IRS Issues Pay or Play Enforcement Guidance

IRS Issues Pay or Play Enforcement Guidance

By GBS Team

On Nov. 2, 2017, the Internal Revenue Service (IRS) updated its Questions and Answers (Q&As) on the employer shared responsibility rules under the Affordable Care Act (ACA) to include information on enforcement. Specifically, these Q&As include guidance on:
• How an employer will know that it owes an employer shared responsibility penalty;
• Appealing a penalty assessment; and
• Procedures for paying any penalties owed.
The IRS also maintains a website on understanding Letter 226-J, as well as a sample letter, which will be used to inform employers of their potential penalty liability.

ACTION STEPS

No penalties have been assessed under the employer shared responsibility rules at this time. However, employers subject to these rules are still responsible for compliance. These Q&As indicate that, for the 2015 calendar year, the IRS plans to issue letters informing employers of their potential liability for an employer shared responsibility penalty, if any, in late 2017.

Background

The ACA’s employer shared responsibility rules require applicable large employers (ALEs) to offer affordable, minimum value health coverage to their full-time employees or pay a penalty. These rules, also known as the “employer mandate” or “pay or play” rules, only apply to ALEs, which are employers with, on average, at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year.

The employer shared responsibility rules took effect for most ALEs beginning on Jan. 1, 2015. However, some ALEs may have had additional time to comply with these requirements. An ALE may be subject to a penalty only if one or more full-time employees obtain an Exchange subsidy (either because the ALE does not offer health coverage, or offers coverage that is unaffordable or does not provide minimum value).

Prior to 2017, the IRS has been unable to identify the employers potentially subject to an employer shared responsibility penalty or to assess any penalties. The IRS previously indicated that it expected to begin sending letters in early 2017 informing ALEs that filed Forms 1094-C and 1095-C of their potential liability for an employer shared responsibility penalty for the 2015 calendar year (with reporting in 2016). However, at this time, no letters have been sent to any ALEs.

Enforcement Guidance

The general procedures the IRS will use to propose and assess the employer shared responsibility penalties are described in Letter 226-J. The IRS plans to issue Letter 226-J to an ALE if it determines that, for at least one month in the year, one or more of the ALE’s full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee).

These letters are separate from the Section 1411 Certification sent by the Department of Health and Human Services (HHS) that employers began receiving in 2016. The Section 1411 Certifications are sent to all employers with employees who receive a subsidy to purchase coverage through an Exchange (including both ALEs and non-ALEs). Section 1411 Certifications do not trigger or assess any penalties for any employers.

Letter 226-J will include:

  • A brief explanation of Section 4980H;
  • An employer shared responsibility penalty summary table itemizing the proposed penalty by month and indicating for each month if the liability is under Section 4980H(a) or Section 4980H(b) (or neither);
  • An explanation of the employer shared responsibility penalty summary table;
  • Form 14764, Employer Shared Responsibility Payment (ESRP) Response, an employer shared responsibility response form;
  • Form 14765, Employee Premium Tax Credit (PTC) List, which lists, by month, the ALE’s assessable full-time employees (individuals who for at least one month in the year were full-time employees allowed a premium tax credit and for whom the ALE did not qualify for an affordability safe harbor or other relief—see instructions for Forms 1094-C and 1095-C, line 16), and the indicator codes, if any, the ALE reported on lines 14 and 16 of each assessable full-time employee’s Form 1095-C;
  • A description of the actions the ALE should take if it agrees or disagrees with the proposed employer shared responsibility penalty in Letter 226-J; and
  • A description of the actions the IRS will take if the ALE does not respond to Letter 226-J on time.

The response to Letter 226-J will be due by the response date shown on Letter 226-J, which generally will be 30 days from the date of Letter 226-J. Letter 226-J will contain the name and contact information of a specific IRS employee that the ALE should contact if the ALE has questions about the letter.

For the 2015 calendar year, the IRS plans to issue Letter 226-J informing ALEs of their potential liability for an employer shared responsibility penalty, if any, in late 2017.

For purposes of Letter 226-J, the IRS determination of whether an ALE may be liable for an employer shared responsibility penalty and the amount of the potential penalty is based on information reported to the IRS on Forms 1094-C and 1095-C and information about full-time employees of the ALE that were allowed the premium tax credit.

Appeals

ALEs will have an opportunity to respond to Letter 226-J before any employer shared responsibility liability is assessed and notice and demand for payment is made. Letter 226-J will provide instructions for how the ALE should respond in writing, either agreeing with the proposed employer shared responsibility penalty or disagreeing with part or all or the proposed amount.

If the ALE responds to Letter 226-J, the IRS will acknowledge the ALE’s response with an appropriate version of Letter 227 (a series of five different letters that, in general, acknowledge the ALE’s response to Letter 226-J and describe further actions the ALE may need to take). If, after receipt of Letter 227, the ALE disagrees with the proposed or revised employer shared responsibility penalty, the ALE may request a pre-assessment conference with the IRS Office of Appeals. The ALE should follow the instructions provided in Letter 227 and Publication 5, Your Appeal Rights and How To Prepare a Protest if You Don’t Agree, for requesting a conference with the IRS Office of Appeals. A conference should be requested in writing by the response date shown on Letter 227, which generally will be 30 days from the date of Letter 227.

If the ALE does not respond to either Letter 226-J or Letter 227, the IRS will assess the amount of the proposed employer shared responsibility penalty and issue a notice and demand for payment—Notice CP 220J.

Paying a Penalty

If, after correspondence between the ALE and the IRS (or a conference with the IRS Office of Appeals), the IRS or IRS Office of Appeals determines that an ALE is liable for an employer shared responsibility penalty, the IRS will assess the employer shared responsibility penalty and issue a notice and demand for payment (Notice CP 220J). Notice CP 220J will:

  • Include a summary of the employer shared responsibility penalty and reflect any payments made, credits applied and the balance due, if any; and
  • Instruct the ALE how to make a payment, if any.

ALEs will not be required to include the employer shared responsibility penalty on any tax return that they file or make a payment before notice and demand for payment. For payment options, such as entering into an installment agreement, refer to Publication 594, The IRS Collection Process

GBS Infographic •Common Payment Models

Overview of Common Payment Models

Group Benefits Strategies is here to help! Contact us today at (508) 832-0490 for more information.

FULLY INSURED PAYMENT MODELS

  • The carrier assumes the financial risk of providing health insurance, and the employer is charged a flat monthly fee.
  • The employer typically knows the costs ahead of time since it pays a flat fee every month.
  • Fully insured plans are subject to state rules and regulations.
  • With this type of payment model, costs are unlikely to decrease, even with a low previous-year utilization.

SELF – INSURED PAYMENT MODELS

  • The employer assumes the financial risk of providing health insurance and pays for medical claims out of pocket.
  • These models can be more easily customized to fit the specific needs of an employer’s workforce.
  • The employer can contract with providers, or a particular provider network, that will best meet the needs of its employees.
  • The employer will typically work with a third-party administrator (TPA), which assumes claims administration duties.
  • Self-insured health plans are not subject to state health laws, but rather federal laws. These plans are not subject to state health insurance premium taxes.

LEVEL FUNDING PAYMENT MODELS

  • Level funding models are sometimes thought of as a hybrid of fully insured and self-insured payment models.
  • In this type of model, the employer pays a set amount each month to a carrier, and the carrier then pays employees’ claims throughout the year.
  • If the employer’s monthly payments exceeded the amount of claims filed, the employer will receive a refund from the excess they paid in monthly claim allotments. If the employer’s monthly payments did not exceed the amount of claims filed, stop-loss insurance will typically cover the overage amount, if allowed by state law.
  • Typically, an employer will be assisted or advised by a TPA on the previous two bullet points.
  • Companies with smaller numbers of employees may benefit differently than those with larger numbers.

New Rules for Disability Benefit Claims May Be Delayed

New Rules for Disability Benefit Claims May Be Delayed

By GBS Team

On Dec. 16, 2016, the Department of Labor (DOL) released a final rule to strengthen the claims and appeals
requirements for plans that provide disability benefits and are subject to the Employee Retirement Income
Security Act (ERISA). The final rule is currently scheduled to apply to claims that are filed on or after Jan. 1, 2018. However, on Oct. 10, 2017, the DOL proposed to delay the final rule for 90 days—until April 1, 2018.

The DOL will review the final rule to determine whether it is unnecessary, ineffective or imposes costs that exceed its benefits, consistent with President Donald Trump’s executive order on reducing regulatory burdens.

Latest ACA Repeal Bill Withdrawn

ACA REPEAL BILL WITHDRAWAL DETAILS

By GBS Team

The Graham-Cassidy bill, the most recent Republican effort to repeal and replace the Affordable Care Act (ACA), was withdrawn from a vote on Sept. 26 due to lack of support in the Senate,
effectively dooming the legislation. Earlier that week, key Republican senators voiced opposition to the bill, which forced Senate leadership to shelf the vote until further notice. Given the
vocal opposition from influential health organizations and lawmakers on both sides of the aisle, the proposed bill would need a variety of amendments before plausibly moving forward.

This means the ACA will almost certainly remain unopposed until 2018. Republicans are using the remainder of the year to focus on a tax overhaul and do not have the bandwidth to continue the repeal and replace effort that has consumed most of this year.

With this latest repeal failure, more and more lawmakers are pushing for bipartisan negotiations to fix the flaws in the current health system. Democrats hope this most recent repeal failure will
increase their bargaining position, since they were largely ignored during all the health bill drafting sessions this year. If Republicans cannot secure enough of their members’ votes, they will be forced to negotiate with their counterparts.

What This Means for Employers

The IRS confirmed recently that employers should continue to comply with any ACA mandates, including the individual mandate and the employer shared responsibility rules. The IRS clarified this after the uncertainty created by President Donald Trump’s initial executive order directing federal agencies to provide relief from the burdens of the ACA.

Health FSA Limit

HEALTH FSA LIMIT WILL
INCREASE FOR 2018

By GBS Team

The Affordable Care Act (ACA) imposes a dollar limit on employees’ salary reduction contributions to health flexible spending accounts (FSAs) offered under cafeteria plans. This dollar limit is indexed for cost-of-living adjustments and may be increased each year.

On Oct. 19, 2017, the Internal Revenue Service (IRS) released Revenue Procedure 2017-58 (Rev. Proc. 17-58), which increased the FSA dollar limit on employee salary reduction contributions to $2,650 for taxable years beginning in 2018. It also includes annual inflation numbers for 2018 for a number of other tax provisions.

ACTION STEPS

Employers should ensure that their health FSA will not allow employees to make pre-tax contributions in excess of $2,650 for 2018, and they should communicate the 2018 limit to their
employees as part of the open enrollment process. An employer may continue to impose its own health FSA limit, as long as it does not exceed the ACA’s maximum limit for the plan year. This means that an employer may continue to use the 2017 maximum limit for its 2018 plan year.

The ACA initially set the health FSA contribution limit at $2,500. For years after 2013, the dollar limit is indexed for cost-of-living adjustments.

• 2014: For taxable years beginning in 2014, the dollar limit on employee salary reduction contributions to health FSAs remained unchanged at $2,500.

• 2015: For taxable years beginning in 2015, the dollar limit on employee salary reduction contributions to health FSAs increased by $50, for a total of $2,550.

• 2016: For taxable years beginning in 2015, the dollar limit on employee salary reduction contributions to health FSAs remained unchanged at $2,550.

• 2017: For taxable years beginning in 2017, the dollar limit on employee salary reduction contributions to health FSAs increased by $50, for a total of $2,600.

• 2018: For taxable years beginning in 2018, Rev. Proc. 17-58 further increased the dollar limit on
employee salary reduction contributions to health FSAs by an additional $50, to $2,650.

The health FSA limit will potentially be increased further for cost-of-living adjustments in later years.

Employer Limits

An employer may continue to impose its own dollar limit on employees’ salary reduction contributions to health FSAs, as long as the employer’s limit does not exceed the ACA’s maximum limit in effect for the plan year. For example, an employer may decide to continue limiting employee health FSA contributions for the 2018 plan year to $2,500.

Per Employee Limit

The health FSA limit applies on an employee-by-employee basis. Each employee may only elect up to $2,650 in salary reductions in 2018, regardless of whether he or she also has family members who benefit from the funds in that FSA. However, each family member who is eligible to participate in his or her own health FSA will have a separate limit. For example, a husband and wife who have their own health FSAs can both make salary reductions of up to $2,650 per year, subject to any lower employer limits.

If an employee participates in multiple cafeteria plans that are maintained by employers under common control, the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,650. However, if an individual has health FSAs through two or more unrelated employers, he or she can make salary reductions of up to $2,650 under each employer’s health FSA.

Salary Reduction Contributions

The ACA imposes the $2,650 limit on health FSA salary reduction contributions. Non-elective employer contributions to health FSAs (for example, matching contributions or flex credits) generally do not count toward the ACA’s dollar limit. However, if employees are allowed to elect to receive the employer contributions in cash or as a taxable benefit, then the contributions will be treated as salary reductions and will count toward the ACA’s dollar limit.

In addition, the limit does not impact contributions under other employer-provided coverage. For example, employee salary reduction contributions to an FSA for dependent care assistance or adoption care assistance are not affected by the health FSA limit. The limit also does not apply to salary reduction contributions to a cafeteria plan that are used to pay for an employee’s share of health coverage premiums, to contributions to a health savings account (HSA) or to amounts made available by an employer under a health reimbursement arrangement (HRA).

Grace Period/Carry-over Feature

A cafeteria plan may include a grace period of up to two months and 15 days immediately following the end of a plan year. If a plan includes a grace period, an employee may use amounts remaining from the previous plan year, including any amounts remaining in a health FSA, to pay for expenses incurred for certain qualified benefits during the grace period. If a health FSA is subject to a grace period, unused salary reduction contributions that are carried over into the grace period do not count against the $2,650 limit applicable to the following plan year.

Also, if a health FSA does not include a grace period, it may allow participants to carry over up to $500 of unused funds into the next plan year. This is an exception to the “use-it-or-lose-it” rule that generally prohibits any contributions or benefits under a health FSA from being used in a following plan year or period of coverage. A health FSA carryover does not affect the limit on salary reduction contributions. This means the plan may allow the individual to elect up to $2,650 in salary reductions in addition to the $500 that may be carried over.

Plan Amendments

Plan documents that specify the health FSA dollar limit must be amended if the higher limit will be used in 2018.