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Health Reimbursement Arrangements (HRAs) are account-based health plans funded with employer contributions to reimburse eligible participants and dependents for medical expenses. Prior to the Affordable Care Act, HRAs were not uncommon.
After the ACA, however, HRAs – which were classified as group health plans (GHPs) – had to satisfy the ACA’s market reform requirements, such as the prohibition against annual limits. Thus, unless an HRA was integrated with a GHP, HRAs usually could not satisfy these requirements alone.
On June 13, the Departments of Treasury, Labor, and Health and Human Services issued final regulations regarding HRAs, which will be effective on January 1, 2020. The regulations discuss two types of HRAs: (1) the individual coverage HRA (ICHRA); and (2) the expected benefit HRA.
An ICHRA can satisfy GHP requirements by integrating the HRA with individual market coverage or Medicare. The expected benefit HRA permits an employee to obtain excepted benefits like dental, vision, or short-term limited-duration insurance with an HRA. This article will focus on ICHRAs.
In order to offer an ICHRA, employers must ensure that a number of requirements are satisfied. For example, all individuals covered by the HRA need to be enrolled in individual health insurance or Medicare. Additionally, before any reimbursements are made, the employer must substantiate such enrollment with documentation from a third party or the participant’s attestation. An attestation, however, must be disregarded, if the employer has actual knowledge that the individual is not enrolled in eligible coverage.
Additionally, HRA coverage must be offered uniformly on the same terms and conditions to all employees in the class. Classes will be discussed in more detail below, but the regulations permit an employer to increase the maximum benefit for (1) older participants if that increase applies to all similarly aged participants in that class, and (2) participants with more dependents.
Further, being covered by an ICHRA will make an individual ineligible for a Premium Tax Credit (PTC). For this reason, the regulations have numerous notice requirements. First, employers must provide notice to eligible ICHRA employees 90 days before the beginning of a plan year that their participation in the ICHRA will make them ineligible for a PTC. For newly eligible employees, the notice must be provided no later than the date they are first eligible to participate. Moreover, there must be an opt-out provision at least annually and upon termination.
The ICHRA regulations make it possible for employers to offer an HRA to a certain class of employees and a traditional GHP to another class. It is important to note that an employer may not offer the same class of employees the option of an ICHRA or a traditional GHP.
The regulations also provide strict rules regarding how to define classes. The classes must be of a minimum size based on the number of employees the employer has:
Additionally, the classes must be based on named classes in the regulations which are based on objective criteria:
The regulations also clarify that employers may still offer retiree-only HRAs and they will not be subject to the ICHRA rules.
Given that there is a notice requirement and that open enrollment for plans that begin January 1, 2020 will generally begin in the fall, employers that would like to implement an ICHRA would likely have to start making plan design decisions soon. Even though the concept of an HRA may be familiar to many employers, these new regulations are nuanced, and employers will likely need assistance to navigate them.
Since the IRS began enforcing the Affordable Care Act (ACA), it has been lenient in its enforcement of the penalties associated with the ACA particularly with regard to late and incorrect Forms 1094-C and 1095-C. This position appears to have changed with regard to the 2017 reporting season. Recently, a number of employers received a Notice 972CG from the IRS. The Notice 972CG proposes penalties under IRC section 6721 for late or incorrect filings. The focus of this is to explain the Notice 972CG and the basic steps employers who receive this letter should follow.
Typically, the employer received a Letter 5699 inquiring why the employer had not filed the Forms 1094-C and 1095-C for the 2017 reporting season. The reasons the employer had not filed timely have varied but most employers filed the Forms 1094-C and 1095-C with the IRS well past the original due date, but well within the parameters discussed in the Letter 5699. Afterwards, these employers reported they then received a Notice 972CG from the IRS.
The Notice proposes penalties under IRC section 6721 for each late Form 1095-C filed by the employer. For the 2017 tax year, the penalty for each section 6721 violation is $260 per return. Therefore, if an employer filed 200 Forms 1095-C late, the Notice 972CG has proposed a penalty of $52,000.
The proposed penalty amounts in the Notice can be smaller than $260 per return if the employer filed the return within 30 days of the original due date (March 31 if the Forms were filed electronically not factoring in the automatic extension). If an employer filed within 30 days of the original March 31 due date, the penalty is $50 per return. If the employer’s returns were filed after 30 days of the original due date but prior to August 1 of the year in which the Forms were due, the employer’s penalty will be $100 per return. Each of these scenarios is unlikely if the employer filed after receiving the Letter 5699 as the IRS did not send these Letters out by the August 1 cutoff to allow employers to mitigate the potential penalties under section 6721.
An employer has 45 days from the date on the notice to respond to the IRS. A business operating outside of the United State has 60 days to respond to the Notice 972CG. If an employer does not respond within this time frame, the IRS will send a bill for the amount of the proposed penalty. Therefore, a timely response to the Notice 972CG is mandatory if an employer wishes to abate or eliminate the proposed penalty.
An employer has three courses of action when responding to the Notice 972CG. First, the employer could agree with the proposed penalty. If an employer agrees with the proposed penalty, box (A) should be checked and the signature and date line below box (A) should be completed. Any employer selecting this option should follow the payment instructions provided in the Notice.
Alternatively, an employer can disagree in part with the Notice’s findings or an employer can disagree with all of the Notice’s findings. If an employer disagrees in part with the Notice, the employer will check box (B). If an employer disagrees entirely with the Notice, the employer will check box (C). If box (B) or (C) are checked, the employer will be required to submit a signed statement explaining why the employer disagrees with the Notice. An employer should include any supporting documents with the signed statement. Any employer who partially disagrees with the Notice should follow the payment instructions provided in the Notice.
An employer checking box (B) or (C) in its response will have to convince the IRS that the employer’s late filing (or incorrect filing) of the Forms 1094-C and 1095-C was due to a “reasonable cause.” The Code discusses what may constitute a “reasonable cause” in exhaustive regulations that must be reviewed thoroughly before any employer responds to a Notice 972CG with box (B) or (C) checked. For an employer to establish a “reasonable cause” the employer will have to establish “significant mitigating factors” or that the “failure arose from events beyond the filer’s control.” Furthermore, to prove “reasonable cause” the employer will have to show that it acted in a “responsible manner” both before and after the failure occurred. An employer should craft its response using the template roughly outlined in the IRS regulations and Publication 1586.
Any employer who receives a Notice 972CG must take action immediately. An employer should consult an attorney or tax professional familiar with its filing process and the pertinent rules, regulations, and publications. Moving forward, it is imperative that employers file the Forms 1094-C and 1095-C in a timely, accurate fashion.
On July 22, 2019, the IRS announced that the ACA affordability percentage for the 2020 calendar year will decrease to 9.78%. The current rate for the 2019 calendar year is 9.86%.
As a reminder, under the Affordable Care Act’s employer mandate, an applicable large employer is generally required to offer at least one health plan that provides affordable, minimum value coverage to its full-time employees (and minimum essential coverage to their dependents) or pay a penalty. For this purpose, “affordable” means the premium for self-only coverage cannot be greater than a specified percentage of the employee’s household income. Based on this recent guidance, that percentage will be 9.78% for the 2020 calendar year.
Employers now have the tools to evaluate the affordability of their plans for 2020. Unfortunately, for some employers, a reduction in the affordability percentage will mean that they will have to reduce what employees pay for employee only coverage, if they want their plans to be affordable in 2020.
For example, in 2019 an employer using the hourly rate of pay safe harbor to determine affordability can charge an employee earning $12 per hour up to $153.81 ($12 X 130= 1560 X 9.86%) per month for employee-only coverage. However in 2020, that same employer can only charge an employee earning $12 per hour $152.56 ($12 X 130= 1560 X 9.78%) per month for employee-only coverage, and still use that safe harbor. A reduction in the affordability percentage presents challenges especially for plans with non-calendar year renewals, as those employers that are subject to the ACA employer mandate may need to change their contribution percentage in the middle of their benefit plan year to meet the new affordability percentage. For this reason, we recommend that employers re-evaluate what changes, if any, they should make to their employee contributions to ensure their plans remain affordable under the ACA.
As we have written about previously, employers will sometimes use the Federal Poverty Level (FPL) safe harbor to determine affordability. While we won’t know the 2020 FPL until sometime in early 2020, employers are allowed to use the FPL in effect at least six months before the beginning of their plan year. This means employers can use the 2019 FPL number as a benchmark for determining affordability for 2020 now that they know what the affordability percentage is for 2020.
As has been reported in various news outlets, new rules issued last year now require hospitals to post their standard charges for various services on their websites. This is part of a move toward greater hospital pricing transparency in the health care provider market. The requirement to post these amounts comes from the Affordable Care Act.
However, the posted prices are likely to be of limited use. First, the amounts on their websites are the “full price” amounts, sometimes referred to as “rack rates” or the “chargemaster”, but almost no one actually pays these prices. Insurance companies and third-party administrators negotiate discounts off of these prices. Furthermore, consumers who are covered by insurance may only pay a portion of these rates through copayments or coinsurance. Even uninsured consumers may negotiate discounts off of these prices.
In many cases, the items or services listed on their websites are given highly technical, often confusing names. Even an experienced health care professional may have trouble understanding them. Additionally, a single hospital procedure may involve multiple services and therefore include several listed amounts, so the total charge for a procedure or visit may require some sleuthing around on the website to figure it out.
It seems unlikely that most employees will get much use out of these posted hospital prices. However, to the extent employers receive questions from their employees, the employers should be prepared to respond. Specifically, employers should point out that the charges on the website do not reflect the discounts negotiated by their insurance carrier or TPA.
If an employee wants to know what he or she will be charged for an item or service, the employer should suggest that they contact the carrier with their questions. Many carriers are also offering price transparency tools that reflect the discounts of the employer’s plan. If those tools are available, the employer may want to mention that as well.
On June 19, 2018, the Trump administration took the first step in a three-part effort to expand affordable health plan options for consumers when the U.S. Department of Labor (DOL) finalized a proposed rule designed to make it easier for a group of employers to form and offer association health plans (AHP). A final rule relaxing rules around short-term, limited duration insurance and a proposed rule addressing health reimbursement arrangements are expected in the upcoming months. In cementing proposed changes to its January 2018 proposed rule, “Definition of ‘Employer’ Under Section 3(5) of ERISA — Association Health Plans,” the administration seeks to broaden health options for individuals who are self-employed or employed by smaller businesses. The final rule will be applicable in three phases starting on September 1, 2018.
Under the rule, it will be substantially easier for a group of employers tied by a “commonality of interest” to form a bona fide association capable of offering a single multi-employer benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA). The rule outlines two primary bases for establishing this “commonality of interest”: (1) having a principal place of business in the same region (e.g., a state or metropolitan area), or (2) operating in the same industry, trade, line of business or profession. An association also may establish additional membership criteria enabling entities with a sufficient “commonality of interest” to participate in the AHP, such as being minority-owned or sharing a common moral or religious conviction, so long as the criteria are not a subterfuge for discrimination based on a health factor. Further, the final rule clarifies how the association must be governed and controlled by its employer-members in order to be considered a bona fide association capable of offering a single-employer health benefit plan.
Meeting the criteria for a bona fide group or association of employers in the final rule allows the AHP to be treated as a single-employer ERISA plan. Thus, assuming the association is comprised of employer-members with more than 50 total full-time employees, it will be considered a large group and exempt from key Affordable Care Act (ACA) market reforms, such as the essential health benefits requirements and modified community rating rules, that would otherwise apply to a health plan offered by any of its individual employer-members with less than 50 full-time employees. This is important because the ACA applies certain requirements only to small group (and individual) health insurance products and not to large group plans.
President Donald Trump signed the Federal Register Printing Savings Act of 2017 (the Act) on January 22 to end the two-day government shutdown. In addition to funding the government for two-and-a-half weeks, the Act delays the onset of the Affordable Care Act’s (ACA’s) “Cadillac Tax” by two more years. The Cadillac Tax was originally intended to go into effect in 2018, but President Obama delayed the effective date until 2020. The Act now delays the Cadillac Tax until 2022.
The Act also extended the Children’s Health Insurance Program (CHIP) funding for six years.
The Cadillac Tax is a 40% tax on the value of employer-sponsored health coverage that exceeds certain benefit thresholds. It is widely unpopular with employer groups and, as we have previously reported, Congress has expressed a strong bipartisan desire to repeal the Cadillac Tax entirely.
In the meantime, the US Department of the Treasury has not issued guidance on the Cadillac Tax since before the initial delay, and therefore, it is likely that the Act will further delay any additional Cadillac Tax guidance.
IRS has begun notifying employers of their potential liability for an ACA employer shared responsibility payment in connection with the 2015 calendar year. It recently released Forms 14764 and 14765, which employers can use to dispute the assessment.
The Affordable Care Act (ACA) imposes employer shared responsibility requirements that are commonly referred to as the “employer mandate.” Beginning in 2015, applicable large employers (ALEs) – generally, employers with at least 50 full-time employees – are required to offer minimum essential coverage to substantially all full-time employees and their dependents, or pay a penalty if at least one full-time employee enrolls in marketplace coverage and receives a premium tax credit. Even if they offer employees coverage, ALEs may still be subject to an employer shared responsibility payment if the coverage they offer to full-time employees does not meet affordability standards or fails to provide minimum value.
The IRS announced their plans in Fall of 2017 to notify employers of their potential liability for an employer penalty for the 2015 calendar year. It released FAQs explaining that Letter 226J will note the employees by month who received a premium tax credit, and provide the proposed employer penalty. Additionally, the IRS promised to release forms for an employer’s penalty response and the employee premium tax credit (PTC) list respectively.
On Form 14764, employers indicate full or partial agreement or disagreement with the proposed employer penalty, as well as the preferred employer penalty payment option. An employer that disagrees with the assessment must include a signed statement explaining the disagreement, including any supporting documentation. This form also allows employers to authorize a representative, such as an attorney, to contact the IRS about the proposed employer penalty.
On Form 14765, the IRS lists the name and last four digits of the social security number of any full-time employee who received a premium tax credit for one or more months during 2015 and where the employer did not qualify for an affordability safe harbor or other relief via Form 1095-C. Each monthly box has a row reflecting any codes entered on line 14 and line 16 of the employee’s Form 1095-C. If a given month is not highlighted, the employee is an assessable full-time employee for that month – resulting in a potential employer assessment for that month.
If information reported on an employee’s Form 1095-C was not accurate or was incomplete, an employer wishing to make changes must use the applicable indicator codes for lines 14 and 16 described in the Form 1094-C and 1095-C instructions. The employer should enter the new codes in the second row of each monthly box by using the indicator codes for lines 14 and 16. The employer can provide additional information about the changes for an employee by checking the “Additional Information Attached” column. As mentioned:
Employers: Carefully Consider 226J Letter Responses
Miscoding can happen for different reasons, including vendor errors and inaccurate data. To minimize risk of additional IRS exposure, employers should carefully consider how best to respond to a 226J letter given circumstances surrounding the disputed assessments. For example, changing the coding on the 1095-C of an employee from full-time to part-time could trigger further review or questions by the IRS on the process for determining who is a full-time employee – and may increase the likelihood of IRS penalties for reporting errors on an employer’s Form 1095-Cs.
In its October FAQs, the IRS stated that it “plans to issue Letter 226J informing ALEs of their potential liability for an employer shared responsibility payment, if any, in late 2017.” If the IRS sticks to that timing, all notices should be sent out by the end of this calendar year. However, because the IRS has not indicated that it will inform employers that they have no employer penalty due, it is impossible to say that an employer not receiving a Letter 226J in 2017 is home free for 2015 employer penalties.
Employers should review the newly released forms so they are prepared to respond within 30 days of the date on the Letter 226J. They should also ensure processes are in place to make these payments, as necessary. Even employers who are not expecting any assessments will need to prepare to respond to the IRS within the limited timeframe to dispute any incorrect assessments.
In a recent statement released by the IRS it advised that it would not accept individual 2017 tax returns that did not indicate whether the individual had health coverage, had an exemption from the individual mandate, or will make a shared responsibility payment under the individual mandate. Therefore, for the first time, an individual must complete line 61 (as shown in previous iterations) of the Form 1040 when filing his/her tax return. This article explains what the new IRS position means for the future of ACA compliance from an employer’s perspective.
First, it will be critical (more so this year than in year’s past) that an employer furnish its requisite employees the Form 1095-C by the January 31, 2018 deadline. In previous years, this deadline was extended (to March 2, 2017 last year). However, with the IRS now requiring the ACA information to be furnished by individual tax day, April 17, 2018, employers will almost certainly have to furnish the Form 1095-C to employees by the January 31, 2018 deadline. This is a tight deadline and will require employers to be on top of their data as the 2017 calendar year comes to a close.
An employee who is enrolled in a self-insured plan will need the information furnished in part III of the Form 1095-C to complete line 61 on his/her tax return. It is reasonable to assume that an employee is more likely to inquire as to the whereabouts of the Affordable Care Act information necessary to complete his/her 2017 tax return. Therefore, the possibility of word getting back to the IRS that an employer is not furnishing the Form 1095-C statements to employees is also likely greater in 2017 compared to past years. Remember, an employer can be penalized $260 if it fails to furnish a Form 1095-C that is accurate by January 31, 2018 to the requisite employees. This penalty is capped at $3,218,500. The $260 per Form penalty and the cap amount can be increased if there is intentional disregard for the filing requirements.
The IRS statement continues the IRS’ trend of being more strenuous with ACA requirements. Many employers have received correspondence from the IRS about missing Forms 1094-C and 1095-C for certain EINs. Frequently, this has been caused by the employer incorrectly filing one Form 1094-C for the aggregated ALE group as opposed to a Form 1094-C for each Applicable Large Employer member (ALE member). While the IRS’ latest statement does not ensure that enforcement of the employer mandate (the section 4980H penalties) is coming soon, one could infer that the IRS will soon be sending out penalty notices with respect to the employer mandate.
With the actions taken by the IRS in 2017, all employers need to be taking the reporting of the Forms 1094-C and 1095-C seriously. As of the date of this publication, the Form 1095-C must be furnished to an employer’s requisite employees by January 31, 2018.
Repeal and replacement of the Affordable Care Act (ACA) by the American Health Care Act (AHCA) may be underway in Washington D.C., but until a final version of the AHCA is signed into law, the ACA is the law of the land. In fact, the IRS is currently issuing notices to employers that require them to disclose whether they complied with ACA large employer reporting duties, or their excuse for not doing so, where applicable.
The ACA required large employers to furnish employee statements (Forms 1095-C) and file them with the IRS under transmittal Form 1094-C, and the Internal Revenue Code (“Code”) imposes separate penalty taxes for failing to timely furnish and file the required forms. Large employer reporting was required for 2015 and 2016, even if transition relief from ACA penalty taxes applied for 2015. The potential penalties can be very large – up to $500 per each 2015 Form 1095-C statement ($250 for not furnishing the form to the employee and $250 for not filing it with IRS) – up to a total annual penalty liability of $3 million. The penalty amounts and cap are periodically adjusted for inflation.
Employers that failed to furnish Form 1095-C and file copies with Form 1094-C may receive the IRS notices, called “Request for Employer Reporting of Offers of Health Insurance Coverage (Forms 1094-C and 1095-C)” and also known as Letter 5699 forms. Forms may be received regarding reporting for 2015 or 2016. Employers that receive a Letter 5699 form will have only thirty days to complete and return the form, which contains the following check boxes:
The Letter also provides: “[i]f you are required to file information returns under IRC Section 6056, failure to comply may result in the assessment of a penalty under IRC Section 6721 for a failure to file information returns.”
Employers receiving Letter 5699 forms should contact their benefit advisors immediately and plan to respond as required within the thirty-day limit; it may be necessary to request an extension for employers that are just realizing that they have reporting duties and need to prepare statements for enclosure with their response. In this regard, the IRS offers good faith relief from filing penalties for timely filed but incomplete or incorrect returns for 2015 and 2016, but relief from penalties for failures to file entirely for those years is available only upon a showing of “reasonable cause,” which is narrowly interpreted (for instance, due to fire, flood, or major illness).
Large employers should not look to coming ACA repeal/replacement process for relief from filing duties and potential penalties. The House version of the AHCA does not change large employer reporting duties and it is unlikely the Senate or final versions of the law will do so. This is largely because procedural rules limit reform/repeal provisions to those affecting tax and revenue measures, which would not include reporting rules. Thus the reporting component of the ACA will likely remain intact (though it may be merged into Form W-2 reporting duties), regardless of the ACA’s long-term fate in Washington.