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IRS Issues Special Guidance for Payroll Tax Refunds

The U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act earlier this year, effectively resulting in the recognition of same-sex marriage for purposes of federal law and regulations.  Since then, the IRS has announced that they will recognize all legal same-sex marriages, and will do so on a retroactive basis.

The IRS recently issued special guidance that is intended to simplify the process of employers applying for a refund of Federal Insurance Contributions Act (FICA) taxes and federal income tax withholding paid with respect to benefits provided to same-sex spouses.

In short, IRS Notice 2013-61 allows employers to use the 2013 fourth quarter Form 941 to correct for overpayments of FICA and income tax withholding made during 2013 (including with respect to imputed income paid on employee benefits).  Further, for tax years prior to 2013, employers can file one Form 941-X to claim a refund or adjustment for all four quarters of the calendar year (generally employers must file a Form 941-X for each calendar quarter).   Employers may, but are not required, to use the relief provided in the Notice.

Employers may also apply for refunds of Federal Unemployment Tax Act (FUTA) and Railroad Retirement Tax Act (RRTA) taxes, but no special procedures are necessary because the returns for those taxes are filed annually.

 November 2013

IRS Permits Modest Carryover of FSA Balances

The IRS has added a new option to health flexible spending accounts (FSAs) offered under Section 125 cafeteria plans.  Participants who contribute to their health FSA can now “carry over” up to $500 of unused amounts remaining in their FSAs at the end of the year.  The prior rule required that all unused amounts in a health FSA be forfeited at the end of the plan year.

This new option is an alternative to the grace period rule.  The carry over feature is not permitted for FSAs that allow a grace period during which a participant can use amounts contributed in a prior year toward expenses incurred in the first two and a half months of the subsequent year.

The plan must still forfeit any amounts in the health FSA that exceed $500 at the end of the plan year, and amounts in the FSA at termination of employment (unless the participant elects COBRA).

The cafeteria plan document must be amended to reflect the carry over provision, and employers can provide for a lower carry over amount (the $500 limit is a maximum).

The IRS guidance is available here.

 November 2013

IRS Recognizes Same-Sex Marriages for Federal Tax Purposes

The Department of Treasury and IRS have confirmed that they will recognize all same-sex marriages for Federal tax purposes.  This means that same-sex couples lawfully married in a state that recognizes same-sex marriages but residing in a state that does not recognizes same-sex marriage will be treated as married for all Federal tax purposes.

This ruling affects the administration of employee benefit plans in a number of respects, and the IRS has announced that it plans to issue additional guidance on the application of its ruling to employee benefits.

The agencies based the ruling on their own precedent, specifically a Revenue Ruling from 1958, which concluded that a taxpayer in a common-law marriage that later moves to a state that does not recognize common-law marriage was nonetheless treated as married for Federal income tax filing purposes.  In addition, the agencies acknowledged the financial and administrative burden, on the IRS as well as employers, if the determination of marital status was based on state of domicile, rather than state of ceremony.

Affected taxpayers can file amended tax returns for prior years where the statute of limitations (generally three years) has not yet run.  The decision also applies retroactively to employee benefits and fringe benefits (e.g., after-tax payment of premiums/imputed income for same-sex spouses under a group health plan).  The IRS intends to issue additional guidance with respect to the retroactive effect of the ruling on employee benefits.

September 2013

Employer Mandate Delayed until 2015

The Department of Treasury has announced that it will delay the enforcement of the “employer mandate” under the Affordable Care Act (a/k/a shared responsibility).

The employer mandate is a provision of the Internal Revenue Code that requires employers of 50 or more “full-time equivalent” employees to provide a minimum level of health coverage to full-time employees.  Failure to do so can result in the assessment of a monetary penalty against the employer.  (For more information about the employer mandate click here.)

Specifically, employers and insurers will not be required to provide notice to the IRS of the health coverage provided to full-time employees until 2015.

Guidance regarding this delay is expected within the next week, and proposed regulations regarding the reporting requirements are expected later this year.  It is expected that Treasury will encourage voluntary compliance in 2014 with the reporting requirements before they become mandatory in 2015.

July 2013

How the DOMA Decision May Affect Employee Benefits

So now that Section 3* of DOMA has been struck down by the U.S. Supreme Court, it remains to be seen what practical effect the action will have on the administration and enforcement of federal laws, including the laws governing employee benefits.  Below are ten benefits-related areas where we expect to see changes:

(1)  Pre-tax premium payments for health benefits covering same-sex spouses.

(2)  Independent election of COBRA continuation coverage by same-sex spouses.

(3)  Special health and welfare plan enrollment rights for same-sex spouses under HIPAA.

(4)  Flexible Spending Account (FSA) reimbursement for expenses incurred by non-dependent same-sex spouses.

(5)  Qualified joint and survivor annuity (QJSA) and qualified pre-retirement survivor annuity rights (QPSA) in pension plans for same-sex spouses.

(6)  Same-sex spouses as automatic beneficiaries under qualified retirement plans.

(7)  Rollovers of qualified plan distributions to non-inherited IRAs by same-sex spouse beneficiaries.

(8)  Same-sex spouse ability to delay required minimum distributions from qualified retirement plans upon a participant’s death.

(9)  Family attribution rules for determining ownership interests including same-sex spouses.

(10) Recognition of same-sex spouses in qualified domestic relations orders (QDROs), allowing for tax-free transfers of qualified plan benefits to same-sex spouses/former spouses.

The change also raises some questions, including:

  • How is “spouse” determined?  For example, does a same-sex couple married in one state but residing in a state that prohibits same-sex marriage qualify as “married” for purposes of federal law?
  • Can a benefit plan exclude same-sex married couples from coverage for optional benefits (e.g., benefits where spousal rights are not mandated by law)?

(*Section 3 of the Defense of Marriage Act (DOMA) provided that the word “spouse,” for purposes of federal laws and regulations, refers only to a husband or wife of an opposite sex couple.)

June 2013

Agencies Issue Final Regulations on Wellness Program Incentives

The Departments of Labor, Treasury and HHS have issued final regulations governing wellness programs.  The final regulations implement the wellness program changes imposed by the Affordable Care Act (ACA) and outline the requirements that wellness programs must meet to avoid violating HIPAA nondiscrimination rules.

The final regulations reflect the increase approved by the ACA of the maximum discount employers can offer in connection with their health-contingent wellness programs.  The maximum discount on the cost of coverage increases from 20% to 30% generally, but if the wellness program is designed to reduce tobacco use, the maximum discount increases from 20% to 50%.  This discount limitation only applies to wellness programs that condition the reward on achieving a standard based on a health factor (such as smoking status or attaining certain results on biometric screenings).  If the discount is available solely for participating in the wellness program (without regard to whether the employee meets any further requirements), then there is no limit on the discount an employer can offer.

The final regulations clarify the reasonable design requirements of health-contingent wellness programs and the reasonable alternatives they must offer in order to avoid prohibited discrimination.

The final regulations apply to wellness programs offered through both the group and individual market, and take effect for plan years beginning on or after January 1, 2014.

May 2013

DOL Issues Model Notice of Exchange

Employers subject to FLSA must provide a “notice of exchange” to all employees by October 1, 2013.  This notice must inform employees of the existence of the Health Insurance Marketplace (i.e., the Exchange) and the fact that employees may be eligible for a premium tax credit if they purchase a qualified health plan through the Marketplace/Exchange.  The notice must also inform employees that the that if they purchase a qualified health plan through the Marketplace/Exchange, they may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.

Employers must provide the notice to each employee, regardless of plan enrollment status or of part-time or full-time status.  Current employees must receive the notice no later than October 1, 2013.  Beginning October 1, 2013, new employees must receive the notice within 14 days of their date of hire.  The notice may be provided by first-class mail or electronically, if the Department of Labor’s electronic disclosure safe harbor requirements are met.

The Department of Labor has issued a model notice that employers can use to satisfy the notice requirement.  There is a model notice for employers that offer health coverage to some or all employees, and a model notice for employers that do not offer health coverage.

Guidance relating to the notice requirement is available here:  DOL Technical Release 2013-02

The DOL also issued a new model COBRA election notice, which was revised to include information about the Marketplace/Exchange.

 May 2013

Agencies Issue Proposed Regulations on Wellness Programs

The Departments of Labor, Treasury and HHS have issued proposed regulations that will implement the changes imposed by the Affordable Care Act (ACA) that affect wellness programs. These proposed regulations specify the requirements that wellness programs must meet to avoid violating HIPAA nondiscrimination rules.

 The proposed regulations reflect the increase adopted in ACA of the maximum discount employers can offer in connection with their health-contingent wellness programs.  The maximum discount on the cost of coverage increases from 20% to 30% generally; but if the wellness program is designed to reduce tobacco use, the maximum discount increases from 20% to 50%.  This discount limitation only applies to wellness programs that condition the reward on achieving a standard based on a health factor.  If the discount is available solely for participating in the wellness program (without regard to whether the employee meets any further requirements), then there is no limit on the amount of the discount an employer can offer.

 The proposed regulations would affect wellness programs offered through the group and individual market, and would apply to plan years beginning on or after January 1, 2014.

The preamble to the propose regulations includes an analysis of the use of wellness programs, looking at the types of employers that use wellness programs, the most popular types of wellness programs, and the effect of wellness programs on employee health.

February 2013

IRS Releases Updated EPCRS Guidance

The IRS has released its long-awaited updates to the Employee Plans Compliance Resolution System (“EPCRS”) program (Revenue Procedure 2013-12).  Most notably, 403(b) plans are now eligible to use the Voluntary Correction Program (VCP) to correct operational failures.  The new guidance also provides for a modified application process (including two new forms required for submission) and clarifies some of the available correction methods.

Other notable provisions include allowing sponsors to adopt a corrective amendment and continue to rely on a pre-approved plan’s opinion or advisory letter, clarifying when a determination letter application is required under EPCRS, and allowing 403(b) plans to use EPCRS to correct a failure to adopt a written plan document.

The updated guidance does not provide correction methods for failures to implement automatic enrollment or failures to provide safe harbor notices, and the IRS has requested comments on these and other specific issues.

The new guidance is effective April 1, 2013, but plan sponsors may choose to apply the provisions of the updated revenue procedure beginning on or after December 31, 2012, meaning, among other things, that 403(b) plans may submit VCP applications before the April 1 effective date.

Click here for more information about EPCRS.

January 2013

Health Care Reform Update: 90-Day Waiting Period

Starting in 2014, the Affordable Care Act (ACA) will prohibit a group health plan from imposing a waiting period longer than 90 days.   In other words, the amount of time that must pass before an otherwise eligible employee or dependent can enroll for coverage under the plan cannot exceed 90 days.  The 90-day waiting period limitation applies to grandfathered and non-grandfathered plans.

If a plan does not comply with the 90-day waiting period rules, the employer sponsoring the plan is subject to excise taxes (generally $100 per day per individual).

The Departments of Labor, HHS, and the Treasury have issued temporary guidance on their interpretation and enforcement of the 90-day waiting period limitation.  The guidance includes the following clarifications:

  •  Eligibility conditions that are based solely on the lapse of a time period can be in place for no more than 90 days.
  •  Conditions on plan participation that are designed to avoid compliance with the 90-day waiting period are not permissible.
  • A plan will not violate the ACA because an employee takes additional time to elect coverage.

For determining whether variable-hour employees work enough hours to be eligible to participate in the plan, the guidance provides a safe-harbor, whereby the plan can take as long as permitted under Section 4980H of the Code to determine whether the employee has worked sufficient hours to be eligible for coverage.  The 4980H safe harbor allows a plan to take up to 12 months to determine whether the employee has sufficient hours to qualify as eligible (see IRS Notice 2012-58, discussed below).  The coverage must begin no later than the first day of the month following the employee’s first 13 months employment.

Keep in mind that imposing waiting periods and eligibility periods can implicate shared responsibility obligations under Section 4980H of the Internal Revenue Code.

The temporary guidance will remain in effect through at least the end of 2014.

October 2012