Compliance Corner Archives
Federal Updates 2013 Archive
On Dec. 16, 2013, the IRS released IRS Notice 2014-1. The notice builds upon guidance provided in Rev. Rul. 2013-17 regarding cafeteria plans in relation to same-sex spouses. Rev. Ruling 2013-17 was issued following the U.S. Supreme Court decision in United States v. Windsor. NFP Benefits Compliance addressed Rev. Ruling 2013-17 in the Sept. 10, 2013, edition of Compliance Corner. The notice first establishes the pertinent general cafeteria plan health and dependent care FSA and HSA rules, restates the changes to the Defense of Marriage Act (DOMA) post-Windsor and confirms the guidance in Rev. Ruling 2013-17. IRS Notice 2014-1 then provides a set of questions and answers giving further guidance on the application of the Windsor decision with respect to certain rules governing the federal tax treatment of certain types of employee benefit arrangements.
The questions and answers are followed by examples used to help demonstrate how the guidance will apply. Of the questions addressed, the first five are about midyear election changes; one is related to health, dependent care and adoption assistance FSA reimbursements; and the final four discuss contribution limits for HSAs and DCAPs. Below are a few highlights of this guidance.
A participant lawfully married to a same-sex spouse as of June 26, 2013 (the date of the Windsor decision), or any date thereafter, may make a midyear election change due to a change in legal marital status. However, a plan may not permit a participant to make a midyear election change on the basis that the change in tax treatment resulted in a significant change in cost of coverage. Nevertheless, due to the legal uncertainty, those plans that have already allowed an election change based on significant change in cost since the Windsor decision will not be seen as out of compliance for such a period. Also included is information about the effective date for cafeteria plan elections regarding same-sex spouses, the date elections for same-sex spouses must be available pretax, and how the Windsor decision affects imputed income.
A cafeteria plan may permit a participant’s health, dependent care or adoption assistance FSA to reimburse covered expenses of the participant’s same-sex spouse (and dependents) that were incurred not earlier than the first day of the plan year that includes the date of the Windsor decision or the date of the marriage, if later. In other words, a calendar-year plan may reimburse covered expenses of same-sex spouses beginning on or after Jan. 1, 2013 (provided that the spouses were married at the time the expense was incurred).
A same-sex married couple is subject to the joint deduction limit of $6,450 (for 2013) for contributions to an HSA with respect to a taxable year (that is, couples who remain married as of the last day of the taxable year). If the combined HSAs of same-sex married couples exceed the HSA contribution limit, contributions for one or both may be reduced for the remaining portion of the tax year to avoid exceeding the applicable contribution limit. Any excess may be distributed from the HSAs no later than the tax return due date for the spouses. This means that the HSAs have the full amount contributed, but income must be attributed for any amount over the limit. Any excess contributions not distributed by that time will be subject to excise taxes.
The same guidance is provided with regard to DCAP contributions exceeding $5,000. Contributions will remain available in the DCAP, yet includable in gross income.
Finally, to the extent that the cafeteria plan sponsor chooses to permit election changes that were not previously provided for in the written plan document, the cafeteria plan must be amended to permit such election changes on or before the last day of the first plan year beginning on or after Dec. 16, 2013. Such an amendment may be effective retroactively to the first day of the plan year including Dec. 16, 2013. This guidance is effective Dec. 16, 2013.
The DOL recently released a new version of Form 5500, Annual Return/Report of Employee Benefit Plan, including the related schedule and instructions. The new 2013 Form 5500 is meant to be used for plan years beginning in 2013. There are some minor changes to the 2013 Form 5500. For example, all welfare plans that file a Form 5500 must provide an attachment to Form 5500 labeled “Form M-1 Compliance Information,” indicating whether the plan was subject to the Form M-1 filing requirement (which reports various compliance items by a multiple employer welfare arrangement, or MEWA) during the plan year. Failure to provide the attachment may lead to a rejection of the Form 5500 as incomplete (which could result in penalties).
In addition, all plans required to file Form M-1 must file Form 5500. Previously, there was a Form 5500 filing exemption for small MEWAs (those with fewer than 100 participants) that were unfunded or insured. Such MEWAs must also file Schedule G (Financial Transaction Schedule) to report any non-exempt transactions with a party in interest, but do not have to file Schedule I (Financial Information—Small Plan).
Lastly, the Form 5500 Instructions now caution against using any portion of Social Security numbers, since Form 5500 filings are publicly available.
DOL News Release
Form 5500 for 2013 Plan Year
DOL Form 5500 Web Page
On Dec. 6, 2013, the IRS issued Notice 2013-80, which announces the 2014 optional standard mileage rates. These rates are used to calculate the deductible costs of operating an automobile to obtain medical care. The same notice also provided the standard mileage rates for use of a car for business, moving or charitable purposes.
Effective Jan. 1, 2014, the standard mileage rates for use of an automobile used for medical purposes will be $0.235 per mile, a one-half cent decrease from the 2013 rate. Notably, this rate can be used for mileage reimbursement from a health FSA, HRA or HSA when such travel is for medically necessary health care as defined by IRC Section 213.
As part of its continued efforts to clarify the taxation of employee benefits in the post-Windsor environment, the IRS recently updated its FAQs for married same-sex couples. Of note are FAQs 21–23, which address reimbursement of overpaid Social Security and Medicare taxes.
The FAQs indicate an employee should seek a refund of overpaid Social Security and Medicare taxes from their employer. If the employer indicates an intention not to file a claim or adjust the overpaid Social Security and Medicare taxes, the employee may claim a refund of any overpayment of employee Social Security and Medicare taxes by filing Form 843, Claim for Refund and Request for Abatement. “Windsor Claim” must be clearly written across the top of the form.
Additionally, employers are provided two special alternatives to address overpaid Social Security and Medicare taxes collected during the first three quarters of 2013 prior to Windsor. Pursuant to IRS Notice 2013-61, an employer may repay or reimburse an employee for 2013 overpayments of taxes on or before Dec. 31, 2013, and correct the overpayment on the fourth quarter 2013 Form 941. In the alternative, an employer who did not repay the excess withholding to employees by Dec. 31, 2013, may, after receiving written confirmation that the affected employee did not file a claim for refund of the overpaid taxes, make necessary adjustments by filing a single Form 941-X for the fourth quarter to correct overpayments for the entire year.
The rules surrounding post-Windsor withholding are complex. Therefore, plan sponsors and employers are encouraged to consult with their tax advisors before implementing a reimbursement strategy.
On Dec. 11, 2013, the IRS released Notice 2013-74, providing clarification around in-plan Roth conversions. The American Taxpayer Relief Act of 2012 (ATRA) included a modification to the rules associated with Roth conversions within participating defined contribution plans. While certain participants age 59 ½ or older (or after separation from service) have always been able to convert distributable pretax plan assets to after-tax savings in a separate Roth account within the plan, the new provision has effectively eliminated the “distributable” requirement. This means that any pretax amount can be converted as long as the plan includes a Roth conversion program and taxes are paid on the converted amount. Notice 2013-74 offers guidance regarding the conversion of otherwise non-distributable amounts, the timing of plan amendments and other matters.
The guidance is effective for in-plan Roth rollovers made after Dec. 31, 2012. Regarding the timing of amendments, the notice says plan sponsors must amend their plans to include the conversions to Roth accounts the later of the last day of the first plan year in which the amendment is effective or Dec. 31, 2014.
The notice illustrates that a plan with in-plan Roth conversions can include elective deferrals, matching and non-elective contributions (both safe harbor and non-safe harbor) and earnings. These remain subject to the distribution restrictions that applied to them before the conversion. However, tax withholding does not apply.
The notice clarifies that a plan with in-plan Roth conversions can limit the frequency of conversions and the type of contributions eligible for conversion. A plan can also eliminate its in-plan Roth conversion feature altogether. However, the limits and choices mentioned above cannot violate nondiscrimination provisions. Finally, the notice addresses general questions related to the top-heavy rules, the tax consequences of conversion and the correction of excess contributions or deferrals.
On Dec. 11, 2013, the IRS released Notice 2013-84, cumulatively reporting the changes the IRS will look to when reviewing retirement plan determination letters submitted between Feb. 1, 2014, and Jan. 31, 2015. The groups that submit determination letters during this period will predominantly consist of single employer, individually designed, defined contribution/defined benefit plans in Cycle D and multi-employer plans. An individually designed plan is in Cycle D if the last digit of the plan sponsor’s employee identification number is four or nine.
Qualifications that were not on the 2012 Cumulative List are designated on the 2013 Cumulative List as “(New).” Some of the new items on the 2013 list include the U.S. Supreme Court’s U.S. v. Windsor decision, subsequent guidance related to definitions of “spouse” and “marriage,” final regulations regarding reductions of safe harbor contributions and guidance relating to in-plan Roth conversions, among other items.
On Nov. 8, 2013, CMS and the U.S. Treasury Department issued final regulations regarding mental health parity. The regulations implement provision of the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 and finalize the interim final regulations previously issued in February 2010. As background, group health plans are required to provide parity for mental health and substance use disorder coverage as compared to coverage provided for medical conditions. The coverage must be equal in terms of both financial requirements and treatment limitations. The regulations state that parity applies to all plan standards, including network adequacy, experimental treatment limitations and geographic limitations.
Historically, small groups with fewer than 50 employees were exempt from the parity requirements. However, such groups are now subject to the requirements as required under PPACA. Effective for plan years beginning on or after Jan. 1, 2014, PPACA requires non-grandfathered small groups to provide coverage for 10 essential health benefit categories, which include mental health and substance use disorder services.
Large groups and self-insured plans are not required to provide coverage for mental health and substance use disorders. (Please note a large fully insured group may be required to provide such coverage under state insurance laws.) If a plan chooses to offer such coverage, they cannot impose an annual or lifetime dollar limitation on those benefits. The regulations clarify that plans are further prohibited from imposing a treatment limitation (for example, a limitation on the number of visits) on mental health and substance use disorder coverage that is not imposed on medical coverage under the plan.
The regulations maintain the six classifications of benefits: inpatient, in-network; inpatient, out-of-network; outpatient, in-network; outpatient, out-of-network; emergency care; and prescription drugs. However, the final regulations provide for a sub-classification of outpatient services into office visits and all other outpatient items and services, such as outpatient surgery or laboratory services. Frequently asked questions, which were issued simultaneously with the regulations, further provide that benefits may also be evaluated using a classification of two or more network tiers of providers.
Typically, a plan that provides any level of mental health coverage then becomes subject to the parity rules. There had been some question as to whether a plan that provides coverage for certain preventive services related to mental health and substance use disorders, as required under PPACA (such as alcohol misuse screening and depression counseling), would then be subject to the parity requirements. The final regulations clarify that complying with the preventive coverage requirements under PPACA does not trigger a broader requirement to comply with the parity rules if the plan does not otherwise offer mental health or substance use disorder benefits.
Lastly, the regulations maintain the cost exemption for plans that experience an increased cost of 2 percent in the first year that the parity requirements apply to the plan or 1 percent in any subsequent year. The regulations clarify that the increased cost must be attributable to the expansion or coverage as required by the parity rules and not otherwise due to occurring trends in utilization and prices, a random change in claims experience that is unlikely to persist or seasonal variation commonly experienced in claims submission and payment patterns.
The rules are effective for plan years beginning on or after July 1, 2014. Until then, plans may continue to comply with the interim final rules.
On Nov. 15, 2013, the IRS released final regulations related to midyear reductions or suspensions of 401(k) safe harbor contributions.
As background, for a cash or deferred arrangement (CODA) ( i.e., a 401(k) plan) to be qualified, elective contributions must satisfy either the actual deferral percentage (ADP) test, or one of the design-based alternatives. Similarly, CODAs providing for matching or employee contributions must satisfy either the actual contribution percentage (ACP) test, or one of the design-based alternatives. The design-based alternatives available for matching contributions parallel the design-based alternatives for elective contributions.
In 2009, the IRS issued proposed regulations that allow the midyear suspension or reduction of safe harbor non-elective contributions in the event of a substantial business hardship. Prior to the proposed regulations, only safe harbor matching contributions could be suspended or reduced midyear without terminating the plan.
Under the final regulations, restrictions around midyear reductions of safe harbor non-elective contributions are loosened, as the substantial business hardship rule is no longer the standard. An employer now must only demonstrate that they are operating at an economic loss. Matching contribution changes, on the other hand, are subject to greater constraint as a new advance notice requirement applies if the employer is not operating at an economic loss. The final regulations modify the rules that apply to midyear amendments reducing or suspending safe harbor matching contributions. The requirements that apply to a midyear reduction or suspension of safe harbor non-elective contributions are not stricter than those that apply to a midyear reduction or suspension of safe harbor matching contributions. So now, if there is not an economic loss, safe harbor non-elective or matching contributions may only be reduced or suspended during a plan year if the plan’s safe harbor notice – a notice that generally must be given at least 30 and no more than 90 days before the beginning of the plan year – includes a statement that the plan may be amended during the plan year to reduce or suspend the contributions.
Finally, whether the notice rule or the economic hardship rule is used, a plan amendment associated with neither will be effective before the later of the date the amendment is adopted or 30 days after all eligible employees are given a supplemental notice. Requirements of the supplemental notice include: explaining the consequences of the amendment, explaining procedures for changing deferral elections and communicating the amendment’s effective date.
The final regulations are effective immediately with respect to safe harbor non-elective contributions. However, the effective date regarding safe harbor matching contributions is the first day of the first plan year in 2015, as the final regulations are more restrictive than the current rules.
On Oct. 31, 2013, the U.S. Department of the Treasury and the IRS – in IRS Notice 2013-71 – announced a major policy modification relating to the “use-or-lose” rule for health FSAs. As background, under the use-or-lose rule, contributions made to the health FSA that have not been used to reimburse expenses incurred during a plan year may not be carried over to a subsequent plan year and may not be returned to the participant. In other words, health FSA participants must use FSA amounts in the current plan year, or risk forfeiting those amounts. Plans may allow for a grace period of up to two and a half months after the close of the plan year, during which a participant may incur expenses reimbursable from the FSA.
Under the new modification, employers have the option of allowing participants to roll over to the next plan year up to $500 of unused FSA contribution amounts that remain at the end of the plan year. This means that participants can carry over up to $500 to reimburse medical expenses incurred during the following plan year. In addition, such carryovers will not count against the annual limit (which is $2,500) on health FSA employee salary reductions. According to a Treasury press release and fact sheet, the change is meant to make health FSAs more consumer-friendly and to provide added flexibility for employers and administrators.
For employers that want to add this new carryover provision, the health FSA and Section 125 plan documents must be amended to include the new carryover provision. If an employer amends its plan to adopt the carryover, the same carryover limit must apply to all plan participants. Further, the amendment must be adopted on or before the last day of the plan year from which amounts may be carried over, and that amendment may be retroactively effective to the first day of that plan year. Plans may implement this change for plan years beginning in 2013, so long as the plan amendment is made on or before the last day of the plan year that begins in 2014. Thus, for a plan year beginning Dec. 1, 2013, the plan would need to be amended to include the carryover provision by Nov. 30, 2015.
Employers that want to retroactively apply the carryover provision for plan years that began in 2012 (and run into 2013) must adopt the carryover by the last day of the plan year. Thus, for a plan that ends Nov. 30, 2013, the plan must be amended by Nov. 30, 2013, to include the carryover provision.
Lastly, a health FSA plan that incorporates this new carryover provision may not also provide for a grace period in the plan year to which unused amounts may be carried over. Thus, where a plan permits carryovers to the following plan year, the plan may not have a grace period in that following plan year. For example, a calendar-year plan permitting a carryover to 2015 of unused 2014 health FSA amounts would not be permitted to have a grace period in 2015. So if a plan has provided a grace period and is being amended to add a carryover provision, the plan must also be amended to eliminate the grace period (per the same amendment deadlines outlined above).
The modification represents a major shift in policy relating to health FSAs. Employers that sponsor or are considering sponsoring a health FSA should consider whether the modification for carryovers is an appropriate change that they should implement. NFP encourages our clients to meet with their advisors regarding these changes and determine the appropriate course of action. NFP Benefits Compliance will continue to monitor this developing news, and will provide updates as necessary.
IRS Notice 2013-71
Treasury Press Release
Treasury Fact Sheet
On Oct. 31, 2013, the IRS issued Revenue Procedure 2013-35, which relates to certain cost-of-living adjustments (COLAs) for a wide variety of tax-related items.
According to Revenue Procedure 2013-35, in regard to Archer MSAs, the annual deductible for self-only coverage must be no less than $2,200 or more than $3,250 (both up $50 from 2013), with an out-of-pocket maximum of $4,350 (up $50 from 2013). For family coverage, the annual deductible must be no less than $4,350 (up $50 from 2013) or more than $6,550 (up $100 from 2013), with an out-of-pocket maximum of $8,000 (up $150 from 2013).
In addition to the Archer MSA-eligible HDHP COLAs, Revenue Procedure 2013-35 increases the limits for long-term care insurance premiums that are considered medical care under IRC Section 213(d), which affects those premiums’ status as qualifying expenses under an HSA or HRA. The limits vary based on age.
Regarding qualified transportation fringe benefits, the monthly limit that may be excluded from income for parking benefits is $250 (up $5 from 2013) while the combined limit for transit passes and vanpooling is $130 (a decrease of $115 because the temporary rule equalizing the two transportation type benefits is expiring and has not been extended).
The annual limit on salary reductions to a health FSA remains $2,500.
Finally, regarding the small business health care tax credit, the average annual wage level at which the credit phases out for small employers is $25,400 (up $400 from 2013), while the maximum annual wages to qualify for the credit will be $50,800 (up $800 from 2013).
The IRS recently released the 2013 version of Form 8889 and corresponding instructions. Form 8889 is used by HSA holders (and beneficiaries of deceased HSA holders) to report their HSA activity, including contributions, distributions and calculating HSA deductions, as well as any reportable income and additional tax triggered by failing to remain HSA-eligible throughout the applicable testing period. The 2013 version reflects the increased HSA limits as well as explanations as to when OTC drugs are considered qualified medical expenses. While employers do not directly file or provide this form to employees (since it is filed in conjunction with an individual’s Form 1040), it is helpful for those involved in benefits administration to have a general understanding of HSA eligibility, contribution and distribution rules.
On Oct. 31, 2013, the IRS released IRS News Release IR-2013-86, which outlines the 2014 cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items. For 2014, the limitation on the annual benefit for a defined benefit plan under Section 415(b)(1)(A) increased, from $205,000 to $210,000, while the limit for defined contribution plans under the same section increased from $51,000 to $52,000. Among other increases is the annual compensation limit, which increased by $5,000 to $260,000.
While there were a number of increases in the dollar limitations, there were a number that remained the same. These include the annual limitation on 401(k) and 403(b) contributions, the limit for catch-up contributions, the annual limit on IRA contributions and the Savings Incentive Match Plan for Employees (SIMPLE) employee contribution limit.
On Sept. 27, 2013, CMS published guidance relating to same-sex marriage and eligibility for advance payments of the premium tax credit and cost-sharing reductions that are available through the health insurance exchanges (also referred to as “marketplaces”). As background, following the U.S. Supreme Court decision in U.S. v. Windsor, 133 S. Ct. 2675 (2013), which held as unconstitutional the Defense of Marriage Act’s (DOMA) prohibition on same-sex marriage, the IRS issued guidance recognizing same-sex marriage for federal tax purposes so long as the marriage is validly performed in a state or country that recognizes same-sex marriage (regardless of laws of the state in which the couple is domiciled). The IRS ruling is relevant in determining eligibility for premium tax credits and cost-sharing reductions because a taxpayer’s spouse is included in determining family size and household income. Also, married couples generally must file a joint federal income tax return to qualify for premium tax credits.
According to the CMS guidance, CMS generally requires exchanges to evaluate marital status based on the law of the state or country where the marriage was performed, even if the state of residence (i.e., the state in which the exchange is located) does not recognize same-sex marriage. Federally facilitated exchanges will recognize same-sex marriages based on the married couple’s attestations that they expect to file a joint federal income tax return for the 2014 tax year. State-based exchanges are given time to adjust their systems to reflect this guidance (but must implement a workaround where they can).
In separate but similar guidance, CMS also explained how the Windsor decision affects Medicaid and Children’s Health Insurance Program (CHIP) eligibility (these are both need-based programs run jointly by the federal and state governments). For income-based eligibility determinations for both Medicaid and CHIP, CMS will permit states to apply their own choice-of-law rules in deciding whether a couple is lawfully married. Thus, in states that do not recognize same-sex marriage, Medicaid and CHIP programs may still use the state of residence rule — potentially denying income-based eligibility for those programs for same-sex couples married in other states. For other eligibility determinations, CMS indicates that the Social Security Administration’s (SSA) eligibility rules will apply; SSA has not yet issued post-Windsor guidance.
The CMS guidance does not directly affect employers. But employers should be aware of the new guidance, as it affects employees interested in the exchanges and potential penalties under PPACA’s employer mandate.
On July 26, 2013, the IRS provided guidance on qualified bicycle commuting reimbursement as a transportation fringe benefit. Under Section 132(f)(1)(D), a qualified transportation fringe benefit includes any "qualified bicycle commuting reimbursement." The regulations define "qualified bicycle commuting reimbursement" as any employer reimbursement during the 15-month period beginning with the first day of such calendar year for reasonable expenses incurred by the employee during the calendar year for the purchase of a bicycle or bicycle improvements, if the bicycle is regularly used for travel to work. The IRS clarified in Chief Counsel Memo 2013-0032 that expenses incurred in using a bicycle share program, however, are not allowed expenses.
The guidance further clarified that unlike other qualified transportation fringe benefits, qualified bicycle commuting reimbursements cannot be excluded from the employee's gross income if the employer provided them in place of pay. Therefore, Section 132(f)(4), the provision which permits employees to reduce their taxable compensation in order to receive reimbursement for transit expenses on pretax basis, does not apply to qualified bicycle commuting reimbursements.
On Sept. 23, 2013, the IRS issued Notice 2013-61. The new notice provides guidance for employers to make claims for refund or adjustments of overpayments of payroll taxes in connection with employer-sponsored coverage and benefits provided to same-sex spouses. The new notice builds on Rev. Rul. 2013-17, issued on Aug. 29, 2013, which provides guidance on the general tax treatment of same-sex marriages following the U.S. Supreme Court’s decision in U.S. v. Windsor holding Section 3 of the Defense of Marriage Act (DOMA) unconstitutional. Rev. Rul. 2013-17 concluded that any same-sex marriage legally entered into in any state (including the District of Columbia and any U.S. territory) or foreign country will be considered a marriage for federal tax purposes, regardless of the laws of the jurisdiction in which the couple resides. The result is that the tax advantages of coverage for employer-sponsored health insurance and other benefits is now available to a same-sex spouse on the same basis as an opposite-sex spouse.
Rev. Rul. 2013-17 provides instructions for individuals and their individual federal income tax returns so that employees may claim refunds for federal income tax paid on the value of health coverage for a same-sex spouse, as well as income taxes paid on premiums that were paid on a post-tax basis. Notice 2013-61 provides instructions for employers to file (and amend filings for) their quarterly federal employment tax returns for 2013 and for prior years. Specifically, for 2013, Notice 2013-61 provides two alternative methods for claiming overpayments of employment taxes in connection with same-sex benefit offerings in 2013. Under the first method, employers may use the fourth-quarter 2013 Form 941, Employer’s Quarterly Federal Tax Return, to correct overpayments of employment taxes for the first three quarters of 2013. Under the second method, employers may file one Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, for the fourth quarter of 2013 to correct the overpayments of FICA taxes for all quarters of 2013.
For overpayments of FICA taxes for years prior to 2013, employers can make a claim or adjustment for all four calendar quarters of a calendar year on one Form 941-X filed for the fourth quarter of such year. (Normally, a Form 941-X must be filed for each calendar quarter for which a refund claim or adjustment is made.) Employers may make a claim or adjustment for prior years if the period of limitations on refunds has not expired. Generally, the period of limitations is the later of three years from the date the return was filed or two years from the date the tax was paid. In addition, for adjustments, the period of limitations must not expire within 90 days of filing the adjusted return.
Notice 2013-61 provides welcome relief (and procedures for claiming that relief) for employers that provide or have provided benefits to same-sex spouses. Such employers should work closely with their tax counsel to develop a plan to properly follow the procedures outlined in Notice 2013-61 in filing adjusted and amended quarterly federal tax returns.
On Sept. 16, 2013, HHS issued a model Notice of Privacy Practices. This is welcome news for employer sponsors of group health plans. For over 10 years, HIPAA has required covered entities (including group health plans) to create and distribute a Notice of Privacy Practices communicating the entity’s policies and procedures related to privacy, use and disclosure of protected health information (PHI), safeguards to protect PHI, the entity’s responsibilities and the individual’s rights. This, however, is the first time that a model notice has been provided.
The model notice is provided in three different formats: a booklet style, layered notice and text-only version. A plan sponsor may use whichever best suits their needs. The language provided should be used as a baseline and customized to reflect the plan’s specific policies and contact information. Instructions for creating the plan’s notice are also provided.
Fully insured plans that are provided through an insurance contract and that do not maintain or receive PHI outside enrollment or summary health information (“hands-off” employer) are exempt from many of the HIPAA privacy requirements, including the Notice of Privacy Practices. The insurance carrier issuing the policy is responsible for creating and distributing the notice to participants, although such employers should be aware of the requirement and work closely with insurers to understand the privacy practices of the insurer.
HHS Announcement and Model Notices
Instructions for Health Plans
On Sept. 18, 2013, the DOL’s EBSA issued Technical Release No. 2013-04 related to the treatment of same-sex spouses for ERISA purposes. The release states that following the U.S. Supreme Court decision in United States. v. Windsor, the term “spouse” as used in title I of ERISA and the IRC, as well as DOL regulations at Chapter XXV of Title 29, refers to same-sex spouses legally married in a state that recognizes such marriages regardless of where the couple lives. The terms “spouse” and “marriage" do not include other formal relationships that are not recognized as marriage, such as domestic partnerships and civil unions. The release did not provide express guidance regarding plan eligibility, specifically for self-funded plans. Future guidance is expected.
On Sept. 13 and Sept. 18, 2013, the IRS issued two Employee Plan newsletters. These newsletters address determination letters, beneficiary designations and Form 8955-SSA penalty notice errors, among other issues.
On determination letters, the IRS noted that it has not made any decision on plan language related to the Supreme Court’s recent Windsor decision (invalidating Section 3 of the Defense of Marriage Act, or DOMA). As of Sept. 9, 2013, determination letter rulings will include a caveat confirming this point (that no decision has been made). Also announced is a modified standard favorable determination letter (2002) that will no longer include adoption dates for plan documents or amendments.
On beneficiary designations, the IRS will no longer allow preapproved plans to contain provisions automatically revoking spousal beneficiary designations upon a legal separation. These automatic revocation provisions remain allowable when related to a divorce. However, when the automatic revocation provisions are permitted in relation to a legal separation, the plan risks violating the spousal death benefit rules. Profit-sharing plans (like a 401(k) plan) that do not offer the annuity form of distribution are required to pay 100 percent of the account balance to the deceased participant’s spouse unless the spouse has consented otherwise. Therefore, an automatic revocation provision that terminates a legally separated spouse’s right would not be allowed because a legally separated spouse is still a spouse. Plans are advised to revise language to ensure that automatic revocation provisions are only applied in the case of divorce.
On Form 8955-SSA penalty notice errors, during July and August, a programming error resulted in 4,000 erroneous penalty notices relating to distributed Forms 8955-SSA. According to the newsletter, the IRS has corrected the error, has abated the wrongly issued penalties and has sent apology letters to the affected parties. As the error has been fixed and parties wrongly cited have been made whole and apologized to, parties affected are aware of who they are. Therefore, penalty notices not related to the above mistake that were issued during this period need to be addressed.
On Aug. 29, 2013, the IRS issued Revenue Ruling 2013-72, which states that same-sex couples legally married in jurisdictions that recognize same-sex marriage will be treated as married for federal tax purposes, regardless of the laws of the jurisdiction in which the couple resides. Known as the “state of celebration” rule, any same-sex marriage legally entered into in any state, the District of Columbia (D.C.), a U.S. territory or a foreign country will be recognized for federal tax purposes. Currently, 13 states and D.C. have legalized same-sex marriage, as have 15 foreign countries.
The ruling—highly anticipated since the U.S. Supreme Court struck down section 3 of DOMA in June—applies for all tax purposes (including filing status, claiming personal dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA and claiming the earned income or child tax credits) where marriage is relevant. This would include any provision of the IRC that uses the terms “husband and wife,” “husband” and “wife”).
For employers, this means that the tax advantages of coverage for employer-sponsored health insurance and other benefits is now available to a same-sex spouse on the same basis as an opposite-sex spouse. Employers that were previously providing coverage to same-sex spouses may immediately stop imputing federal tax relating to that coverage (although state taxes may still apply). The ruling also announced that the agencies will issue streamlined procedures for employers that wish to file refund claims for employment taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses (for tax years still open under the statute of limitations (SOL)—generally the later of three years from the date the return was filed or two years from the date the tax was paid).
For employees, individuals who were in same-sex marriages and covered by an employer plan may file original or amended federal income tax returns choosing to be treated as married for federal tax purposes. Such individuals may do so for tax years still open under the SOL. In addition, for employee benefits purposes, employees who previously purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat amounts paid for that coverage as pre-tax and excludable from gross income. The ruling describes the process for filing an amended individual federal income tax return. The IRS also issued a set of frequently asked questions (FAQs) for individuals of the same sex who are married under state law—the FAQs further describe the ruling’s effect on their situation.
Importantly, the ruling does not apply to registered domestic partners, civil unions or other similar relationships under some states’ laws. The IRS issued a set of FAQs that explain the various federal tax implications for individuals in these relationships.
FAQs for Individuals of the Same Sex Who are Married Under State Law
FAQs for Registered Domestic Partners and Individuals in Civil Unions
On Aug. 29, 2013, HHS issued a memo clarifying that all beneficiaries in private Medicare plans have access to equal coverage when it comes to care in a nursing home where their spouse lives. This guidance is in response to the recent Supreme Court ruling in United States v. Windsor, No. 12-307, finding section 3 of DOMA unconstitutional. Under current law, Medicare beneficiaries enrolled in a Medicare Advantage plan are entitled to care in the skilled nursing facility where their spouse resides. This guidance now clarifies that such treatment will be extended to same-sex spouses, consistent with the Windsor decision. Previously, seniors with same-sex spouses enrolled in Medicare Advantage may have had to choose between receiving coverage in a nursing home separate from their spouse or disenrolling in the Medicare Advantage plan, resulting in more out-of-pocket cost to receive care in the same facility. This guidance specifically states that this extends to all couples in a legally recognized same-sex marriage, regardless of where they reside.
On Aug. 30, 2013, the IRS issued proposed regulations that would require plan administrators of 401(k) and other retirement plans to file certain forms electronically (or using other specified magnetic media), namely the Form 5500 series and Form 8955-SSA. The proposed rules would apply to any plan administrator or employer required to file at least 250 returns of any type— including employment tax returns, income tax returns and information returns such as Form W-2 and Form 1099. The controlled group rules under IRC section 414 would apply in determining whether the 250-return threshold is exceeded.
The requirement applies for plan years beginning on or after Jan. 1, 2014 for plans that have a filing deadline (without extensions) after Dec. 31, 2014. Failure to comply will be seen as a failure to file. Penalties for such are $25 per day for failure to file Form 5500, up to $15,000; and $1 per day for failure to file Form 8955-SSA, up to $5,000.
Since the June 26, 2013 Supreme Court decision striking down Section 3 of the Defense of Marriage Act (DOMA), we have been awaiting guidance from federal agencies on how the decision will impact employer-sponsored benefits. On Aug. 14, 2013, the DOL released a revised version of Fact Sheet #28F, “Qualifying Reasons for Leave under the FMLA.” The revised fact sheet defines a spouse as: “a husband or wife as defined or recognized under state law for purposes of marriage in the state where the employee resides, including “common law” marriage and same-sex marriage.” This indicates, that for FMLA purposes, a same-sex spouse residing in a state that recognize same-sex marriage will be eligible for leave under the same conditions as an opposite sex spouse. A same-sex spouse residing in a state that does not recognize same-sex marriage would not be entitled to leave as a spouse under FMLA. This practice is also known as the state of residence rule, meaning that a spouse’s obligations and privileges are based on the definition of a spouse in the state in which they reside.
On Aug. 13, 2013, the U.S. Department of Defense (DOD) issued a press release stating that the DOD will extend benefits to same-sex spouses regardless of where the couple is stationed or residing. This is known as the state-of-celebration rule, meaning that a spouse’s obligations and privileges are based on the definition of “spouse” in the state in which they were married, regardless of where the spouse now resides.
While the decisions of these agencies seem contradictory, it is important to note that the IRS has not yet published guidance relating to the group health plan eligibility or tax consequences of the recent DOMA decision on same-sex marriage. Until that guidance is received, employers are encouraged to work with legal counsel in determining policies and procedures which are appropriate for the employer.
On Aug. 14, 2013, HHS announced a resolution agreement with a health plan to settle certain HIPAA violations relating to electronic protected health information (PHI) found on the hard drives of leased photocopiers after the health plan returned them to the leasing company. According to the HHS news release, the health plan submitted a breach notification to HHS after learning of the problem from a television network, which has purchased one of the photocopiers as part of an investigative report. The plan submitted a breach notification to HHS, which in turn investigated the plan. As a result of the investigation, HHS determined that the health plan had failed to properly erase multiple photocopier hard drives prior to returning them to the leasing company. That failure resulted in the impermissible disclosure of electronic PHI of up to 344,579 individuals.
According to the resolution agreement, the health plan also failed to consider the photocopiers in its HIPAA security risk assessment and failed to implement appropriate policies for the disposal of electronic PHI. Accordingly, the agreement requires the health plan to pay over $1.2 million and to comply with a corrective action plan.
The settlement serves as a strong reminder of the importance of HIPAA compliance. Any entity that is considered a ‘covered entity’ subject to ERISA—which may include an employer in their role as plan sponsor or plan administrator, particularly if PHI is involved—must conduct a thorough security risk assessment and develop proper HIPAA policies and procedures with respect to PHI. PHI can appear in many mediums, including hard drives, computer workstations, photocopiers, fax machines and portable devices, such as a laptop or phone. Importantly, HHS takes the position that electronic PHI stored on these mediums is subject to the HIPAA privacy and security rules, even where the storage is unintentional. Employers should review their policies and determine what HIPAA rules might apply to them as a covered entity (or as a business associate of a covered entity). The HHS news release contains links to resources on media sanitation and safeguarding information stored on electronic devices, including copiers.
In Danois v. i3 Archive Inc., 2013 WL 3556083 (E.D. Pa. 2013), two employees were on the company’s board of directors. The employees were married, but kept that fact a secret from their employer. As part of their duties on the board, the employees made decisions that benefited the other. During a company-wide reduction in force, the employees were terminated upon their own suggestion. Their coverage was terminated under the group health plan and COBRA was offered in a timely manner. A month later, the employer learned of the employee’s undisclosed marriage, re-characterized their termination as gross misconduct and withdrew the COBRA offer. The DOL later ruled that the termination had not been for gross misconduct and that the COBRA offer and coverage must be reinstated. This is consistent with case law which requires that the determination of gross misconduct be made at the time of termination. Evidence or proof of gross misconduct cannot be used or obtained following the termination to re-characterize the reason for termination. The employer has asked the court for equitable relief to compensate them for the cost of health insurance they obtained while they were without COBRA coverage. The court has not yet ruled on this ERISA breach of fiduciary duty charge.
On July 19, 2013, the IRS posted a video titled “Forms 5500 and 5558 Filing Tips,” which is a less than two minute video describing five tips that plan sponsors should keep in mind when filing Form 5500, or an extension relating thereto (Form 5558). The five tips are also listed on the web page below the video. With the filing deadline for calendar year plans occurring tomorrow, July 31, 2013, plan sponsors may find the video especially timely.
Treasury and IRS Officials Answer Questions, Offer Informal Guidance During Meetings with ABA
The American Bar Association (ABA) recently hosted a meeting of its Joint Committee on Employee Benefits. During the meeting, IRS and Treasury officials provided ABA members an opportunity to ask questions in an informal setting. Although the responses are not binding, they do offer insight on how the IRS would likely resolve such issues if presented. The IRS and Treasury provided comments on a variety of employee benefit issues including performance pay, the short-term deferral rule as applied to severance packages and collateral requirements for plan loans.
On the health and welfare side, ABA members questioned the treatment of automatic adjustments to HDHP out of pocket maximums that begin in 2015. Specifically, members asked what would happen if the HHS adjustment creates a higher out-of-pocket maximum than the IRS adjustment. In response, the IRS explained that if two different out-of-pocket maximum levels apply to a plan, the plan complies with both if it complies with the lower out-of-pocket maximum.
On July 22, 2013, the DOL released Filed Assistance Bulletin (FAB) 2013-02, in which it introduces temporary relief and a one-time “reset” from certain annual participant-disclosure requirements.
As background, under October 2010 DOL regulations, plan administrators were required to disclose comparative charts of plan investment options no later than Aug. 30, 2012, and then at least annually thereafter. Therefore, a plan that initially filed in August 2012 would have the next disclosure due in August 2013. Some plan administrators expressed concern with this timing, as it would preclude this disclosure from being combined with other participant disclosures, resulting in additional costs.
In response to these concerns, under FAB 2013-02, the DOL will allow a plan to align the comparative chart deadline with other plan disclosure and notice deadlines in order to achieve cost efficiencies. Thus, if the plan administrator reasonably determines that it will benefit the plan, participants and beneficiaries, then it may provide the 2013 comparative chart no later than 18 months after the initial chart (as opposed to 12 months, as previously required). For example, a plan that provided the initial chart on Aug. 1, 2012 will have until Feb. 1, 2014 to furnish the next one.
For those plan administrators that already provided the 2013 comparative chart, FAB 2013-02 provides that the same relief is available to them in 2014 (allowing the one-time “reset” and up to 18 months between charts).
Finally, the DOL is considering revising the disclosure requirement to permanently provide more flexibility. Specifically, it is considering whether to allow a 30- or 45-day window within which the annual comparative chart would be provided, rather than the hard deadline of “at least annually” ending on a particular day.
On July 3, 2013, the DOL issued Advisory Opinion 2013-03A. While advisory opinions are only controlling as to the entities named, they are illustrative as to how the DOL likely sees an issue. Advisory Opinion 2013-03A describes a common practice by 401(k) plan recordkeepers which involves offering plan clients potential sources of revenue sharing, and concludes that the revenue sharing amounts were not “plan assets” under ERISA.
As background, many plan recordkeeping and administrative service providers provide a variety of investment options to defined contribution plans. These firms receive payments from plan investments through various fees which are generally taken into account in calculating the recordkeeper’s fee. The service provider will retain the payments, but will maintain bookkeeping records and credit the plan a portion for such payments. The arrangement allows service providers to deal with these credits in two ways: (1) By applying the credits against plan expenses; or (2) by depositing an amount equal to the credit in the plan’s account. Neither approach requires segregation of any amount for the benefit of the plan, nor is such representation to that effect made.
These types of practices are common, but lack formal approval through DOL guidance, leading to the request of this advisory opinion. The request asks the DOL to confirm that revenue sharing payments received by plan service providers do not constitute plan assets.
As they have with similar plan asset questions, the DOL noted that the assets of a plan are to be identified on the basis of ordinary notions of property rights. Furthermore, the assets of a plan include any tangible or intangible property in which the plan has a beneficial ownership interest. Using this analysis, the DOL concluded that the revenue sharing payments are not plan assets for purposes of ERISA where the plan itself does not actually receive the revenue sharing payments (rather, the plan receives only credits calculated by reference to the amounts received by the service provider). Finally, any credits actually paid into the plan’s account would become plan assets once actually placed into the account.
While the revenue sharing amounts themselves are not plan assets, the plan’s contractual right to benefit from the payments would be a plan asset. Therefore, any claim by the plan for credit or payment due under the contract from the recordkeeper would be a plan asset.
On June 25, 2013, the U.S. District Court for the Southern District of Indiana, in Pierce v. Visteon Corp., 2013 WL 3225832 (S.D. Ind. 2013), found that an employer failed to send timely COBRA election notices to over 700 former employees going back to 2004. This resulted in a penalty of $1.85 million plus attorney’s fees. The employer utilized different third-party administrators (TPAs) to administer payroll, benefits and COBRA. Human resource personnel, including regional office representatives, would enter employee termination data into a timekeeping system, which was then to be distributed electronically through a data feed system to the TPA. Due to many procedural errors, several employees never received a COBRA election notice, while some received the notice over 400 days late. Some participants forewent medical care because of no insurance coverage.
The court found that the employer did not conduct audits on the system or on the performance of the TPAs to ensure that participants were being properly notified of their COBRA rights. In addition, the employer did not receive reports or confirmations of COBRA notifications. The court found that the employer, as the plan administrator, was ultimately responsible for the failure to timely distribute the COBRA Election Notice. The opinion stated:
“[The employer] cannot hide behind its TPAs because [the employer] acknowledged that it was the administrator under ERISA and as such, it is the responsible party…in the absence of an oversight system, the use of a TPA cannot shield the administrator from liability for violations of COBRA’s notification requirements.”
The case serves as an important reminder to employers regarding their COBRA obligations. Employers should establish proper COBRA policies and procedures to ensure that they are meeting the appropriate deadlines and obligations, whether working with a TPA or not. Proper COBRA compliance will help ensure that an employer will avoid costly penalties, such as the ones described in this case.
On July 10, 2013, the IRS updated their website with guidance addressing the expiration of the health care tax credit (HCTC). As background, legislation authorizing the HCTC expires on Jan. 1, 2014, and therefore the tax credit will no longer be available.
The HCTC helps make health insurance more affordable for eligible individuals and their families by paying 72.5 percent of monthly qualified health insurance premiums. Eligible individuals include those who have lost their jobs due to foreign competition and retirees (at least age 55) who worked for companies whose pension plans were taken over by the Pension Benefit Guaranty Corp. The HCTC can be used to offset the premiums of a variety of health insurance coverage types, including COBRA continuation coverage and individual policies offered by commercial insurer.
According to the IRS website, as of Oct. 1, 2013, the HCTC program will no longer accept new registration forms for individuals or qualified family members who wish to be enrolled in the monthly HCTC program. The final monthly HCTC payment due date is Dec. 24, 2013. Therefore, beginning Jan. 1, 2014, previously eligible individuals will become responsible for their health insurance premiums. Because the HCTC program does not have authority to transition HCTC participants into any other federal health program, the IRS encourages participating individuals to contact their health plan administrator to discuss other options that may be available.
On June 26, 2013, the U.S. Supreme Court let stand a lower court ruling overturning California’s Proposition 8 and struck down Section 3 of the Defense of Marriage Act (DOMA). While the decision results in significant uncertainty for employer-sponsored employee benefit plans, federal agencies have announced guidance is forthcoming.
As background, Proposition 8 is a 2008 California voter initiative that banned same-sex marriage in California by defining a marriage as between only a man and a woman. A lower court overturned the proposition to which the proponents of Proposition 8 appealed. In the first decision, Hollingsworth v. Perry, No. 12-144, the Court held that the proponents of Proposition 8 did not have the legal rights to defend the law. Therefore, the decision by the U.S. Court of Appeals for the Ninth Circuit, from which the U.S. Supreme Court appeal was born, has no legal force. The court sent the case back to the Ninth Circuit with instructions to dismiss the case. This means that the California ruling striking Proposition 8 down stands, and same-sex marriage is now legal in California. State officials ordered all counties in California to begin issuing marriage licenses on June 28, 2013.
For purposes of federal law, DOMA Section 3 defines marriage as between only a man and a woman. In the second decision, United States v. Windsor, No. 12-307, the court ruled that Section 3 is unconstitutional. As background, this challenge was brought by a woman considered married under New York state law who paid more than $350,000 in estate taxes because her deceased partner was not recognized as her spouse for federal tax purposes. By overturning Section 3, the court opens up to same-sex spouses more than 1,100 federal benefits, rights and burdens linked to marital status. Section 2 of DOMA, allowing states to refuse to recognize same-sex marriages from other states, was not before the court as part of this case. Therefore, states still have the option of refusing to recognize such out-of-state unions. Ultimately, the Windsor decision means that same-sex couples who are legally married must now be treated the same under federal law as married opposite-sex couples. (Please note that domestic partnership may be different than same-sex marriage, and the tax consequences relating to domestic partnership remain unchanged by the Windsor decision—for more on this see the FAQ at the end of Compliance Corner.)
Implications for Employer-sponsored Employee Benefit Plans
The Supreme Court rulings have major implications for employer-sponsored employee benefit plans. Specifically, for all purposes under ERISA and the IRC, employers and plans will now be required to recognize a same-sex spouse as a spouse, at least in states that allow same-sex marriage. The following states currently issue same-sex marriage licenses: CA, CT, DE, IA, MA, MD, ME, MN (8/1/2013), NH, NY, RI (8/1/2013), VT, WA and DC. This generally means that employers in these states will no longer be required to impute income for coverage or benefits provided to a same-sex spouse. This is because a same-sex spouse may be covered on a tax-free basis the same as any opposite-sex spouse, although IRS guidance would be welcomed on this point (specifically on when an employer should discontinue the practice of imputing income: prospectively or retroactively).
Some states specifically prohibit the recognition of same-sex marriages performed in other states. Employers in these states will not be required to recognize same-sex marriages, although employers may choose to do so on a voluntary basis (please note that there may be tax consequences): AK, AL, AR, AZ, FL, GA, HI, ID, IN, KS, KY, LA, MI, MO, MS, MT, NC, ND, NE, NM, OH, OK, PA, SC, SD, TN, TX, UT, VA, WI, WV, WY, and Puerto Rico.
Finally, six states provide for civil unions or domestic partnerships that offer spousal-equivalent protections for same-sex couples, which may include same-sex couples married in other states. These states are: CO, HI, IL, NV, NJ and OR.
From a retirement plan perspective, there will be implications regarding spousal rights in relation to areas such as annuities, required minimum distributions(RMDs), hardship withdrawals, loan, rollovers and Qualified Domestic Relations Orders (QDROs). From a health and welfare benefits perspective, there will be implications regarding pre-tax eligibility (such as allowing a qualifying event under Section 125 for mid-year enrollment in the health plan), COBRA rights, FMLA, HIPAA, consumer driven reimbursement plans (i.e. HRAs, FSAs and dependent care flexible spending accounts) and use of HSA funds to pay qualified medical expenses of a same-sex spouse. Significantly, self-insured plans that currently define a “spouse” as defined under federal law will need to revise the plan eligibility language accordingly. Fully insured plans should contact the insurance carrier to determine what action, if any, is needed.
The President issued a press release, directing the Attorney General to review affected federal statutes. On June 27, 2013, both the IRS and HHS announced they are working with the Department of the Treasury and Department of Justice and expects to provide revised guidance in the near future. Finally, in a memo issued by the federal government’s Office of Personnel Management, federal agencies were told to allow health coverage to begin immediately to the spouses and children of married same-sex employees, and to set the stage for more to gain that coverage within 60 days. The memo also covered other forms of insurance and retirement benefits. Private employers should wait for further guidance prior to implementing plan changes and revising payroll practices.
White House Press Release
California Press Release
IRS Announcement
HHS Announcement
OPM Memo
Hollingsworth v. Perry
United States v. Windsor
On June 25, 2013, the DOL’s EBSA issued a set of 22 FAQs for health and retirement plan participants and beneficiaries in conjunction with the Oklahoma tornadoes. The FAQs provide guidance on certain questions that participants and beneficiaries may be facing following the tornadoes in Oklahoma. For example, one FAQ asks how an employee should proceed in filing a claim for benefits or obtaining replacement identification cards if the employer is closed as a result of the tornadoes. Other FAQs address how an employee should proceed if an affected employer has failed to pay their portion of an employee’s health insurance premium, where a COBRA participant should send a COBRA premium payment if the prior location for sending the COBRA premium is closed, and an employee’s rights when it comes to promised benefits in the event that the employer shuts down. The FAQs also include additional resources for more information.
Employers with Oklahoma ties should be aware of the FAQs, both to educate themselves and to help address any questions that may arise from employees and others affected by the Oklahoma tornadoes.
DOL FAQs for Participants and Beneficiaries Following the Oklahoma Tornadoes.
On June 7, 2013, HHS published technical corrections addressing inadvertent errors and omissions in the HIPAA Privacy, Security and Enforcement Rules that were initially published on Jan. 25, 2013. The corrections address several errors such as incorrect citation references and one typographical error. Importantly, HHS did not waive the effective date of the final regulations as a result of discovering these errors. The effective date of the final regulations remains Sept. 23, 2013.
On May 10, 2013, the IRS issued Chief Counsel Advice 2013042214410232.
In this Chief Counsel Advice, as a settlement to an employee, an employer was providing cash in lieu of the health benefits that it should have provided. The IRS concluded that even though the health benefits themselves may have been excludable from gross income, the cash payments are not. Rather, the cash payments are regular wages and must be reported on Form W-2.
Chief Counsel Advice consists of memoranda written in response to various internal requests for guidance from IRS agents, officers and attorneys. The advice is not substantial authority and cannot be relied upon by an employer, but it provides insight into the IRS’ standing on certain issues, and it outlines an important tax principle for employers that may encounter a similar situation in the future.
On May 8, 2013, the DOL issued Technical Release No. 2013-02, which announces an updated model COBRA election notice. The updated model notice includes changes relating to the availability of alternatives to COBRA coverage through the state health insurance exchanges (referred to in the notice as “Marketplaces”). Specifically, the updated notice adds language that COBRA qualified beneficiaries may be able to purchase alternative coverage through the Marketplace, that a premium tax credit may be available to help pay for some or all of that Marketplace coverage, that special enrollment opportunities may be available in other group health plans for which they are eligible (if enrollment is requested within 30 days) and that there are limitations on a plan’s ability to impose a pre-existing condition exclusion (those exclusions are prohibited beginning in 2014). The DOL also released a redline version of the COBRA election notice, which highlights changes that were made to the prior version of the notice.
The updated notice is in modifiable, electronic form. Use of the updated model election notice, appropriately completed, will be considered by the DOL to be good faith compliance with the election notice content requirements of COBRA. Thus, employers may begin using the updated notice immediately (even though the exchanges are not currently in operation).
In addition to the updated model COBRA election notice, Technical Release No. 2013-02 also includes model notices that employers may use to satisfy the notice of exchange requirement under PPACA (as discussed in the above article).
Technical Release No. 2013-02
Updated Model COBRA Election Notice
Updated Model COBRA Election Notice Redline Version
On May 7, 2013, the EEOC settled its first lawsuit arising from violations of the Genetic Information Nondiscrimination Act (GINA). In EEOC v. Fabricut Inc., No. 13-Civ. 248 (N.D. Okla. May 7, 2013), an applicant for a memo clerk position was asked if she, or anyone in her family, suffered from conditions such as heart disease, cancer, diabetes or “mental disorders.” The applicant was then subjected to medical testing, from which the examiner concluded that further evaluation was needed to determine whether the applicant suffered from carpal tunnel syndrome (CTS). The employee was instructed she needed to be evaluated for CTS by her personal physician, and to provide the company with the results, which she did. Although her physician concluded she did not have CTS, the company rescinded its job offer.
The EEOC filed a lawsuit against the employer. In its suit, the EEOC charged that the employer violated the ADA when it refused to hire the applicant because it regarded her as having CTS, and violated GINA when it asked for her family medical history in its post-offer medical examination. The case was quickly settled. Under the terms of settlement, the employer will pay $50,000. In addition, the employer agreed to take specified actions designed to prevent future discrimination.
At the end of 2012, the EEOC declared that prevention of genetic discrimination would be one of its top priorities over the next four years. The EEOC’s General Counsel reiterated this position in announcing the Fabricut settlement, cautioning that
"[e]mployers need to be aware that GINA prohibits requesting family medical history, . . .[and] [w]hen illegal questions are required as part of the hiring process, the EEOC will be vigilant to ensure that no one be denied a job on a prohibited basis."
On May 2, 2013, the IRS announced the 2014 cost-of-living adjustments for HSAs and high-deductible health plans (HDHPs). The 2014 annual HSA contribution limit for individuals with self-only HDHP coverage is $3,300, while the limit for individuals with family HDHP coverage is $6,550. With respect to HDHPs, the 2014 out-of-pocket maximums for self-only HDHP coverage is $6,350. The limit for family HDHP coverage is $12,700.
Although the HSA contribution limits and the HDHP out-of-pocket maximums are increasing for 2014, the HDHP minimum deductibles will remain the same. As such, the 2014 minimum annual deductible for self-only HDHP coverage remains $1,250, and the minimum annual deductible for family HDHP remains $2,500.
The 2014 out-of-pocket maximums outlined above are important for all plans, not just qualified HDHPs. This is because, under PPACA, the out-of-pocket maximums are extended to all non-grandfathered group health plans, whether self-insured or fully insured. This was confirmed in guidance issued by HHS in the form of final regulations on Feb. 25, 2013.
IRS Updates VCP Kit for Those Who Missed the Preapproved Defined Contribution Plan Deadline
The IRS has updated its Voluntary Correction Program (VCP) submission kit to account for changes in the Employee Plans Compliance Resolution System (EPCRS) announced earlier this year. This update is for plan sponsors who missed the deadline of April 30, 2010, to adopt a preapproved defined contribution plan. As discussed in the Jan. 15, 2013, edition of Compliance Corner, the IRS made many clarifications, revisions and additions to the old EPCRS. The new VCP submission kit guides plan sponsors through the process in consideration of the updated procedure. It includes a checklist of items to be submitted and step-by-step instructions for completing the new required forms. Additionally, it includes a description of the review process, links to other IRS resources and sample forms.
ERISA Section 502(a)(3) provides for appropriate equitable relief for a fiduciary to enforce any terms of the plan. In U.S. Airways, Inc. v. McCutchen, 2013 WL 1567371 (U.S. 2013), the group health plan had paid benefits for James McCutchen’s health care expenses, which had been incurred due to an accident involving a third party. McCutchen recovered $110,000 from the third party. Some of those funds were used to pay legal expenses. The plan demanded full reimbursement for the claims paid. The summary plan description included a provision regarding plan reimbursement when expenses are recovered from a third party. McCutchen argued that he had received only a portion of his total damages and that reimbursement was only required under the double recovery rule if he had been compensated for the same loss. The court ruled that the double recovery rule did not override the terms of the plan, which provided for plan reimbursement.
McCutchen further argued that reimbursement was not required because full reimbursement to the plan would mean that the plan did not account for his legal expenses, which courts generally recognize under the so-called common-fund rule. The plan document was silent regarding this issue, which the court called a contractual gap. In light of the contractual gap, the court ruled that the common-fund rule would apply and that the attorney’s fees would be paid before the plan was reimbursed.
This case, as well as Thurber v. Aetna Life Ins. Co. (discussed below), shows the importance of clearly documenting an ERISA plan’s terms and conditions in the plan document. Additionally, the Supreme Court has recently decided to hear Heimeshoff v. Hartford Life & Accident Insurance Co., 2013 WL 1500233 (U.S. 2013), which involves a participant’s right to appeal under a plan that, according to a lower court ruling, has unambiguous language regarding the statute of limitations period.
On March 13, 2013, the U.S. Court of Appeals for the Second Circuit ruled on a case involving a plan’s right to reimbursement under Section 502(a)(3) of ERISA. In Thurber v. Aetna Life Ins. Co., 2013 WL 950704 (2nd Cir. 2013), Sharon Thurber had been receiving disability benefits through her employer-sponsored disability plan administered by an insurance company. The insurance company later learned that Thurber had simultaneously received benefits from a no-fault insurance policy. Under the terms of the plan, a participant’s disability benefit payments would be reduced if the participant received other income benefits. The plan document authorized the insurance company to require the return of overpayments. Thus, the insurance company requested that Thurber repay a portion of the paid disability benefits because of her receipt of other income benefits. Thurber refused repayment arguing that she had already spent the benefit amounts.
The courts have been divided on this issue. The Eighth and Ninth Circuits have held that an ERISA plan cannot obtain reimbursement from the plan participant if he or she no longer possesses the funds (i.e., the plan participant spent the money by the time the plan tries to obtain reimbursement.) Conversely, the First, Third, Sixth and Seventh Circuits have all held that reimbursement may still be obtained from a participant who has already spent the funds. In this case, the Second Circuit joined the First, Third, Sixth and Seventh Circuits and ruled that dissipation of the funds does not prevent the plan from obtaining reimbursement because the plan’s “equitable lien” over the funds attached as soon as the third-party recovery came into existence, and the funds were at that point in the participant’s possession.
On April 10, 2014, in Fama v. Design Assistance Corp., 2013 WL 1443463 (3d Cir. 2013), the U.S. Court of Appeals for the Third Circuit affirmed a trial court’s decision regarding the awarding of a $10-per-day penalty for an employer’s failure to timely provide a COBRA election notice.
The employer had terminated the employee, but had mistakenly continued the employee’s health insurance coverage. The COBRA election notice was sent, but not until a number of months after the health insurance coverage was terminated. This case arose because the employer had not sent the COBRA election notice within 44 days of the employee’s termination date, as required by COBRA. The trial court award a $10-per-day penalty starting from the 45th day following the termination of employment. Both sides appealed. The employer argued that the termination of employment was not a qualifying event giving rise to the COBRA notice obligation because the employee had not lost coverage at that time and that any penalty should be calculated from the loss of coverage. The employee asserted that higher penalties should have been awarded, including attorney’s fees and reimbursement for medical expenses.
The Third Circuit rejected both parties’ arguments and affirmed the trial court’s decision. It determined that the trial court properly concluded that a loss of coverage had occurred and correctly measured the penalty period. To support its finding, the appellate court relied on the COBRA regulations, which contained situations where there was a delay between the triggering event and the loss of coverage. The appellate court also affirmed the trial court’s penalty amount determination, finding that the amount was appropriately calculated and that payment of medical expenses and attorney’s fees was not warranted.
This case serves as a reminder to employers of the importance of proper COBRA administration. The ultimate penalty amount paid by the employer was quite low in this case, but the cost of the litigation likely was not.
In the March 18, 2014, edition of its Retirement News for Employers newsletter, the IRS addressed corrections of retirement plan errors. Following a general discussion about correcting retirement plan errors (i.e., how mistakes happen, why and how to correct them, and correction resources), the newsletter includes useful links addressing self-correction of retirement plan errors. A plan can self-correct many retirement plan errors without contacting the IRS or paying a fee. In addition, there are no additional application or reporting requirements. Self-correction is authorized under Rev. Proc. 2013-12, the revenue procedure that governs the Employee Plans Compliance Resolution System.
According to the IRS, a plan can self-correct an insignificant operational error at any time to preserve tax-favored status. An operational error occurs when a plan does not follow its written terms. Even where the operational error is significant, the plan may still be able to self-correct if action is taken in a timely manner.
The links included in the newsletter will help educate as to what types of plan errors are eligible for self-correction, the steps necessary to self-correct, the timing involved in self-correction, and special rules associated with the self-correction process. There is also a link to an IRS FAQ about the self-correction program.
Finally, the newsletter also introduced a new phone number to check the status of a plan’s Voluntary Correction Program submission.
IRS Retirement News for Employers Newsletter
Retirement Plan Errors Eligible for Self-correction
Steps to Self-correct Plan Errors
Timing of Retirement Plan Self-correction
Special Rules for Self-correction of Retirement Plan Errors
FAQs Regarding the Self-correction Program
On April 11, 2013, the DOL updated its website with a new Microsoft PowerPoint presentation on FMLA. The 69-slide presentation explains FMLA rules and employer responsibilities. Importantly, the presentation is up to date with guidance from the FMLA Final Rule issued on Feb. 8, 2013, relating to military family leave and provisions for airline flight crews (as reported in the Feb. 12, 2013, edition of Compliance Corner). Materials made available from a governmental agency (including the DOL) may be used as presentation material.
On March 28, 2013, the U.S. Court of Appeals for the Eighth Circuit upheld a decision by a trial court in the case of Dakota Minnesota & E.R.R. Corp. v. Schieffer, 2013 WL 1235235 (8th Cir. 2013). In the case, a former chief executive officer (CEO) was pursuing arbitration to recover severance benefits from his employer under an individual employment agreement, but the employer sued to move the issue to federal court. The trial court had previously determined, and the Eighth Circuit upheld, that even though the employment agreement stated that the employer would continue to provide the CEO the health, welfare and retirement plan benefits (all governed by ERISA) described in the agreement for three years after his termination of employment, the plans themselves did not permit the type of post-employment participation described in the employment agreement. The employer’s offer within the severance agreement to provide cash payments in lieu of these benefits if the CEO became ineligible to participate did not actually amend the ERISA plans themselves. Thus, the Eighth Circuit concluded that the CEO’s claims were not claims for benefits due under an ERISA plan, but for amounts due under the terms of a “freestanding” employment agreement. In addition, although the employment agreement referenced employee benefit plans that are subject to ERISA, it did so only as a means of calculating the amounts due under the employment agreement.
Employers generally prefer to litigate benefit disputes in federal court, since ERISA may limit available remedies and supersede state-law claims that could allow larger recoveries. But this case illustrates that every issue that involves an employee benefits situation is not necessarily governed by ERISA and federal law. Thus, pursuing the case in federal court did not limit remedies, but cost the employer time and litigation expense, and will continue to do so since the case will now likely continue to be pursued as a state-law claim.
On March 29, 2013, the IRS released a final report summarizing the results from the 401(k) Compliance Check Questionnaire, a questionnaire previously distributed by the IRS that requested information from 1,200 randomly selected plan sponsors relating to their 401(k) plans. Such information included plan demographics, plan participation, contributions, designated Roth features, distributions, top-heavy and nondiscrimination testing, IRS correction programs and plan administration. The questionnaire was meant to help the IRS measure the health of 401(k) plans in terms of compliance levels and risk factors, better understand compliance issues related to 401(k) plans, evaluate the effectiveness of voluntary compliance programs and tools, and determine how the IRS can best foster compliance.
In conjunction with the final report, the IRS also published a set of FAQs describing the report, as well as next steps for the IRS. The IRS will use the final report to modify and improve their 401(k) plan compliance tools, produce outreach materials, improve voluntary compliance programs, assess the need for additional guidance and define upcoming projects and enforcement activities. Plan sponsors should be aware of the findings as well as the next steps that the IRS plans to take.
IRS Section 401(k) Compliance Check Questionnaire Final Report
IRS Section 401(k) Compliance Check Questionnaire Final Report FAQs
IRS Section 401(k) Compliance Check Questionnaire Final Report Next Steps and Web Resources
IRS Compliance Check Questionnaire Final Report Web Page
On Feb. 15, 2013, the U.S. Court of Appeals for the Sixth Circuit, in Price v. Bd. of Trs. of the Ind. Laborer’s Pension Fund, 707 F.3d 647 (6th Cir. 2013), held that a disability plan may amend its terms to terminate benefits that have already been awarded, so long as the plan in the plan document reserved the right to retroactively amend its terms. In the case, the disability plan was paying disability benefits to a plan participant, but then stopped paying benefits after an amendment to the plan terminated the benefits period by providing an end date for benefits. Prior to the amendment, there was no end date or other time-period limitation on disability benefits. After the benefits stopped, the plan participant sued for benefits.
The Sixth Circuit held that because the plan contained a provision that allowed for amendments to be made retroactively, the retroactive termination was allowable. There was a strongly worded dissent to the holding, noting that because a plan may not retroactively deny death benefits, the same should be true for disability benefits. Plan sponsors should be aware of the decision, and should review their plan documents in accordance with the holding. Plan sponsors should also note that the Price decision holds precedent only in the Sixth Circuit, which includes Tennessee, Kentucky, Ohio and Michigan.
In 2010, PPACA implemented a health care tax credit for small employers. Generally, employers are eligible for the credit if they have 25 or fewer full-time equivalent employees and have average annual wages of $50,000 or less. For eligible tax-exempt employers, the credit is a refundable tax credit limited to the amount of the employer's payroll taxes during the calendar year in which the tax year begins. Under the sequester requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, certain automatic cuts took place as of March 1, 2013. One of those cuts is an 8.7 percent reduction in the refundable portion of the credit for tax-exempt employers. The sequestration reduction rate is in effect until Sept. 30, 2013, unless Congress takes intervening action.
Effective in 2014, PPACA authorizes states to expand Medicaid eligibility and coverage to adults under the age of 65 who have income up to 133 percent of the federal poverty level. Currently, Medicaid is generally only available to children, pregnant women, those age 65 or older, or individuals with disabilities. On April 2, 2013, HHS published final regulations regarding the funding for those states that choose to expand Medicaid. From 2014 through 2016, the federal government will pay 100 percent of the cost of certain newly eligible adult Medicaid beneficiaries. The federal funding will gradually decrease to 90 percent by 2020, which is where the funding rate will remain.
On Mar. 29, 2013, HHS also released FAQs related to Medicaid Premium Assistance. Some states had indicated an interest in using Medicaid funds to purchase private health insurance through the exchange for the Medicaid expansion population. The FAQs explain that HHS may consider this type of program if it meets certain criteria, including that recipients have a choice of at least two private plans and coverage provides all required Medicaid benefits. The department considers this to be a premium assistance program and not a partial expansion of Medicaid. Some states already have a premium assistance program in which Medicaid or Children’s Health Insurance Program funds are used to pay for an eligible individual’s premium under a group health plan if it is cost-effective to do so.
On March 29, 2013, CMS issued a bulletin with three FAQs pertaining to dental, vision and other ancillary products and whether they may be provided on health insurance exchanges.
The three FAQs clarify that an exchange may offer qualified health plans (QHPs), which do include stand-alone dental plans. However, stand-alone vision plans and other ancillary insurance products will not be offered on the exchange, although if a state program shares resources and infrastructure with a state-based exchange, they may choose to offer such products. Additionally, an exchange may explain these products and provide basic information, as long as the information provided clarifies that advanced payment of premium tax credits and cost-sharing reductions are not available for vision or other ancillary insurance products.
On March 8, 2013, the U.S. Citizenship and Immigration Services (USCIS) published a revised version of Form I-9, the form used by employers to verify the identity and authorization of their employees to work in the United States. Also published on that date was the Federal Register notice explaining changes to Form I-9.
All employers are required to complete a Form I-9 for each employee hired in the United States. Improvements to the Form I-9 include new fields and a new format to reduce errors. The form's instructions also have been revised to describe more clearly the information that employees and employers must provide in each section.
The USCIS recognizes that some employers, particularly those that use electronic systems to verify employee work authorization, need time to modify their procedures. For this reason, it will continue to accept previous versions of Form I-9 until May 7, 2013, when the new Form I-9 will be required. The USCIS also notes that employers need not complete the new form for current employees unless there is a need for re-verification. Employers should therefore modify their verification processes to make use of the new Form I-9 to confirm the identity and work authorization of any new employees as soon as possible.
A Spanish version of Form I-9 is available on the USCIS website for use in Puerto Rico only. Spanish-speaking employers and employees in the 50 states, Washington, D.C., and other U.S. territories may use the Spanish version for reference, but must complete the English version of the form. Information on the revised forms is available in English and Spanish online at www.uscis.gov.
The IRS released 2013 versions of Forms 5498-SA and 1099-SA. The two forms, along with joint instructions, are used by trustees and custodians of HSAs, Archer Medical Savings Accounts (MSAs) and Medicare Advantage MSAs to report contributions to, and distributions from, these accounts.
The 2013 versions are substantially similar to the 2012 versions, with only minimal changes. Use of the 2013 forms does not begin until 2014, when reporting for the 2013 tax year is due.
On Feb. 25, 2013, Tatum v. R.J. Reynolds Tobacco Co., 2013 WL 692832 (M.D.N.C. Feb. 25, 2013),the U.S. District Court for the Middle District of North Carolina found that, despite the finding that the fiduciaries did not exercise prudence in deciding to eliminate certain funds from the 401(k) plan, the fiduciaries were not liable for participant losses due to the reasoning that a hypothetical prudent fiduciary could have made the same decision.
In this long-running case, participants in a 401(k) plan claimed the plan sponsor did not act prudently when it eliminated certain stock funds. The funds in question held shares of the defendant company’s former parent company and one subsidiary. The decision to liquidate the funds was initiated before a corporate spinoff and discussed after the spinoff, but never formally investigated. When the funds were actually liquidated, the value had dropped significantly due to potential tobacco liability exposure. Yet, after the liquidation, the value of the shares rebounded. The participant individually brought action for the fund losses, which was denied. This class action was then initiated.
The court looked at the issue in two parts: first, whether the decision to eliminate the funds was properly investigated; and second, whether a hypothetical fiduciary would have reached the same result. The court found that plan fiduciaries had failed to exercise prudence in deciding to eliminate the funds. Nevertheless, the court then looked to whether the decision was “objectively prudent,” based on risks, analysts’ reports and the foreseeability of the value rebound. Because a hypothetical prudent fiduciary could have reached the same decision, the decision did not cause the participant’s losses, and the fiduciaries could not be held liable for them.
The DOL recently released two self-compliance tools designed to assist group health plans, plan sponsors, plan administrators and health insurance issuers in determining whether the group health plan is in compliance with Part 7 of ERISA’s PPACA and HIPAA provisions. While the self-compliance tools do not necessarily cover all the specifics of these laws, they are intended to assist those involved in the operation of a group health plan in understanding the laws and related responsibilities. To this end, the tools include an informal explanation of relevant statutes and interpretations of recent regulations. The publication of the self-compliance checklist is part of the DOL’s ongoing effort to assist (rather than impose penalties on) plans, issuers and others who are working diligently and in good faith to understand and come into compliance with the new law.
On Feb. 27, 2013, the DOL’s Occupational Safety and Health Administration (OSHA) issued interim final regulations implementing health care reform whistleblower protection provisions. The regulations establish procedures and time frames for the filing and handling of retaliation complaints.
An employer may not retaliate against an employee for receiving subsidized coverage under a qualified health plan through an exchange. Furthermore, retaliation is prohibited for reporting a violation under Title I of PPACA, refusing to participate in an activity the employee reasonably believes to be a violation of Title I or participating in a whistleblower proceeding.
An employee who believes he or she has been the victim of retaliation in violation of PPACA may file a complaint within 180 days of the claimed retaliation. OSHA will review the employee’s evidence and conduct an investigation at its discretion. Under these interim final regulations, OSHA has the power to negotiate settlements or enter an order awarding damages and other remedies.
On Feb. 27, 2013, HHS issued final regulations in the Federal Register on health care reform’s market rules, covering premium rate setting and review, risk pooling, guaranteed availability and renewability, and catastrophic plan standards. Initially proposed in November 2012, the final regulations generally apply to insurers offering individual and non-grandfathered small group market health insurance (both inside and outside the exchanges) beginning in 2014. For the most part, the final regulations adopt the provisions of the proposed regulations. While the details are primarily of interest to insurers, the rules will have significant direct and indirect impacts on how much plans made available both inside and outside of the exchanges will cost. HHS indicated it will release future guidance on counting employees for determining market size of a group health plan.
Rating Factors
Importantly, HHS rejected requests to allow flexibility to health care reform’s restricted list of health insurance rating factors. As a result, rating factors may only take into account family size, geography, age and tobacco use. While these factors will only apply in the individual and small group market in 2014, these rating factors will extend to all coverage offered in the large group market beginning in 2017, in states that open exchanges to large employers.
Some of the significant results under the rating factors discussion included the fact that HHS will permit states to decide what family members may be included on family policies. For example, whether opposite- and same-sex domestic partners, as well as stepchildren and foster children, are included in the family policy will be up to the state. For geographic rating areas, states will have the discretion to establish rating areas, if they are based on certain geographic divisions such as counties or ZIP codes. There will be three permissible age bands (children under 21 years old, adults 21 to 63 years old and adults age 64 and older). Finally, for tobacco, the final regulations state that insurers in the small group market may impose a tobacco rating factor only if a tobacco user can avoid paying the full amount of that factor by participating in a wellness program.
Guaranteed Availability and Renewability
There are some changes in these rules that will be of particular interest to employers in the small group market. The most significant change is with respect to minimum participation and minimum coverage requirements, as the final regulations provide that insurers cannot deny coverage to small employers for failure to satisfy minimum participation or contribution requirements. But the final regulations continue to allow an insurer to refuse to renew a group policy in the small group market if the employer fails to satisfy an employer contribution or group participation rule under applicable state law. This rule is significant for employers in the small group market that are large enough to be subject to the employer shared responsibility (“play or pay”) penalty taxes. It means they will at least be able to offer minimum value, affordable coverage to avoid penalties, but unfortunately, may be forced to switch insurers every year.
The final regulations do not allow insurers to limit coverage sold through bona fide associations only to associations, although there is a statutory exception that allows insurers to refuse to renew coverage sold through bona fide associations to a nonmember.
Finally, the final regulations clarified that the small group market generally will have continuous open enrollment. But to address adverse selection concerns, enrollment for small employers that fail to meet minimum participation or minimum coverage requirements may be limited to a restricted open enrollment period (Nov. 15 through Dec. 15). In addition, to minimize adverse selection and align open enrollment periods in the individual and small group markets, the regulations provide a one-time open enrollment period for individuals with a non-calendar-year plan to transition to a calendar-year plan on their renewal date in 2014. The final regulations also adopt additional triggers for “limited” open enrollment periods in the individual market that are equivalent to the exchange special enrollment periods (e.g., an individual and any dependent losing minimum essential coverage other than because of a failure to pay premiums timely). The final regulations establish 60-day special enrollment periods in the individual market but 30-day special enrollment periods in the small group market.
On March 11, 2013, HHS published final regulations in the Federal Register providing details and payment parameters for three programs designed to stabilize premiums (risk adjustment, reinsurance and risk corridors) that will begin in 2014. Initially proposed in December 2012, these final regulations also establish standards for advance payments of premium tax credits, cost-sharing reductions, the MLR program and the Small Business Health Options Program (SHOP). HHS simultaneously issued interim final regulations providing a transitional, simplified method for insurers to use in calculating cost-sharing reductions to be reconciled against advanced payments received from HHS. Both the final and interim final regulations are full of technical detail of interest primarily to insurers. But the final regulations address some issues that are worth highlighting for employers, particularly employers who sponsor self-insured plans subject to reinsurance contribution requirements.
Reinsurance Contributions Required From Insurers and Self-Insured Plans
Insurers and self-insured plans will be required to contribute to a reinsurance program for three years (2014–2016).
Contributing Entities
A modified definition clarifies that a self-insured health plan is the contributing entity responsible for reinsurance contributions, although it may choose to use a third-party administrator (TPA) to transmit the contribution. It is now clear that the self-insured health plan is ultimately responsible to HHS, although plans may choose to contract with a TPA to calculate and transmit the payments.
Coverage Excluded from Contributions
Under the final regulations, a self-insured health plan must make reinsurance contributions for major medical coverage, with certain exceptions. For this purpose, HSAs, health FSAs, expatriate health plans and prescription drug plans are expressly excluded. HRAs are excluded only if they are integrated with other health coverage. Wellness, disease-management and employee assistance programs are excluded if they do not provide major medical coverage. COBRA coverage and retiree medical coverage are subject to reinsurance contributions, unless one of the general exceptions applies. The regulations also clarify the treatment of coverage that is coordinated with Medicare under the Medicare secondary payer rules.
Counting Covered Lives
A variety of methods are provided to count covered lives for calculating reinsurance contributions. The final regulations modify the rules for employers with multiple plans, giving plan sponsors flexibility, under certain conditions, to count coverage options within a single group health plan separately and not to aggregate separate group health plans.
Contribution Rate
HHS will establish a national reinsurance contribution rate each year. The annual per capita (i.e., per covered life) contribution rate for 2014 announced by HHS is $63 ($5.25 per month). HHS will collect all contributions and allocate reinsurance payments on a national basis. The same contribution rate applies to self-insured group health plans, although those plans are excluded from receiving reinsurance payments under the program. States may elect to operate their own reinsurance programs, and can require supplemental contributions and administrative cost payments.
Plan Expenses
HHS notes that the DOL has confirmed that reinsurance contributions are permissible plan expenses under ERISA, and the IRS has confirmed that self-insured plan sponsors may treat them as deductible ordinary and necessary business expenses.
Annual Payments
Contributing entities are to make reinsurance contributions annually. Enrollment data must be provided to HHS by Nov. 15 (generally calculated based on January through September data, even for non-calendar-year plans). HHS will notify the contributing entity, by the later of Dec. 15 or 30 days after receiving the data, of the amount of the contribution for the year, and payment is due 30 days after notification.
MLR Adjustment
The final regulations also adjust the MLR calculation to include premium stabilization amounts, a change HHS indicates will improve accuracy. The proposed delays in MLR reporting deadlines (from June 1 to July 1) and rebate disbursement (from Aug. 1 to Sept. 30) are retained, beginning with the 2014 MLR reporting year. According to the preamble, this change allows the deadlines to occur after all the premium stabilization payment and receipt amounts are determined.
More Standards for SHOPs
The final regulations also clarify and expand on a number of standards for SHOPs that were established in earlier final exchange establishment regulations:
Determining Employer Size for SHOP Participation
For purposes of counting employees to determine whether an employer is a small employer (and thus SHOP-eligible), the final regulations adopt the Code Section 4980H(c)(2) counting method, which applies for employer shared responsibility (play or pay) purposes and which, in simplified terms, counts not only full-time employees (those averaging 30 hours of service per week) but also part-time employees (as full-time equivalents). The preamble notes that employers should be able to use the same method to determine SHOP eligibility that they will use to determine whether they are subject to employer shared responsibility.
Minimum Participation Rates
Under the earlier final exchange establishment regulations, a state-operated SHOP may have minimum participation requirements as long as they are based on the rate of employee participation in the SHOP, not on the rate of employee participation in any qualified health plan (QHP) of a particular issuer.
Employee-Choice Model Delayed
Under the original SHOP rules, both state-operated and federally facilitated SHOPs were required to allow employees to have a choice among all QHPs at the metal level chosen by the employer (bronze, silver, gold or platinum). The final regulations contain a statement of this rule for both types of SHOPs. Separate SHOP regulations proposed on the same day, however, delay the effective date for this “employee-choice” model so that, for plan years beginning before Jan.1, 2015, state-operated SHOPs could choose (but would not be required) to offer an employee-choice option, and federally facilitated SHOPs would offer no employee-choice option. This will allow employers who prefer to offer employees a single QHP to participate in a federally facilitated SHOP and retain potential eligibility for the small business tax credit, which, beginning in 2014, is only available through a SHOP exchange. More information on these separate SHOP proposed regulations can be found below.
On March 11, 2013, HHS published proposed regulations in the Federal Register that would amend existing Small Business Health Options Program (SHOP) rules for special enrollment periods and also implement a transitional policy for an “employee-choice” model in both state-operated and federally facilitated SHOPs.
As background, health care reform requires each state that chooses to operate an exchange to also establish a SHOP that assists eligible small businesses in providing health insurance options for their employees. Federally facilitated SHOPs will operate in states that do not establish an exchange. These proposed regulations would amend some of the standards that were established for SHOPs by final exchange regulations in March 2012 and by another set of final regulations issued simultaneously with the proposed regulations. Here are highlights of the proposed regulations:
- SHOP Special Enrollment Periods Aligned with HIPAA. For most applicable triggering events (losing coverage, gaining a dependent due to marriage, birth or adoption), the proposed regulations would amend the SHOP special enrollment period from 60 days, as previously established in the final exchange regulations, to 30 days. For the triggering event of loss of Medicaid or CHIP eligibility, the proposed regulations would specify a 60-day special enrollment period. Under another clarifying amendment, dependents would only be eligible for a special enrollment period if the employer offers coverage to dependents of qualified employees. These changes align the SHOP special enrollment periods with the special enrollment periods for the group market under the HIPAA portability rules.
- Employee Choice and Premium Aggregation Delayed. Under the SHOP rules as they developed, both state-operated SHOPs and federally facilitated SHOPs were to allow employees to have a choice among all qualified health plans (QHPs) at the metal level chosen by the employer (bronze, silver, gold or platinum). Final regulations, issued on the same day as these proposed regulations, contain a statement of this rule for both types of SHOPs. The proposed regulations, however, would delay the effective date for this “employee-choice” model so that, for plan years beginning before Jan. 1, 2015, state-operated SHOPs could choose (but would not be required) to offer an employee-choice option, and federally facilitated SHOPs would offer no employee-choice option. The proposed regulations would also delay the implementation of the SHOP premium aggregation function designed to assist employers with employees enrolled in multiple QHPs.
On March 11, 2013, the Office of Personnel Management (OPM) published final regulations in the Federal Register establishing the multi-state plan program (MSPP) under health care reform. A multi-state plan (MSP) is a new type of private health insurance that will be administered by OPM and offered across state lines through the exchanges beginning in 2014. Following the issuance of proposed regulations in December 2012 (discussed in the Dec. 18, 2012, edition of Compliance Corner), OPM received numerous comments from interested parties but adopted the proposed rules largely unchanged.
OPM will contract with insurers to provide multi-state coverage through the exchanges in all 50 states and the District of Columbia. The MSPP will offer individuals and small businesses a choice of plans providing a uniform benefits package that includes essential health benefits (EHB). The regulations contain details on the requirements for an MSP’s selection of an EHB package. MSPs must comply with the otherwise applicable cost-sharing limits (unless state law imposes stricter requirements), and MSPP insurers must ensure that eligible individuals receive advance payment of premium tax credits and cost-sharing reductions. Insurers must offer in each state at least one plan at each of the gold and silver metal levels; bronze or platinum levels of coverage may also be offered.
Insurers may phase in MSPP coverage over four years but must provide coverage in all states by 2017. MSPs must provide SHOP coverage only if required to do so by the rules for the federally facilitated SHOP program or by state law in states with state-based exchanges. OPM has the discretion to allow phased-in SHOP coverage if such coverage is required.
Enrollment for individuals and small employers is expected to begin on Oct. 1, 2013, for coverage beginning Jan. 1, 2014. Large employers will be eligible to participate beginning in 2017.
On March 4, 2013, the IRS released proposed regulations regarding the annual fee for health insurers (also sometimes referred to as the “health insurance tax,” or “HIT”). This fee applies to any “covered entity” engaged in the business of providing health insurance with respect to U.S. citizens, residents and certain other persons present in the U.S. Put simply, this fee only applies to insurers, and the regulations specifically exclude self-insured plans. It is based on an annual target amount called the “applicable amount.” For 2014, this amount is $8 billion; $11.3 billion in 2015 for 2016; and $13.9 billion for 2017. The fee will be apportioned among insurers to reflect market share based on net premiums for health insurance written during the preceding calendar year. The proposed regulations offer guidance regarding who must pay the tax, how each covered entity’s tax obligation will be determined and when it will be due.
The guidance helps define a “covered entity” for these purposes, specifically including health insurance issuers, HMOs, insurance companies, insurers providing Medicare Advantage, Medicare Part D or Medicaid Coverage, and certain MEWAs that are not fully insured. It also established that a more-than-50 percent ownership standard applies when determining when entities will be considered one covered entity.
The proposed regulations define “health insurance” and advise on what amounts are excluded when determining net premiums to be reported. “Health insurance” is defined as benefits consisting of medical care provided under a certificate, policy or contract with a health insurance insurer. Generally excluded from this definition are HIPAA-excepted benefits. However, limited-scope dental and vision benefits are not excluded, nor are retiree-only plans. Regarding the calculation of a covered entity’s net premiums that need to be reported, the first $25 million of net premiums for a year, and 50 percent of the next $25 million in net premiums for the same year, will not be included in the amount.
Finally, the proposed regulations outline how and when a covered entity will have to report net premiums. Based on that information, the IRS will calculate the fee for each covered entity. Then those entities will have an opportunity to make corrections before ultimately remitting the owed fee.
On Feb. 28, 2013, the DOL finalized two sets of proposed regulations relating to multiple employer welfare arrangements (MEWAs). To combat fraud and other abuses, the regulations increase MEWA reporting requirements through revisions to Forms M-1 and 5500 and strengthen the DOL’s enforcement authority. The enforcement regulations permit the DOL, without a court order, to: 1) stop a MEWA’s operations if its conduct appears to be fraudulent or dangerous; and 2) seize a MEWA’s assets if it appears to be in a financially hazardous condition. Key elements of the final reporting regulations include new rules coordinating Form 5500 and Form M-1 filings, mandatory electronic filing, civil penalties for failure to comply with reporting requirements and criminal penalties for submitting false statements or misrepresentations.
In conjunction with these regulations, the DOL also released notices regarding changes to the Form M-1, Report for Multiple Employer Welfare Arrangements and Certain Entities Claiming Exception (ECEs), and changes to the Form 5500, Annual Return/Report, that is filed by administrators of certain welfare plans. The revised Form M-1 includes additional fields for filers to indicate the type of entity and the type of filing being submitted (e.g., annual report, registration, origination or special filing). The revised Form 5500 requires more custodial and other financial information to be provided. The revisions to the Form 5500 require each employee welfare benefit plan subject to the Form M-1 filing requirements to file a Form 5500, regardless of the type or size of plan, to at least indicate whether it is currently in compliance with the Form M-1 requirements and to include proof of Form M-1 filing as part of the Form 5500. Plan administrators who indicate that the plan is subject to the Form M-1 filing requirements must enter a receipt confirmation code for the most recent Form M-1 filed by the plan. Failure to answer the Form M-1 compliance question will cause the Form 5500 to be rejected as incomplete, in which case civil penalties may be assessed under ERISA section 502(c)(2).
Under the final rules, all employee welfare benefit plans that are MEWAs or ECEs subject to the Form M-1 reporting requirements must file a Form 5500 Annual Return/Report, regardless of the plan size or type of funding, and include information on compliance with the Form M-1 filing requirements as part of the Form 5500. MEWAs and ECEs are no longer eligible to file the short form, Form 5500-SF. The deadline for filing the 2012 Form M-1, which would normally be due March 1, 2013, has been moved to May 1, 2013 (with an extension available until July 1, 2013). The new rules are otherwise generally applicable for filings due on or after July 1, 2013.
In February 2013, EBSA released Target Date Retirement Funds – Tips for ERISA Fiduciaries. Target date retirement funds (TDFs) have become an increasingly popular investment option in employee-directed retirement plans. To assist plan fiduciaries who offer TDFs, EBSA produced guidance aimed to help those fiduciaries select and monitor TDFs.
With the growth of individual account retirement plans, more participants are responsible for investing their retirement savings. TDFs provide an attractive alternative for those who don’t want to actively manage their retirement savings. They offer a long-term investment strategy that automatically changes over time as the participant ages, becoming more conservative as an employee gets closer to retirement. The shift toward a more conservative strategy over time is called the “glide path.”
Although similar in general framework, TDFs offered by different providers possess considerable differences. These differences include investment strategies, glide-paths and investment-related fees. As they can have a significant impact on the performance of a TDF, it is important for fiduciaries to understand these differences when selecting and monitoring TDFs as an investment option for their plan.
Fiduciaries should remember to do the following when choosing TDFs:
- Establish a process for comparing and selecting TDFs.
- Establish a process for the periodic review of selected TDFs.
- Understand the fund’s investments — the allocation in different asset classes (stocks, bonds, cash), individual investments and how these will change over time.
- Review the fund’s fees and investment expenses.
- Inquire about whether a custom or non-proprietary TDF would be a better fit for the plan.
- Develop effective employee communications.
- Take advantage of available sources of information to evaluate the TDF and recommendations received regarding the TDF selection.
- Document the process.
The IRS recently released the 2012 version of Form 8955-SSA, Annual Registration Statement Identifying Separated Participants with Deferred Vested Benefits, and the related instructions. As background, retirement plan sponsors file Form 8955-SSA with the IRS on an annual basis to fulfill a requirement for reporting certain information relating to separated plan participants with vested benefits that have not yet been distributed.
The 2012 version of Form 8955-SSA and its related instructions are substantially similar to the 2011 versions. The 2012 instructions encourage electronic filing to save time and effort and to help ensure accuracy. The 2012 instructions also remind filers that old Schedule SSAs should no longer be used even if the filing is for a plan year beginning before 2009 (the year in which Form 8955-SSA replaced Schedule SSA). Retirement plan sponsors should be aware of the updated Form 8955-SSA and instructions, particularly if the plan has separated participants with vested, but undistributed, benefits.
As background, under FMLA, an employer may require medical certification from an employee who requests leave for his or her own serious health condition. The employee must submit the certification to the employer within 15 calendar days of the request. If the certification is not received in a timely manner, the employer may deny the FMLA request until certification is received. An employee may be entitled to a longer submission period if he or she shows a diligent, good faith effort to submit the certification.
In Brookins v. Staples Contract and Commercial, Inc., 2013 WL 500874 (D.Mass., Feb. 12, 2013), an employee failed to submit her certification within 15 days. The employer gave her two extensions resulting in nearly a month-long period in which to submit the completed certification form. When the employee failed to do so, her absences from work were categorized as unexcused absences and her employment was terminated. The employee filed suit for FMLA interference and retaliation.
On Feb. 13, 2013, the U.S. District Court for the District of Massachusetts rejected the employee’s claims. The court’s decision was based on the fact that the employee did not return the certification form in a timely manner, nor did she demonstrate a diligent, good faith effort to do so. The court stated that the employee would have demonstrated such an effort if she had followed up with her providers regarding the certification form, contacted another provider with the certification form request or explained to her employer the difficulty she was having in obtaining the completed certification form from her provider.
This case provides some helpful guidance for employers who have difficulty receiving the requested FMLA certification forms from employees.
On Feb. 14, 2013, the IRS issued Announcement 2013-15. As background, as mentioned in the Feb. 12, 2013, edition of Compliance Corner, the IRS previously issued a correction relating to several address references in Rev. Proc. 2013-6, which sets forth procedures for applying for a determination on the qualified status of retirement plans, including 401(k) plans. Rev. Proc. 2013-6 stated that determination letter submissions should go to one address while comments should go to another. In the past, applications and comments from interested parties were directed to the same address.
As a requirement of filing an application, a retirement plan sponsor generally must distribute to plan-eligible employees a Notice to Interested Parties of its intent to file an application. While the previous announcement changed the addresses to which comments should be sent, the Sample Notice still contained the old address. The IRS has resolved the resultant confusion by issuing a revised Sample Notice in IRS Announcement 2013-15.
The IRS recently released the 2012 version of Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans—which is used in preparing 2012 tax returns. Publication 969 provides basic information about HSAs, HRAs, health FSAs and medical savings accounts (MSAs), and includes brief descriptions of benefits, eligibility requirements, contribution limits and distribution issues. While there are no major changes to the 2012 version, the publication has been updated to reflect PPACA’s $2,500 limit on health FSA salary reduction contributions that applies to plan years beginning after Dec. 31, 2012. The publication has also been updated to reflect the expiration of the opportunity to make direct rollovers, also called “qualified HSA distributions,” to an HSA from a health FSA or HRA. Qualified HSA distributions were only permitted prior to 2012. Finally, the HSA contribution limits, HDHP out-of-pocket maximums, and the MSA deductible requirements and out-of-pocket maximums have all been revised for 2013.
The IRS recently released the 2013 version of Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Publication 15-B contains information for employers on the tax treatment of fringe benefits, including accident and health coverage, adoption assistance, dependent care assistance, educational assistance, employee discount programs, group-term life insurance, moving expense reimbursements, HSAs and transportation benefits. The 2013 version is substantially similar to the 2012 version, but the 2013 version does reflect PPACA’s $2,500 limit on contributions to a health FSA for plan years beginning on Dec. 31, 2012. The 2013 version also incorporates the increase in the monthly limits for qualified transportation benefits for 2013, and also reflects the 2013 dollar limits for various benefit limitations and definitions (such as the maximum contribution to an HSA, the definition of an HDHP, etc.)
Publication 15-B is a useful resource for employers on the tax treatment of fringe benefits. Employers should familiarize themselves with the publication, as well as the various other IRS publications referenced in Publication 15-B (which further describe and define certain aspects of these types of fringe benefits).
The IRS recently released the 2012 version of Form 8839, Qualified Adoption Expenses, and the accompanying instructions. Form 8839 is used by individual taxpayers to claim the adoption credit, the exclusion for employer-provided adoption benefits, or both. While the 2012 version is substantially similar to the 2011 version, there are some differences.
To begin with, the maximum adoption credit and exclusion amounts have been adjusted on Form 8839 to reflect their 2012 values--$12,650 per eligible child. Along those lines, both the credit and the exclusion are phased out gradually for individuals with modified adjusted gross income (MAGI) of greater than $189,710, and are phased out entirely for individuals with MAGI of $229,710 or more.
In addition, the 2012 form and instructions reflect that the adoption credit is no longer refundable, and that taxpayers may not be able to carry forward unused credit amounts to future years, as they have been able to in the past. The instructions also state that taxpayers do not need to attach supporting documentation for an adoption tax credit claim (but they should keep such documentation in case of an audit). Finally, the instructions contain more detail than in the past with respect to foreign adoptions.
The IRS recently released the 2012 version of Form 2106, Employee Business Expenses, and the accompanying instructions, as well as Form 2106-EZ, Unreimbursed Employee Business Expenses (and instructions). Filed by an individual with Form 1040, Form 2106 is used by employees to claim business expense deductions in certain situations. The first is for expenses that were for work-related vehicles, travel, transportation, meals or entertainment. The second is where the employee was reimbursed for any deductible work-related expenses (other than work-related moving expenses—which are reported on Form 3903). The third is where the employee is a reservist, qualified performing artist, government official or disabled individual who is subject to a special filing rule. Employees may also file Form 2106-EZ, which is a simplified version of Form 2106, if the employee uses the standard mileage rate to claim vehicle expenses (and the employee receives no other non-taxable expense reimbursements from their employer).
The 2012 versions of Form 2106, Form 2106-EZ and related instructions are substantially similar to the 2011 versions. But the 2012 forms have been revised to reflect that the standard business mileage rate for all of 2012 is 55.5 cents per mile.
2012 Form 2106
2012 Instructions for Form 2106
2012 Form 2106-EZ (and instructions)
In conjunction with the HIPAA final regulations published on Jan. 25, 2013, HHS posted sample provisions for use in business associate agreements (BAAs) between a covered entity and its business associate, or between a business associate and its subcontractor on its website. As part of the recently revised rules, business associates will need to amend their existing BAAs in order to incorporate the final rules by the compliance date of the final rule, Sept. 23, 2013. However, the final rules contained a transition period, which in certain cases may extend the time that business associates have to amend their existing BAAs until Sept. 23, 2014. Determining whether the transition period applies must be closely examined.
- If the business associate does not or did not have an existing contract or written agreement with the covered entity (the plan) in place prior to the publication date of the rules (Jan. 25, 2013), the business associate will be required to implement such agreement by the Sept. 23, 2013 compliance date. The transition period will not apply.
- If the business associate does have an existing contract or written agreement with the covered entity (the plan) in place prior to Jan. 25, 2013, and does not “renew or modify” the agreement between March 26, 2013 (the effective date of the final rule) and Sept. 23, 2013 (the compliance date of the final rule), the business associate will be able to take advantage of the transition rule and will have an additional year (until Sept. 23, 2014) to amend the contract to incorporate the modifications to the HIPAA rules. Please note that importantly, the existing contract/agreement in place must have complied with prior versions of the HIPAA rules (i.e. it cannot be out of compliance).
- If the business associate does have an existing contract or written agreement with the covered entity (the plan) in place prior to Jan. 25, 2013, and does “renew or modify” the agreement between March 26, 2013 (the effective date of the final rule) and Sept. 23, 2013 (the compliance date of the final rule), the business associate will not be able to take advantage of the transition rule and will be required to amend the BAA for the final rule by the earlier compliance date of Sept. 23, 2013.
On Jan. 31, 2013, the DOL updated its Employer CHIP model notice that employers with group health plans may use to notify eligible employees about premium assistance available through their state Medicaid or Children's Health Insurance Program (CHIP). Since its initial release in 2010, the DOL has been updating the notice twice annually, on or around Jan. 31 and July 31 of each year. The updates reflect changes to contact information for the list of states offering premium assistance programs.
Unlike previously revised versions of the CHIP notice, there were no significant state additions or deletions. Employers creating their own notices, rather than the DOL’s model notice, should pay special attention to ensure the most recent information is used.
Employees must receive this information automatically, before the start of the plan year and free of charge.
On Jan. 25, 2013, the IRS issued a correction covering several address references in Rev. Proc. 2013-6, which sets forth procedures for applying for a determination on the qualified status of retirement plans, including 401(k) plans. Announcement 2013-13 states that applications for determination letters should continue to be submitted to the Covington, Kentucky address in Rev. Proc. 2013-6, while comments submitted by interested parties in connection with the process should be directed to the Cincinnati, Ohio address in Rev. Proc. 2013-6.
It is clarified that applications for determination letters are to be sent to:
Internal Revenue Service
EP Determinations
Attn: Customer Service Manager
P.O. Box 2508
Cincinnati, OH 45202
On the other hand, comments from interested parties should be sent to:
Internal Revenue Service
EP Determinations
P.O. Box 12192
Covington, KY 41012-0192
In the past, applications and comments from interested parties were directed to the same address.
On Jan. 29, 2013, the DOL announced updates to the Delinquent Filer Voluntary Compliance (DFVC) Program. This program was established in 1995 as an avenue for reduced penalties for those ERISA plan administrators who did not timely file Form 5500s. It was last formally updated in 2002. Since that time, changes to the program have been issued through the DOL website. This update incorporates all of the changes instituted since 2002.
On Feb. 8, 2013, the DOL published final regulations that expand FMLA's military family leave entitlements and provides special rules for airline flight crews. The DOL has revised all FMLA forms to reflect the new provisions, which are summarized below. The final regulations are effective March 8, 2013.
Qualifying Exigency Leave
In 2008, FMLA was amended to include a new category of leave called qualifying exigency leave. The qualifying exigency leave is for employees who have a family member on active duty and who have been notified of an impending call or order to active duty. The National Defense Authorization Act for Fiscal Year 2010 (NDAA FY 2010) expanded the leave to include employees whose family members are serving in the regular armed forces and added a requirement that the military member must be deployed to a foreign country. The new final regulations implement the amendments of the NDAA FY 2010.
A qualifying exigency is defined as: short notice deployment; military events and related activities; childcare and school activities; financial and legal arrangements; counseling; rest and recuperation; post-deployment activities and additional activities. The final regulations add a new qualifying exigency leave category for parental care leave. An eligible employee may take leave to care for a military member's parent who is incapable of self-care when the care is necessitated by the military member's covered active duty. Additionally, the rest and recuperation leave has been expanded from five days to 15 days.
Military Caregiver Leave
In 2008, FMLA was amended to include a new category of leave called military caregiver leave. An employee is eligible for this type of leave if he/she has a family member who is a current servicemember of the armed forces, including National Guard and Reserve members. The military member must have a serious illness or injury that is incurred in the line of duty while on active duty. The NDAA FY 2010 expanded the definition of serious injury or illness to include a pre-existing condition that is aggravated during the line of duty.
The final regulations implement the amendments of the NDAA FY 2010 and expand military caregiver leave to include employees whose family members are veterans who have a serious injury or illness. The veteran must have been discharged or released (under conditions other than dishonorable) at any time during the five year period prior to the employee's military caregiver leave under FMLA. The DOL has provided a new certification form to be used by an employee requesting military caregiver leave for a family member that is a veteran (WH-385-V).
Special Provisions for Flight Airline Crews
The final regulations provide that airline flight crew members are entitled to 72 days of leave during a 12-month period for FMLA qualifying reasons other than military caregiver leave, under which they are entitled to 156 days. If the crew member takes intermittent leave, the employer must account for the leave using an increment no greater than one day.
On Jan. 25, 2013, the United States Court of Appeals for the Eighth Circuit affirmed the decision of two lower courts in a case involving an employer's failure to comply with COBRA. In Deckard v. Interstate Bakeries Corp., 2013 WL 275978 (8th Cir. Jan. 25, 2013), the employer, who was going through bankruptcy proceedings, failed to provide an employee with an Initial COBRA Notice or an Election Notice. Further, the employer failed to terminate the employee's coverage upon employment termination. Two years after the former employee's termination, the employer discovered the mistaken ongoing coverage and retroactively terminated the employee's coverage. The employee sued seeking penalties under ERISA for the failure to provide timely notices as well as reimbursement of medical expenses. During its investigation, the employer reinstated the employee’s coverage from the date of his employment termination to his date of eligibility for Medicare, which was a two year period. The bankruptcy court and the district court had both rejected the plaintiff's claim based on the fact that the former employee had suffered no harm because of the notice failures. The federal appeals court agreed with the courts' decision.
It is worth noting that a dissenting judge stated that the retroactive termination and subsequent reinstatement of coverage resulted in a temporary break in coverage for the employee. During this time, the employee testified that he had decided not to pursue medical treatment because of the expense. The dissent said that the main purpose of COBRA is to prevent gaps in coverage and that foregone or delayed medical treatment is a principal harm.
The case serves as a reminder for employers to timely distribute the Initial COBRA Notice and Election Notice as well as be diligent in terminating coverage in a timely manner.
As reported in our last edition of Compliance Corner, the American Taxpayer Relief Act of 2012 (ATRA) was passed on Jan. 2, 2013, avoiding the fiscal cliff. As part of that legislation, retroactive effect was given to the transit parity rule, which essentially raised the combined transit pass/vanpooling limit to $240 from $125.
On Jan. 16, 2013, the IRS released Notice 2013-8. This notice explains how employers may correct FICA tax overpayments resulting from the higher 2012 limit and report the proper amounts of income and tax on Forms 941 and W-2. This guidance only affects employers that provided 2012 transit benefits in excess of the old limit of $125.
Employers that treated transit benefits in excess of the old limit as wages and have yet to file their quarterly tax return (Form 940) for the fourth quarter of 2012 can make adjustments to that form before it is filed. If that quarterly return has already been filed, the employer will need to amend that return by filing a Form 941-X. Furthermore, employers in both cases can adjust the amount reported on the employee’s Form W-2 reflecting the higher transit limit, thereby reducing wages reported.
Long-anticipated HHS regulations released on Jan. 17, 2013, make significant changes in HIPAA privacy and security rules for health plans and their business associates. The final omnibus regulation is comprised of four final rules that modify the substantive provisions of the privacy and security rules, incorporate increased civil monetary penalties, replace the interim rule on breach notification and restrict health plans’ use and disclosure of genetic information. Covered entities must comply with the new rules by Sept. 23, 2013.
Although the 600-page regulation will take some time to digest, highlights include:
- Direct Liability for Business Associates. The business associate definition is broadened to include entities that create, receive, maintain or transmit protected health information (PHI) in connection with services to a covered entity. Business associate agreements will need to be updated to reflect this new liability. A special transition rule applies to valid business associate agreements in effect before Jan. 25, 2013.
- Increased Access. Individuals can obtain electronic access to their PHI that is maintained electronically in a designated record set. This generally requires a covered entity to provide PHI in the form and format requested, or agreed to, by the individual. Individuals can also direct the covered entity to transmit electronic PHI to a third party.
- Increased Civil Penalties. The final regulations implement the increased penalty amounts under the HITECH Act and extend potential liability to business associates that violate an applicable HIPAA provision. Further, both covered entities and business associates may be liable for civil penalties if their “agents” violate HIPAA.
- Breach Notification. The final regulations change the definition of a “breach” of unsecured PHI. The new definition presumes there is a breach – and generally requires notification – unless a risk assessment demonstrates a low probability that PHI has been compromised. The risk assessment must consider at least the following factors: the nature of the PHI, the unauthorized person who received the disclosure, whether the PHI was actually acquired or viewed, and the extent to which the risk has been mitigated.
- Genetic Information Nondiscrimination Act. The regulations prohibit health plans from using or disclosing genetic information for underwriting purposes.
These sweeping changes mean updates to HIPAA policies and procedures, business associate agreements, privacy notices and workforce training. Plan sponsors will also need to conduct workforce training to update individuals with access to PHI on the new rules. We will continue to report any updates in future editions of Compliance Corner.
On Jan. 14, 2013, the DOL’s Wage and Hour Division issued Administrator’s Interpretation No. 2013-1, which provides a clarification of when an employee is permitted leave under FMLA to care for an adult child who is incapable of self-care. As a reminder, eligible employees are entitled to 12 weeks of unpaid leave for certain qualifying reasons. One of those reasons is to provide care for a child with a serious health condition, including a child who is aged 18 or older and incapable of self-care because of a mental or physical disability. Prior to the new interpretation, it was unclear whether the child’s disability had to be in existence before age 18. The DOL has now clarified that the date of onset does not matter. An otherwise eligible employee is entitled to FMLA to care for a disabled child regardless of when the disability began.
To be a qualifying reason for leave, the child must have a disability as defined under the ADA (as amended by the Americans with Disabilities Act Amendments Act of 2008), have a serious health condition as defined by FMLA, be incapable of self-care and be in need of care because of the serious health condition. The interpretation includes examples of both temporary conditions, such as a shattered pelvis from a car accident, and ongoing conditions, such as diabetes.
Recently, the IRS released the 2012 version of Form 2441, Child and Dependent Care Expenses, and its accompanying instructions. Generally, taxpayers file Form 2441 with Form 1040 to determine the amount available for the Dependent Care Tax Credit (DCTC). In addition, participants in employer-sponsored dependent care assistance programs (DCAPs) must file the form with Form 1040 to support the income exclusion for their DCAP reimbursements.
While the 2012 version of Form 2441 and its instructions are substantially similar to the 2011 versions, there are some differences. Specifically, the instructions contain additional detail regarding the types of expenses that are not considered to be for care, as well as a clarification regarding when a spouse might be considered a full-time student.
There is some interplay between the tax benefits of the DCTC and a DCAP. Generally, the expenses that may be used to calculate the DCTC for 2012 are limited to $3,000 for one qualifying individual and $6,000 for two or more qualifying individuals. But these limits are reduced by the amount of any DCAP reimbursements for the year. Employers and employees should consult with tax counsel or an accountant with specific questions on the DCTC and DCAP participation.
On Jan. 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (ATRA), creating Pub. L. No. 112-240 (Jan. 2, 2013). In connection with ATRA, on Jan. 11, 2013, the IRS published Rev. Proc. 2013-15, which announces the 2013 transportation limits. Normally, those transportation limits are announced in October or November of the prior year, but were delayed due to this legislation.
ATRA addresses the combination of tax increases and automatic spending cuts popularly known as the “fiscal cliff.” Among the changes made by ATRA are several that relate to fringe and other benefits, including qualified transportation plans, adoption and education assistance benefits, employer-provided child care, dependent care assistance programs (DCAPs), the dependent care tax credit (DCTC) and expanded Roth conversions. ATRA also contained a provision that defunds future funding for PPACA’s consumer operated and oriented plans (co-ops).
With respect to qualified transportation plans, ATRA extends through the end of 2013 the transit parity rule, which makes the combined monthly limit for qualified transit pass and vanpooling benefits equal to the considerably higher monthly limit for qualified parking benefits. For example, in 2012, the combined limit for transit pass and vanpooling benefits was $125 per month, while the 2012 limit for parking benefits was $240. As a result of ATRA, the combined transit pass/vanpooling limit for 2012 rises to $240. This retroactive increase likely will have little impact on 2012 transit benefits, since IRS guidance requires that employee elections pay for qualified transportation benefits prior to the period for which the benefit was provided. For 2013, Rev. Proc. 2013-15 establishes that the 2013 transit pass/vanpooling limit is $245.
With respect to qualified adoption and educational assistance, under ATRA the income exclusion for employer-provided adoption and educational assistance benefits (and the expansion of the adoption assistance credit) become permanent. Those exclusions would have expired at the end of 2012. Rev. Proc. 2013-15 establishes that the 2013 employer-provided adoption limit is $12, 970 (up from $12,650 in 2012). The excludable amount begins to phase out for modified adjusted gross income (MAGI) in excess of $194,580 (up from $189,710 in 2012) and ends when MAGI reaches $234,580 ($229,710 in 2012).
Similarly, ATRA makes permanent the tax credit for employers that actually provide childcare services. That credit is equal to 25 percent of qualified childcare expenditures and 10 percent of qualified childcare resource and referral expenditures, up to a maximum of $150,000 per taxable year.
With respect to DCAPs and the DCTC, ATRA deems earned income of a spouse who is a full-time student or incapable of self-care will remain at $250 per month for one qualifying individual and $500 per month for two or more qualifying individuals (rather than falling to $200 and $400, respectively). ATRA also makes permanent several DCTC provisions. These include the amount of employment-related expenses that taxpayers may take into account ($3,000 for one qualifying individual and $6,000 for two), the percentage for determining the credit (35 percent), and the income level at which the credit begins to phase out ($15,000).
With respect to Roth conversions, under ATRA, qualified retirement plans (including 401(k) plans) that allow elective deferrals to a designated Roth account can allow amounts in other accounts to be transferred to a participant’s designated Roth account, regardless of whether those amounts are otherwise distributable. These transferred amounts, like other converted amounts, will be treated as distributions, but they will not be subject to the 10 percent early distribution penalty.
Finally, with respect to PPACA’s co-ops, ATRA eliminates most of the funding from PPACA for co-ops, which are new nonprofit, customer-owned health plans designed to compete against the major for-profit insurers. However, entities that have already been awarded federal loans for co-ops can continue to establish co-ops as planned.
On Jan. 7, 2013, the United States Supreme Court refused to review a lower court decision in the case of Walker v. Federal Express Corp., No. 12-465 (Jan. 7, 2013). In the case, the employee participated in his employer’s ERISA-governed group term life insurance policy until a debilitating stroke left him unable to return to work. To continue his life insurance coverage after his termination, the employee was required to convert his group life insurance coverage into an individual life insurance policy within 31 days of receiving the conversion notice. The employee needed to apply to the appropriate insurance company and make a premium payment to successfully convert his policy. The employee failed to do so within the specified time.
After the employee’s death, the beneficiary filed a life insurance claim. The employer denied the claim based on the employee’s failure to convert the insurance policy after his termination. The beneficiary then filed a lawsuit against the employer and its third-party administrator, arguing each breached its fiduciary duties under ERISA by failing to notify the employee of his right to convert the policy. The beneficiary also argued the employee was provided inadequate COBRA notification in that the notice did not contain a life insurance conversion form.
The U.S. District Court for the Western District of Tennessee dismissed the complaint, holding ERISA provided no remedy for the beneficiary’s fiduciary duty claim because ERISA Section 502(a)(2) precluded individual recovery. The U.S. Court of Appeals for the Sixth Circuit affirmed the district court’s decision, adding that although Section 409 holds plan fiduciaries personally liable for plan losses due to breaches of fiduciary duties, ERISA Section 502(a)(2) barred “Plaintiff’s recovery for individual relief in the form of payment for the individual insurance policy and requires Plaintiff to allege injury with respect to the actual plan.” The Supreme Court declined to review the appeals court decision.
The IRS recently issued the 2012 versions of Publication 502 (Medical and Dental Expenses) and Publication 503 (Child and Dependent Care Expenses). Publication 502 describes what medical expenses are deductible on taxpayers’ 2012 federal income tax returns. The 2012 version includes minor clarifications with respect to adjustments to the standard mileage rate for use of an automobile to obtain medical care, expensing lodging when traveling with a person receiving medical care and an explanation of the health coverage tax credit. Publication 502 is used by taxpayers to determine what qualifies as a medical expense under Code 213(d) to the extent they exceed 7.5 percent of the taxpayer’s adjusted gross income, and many use this publication to help identify expenses that may be reimbursed or paid by health FSAs, HSAs or HRAs. However, employers sponsoring these plans who refer to Publication 502 must do so with caution, as it addresses the expenses that are deductible, but does not describe the various rules that need to be considered when administering health FSAs, HSAs or HRAs.
Publication 503 describes the requirements that taxpayers must meet in order to claim the dependent care tax credit (DCTC) under IRC Section 21 for child and dependent care expenses. Following a similar concept of Publication 502, employers relying on Publication 503 should do so with caution, as the expenses reimbursable under an employer-sponsored dependent care assistance program may have different rules than the DCTC.
The Joint Committee on Employee Benefits of the American Bar Association reported on its May 2012 Q&A session with DOL staff members. Highlights include unofficial, nonbinding remarks about the following issues affecting 401(k) plans:
Interest on Late Contributions
The staff members were asked whether a plan sponsor wanting to self-correct late deposits of employee deferrals outside the DOL’s Voluntary Fiduciary Correction (VFC) Program could calculate the interest owed using the online calculator developed for that program. While not specifically stating that such use was prohibited, staff members noted that the VFC Program does not currently recognize self-correction (although the DOL is considering adding a self-correction component) and that the calculator was not meant to be used for self-correction. Consequently, a sponsor that self-corrects through the VFC Program would not receive a no-action letter and would not necessarily be protected from DOL enforcement and penalties.
Electronic Delivery of SPDs
The staff members explained that first-class mail distribution of Summary Plan Descriptions (SPD) on electronic media, such as flash drives or CDs, would not meet the general requirements for SPD disclosure under ERISA even when the electronic media was accompanied by a written notice explaining what was on it, its significance, and that each recipient could request a paper version of the SPD free of charge. Such a delivery method was not “reasonably calculated to ensure actual receipt,” because it could not be assumed that recipients would be able to access the electronic media merely because it was formatted “in a commonly accessible fashion.” For example, there was no indication that the plan administrator had done anything to determine whether recipients had the necessary technology or ability to retrieve the SPDs from the media. Consequently, the delivery method failed to satisfy the regulations’ electronic delivery safe harbor.
Mapping Investments
Another question focused on two alternatives for transitioning participants out of a balanced fund (approximately 60 percent equities and 40 percent bonds) and into target date funds. Under one alternative, participants would be mapped into the one target date fund that, as of the date of conversion, had approximately the same 60/40 investment mix as the balanced fund. Under the other alternative, participants would be mapped into a target date fund based on their anticipated retirement ages (as indicated by their dates of birth). The staff members indicated that the first alternative would not be a “qualified change in investment options” under ERISA Section 404(c)(4), since the target date fund’s investment mix was expected to change over time. A target date fund might be used as a “qualified default investment alternative” (QDIA), however, in light of prior DOL guidance indicating that the QDIA rules may apply when a participant fails to give investment directions following the elimination of an investment option.
On Nov. 21, 2012, the Seventh Circuit made a decision in the case of Raybourne v. CIGNA Life Ins. Co. of N.Y., 2012 WL 5870713 (7th Cir. 2012). As background, a participant in his former employer’s long-term disability plan sued the plan’s insurer, acting as the plan administrator, over its decision to discontinue his benefits. The Seventh Circuit upheld the lower court’s ruling, which found the insurer was improperly motivated by its own financial interest.
In reaching its decision, the Seventh Circuit placed significant weight on the recent U.S. Supreme Court decision in Metro Life Ins. v. Glenn, in which the court noted that if the entity determining benefits is the same entity that would pay for the benefits, then there is a structural conflict of interest that, while not dispositive, must be considered when determining whether the decision-maker abused its discretion in denying benefits.
Further undercutting the insurer’s claim of neutrality was the insurer’s seemingly inconsistent position with respect to the claim. Specifically, the insurer granted disability benefits for the first 24 months of disability, during which the plan’s definition required the participant to demonstrate that he was unable to perform his own job. The insurer thereafter denied benefits, noting that after 24 months, the participant must show the disability was such that he was unable to perform any job commensurate with his training. Although the insurer determined no such disability existed, it nonetheless supported the participant’s application to the Social Security Administration (SSA), going so far as to engage a consultant to assist the participant in proving his disability was such that he could perform no job commensurate with his training. When the participant prevailed with the SSA, the insurer was then able to recoup the disability benefits it had paid for the first 24 months. The court concluded the insurer’s contradictory positions evidenced decision-making based more on its own financial interest than adherence to the plan’s terms.
On Nov. 28, 2012, in Mondry v. American Family Mutual Insurance Company, 2012 WL 5938681 (7th Cir. Nov. 28, 2012), the United States Court of Appeals for the Seventh Circuit affirmed the trial court’s award of fees where plan documents were not timely produced. Mondry filed the appeal, arguing the penalties were insufficient. The Court of Appeals, in affirming the decision, found that the trial court had exercised proper discretion in calculating the penalties and had weighed the relevant considerations.
The decision at the trial court involved the failure of an employer, in its role as plan administrator of its self-insured health plan, to timely provide internal guidelines requested by the participant in connection with a disputed claim for benefits. The guidelines requested are relied upon by its third-party claims administrator in denying the benefits claim. Previously, the Seventh Circuit ruled in this case that the employer was responsible for providing the documents under ERISA Section 104(b)(4), even though the documents were in the claim’s administrator’s possession. At that point, the Appeals Court remanded the case to the trial court to award penalties and determine whether the delay in producing the documents was a fiduciary breach of duty.
The trial court, while possessing discretion to impose penalties of a greater amount, only imposed penalties totaling less than $10,000. The trial court also concluded that the employer had breached its fiduciary duty, but only awarded Mondry $603 for that. This amount was the lost-time value of the money that Mondry had spent out-of-pocket for medical services while the appealed benefit claim was pending. The participant claimed the amount was insufficient. The Seventh Circuit, however, agreed with the trial court.
On Oct. 11, 2012, in Malbrough v. Kanawha Insurance Co., 2012 WL 4856061 (U.S. Dist. Court, W.D. LA Oct. 11, 2012), the United States District Court of the Western Division of Louisiana found that an employer did not have to pay out the excess of a death benefit where an enrollment error allowed the employee to enroll in more coverage than permitted.
The ERISA group life insurance plan was drafted to allow employees to elect term life and accidental death coverage up to five times their annual salary. The employee was able to elect $700,000 of coverage instead of the $300,000 allowed, due to an error in the enrollment website. Unfortunately, the employee died a couple of years later. The beneficiaries tried to claim the benefit, but the insurer refused to pay out more than the maximum the employee was supposed to be able to elect. The beneficiaries sued the insurer and employer for the remainder of the benefit, pushing claims of detrimental reliance and breach of contract. The employer filed for dismissal, arguing the beneficiaries’ claims are pre-empted by ERISA, and further, ERISA does not permit for recovery of money damages.
The court agreed with the employer. ERISA pre-empted the state law claim of detrimental reliance and does not allow an individual remedy (money) if a breach of fiduciary duty is found. However, the court did allow the beneficiaries to amend the complaint to claim a refund of the difference between the premiums the employee had paid and those he should have paid under the plan’s terms. This, the court ruled, is the only avenue of recovery available to the beneficiaries in this case.
On Dec. 31, 2012, the IRS released Revenue Procedure 2013-12, which is guidance for the Employee Plans Compliance Resolution System (EPCRS). While not effective until April 1, 2013, practitioners may rely on this guidance for submissions made on or after Dec. 31, 2012.
The IRS made many clarifications, revisions and additions to the old EPCRS (Rev. Proc. 2008-50). A four-page summary of the changes was provided by the IRS and can be found at the link below. A few of the changes include new or adjusted guidance about the following:
- Correcting a matching contribution failure;
- Determination letters;
- Nonamender failures;
- Voluntary correction program procedural changes;
- Modifications regarding 403(b) plans; and
- Correcting ADP/ACP failures.
On Dec. 11, 2012, in Pantoja v. Edward Zengel & Son Express, Inc., 2012 WL 6117886 (11th Cir. Dec. 11, 2012), the United States Court of Appeals for the Eleventh Circuit found that owed contributions to a 401(k) were not plan assets, because they were not clearly identified as plan assets in the governing plan documents. The lower district had previously entered judgment in favor of the employer, because it did not breach a fiduciary duty as a matter of law.
Pantoja worked for the defendant in 2009. During his employment, the defendant withheld fringe benefits totaling $3,472.17, but did not deposit said money in the 401(k) plan. The plaintiff discovered the money was not in his account and filed suit against the employer and three corporate officers, alleging a breach of fiduciary duty. Following the filing of the lawsuit, the employer funded the 401(k) plan with the withheld amount, plus interest.
The Appeals Court stated that the regulations clearly show that an employee’s elective contributions to an ERISA plan, withheld from wages, are “plan assets” even when the funds remain in the employer’s possession. However, the regulations do not similarly address employer contributions. The appeals court ruled that, in the absence of regulations addressing the matter, unpaid employer contributions are not “plan assets.” In this case, the unpaid fringe benefits were unpaid employer contributions. Therefore, the employer did not breach its fiduciary duty.
On Dec. 20, 2012, the United States District Court for the District of Connecticut held that pension plan participants who received inaccurate and misleading Summary Plan Descriptions (SPD) are entitled to equitable relief under ERISA. In 2011, the U.S. Supreme Court ruled that the trial court incorrectly relied on ERISA Section 502 to reform the plan to reflect the benefits communicated. It was found that ERISA Section 502 only permits enforcement of plan terms as actually written. It also ruled that the SPD terms couldn’t be enforced as plan terms. With these findings, the Supreme Court remanded the case to the trial level to determine whether equitable relief might be available under a different provision.
In the case, Cigna Corp. v. Amara, 2012 WL 6649587(U.S. Dist. Court, D. Conn., Dec. 20, 2012), the trial court focused on reformation and surcharge, two equitable remedies. Discussing equity, the court stated that it traditionally permitted reformation of contracts that failed to express the true agreement between the parties. The court then held that reformation was appropriate as the employer used fraudulent communications to mislead the employees as to their retirement benefits. Regarding surcharge, the court found that a breach of duty is required, as is a related loss. As the court had earlier found that the prior misleading communications were intended to avoid employee backlash, there was sufficient connection between breach and loss to warrant surcharge.
On Dec. 21, 2012, federal agencies released the “Unified Agenda” and regulatory plans for 2013. Under the Regulatory Flexibility Act, federal agencies are required to publish semiannual lists of economically significant regulations under development. Of particular interest is the status of several items being worked on by the DOL and its sub-regulatory agencies.
In the agenda, the Wage and Hour Division of the DOL set a March 2013 target date for finalizing changes in its existing FMLA regulations to incorporate congressional amendments made to FMLA by the fiscal 2010 National Defense Authorization Act and the Airline Flight Crew Technical Corrections Act.
EBSA plans to re-propose the previously withdrawn fiduciary rule, which is expected to come out sometime in 2013; release an amendment of the abandoned plan program, which seeks to extend rules on abandoned plans to cases involving sponsors in Chapter 7 bankruptcy; and publish a “guide or similar requirement” for disclosures made under ERISA Section 408(b)(2). Also listed under the proposed rule stage is EBSA's rule on target date fund disclosures. According to the regulatory agenda, the DOL will soon begin analyzing comments on the proposed rule and put out a final rule in late 2013.
Two rules relating to PPACA are classified in the proposed rule stage by EBSA. A proposed rule on contraceptive coverage by religious-affiliated employers is scheduled to come out in December 2012, according to the agenda, although that deadline has clearly passed. A proposed rule on wellness programs is also on EBSA's agenda, and the comment period for the proposal ends Jan. 25, 2013.
The only item listed in the final rule stage is EBSA's rule on annual funding notice requirements, which was proposed in November 2010. According to the agenda, the rule is scheduled to come out in late 2013.
On Nov. 8, 2012, in Access MediQuip LLC v. UnitedHealthCare Insurance Co., 698 F.3d 229 (5th Cir. 2012), the United States Court of Appeals for the Fifth Circuit found that ERISA does not pre-empt a medical provider’s misrepresentation claim against a plan insurer.
The medical device provider regularly contacted ERISA health plan insurers to confirm whether devices to be provided for a procedure would be covered by a patient’s plan. The insurer indicated in over 2,000 instances that the devices would be covered, yet ultimately denied the claim. The insurer had an internal policy of denying claims for devices not billed by surgical facilities. The device provider sued, asserting that the coverage confirmations amounted to representations that could be relied upon. The insurer countered that these claims were pre-empted by ERISA.
The Fifth Circuit held that certain of the provider’s claims were not pre-empted. The court determined that responding to this type of inquiry did not fall within the area that ERISA is intended to regulate. It reasoned that ERISA does not impose any responsibility for accurate disclosure to third-party health care providers. Therefore, lawsuits concerning such may be brought under state law. This finding clarifies conflicting precedent.
HHS has published a new educational Web page that provides guidance related to the safeguarding of protected health information (PHI) on portable electronic devices (i.e., mobile devices). The site is comprehensive, providing information on security procedures, including best practices on password requirements, encryption and disposal of mobile devices. Sample presentations, fact sheets, posters, frequently asked questions and videos are available. Employer plan sponsors that create, maintain or receive PHI in a mobile device format should review the new resources and make any necessary adjustments to their current policies and procedures.
On Dec. 26, 2012, the DOL announced that a National Emergency Grant of $1,058,254 would be awarded to seven states to help provide unemployed workers with supplemented health insurance coverage. The workers must be receiving Trade Adjustment Assistance benefits and certified eligible for the Health Coverage Tax Credit program. The program pays 72.5 percent of premiums for qualified health insurance coverage for employees who lost their jobs because of trade with foreign countries. This grant helps provide coverage under state-run qualified health plans in Maryland, Alabama, Delaware, District of Columbia, Mississippi, South Carolina and Virginia.
On Dec. 17, 2012, the IRS issued Announcements 2012-45 and 2012-46, both published in IRS Bulletin No. 2012-51. The announcements relate to the Voluntary Classification Settlement Program (VCSP), which is an IRS program that allows employers to voluntarily reclassify workers – usually independent contractors – as employees for future tax periods for employment tax purposes. Generally, under the VCSP, employers will pay 10 percent of the amount of employment taxes that would have been due on compensation paid to the workers being reclassified for the most recent tax year. In addition, the employer will not be liable for any interest and penalties on the payment and will not be audited for employment tax purposes for prior years with respect to the classification of the workers.
Specifically, Announcement 2012-45 provides notice and information regarding the revised VCSP that provides partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees. Among the revisions, the IRS would permit employers undergoing an audit, other than employment tax audits, to participate in the program. In addition, the revisions eliminate the requirement that employers agree to extend the assessment period of limitations for employment taxes as part of the VCSP closing agreement. Finally, the revisions clarify that employers contesting the classification of workers from previous audits are ineligible to participate.
Announcement 2012-46 provides notice and information regarding a temporary expansion of eligibility for the VCSP that is available through June 30, 2013. The temporary eligibility expansion makes available a modified VCSP to otherwise eligible employers that have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified. Eligible employers that take advantage of this limited eligibility expansion will receive partial relief from federal employment taxes.
While primarily an employment tax issue, employers should be aware of the employee misclassification issue, particularly since the IRS, DOL and state agencies are working more closely together on enforcing misclassification. In addition, employers will want to review their employee benefit offerings with respect to independent contractors or other non-employee workers, since the offering of benefits is one factor that could lead an agency to conclude that the independent contractor is actually an employee.
On Dec. 11, 2012, the DOL’s EBSA updated its website with Proposed Amendments to the Abandoned Plan Program. As background, in 2006 EBSA established the Abandoned Plan Program to assist bankruptcy trustees in distributing assets from bankrupt companies’ individual account retirement plans. Previously, such trustees lacked authority to terminate such plans and make benefit distributions, even in response to participant demands. The Proposed Amendments to the Abandoned Plan Regulations expand the current program to plans of companies that are in liquidation under Chapter Seven of the U.S. Bankruptcy Code.
Proposed Amendments to Abandoned Plan Program
EBSA News Release
EBSA Fact Sheet