The IRS recently announced major changes to its determination letter program in Announcement 2015-19. Starting January 1, 2017, determination letter applications will only be accepted for newly created and for terminating individually designed plans (IDPs). At that time, the IRS will no longer accept applications from existing IDPs to determine the ongoing qualified status of the plan. Many plan sponsors use IDPs, as opposed to prototype or volume submitter plans, because they wish to have customized plan design features and provisions. Sponsors of IDPs have long been able to file an application with the IRS to request a determination that the plan as written is tax-qualified. After next year, such a determination will only be available to plan sponsors upon starting and terminating a plan.
In past years, instead of or in addition to offering a group health plan, many employers agreed to reimburse their employee’s health insurance premiums (usually up to a pre-determined limit) if the employee obtained an individual policy of her own.
Among the many changes brought about by the Affordable Care Act, however, were new requirements that essentially make this type of arrangement impossible to offer to employees without violating the statute and incurring very onerous penalties.
If there was any doubt about whether employers could continue to offer these so-called employer payment plans, the IRS has made it abundantly clear: employers can no longer reimburse employees for the cost of premiums for health insurance purchased on the individual market. This is the case regardless of whether:
There are only very limited exceptions, such as for employer payment plans with fewer than two active employees (e.g., retiree-only plans).
Employers who continue to offer these types of employer payment plans may be liable for excise taxes under Section 4980D of the tax code. Because this rule has been the source of much confusion over the past several months, the IRS has provided a limited transition relief period for small businesses to come into compliance with the rules. The transition period is available (1) for 2014 for employers that are not “applicable large employers” (“ALEs”) for 2014, and (2) for January 1 through June 30, 2015 for employers that are not ALEs for 2015. ALEs are generally those employers who employ an average of at least 50 full-time equivalent employees during the calendar year.
If an employer qualifies for the relief, it will not be liable for the excise taxes that would otherwise apply under Section 4890D of the tax code. After June 30, 2015, such employers may be liable for the excise tax – which is a whopping $100 per day per employee who receives this type of payment or reimbursement for health insurance coverage. No transition relief was provided to employers that are ALEs.
IRS Notice 2015-17 provides guidance on the transition relief and is available here.
The Departments of Labor, Treasury and HHS have issued additional Frequently Asked Questions (FAQs) regarding certain employer reimbursement of health coverage premiums.
The FAQs address arrangements where employers (i) reimburse employees for the cost of individual insurance plan coverage or (ii) offer cash to employees with high-risk claims who opt of the employer’s health plan. The FAQs provide that these arrangements are not in compliance with market reforms. Additionally, the FAQs specifically disallow an arrangement some vendors have promoted, whereby employers set up a Code Section 105 reimbursement plan to reimburse employees for individual insurance coverage (including Marketplace coverage for which the employee may have received premium tax credits).
The Department of Labor has issued guidance for plan fiduciaries who need to locate missing plan participants and beneficiaries. Field Assistance Bulletin No. 2014-01 describes the steps a plan fiduciary should use to locate these missing plan participants and beneficiaries.
The FAB discusses locating missing participants in the context of a plan termination, when plan accounts must be distributed to all participants; however, the guidance is also informative in other situations where the plan must make a distribution to a participant or beneficiary, such as a plan correction requiring cash-out distributions to former participants.
If a participant remains missing after using any standard methods of communicating with participants, such as first-class mail or e-mail, the Department of Labor believes that plan fiduciaries should take all of the following steps to locate the missing participant:
If the plan fiduciaries still cannot locate the participant using the methods above, the DOL advises that use of additional search methods that may incur charges may be appropriate, depending on the size of the participant’s account relative to the cost of the search. These additional search methods include:
The reasonable costs of the search for a missing participant can be charged to the participant’s account.
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.
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.
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.
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.
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:
(*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.)
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.