument, and his request was denied. Then, Mathias petitioned for mandamus relief in the United States Court of Appeals for the Seventh Circuit.

    Seventh Circuit Decision

    In a mandamus proceeding, the court can only reverse a transfer decision if the applicant can show that the transfer order is a “violation of a clear and indisputable legal right, or at the very least, is patently erroneous.” In re Rhone-Poulenc Rorer, Inc., 51 F.3d 1293, 1295 (7th Cir. 1995).  This high standard was not met here.

    Under ERISA’s venue provision, an action may be brought in the district court where (1) the plan is administered, (2) the breach or violation took place, or (3) a defendant resides or may be found.  ERISA § 502(e)(2) (emphasis added).  The Seventh Circuit cited the Smith decision which found the language in ERISA to be permissive and explained that the statute doesn’t limit parties from contractually narrowing the options to one of the venues listed in the statute.  769 F.3d at 931-32. The Court ultimately found that ERISA venue provisions do not invalidate forum-selection clauses in plan documents.

    Mathias filed a petition in the U.S. Supreme Court for certiorari review. The Department of Labor filed an amicus brief encouraging the Supreme Court to review the case and to invalidate the venue provision in the Caterpillar plan.  The Supreme Court declined to review the case, however.

    Effect of Decision

    For now, employers in the Sixth and Seventh Circuit (Illinois, Indiana, Kentucky, Michigan, Ohio, Tennessee, and Wisconsin) can have confidence that their plan venue selection clauses are enforceable. However, both of these decisions were split decisions.  A more participant-friendly Circuit could reach a different conclusion.

    Wednesday, March 7, 2018

    First in a Series

    On October 12, 2017, President Trump signed a “Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States” (the “Executive Order”) to “facilitate the purchase of insurance across State Lines and the development and operation of a healthcare system that provides high-quality care at affordable prices for the American People.” One of the stated goals in the Executive Order is to expand access to and allow more employers to form Association Health Plans (“AHPs”). In furtherance of this goal, the Executive Order directed the Department of Labor to consider proposing new rules to expand the definition of “employer” under Section 3(5) of the Employee Retirement Income Security Act of 1974 (“ERISA”). The Department of Labor issued its proposed rule on January 5, 2018.

    With the renewed focus on AHPs, we will be examining the history of AHPs and the effects of the changes proposed by the Trump Administration in this “Deep Dive” series. First in our series is a high-level, summary overview of the three types of arrangements that fall under the umbrella of health arrangements sponsored by associations: Affinity Arrangements, Group Insurance Arrangements (“GIAs”), and AHPs.

    Affinity Arrangements

    • A trade group or association (e.g., a local chamber of commerce) endorses a specific health plan.
    • The insurance carrier for the health plan pays a royalty to the trade group or association.
    • The insurance carrier issues standard fully-insured policies to members of the association who elect to purchase coverage through the health plan.
      • There may be a discount off the standard rate for the health plan offered to members purchasing coverage, to the extent permitted by state and federal community rating rules.
    • Each member that purchases the insurance policy has its own health plan that must independently comply with all associated legal requirements.
    • Each member that purchases the insurance policy files its own Form 5500, if applicable.
    • Because each member has its own health plan, the Affinity Arrangement is not subject to Multiple Employer Welfare Arrangement (“MEWA”) rules.

    Group Insurance Arrangements (“GIA”)

    • A trade group or association establishes an independent trust, and a health insurance carrier issues a single group insurance policy to the trust.
    • Association members purchase insurance through the trust and receive a certificate of coverage.
    • Each such association member is treated as having its own plan under ERISA.
    • The GIA files a single Form 5500 (which satisfies the Form 5500 filing obligations of all member firms).
    • The GIA is a MEWA subject to the MEWA rules and files a Form M-1 with the Department of Labor.

    AHP

    • A trade group or association establishes an independent trust, and the health insurance carrier issues a single group insurance policy to the trust.
    • Association members purchase insurance through the trust and receive a certificate of coverage.
    • Unlike a GIA, the AHP is considered to be a single plan covering multiple employers.
    • The AHP files a single Form 5500 for the plan.
    • The AHP is a MEWA subject to the MEWA rules and files a Form M-1 with the Department of Labor.

     

    Next “Deep Dive”: Comparison of Affinity Arrangements, GIAs, and AHPs under Current Law

    Tuesday, February 6, 2018

    On December 22, 2017, President Trump signed the bill popularly referred to as the “Tax Cuts and Jobs Act” (the “Act”) into law.  The Act contains significant changes to Section 162(m) of the Internal Revenue Code that are effective for taxable years beginning after December 31, 2017. In this article, we provide a summary of the changes to Section 162(m) and suggest planning considerations for publicly held corporations.

    Summary of Changes to Section 162(m)

    Among other changes to Section 162(m), the Act eliminated the performance-based compensation exception to the $1 million deduction limitation under Section 162(m).  The Act amended the scope of the covered employees, corporations, and compensation for purposes of the $1 million limitation on the deduction for compensation paid to certain employees under Section 162(m). The changes to Section 162(m) include the following:

    • Eliminating the performance-based compensation and commission exceptions from compensation subject to Section 162(m). Under the prior rules of Section 162(m), performance-based compensation and commission were excluded from the $1 million deduction limitation. This change means that a corporation’s compensation committee no longer will be required to establish objective performance goals within 90 days of the start of an applicable performance period and that shareholder approval of the compensation terms and maximum amounts payable no longer is required for Section 162(m) purposes.
    • Expanding the definition of publicly held corporations to include corporations that file reports under Section 15(d) of the Securities Exchange Act of 1934, as amended, which will subject certain corporations with publicly traded debt and certain foreign private issuers to the deduction limitation of Section 162(m). Under the prior rules, only corporations with publicly traded equity were subject to Section 162(m).
    • Expanding the definition of covered employee to include any individual who served as the CFO during the taxable year. In addition to the CEO and CFO, the definition continues to include the three other highest compensated officers required to be reported to shareholders under the Securities and Exchange Commission rules. The prior rules excluded the CFO.
    • Expanding the definition of covered employee to include any individual who was a covered employee in any taxable year beginning after December 31, 2016, so that once an employee is covered under Section 162(m) for any year, that individual will continue to be covered for all future years. Under the prior definition, covered employees were determined each year without regard to whether an individual was a covered employee in a prior year. With this change, payments to former employees (such as severance payments and stock option exercises) will be subject to the $1 million deduction limitation.
    • Expanding the scope of compensation subject to Section 162(m) to include amounts paid to an individual other than the covered employee, including a covered employee’s beneficiary following the employee’s death.

    Transition Rule for Contracts in effect on November 2, 2017

    The Act includes a transition rule under which the changes to Section 162(m) will not apply to compensation paid pursuant to a written binding contract that was in effect on November 2, 2017, provided that no material modification is made after that date. The Act’s conference agreement between the House and Senate makes clear that a contract that was in place prior to November 2, 2017, and that is renewed after that date, will be treated as a new contract that will no longer qualify for the transition rule. The requirement of a written binding contract under the transition rule raises issues such as whether a contract or plan subject to the compensation committee’s discretion to adjust a performance award downward will result in the contract being ineligible for the transition rule. We expect that future guidance from the Internal Revenue Service will address these issues and will provide additional guidance as to what constitutes a written binding contract and a material modification.

    Considerations in Planning for the New Section 162(m)

    Corporations covered by Section 162(m) should review their current compensation arrangements now to identify the contracts and plans that may take advantage of the transition rule.  We recommend the following:

    • In order to determine what constitutes a written binding contract, it may be helpful to look to applicable state law or analogous federal laws, until we have further guidance from the IRS.
    • Once identified, any change to a contract should be carefully reviewed to determine whether it will cause the arrangement to lose the benefit of the transition rule. In the absence of guidance from the Internal Revenue Service, guidance and interpretations under other tax laws that included transition relief for agreements that had not been subject to a material modification, such as Section 409A of the Internal Revenue Code, may be helpful in determining whether such a modification has been made.
    • In addition, because contracts eligible to take advantage of the transition rule are subject to the prior Section 162(m) rules, they must be administered in compliance with the prior requirements related to performance-based compensation, including the requirement to certify the attainment of the performance goals.

    For new performance-based compensation arrangements, the repeal of the performance-based pay exception allows corporations increased flexibility in the establishment and operation of performance-based pay programs.

    • Performance goals no longer need to be pre-established or objectively determinable. This change will permit compensation committees greater flexibility in taking into account events that occur during the performance period when determining whether the performance goals have been satisfied.
    • Performance goals no longer need to be approved by the compensation committee within 90 days of the beginning of the performance period.
    • The compensation committee may reserve the discretion to adjust performance-based awards up or down based on actual performance.
    • To limit the impact of the repeal of the performance-based pay and commission exceptions, a corporation may consider permitting or requiring covered employees to defer receipt of all or a portion of the individual’s compensation or extending the payment schedule over a period of years in a manner such that the payments would fit within the $1 million deduction limit for the year. These strategies may implicate additional legal requirements applicable to deferred compensation which should be taken into account, including under Section 409A.

    In addition, the changes to Section 162(m) may present state tax deduction issues in states which conform sections of their tax code to the federal tax code. In states that permit deductions for performance-based pay under state tax laws mirroring the prior version of Section 162(m), the performance-based pay deduction may continue to be available for performance-based plans that comply with the prior rules of Section 162(m) until the state brings its tax law into conformity with the new federal Section 162(m). Amended or newly established performance-based plans designed under the new federal Section 162(m) may lose a state tax deduction for performance-based pay in states that have not conformed to the new federal Section 162(m) because these plans will not comply with the prior Section 162(m) performance-based pay exception rules.

    Finally, in addition to planning for compliance with the transition rule and the repeal of the performance- and commission-based compensation exceptions, corporations should consult with their outside advisers to determine whether and how to describe the changes relating to Section 162(m) in their proxy statements.

    The changes to Section 162(m) and the repeal of the performance- and commission-based pay exceptions pose a significant change in the tax rules governing executive compensation and, likely, a major shift in how corporations will compensate their executives as a result. We expect future guidance from the Internal Revenue Service will be issued to assist with compliance. With this in mind, corporations subject to Section 162(m) should consult with their legal counsel, compensation consultants, and other outside advisers to implement any changes to their compensation programs and comply with the new rules.

    Tuesday, January 23, 2018

    On December 22, President Trump signed “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018” (“Bill”) into law. The Bill was previously named the much-shorter “Tax Cuts and Jobs Act,” but was changed after a senator pointed out that the name violated an obscure Senate rule.

    The new employee benefit and executive compensation provisions in the Bill affect both individuals and employers. The good news for colleges and universities is that the harshest employee benefit provisions directed at colleges and universities were not included in the final Bill. The bad news is that the executive compensation and fringe benefit changes directed at tax-exempt organizations are unfavorable to institutions of higher education.

    THE GOOD: CHANGES EXCLUDED FROM THE FINAL BILL

    The House passed a version of the Bill that would have repealed the exclusion from income for qualified tuition reductions provided by educational institutions to (i) employees and their spouses or dependents and (ii) graduate teaching assistants.  The House’s version of the Bill also eliminated the exclusion for education assistance (up to $5,250 per year per employee) that was available to all employers.

    Fortunately, both of these changes were eliminated in the final Bill.

    THE BAD: EXCISE TAX ON EXCESS COMPENSATION PAID TO COVERED EMPLOYEES

    The Bill places a 21% excise tax on the amount of annual compensation in excess of $1,000,000 paid to covered employees of most tax-exempt organizations, including tax-exempt institutions of higher education.

    Covered Employees

    A “covered employee” is any employee—including a former employee—who is either one of the five highest compensated employees of the organization for the taxable year, or an employee who was a covered employee of the organization (or any predecessor to the organization) for any preceding taxable year beginning in 2017.

    Compensation

    Compensation generally includes all taxable remuneration payable to a covered employee (“Compensation”).  For purposes of this rule, remuneration is considered payable in the first year that it is no longer subject to a substantial risk of forfeiture, regardless of when actually paid. A substantial risk of forfeiture exists when a person’s rights to remuneration are conditioned upon the future performance of substantial services or the occurrence of a condition related to the purpose of the remuneration. So, to determine the total Compensation of a covered employee in any year, an employer must add together current salary and other current taxable remuneration as well as any future rights to payments (but only for the first year in which such future payments are no longer subject to a substantial risk of forfeiture).

    Compensation does not include designated Roth contributions or amounts paid to licensed medical professionals for medical or veterinary services. Licensed medical professionals include doctors, nurses, and veterinarians. The Bill does not provide any guidance on what qualifies as medical or veterinary services, but the IRS may promulgate regulations to clarify the provisions of this Code section.

    Compensation of a covered employee by an applicable tax-exempt organization includes amounts paid by all related tax-exempt organizations and governmental entities. So, if two related organizations each pay a covered employee $900,000, even though neither organization pays the covered employee more than $1,000,000 individually, both will be liable for a 21% tax on a portion of the amount over $1,000,000 that the covered employee receives (here, $800,000). Each related organization is liable for the amount of taxes proportional to Compensation it pays the covered employee during the year. In the example above, each organization would be liable for half of the taxes assessed because each organization paid the covered employee an equal amount. However, if one organization paid $450,000, and the other paid $1,350,000, the first organization would owe one-quarter of the total tax assessed and the other organization would owe three-quarters of the total tax assessed.

    EXCISE TAX ON EXCESS PARACHUTE PAYMENTS TO COVERED EMPLOYEES

    The Bill also places a 21% excise tax on the amount of “excess parachute payments” paid to covered employees of most tax-exempt organizations, including tax-exempt institutions of higher education.

    Parachute payments are taxable payments available to a covered employee contingent on the employee’s termination of employment (“Parachute Payments”). An excess parachute payment is any such taxable payment in excess of three times the base amount allocated to such payment. The base amount is the annualized includable Compensation of the covered employee for the five taxable years ending before the date of the employee’s separation from employment. So, if an employee’s annualized Compensation (including amounts not subject to a substantial risk of forfeiture) is $200,000, any amount over $600,000 paid to the employee contingent upon his separation from service would be taxed at a rate of 21%.

    Many of the concepts described in the preceding section apply in the Parachute Payment context.  The definitions of “covered employee” and “Compensation” are the same, and Parachute Payments do not include amounts paid to licensed medical professionals for medical or veterinary services.  In addition, amounts payable to non-highly compensated employees and distributions from qualified plans, 403(b) plans, and 457(b) plans do not count as Parachute Payments.

    One element of uncertainty associated with the Parachute Payment excise tax relates to amounts which become fully vested upon an involuntary termination of employment under a Section 457(f) plan.  Assume, for example, that a covered employee would be entitled to a $300,000 payment under a Section 457(f) plan on the earlier of an involuntary separation from service without cause or March 1, 2025.  Assume further that the covered employee is involuntarily terminated without cause on January 1, 2025 and receives a lump sum payment of $300,000.  By analogy to the golden parachute payment regulations issued under Internal Revenue Code Section 280G, the value of such payment for purposes of the 21% excise tax should equal at most the value of the two-month vesting acceleration rather than the full $300,000, but this is not clear pending further guidance from the Internal Revenue Service.

    If an amount is subject to the Parachute Payment excise tax, it will not also be subject to the Excess Compensation excise tax described in the preceding section.

    NEXT STEPS FOR COLLEGES AND UNIVERSITIES POTENTIALLY AFFECTED BY EXCISE TAXES

    The first step for employers potentially affected by either of these excise taxes will be to identify their covered employees and the covered employees’ annual Compensation and potential Parachute Payments due upon severance from employment. After identifying the Compensation and potential Parachute Payments associated with each covered employee, employers may want to restructure certain covered employees’ compensation. Affected employers will need to weigh competing interests: (i) the need to retain skilled executives and other key employees against (ii) the added tax costs and the perception of donors and the public in the event either excise tax might apply to payments to a covered employee.

    UNRELATED BUSINESS TAXABLE INCOME INCREASED

    The Bill also increases the amount of unrelated business taxable income of a tax-exempt organization by any amount that is paid or incurred by the organization (i) as a qualified transportation fringe, (ii) made to a parking facility used in connection with qualified parking, or (iii) towards any on-premises athletic facility. For example, if an organization pays $100 a month for an on-premises gym on behalf of an employee, $1,200 ($100/month x 12 months) will be added to that organization’s unrelated business taxable income.

    When considering this new provision, employers will want to weigh their own financial interests with the interests of their employees. While no longer providing the fringe benefits discussed above may save unrelated business income taxes, doing so would undoubtedly be viewed unfavorably by employees.

    Monday, November 27, 2017

    The Affordable Care Act (ACA) introduced a “pay or play” scheme, effective January 1, 2015, in which Applicable Large Employers (ALEs) must offer affordable qualifying healthcare to their full-time employees (and their dependent children) or pay a penalty. Despite President Trump’s first Executive Order (discussed here) directing a rollback of the Affordable Care Act (ACA) and instructing the Secretary of Health and Human Services to minimize the “unwarranted economic and regulatory burden of the act,” the Internal Revenue Service (IRS) quietly updated its Questions and Answers on Employer Shared Responsibility Provisions Under the ACA to include the first official guidance detailing the process for enforcement of the penalty. Notably, this update coincided with an IRS announcement that penalties for the 2015 calendar year will be assessed late this year.

    The ALE penalty process starts with Letter 226J, which the IRS will send to ALEs it believes owe a penalty based on information reported on Forms 1095-C and 1094-C. The letter will explain the penalty calculations and describe steps to follow depending on whether the ALE agrees or disagrees with the proposed penalty amount.

    If you receive Letter 226J and disagree with the proposed penalty, you may:

    • Complete, sign and date Form 14764 ESRP Response (to be included with Letter 226J);
    • Include a statement explaining the basis for your disagreement (you may include supporting documentation) and describing any changes you want to make to the information reported on your Form(s) 1094-C or 1095-C (do not file a corrected Form 1094-C); and
    • Make any changes to Form 14765, Employee PTC Listing to dispute and make corrections to the assessable full-time employees (including any additional documentation supporting your changes).

    Generally, you will have 30 days from the date the letter was issued to respond. If the IRS does not receive your response by the response date indicated on the first page of Letter 226J, it will issue a Notice and Demand for the proposed and assessed penalty.

    The IRS will review any response to Letter 226J and respond with the appropriate version of Letter 227, which will outline any further actions you may need to take. If you disagree with the proposed or revised penalty in Letter 227, you may request a “pre-assessment conference” within the IRS Office of Appeals. However, you must do so by the response date indicated on Letter 227, which generally will be 30 days from the date of the letter. If, at the end of this process, the IRS determines a penalty is owed, it will issue a notice and demand for payment using Notice CP 220J.

    Given that it is already late November, ALEs should expect to begin receiving Letter 226Js in the near future.

    Thursday, November 9, 2017

    Last week the House unveiled its tax overhaul plan, the Tax Cuts and Jobs Act (“Act”).  The Act’s proposals related to employee benefits and compensation are as follows:

    Nonqualified Deferred Compensation

    Perhaps one of the most talked about aspects of the Act (at least among benefits practitioners) is the demise of Code section 409A and the creation of its replacement, Code section 409B.

    Under the proposed Code section 409B regime, nonqualified deferred compensation would be defined broadly to include any compensation that could be paid later than the March 15 following the taxable year in which the compensation is no longer subject to a substantial risk of forfeiture, but with specific carve-outs for qualified retirement plans and bona fide vacation, leave, disability, or death benefit plans.  Stock options, stock appreciation rights, restricted stock units, and other phantom equity are included expressly in the definition of nonqualified deferred compensation.

    All nonqualified deferred compensation earned for services performed after 2017 would become taxable once the substantial risk of forfeiture no longer exists, even if payment of the compensation occurs in a later tax year.  As a result:

    • Stock options and stock appreciation rights would become includible in income in the year in which the award vests, without regard to whether they have been exercised.
    • An employee’s deferral of any salary under a nonqualified deferred compensation arrangement until separation from service or otherwise would result in the inclusion of such amount in the employee’s income in the year earned.
    • All salary continuation payments under a severance arrangement would be taxable in the year in which the termination of employment occurs.

    Further, a substantial risk of forfeiture exists only so long as the compensation remains subject to the service provider’s continued substantial future services.  The satisfaction of performance conditions would no longer qualify as a substantial risk of forfeiture.

    All nonqualified deferred compensation earned for services performed before 2018, to the extent not previously includible in income, will be included in income in the last tax year beginning before 2026 or, if later, the date the substantial risk of forfeiture with respect to such compensation no longer exists.  A limited period of time would be provided during which such nonqualified deferred compensation may be amended to conform the date of distribution to the date such amount would be required to be included in the participant’s income without violating Code section 409A.

    Performance-Based Compensation

    The Act also would eliminate the exception to the Code section 162(m) limit on deductible compensation for performance-based compensation, effective January 1, 2018.  The definition of a “covered employee” for purposes of application of Code section 162(m) would change to include an employee who is the principal executive officer or principal financial officer at any time during the taxable year or one of the top three highest-paid employees (or who has ever been a covered employee after 2016).

    Since satisfaction of the specified performance targets would no longer constitute a substantial risk of forfeiture, an employee who participates in a long-term incentive plan that does not require continued employment through the end of the performance period as a condition to receiving the bonus (or the Company subsequently waives such requirement) would be required to include the bonus amount in income in the year in which no additional services are required (even if the final performance results are unknown).

    Beginning in 2018, tax-exempt organizations would become subject to a 20% excise tax on all compensation (cash and the cash value of all remuneration, including benefits paid in a medium other than cash, except for payments to a qualified retirement plan and amounts that are excludable from the employee’s gross income) in excess of $1 million paid to the five highest-paid employees.

    Retirement Plans

    Many of the proposed changes for qualified plans would be favorable for participants.

    Hardship distributions would no longer require participants to cease making contributions during the six-month period after the distribution.  In addition, a defined contribution plan could permit participants to receive a distribution from qualified nonelective contributions (QNECs), qualified matching contributions (QMACs), profit sharing contributions and earnings on any such contributions.  In addition, participants would no longer be required to seek any available plan loan first to alleviate their financial need.

    The minimum age at which a defined benefit pension plan could permit commencement of in-service benefits or a state and local government defined contribution plan could permit an in-service distribution is reduced from age 62 to age 59 ½.

    A participant would have until the due date for filing his or her tax return to roll over a loan balance from a qualified plan to an individual retirement account (IRA), instead of the current 60 day period, before such amount is treated as a distribution.

    Miscellaneous and Fringe Benefits

    Effective January 1, 2018, the following benefits would become taxable to the employee:

    • Reimbursed dependent care expenses under a dependent care assistance program (DCAP) and employer-provided onsite daycare
    • Qualified tuition reimbursement plan benefits
    • Adoption assistance plan benefits
    • Qualified moving-expense reimbursements
    • Employee achievement awards given in recognition of length of service or safety achievement
    • Employer contributions to an Archer Medical Savings Account (accounts could not be established after 2005). Such contributions also would be non-deductible by the employer.

    Transportation fringe benefits would continue to be excludible from employees’ income, but an employer would no longer be entitled to a deduction.

    As expected, the House is engaged in intense negotiations on various parts of the Act so the extent to which any of these provisions will remain in their current iteration in the final version is yet to been determined.

    For more information on the Act’s proposals related to estate transfer taxes, read the Trust Bryan Cave blog’s summary of the Act.

    Tuesday, August 8, 2017

    According to one recent survey, telemedicine services (i.e., remote delivery of healthcare services using telecommunications technology) among large employers (500 or more employees) grew from 18% in 2014 to 59% in 2016.  Common selling points touted by telemedicine vendors include reduced health care costs and employee convenience.  However, state licensure laws imposing restrictions on telemedicine practitioners can often limit the value (or even availability) of telemedicine services to employees.

    But that seems to be changing.

    Texas Law Change

    This summer Texas passed legislation (SB 1107) prohibiting regulatory agencies with authority over a health professional from adopting rules pertaining to telemedicine that would impose a higher standard of care than the in-person standard of care.  With the enactment of SB1107, the Texas Medical Board must revise portions of its existing telemedicine regulations, which had largely been viewed as some of the most restrictive in the country.  Key revisions proposed by the Board at its July meeting included the elimination of the following requirements:

    • Patient must be physically in the presence of an agent of the treating telemedicine practitioner
    • Physical examination of the patient by the telemedicine practitioner in a traditional office setting within the past twelve months
    • Interaction between the patient and telemedicine practitioner must be via live video feed

    However, it appears that the Board will continue its prohibition against the use of telemedicine for prescribing controlled substances for the treatment of chronic pain.

    Prescribing Controlled Substances

    Meanwhile other states have relaxed their rules relating to telemedicine practitioners seeking to prescribe controlled substances.  For example, the Florida Board of Medicine replaced its ban on any prescription of controlled substances using telemedicine with a new rule that allows telemedicine practitioners to issue prescriptions except in the case of controlled substances for the treatment of psychiatric disorders.  Delaware, Indiana, Michigan, Ohio and West Virginia have also expanded the circumstances under which telemedicine practitioners can prescribe controlled substances.

    For more information on the Texas legislation, read this overview from Bryan Cave’s healthcare attorneys.

    Expanded State Licensing of Practitioners

    State licensing laws generally preclude or restrict a provider licensed in one state from delivering medical services to individuals in another state.  Consequently, an out-of-state physician (absent certain exceptions) must obtain a full and unrestricted license to practice medicine on patients in a particular state.  In an effort to facilitate license portability and the practice of interstate telemedicine, the Federation of State Medical Boards developed an Interstate Medical Licensure Compact.  So far, 25 states participate in the Compact or have taken action to become Compact states.  Under the Compact, licensed physicians can qualify to practice medicine across state lines within the Compact if they meet the agreed upon eligibility requirements.

    Employer Compliance Considerations

    These and other actions by states to facilitate the growth of telemedicine may encourage more employers to jump on the telemedicine bandwagon.  However, employers should be aware that as with any group health plan, the provision of a telemedicine program to employees can raise a number of compliance issues under the Affordable Care Act (ACA), Health Insurance Portability and Accountability Act (HIPAA), Employee Retirement Income Security Act (ERISA) and the Consolidated Omnibus Budget Reconciliation Act (COBRA) as well as disqualify individuals participating in a high deductible health from making or receiving contributions to their health savings account.

    Wednesday, July 19, 2017

    Update: On November 24, 2017, the Department of Labor filed a final rule to delay the applicability date of new disability claims procedures regulation by 90 days, through April 1, 2018.

    Plan sponsors are typically forced to wait for last minute guidance to satisfy year-end compliance obligations. As a result, those of us who work with these plans spend the last days of the year frantically ensuring plans are in compliance mode while friends and family ring in the new year with frivolity and festivities. While we can’t guarantee that won’t happen again this year, if it happens to you because you are evaluating the impact of the new disability claim procedures on plans, then shame on you. As discussed below, the information necessary to comply with the new rules is already available. So address these obligations now – then dig out your little-black-dress or tux, and join the year-end frivolity!

    The final rule modifying the disability claims procedures, issued late last year, became effective January 18, 2017, and applies to claims for disability benefits which are filed on or after January 1, 2018.  Plan sponsors should identify their claims procedures, plan documents and SPDs that may need to be updated to reflect the new rule. To assist in that endeavor, the key changes implemented by the new rule are summarized below.

    1. New Independence and Impartiality Provisions. These new provisions are intended to reduce the possibility of unfair claims review. The change requires that “decisions regarding hiring, compensation, termination, promotion, or other similar matters…must not be based upon the likelihood that the individual will support the denial of benefits.” That being said, the regulation does not represent a significant change from prior law as both industry practice and case law have generally protected procedural independence.
    2. New Disclosure Requirements. The new disclosure requirements mandate three new disclosures upon an adverse benefit determination. First, the plan must provide a “discussion of the decision” explaining the basis for disagreeing with views presented by certain professionals. The regulation requires the discussion when the plan administrator disagrees with the (1) “views presented by the claimant to the plan of health care professionals treating the claimant and vocational professionals who evaluated the claimant,” (2) “views of medical or vocational experts whose advice was obtained on behalf of the plan…regard[less of] whether the advice was relied upon in making the benefit determination,” and (3) “disability determination[s] regarding the claimant presented by the claimant to the plan made by the Social Security Administration.” Second, the plan must disclose the specific internal rules, guidelines, protocols, standards and other similar criteria which were relied upon in making the adverse determination. If such guidelines, protocols, etc. do not exist, the plan must make a statement saying so. Third, the plan must make a statement that the claimant is entitled to receive upon request and free of charge all the documents, records, and other information relevant to the claimant’s claim for benefits.
    3. Enhanced Review Rights. The final rule also requires affords enhanced rights to review and respond to new information before the final decision. The plan must promptly disclose (1) “new or additional evidence considered, relied upon, or generated by the plan, insurer, or other person making the benefit determination…in connection with the claim;” and (2) new or additional rationales forming the basis of the plan’s determination. The disclosures must be made free of charge and “as soon as possible and sufficiently in advance of the date on which the notice of [an] adverse benefit determination on review is required.”
    4. New Deemed Exhausted Provisions. The new deemed exhausted provision allows claimant to immediately pursue civil enforcement if the plan fails to strictly adhere to all the requirements of the ERISA claims procedures in connection with the claim.
    5. Expanded Definition of Adverse Benefit Determination. The new regulation adds that in the case of a plan providing disability benefits, the term ‘adverse benefit determination’ includes any cancellation or discontinuance of disability coverage that, except to the extent it is attributable to a failure to timely pay required premiums or contributions, has a retroactive effect with respect to a participant or beneficiary.
    6. New Culturally and Linguistically Standards. New standards apply when the claimant’s address is in a county in which ten percent or more of the population is literate only in the same non-English language (e.g. ten percent of the county is literate in Spanish but not English). In those circumstances, a notice will not be culturally and linguistically appropriate unless the plan meets the following requirements: (1) “[t]he plan provide[s] oral language…that include answering questions in any applicable non-English language and providing assistance with filing claims and appeals,” (2) “[t]he plan must provide, upon request, a notice in any applicable non-English language,” and (3) “[t]he plan must include in the English version of all notices, a statement prominently displayed in any applicable non–English language clearly indicating how to access the language services provided by the plan.”
    7. New Disclosure Requirements. The new regulation provides additional requirements to the process of notifying the claimant of the plan’s benefit determination following review. While the prior regulation required a statement of the claimant’s right to bring an action under § 502(a), the new regulation also requires the plan to describe any applicable contractual limitations periods applying to the claimant’s right to bring the action as well as the calendar date upon which the claimant’s rights expire.

    Party on!

    The author thanks St. Louis summer associate Ben Ford for his assistance in researching and preparing this blog post.