Final Rules Expand Availability of Health Reimbursement Arrangements and Other Account-Based Group Health Plans

On June 13, 2019 the U.S. Departments of Health and Human Services, Labor, and the Treasury (the Departments) issued final rules that the Departments stated “will provide hundreds of thousands of employers, including small businesses, a better way to provide health insurance coverage, and millions of American workers more options for health insurance coverage.”

Summary of the Final Rules

The final rules expand opportunities for employers to establish Health Reimbursement Arrangements (HRAs) and other account-based group health plans under various provisions of the Public Health Service Act (PHS Act), the Employee Retirement Income Security Act (ERISA), and the Internal Revenue Code (Code). Specifically, the final rules:

  • Allow employers to integrate HRAs and other account-based group health plans with individual health insurance coverage or Medicare, if certain conditions are satisfied (an individual coverage HRA).
  • Set forth conditions under which certain HRAs and other account-based group health plans will be recognized as limited excepted benefits.
  • Provide rules regarding premium tax credit (PTC) eligibility for individuals offered an individual coverage HRA.
  • Clarify rules to provide assurance that the individual health insurance coverage for which premiums are reimbursed by an individual coverage HRA or a qualified small employer health reimbursement arrangement (QSEHRA) does not become part of an ERISA plan, provided certain safe harbor conditions are satisfied
  • Provide a special enrollment period (SEP) in the individual market for individuals who newly gain access to an individual coverage HRA or who are newly provided a QSEHRA.

The stated goal of the final rules s is to expand the flexibility and use of HRAs and other account-based group health plans to provide more Americans with additional options to obtain quality, affordable healthcare. The final rules generally apply for plan years beginning on or after January 1, 2020.

Implications for Employers

Employers can contribute as little or as much as they want to an Individual Coverage HRA. However, Employers that offer an Individual Coverage HRA, must offer it on the same terms to all individuals within a class of employees, except that the amounts offered may be increased for older workers and for workers with more dependents.

An employer cannot offer an Individual Coverage HRA to any employee to whom you offer a traditional group health plan. However, you can decide to offer an individual coverage HRA to certain classes of employees and a traditional group health plan (or no coverage) to other classes of employees.

Employee Classes

Employers may make distinctions, using classes based on the following status:

  • Full-time employees,
  • Part-time employees,
  • Employees working in the same geographic location (generally, the same insurance rating area, state, or multi-state region),
  • Seasonal employees,
  • Employees in a unit of employees covered by a particular collective bargaining agreement,
  • Employees who have not satisfied a waiting period,
  • Non-resident aliens with no U.S.-based income,
  • Salaried workers,
  • Non-salaried workers (such as hourly workers),
  • Temporary employees of staffing firms, or
  • Any group of employees formed by combining two or more of these classes.

To prevent adverse selection in the individual market, a minimum class size rule applies if an employer offers a traditional group health plan to some employees and an Individual Coverage HRA to other employees based on:

  • full-time versus part-time status;
  • salaried versus non-salaried status; or
  • geographic location, if the location is smaller than a state.

Generally, the minimum class size rule also applies if you combine any of these classes with other classes. The minimum class size is:

  • Ten employees, for an employer with fewer than 100 employees,
  • Ten percent of the total number of employees, for an employer with 100 to 200 employees, and
  • Twenty employees, for an employer with more than 200 employees.

Also, through a new hire rule, employers can offer new employees an Individual Coverage HRA, while grandfathering existing employees in a traditional group health plan.

ACA Employer Mandate

An offer of an Individual Coverage HRA counts as an offer of coverage under the employer mandate. In general, whether an applicable large employer that offers an Individual Coverage HRA to its full-time employees (and their dependents) owes a payment under the employer mandate will depend on whether the HRA is affordable. This is determined under the premium tax credit rule being issued as part of the HRA rule and is based, in part, on the amount the employer makes available under the HRA.

The Internal Revenue Service is expected to provide more information on how the employer mandate applies to Individual Coverage HRAs soon.

Administrative Requirements

Individual Coverage HRAs must provide a notice to eligible participants regarding the Individual Coverage HRA and its interaction with the premium tax credit. The HRA must also have reasonable procedures to substantiate that participating employees and their families are enrolled in individual health insurance or Medicare, while covered by the HRA.

Employees must also be permitted to opt out of an Individual Coverage HRA at least annually so they may claim the premium tax credit if they are otherwise eligible and if the HRA is considered unaffordable.

Employers generally will not have any responsibility with respect to the individual health insurance itself that is purchased by the employee, because it will not be considered part of your employer-sponsored plan, provided:

  • An employee’s purchase of any individual health insurance is completely voluntary.
  • The employer does not select or endorse any particular insurance carrier or insurance coverage.
  • The employer does not receive any cash, gifts, or other consideration in connection with an employee’s selection or renewal of any individual health insurance.
  • Each employee is notified annually that the individual health insurance is not subject to ERISA.

More….

The Final Rules can be found here

DOL FAQs can be found here

HHS Proposes to Revise ACA Section 1557 Nondiscrimination Rules

The U.S. Department of Health and Human Services (HHS) is issuing a proposed rule to revise regulations implementing and enforcing Section 1557 of the Affordable Care Act (ACA). Section 1557 prohibits discrimination on the basis of race, color, national origin, sex, age, or disability in certain health programs or activities.

PURPOSE OF THE PROPOSED RULE

The proposed rule would maintain vigorous civil rights enforcement of existing laws and regulations prohibiting discrimination on the basis of race, color, national origin, disability, age, and sex, while revising certain provisions of the current Section 1557 regulation that a federal court has said are likely unlawful. The proposal also would relieve the American people of $3.6 billion in unnecessary regulatory costs over five years, mainly by eliminating the mandate for entities to send patients and customers “notice and tagline” inserts in 15 foreign languages that have not proven effective at accomplishing their intended purpose. Covered entities report that they send billions of these notices by mail each year.

BACKGROUND

Section 1557 is a civil rights provision in the ACA that prohibits discrimination on the basis of race, color, national origin, sex, age, or disability in certain health programs or activities. Congress prohibited discrimination under Section 1557 by referencing four longstanding federal civil rights laws:

1. Title VI of the Civil Rights Act of 1964 (Title VI) (prohibiting discrimination on the basis of race, color, and national origin).

2. Title IX of the Education Amendments of 1972 (Title IX) (prohibiting discrimination on the basis of sex).

3. Section 504 of the Rehabilitation Act of 1973 (Section 504) (prohibiting discrimination on the basis of disability).

4. Age Discrimination Act of 1975 (Age Act) (prohibiting discrimination on the basis of age).

HHS proposes to ensure the scope of the regulation matches the text of Section 1557 with respect to:

(1) Any health program or activity, any part of which is receiving federal financial assistance (including credits, subsidies, or contracts of insurance) provided by HHS;

(2) Any program or activity administered by HHS under Title I of the ACA; and

(3) Any program or activity administered by any entity established under that Title.

Thus, for example, the rule would apply to federally facilitated and state-based health insurance Exchanges created under the ACA, and the qualified health plans offered by issuers on those Exchanges.

Section 1557 has been in effect since its enactment in 2010, and Congress directed the HHS Office for Civil Rights (OCR) to enforce the provision.

Although Congress prohibited discrimination on the basis of sex in 1972 (Title IX), and Section 1557 applied that law to healthcare and the Exchanges established under the ACA, HHS’s 2016 Section 1557 regulation redefined discrimination “on the basis of sex” to include gender identity and termination of pregnancy and defined gender identity as one’s internal sense of being “male, female, neither, or a combination of male and female.” As a result, several states and healthcare entities filed federal lawsuits against HHS. On December 31, 2016, the U.S. District Court for the Northern District of Texas issued an opinion in Franciscan Alliance, Inc. et al. v. Burwell, preliminarily enjoining HHS’s attempt to prohibit discrimination on the basis of gender identity and termination of pregnancy as sex discrimination in the Section 1557 regulation. This federal court concluded the provisions are likely contrary to applicable civil rights law, the Religious Freedom Restoration Act, and the Administrative Procedure Act. The preliminary injunction applies on a nationwide basis. A separate federal court in North Dakota agreed with the reasoning of the Franciscan Alliance decision, and stayed the rule’s effect on the plaintiffs before it.

Consequently, HHS has concluded that it does not have legal authority to implement the provisions on gender identity and termination of pregnancy in light of the court’s injunction which remains in full force and effect.

SUMMARY OF THE PROPOSED RULE

WHAT THE PROPOSED RULE KEEPS IN PLACE

  • HHS Would Continue to Vigorously Enforce Civil Rights in Healthcare: Under the proposed rule, HHS would continue to vigorously enforce all applicable existing laws and regulations that prohibit discrimination on the basis of race, color, national origin, disability, age, and sex based on HHS’s longstanding underlying civil rights regulations.
  • Protections for Individuals with Disabilities: The proposed rule would retain protections in the current Section 1557 regulation that ensure physical access for individuals with disabilities to healthcare facilities, and appropriate communication technology to assist persons who are visually or hearing-impaired.
  • Protections for Individuals with Limited English Proficiency: HHS proposes to retain the current Section 1557 regulation’s qualifications for foreign language translators and interpreters for non-English speakers, and its limitations on the use of minors and family members as translators or interpreters. HHS also proposes to include standards from longstanding LEP guidance in the regulation to ensure meaningful access to health programs and activities for LEP individuals and flexibility in meeting such obligation.
  • Assurances of Compliance: Under the proposed rule, regulated entities would still be required to submit to HHS a binding assurance of compliance with Section 1557.

PROPOSED RULE REVISIONS

HHS proposes to revise various provisions that are not statutorily supported, are unnecessary, or are duplicative of existing regulations. HHS also proposes to remove costly and unjustified regulatory burdens, to conform the scope of the regulation to HHS’s own implementation of the statutory limits set by Congress, and to implement the regulation consistent with all applicable federal civil rights laws.

Revise Provisions Preliminarily Enjoined Nationwide in Federal Court

Under the proposed rule, HHS would apply Congress’s words using their plain meaning when they were written, instead of attempting to redefine sex discrimination to include gender identity and termination of pregnancy. These redefinitions were preliminarily enjoined because a federal court found they were unlawful and exceeded Congress’s mandate. The proposed rule would not create a new definition of discrimination “on the basis of sex.” Instead HHS would enforce Section 1557 by returning to the government’s longstanding interpretation of “sex” under the ordinary meaning of the word Congress used. HHS also proposes to amend ten other regulations, issued by the Centers for Medicare & Medicaid Services, implementing the prohibition on discrimination on the basis of sex, to make them consistent with the approach taken in the proposed Section 1557 rule.

HHS proposes to ensure its Section 1557 and Title IX regulations include language Congress enacted that protects religious entities, and that prevents Title IX from requiring performance of, or payment for, abortions.

Remove Costly and Unnecessary Regulatory Burdens

The proposed rule would eliminate burdens imposed by the 2016 regulation’s requirement that regulated health companies distribute non-discrimination notices and “tagline” translation notices in at least fifteen languages in “significant communications” to patients and customers. These notices have cost the healthcare industry billions of dollars (a cost which is ultimately passed on to consumers and patients), and data does not show that the notices have yielded the intended benefit for individuals with limited English proficiency.

Revise an Enforcement Structure That Created Legal Confusion

Section 1557 applies multiple civil rights statutes to healthcare settings. As Congress explicitly recognized in Section 1557, HHS has regulations in place for each of those statutes. HHS intends to enforce all those pre-existing statutes and regulations. The 2016 regulation, however, imposed a new single enforcement structure for every type of discrimination claim. Multiple federal courts have rejected various legal theories amalgamated into the 2016 regulation, such as the assertion of private rights of action for Title VI disparate impact claims. HHS proposes to return to the enforcement structure for each underlying civil right statute as provided by Congress and also proposes to remove portions of the 2016 regulation that are duplicative of, or inconsistent with, its longstanding regulations implementing Title VI, Title IX, Section 504, and the Age Act.

Revise the Scope of HHS’s Enforcement of Section 1557

HHS proposes to revise the 2016 regulation’s interpretation of Section 1557 as applying to all operations of an entity, even if it is not principally engaged in healthcare. The proposed rule would, instead, apply Section 1557 to the healthcare activities of entities not principally engaged in healthcare only to the extent they are funded by HHS. For example, the proposed rule would generally not apply to short-term limited duration insurance, because providers of those plans are not principally engaged in the business of healthcare, and those specific plans do not receive federal financial assistance.

Comply with All Applicable Federal Civil Rights Laws, Including Conscience and Religious Freedom Protections

In addition to ensuring consistent enforcement of longstanding regulations for Title VI, Title IX, Section 504, and the Age Act as passed by Congress and implemented by their HHS regulations, HHS proposes to add a regulatory provision stating that Section 1557 shall be enforced consistent with the ACA’s healthcare conscience protections (Section 1303 concerning abortion and Section 1553 concerning assisted suicide); healthcare conscience laws set forth in the Church, Coats-Snowe, Weldon, Hyde, and Helms Amendments; the Religious Freedom Restoration Act; and the First Amendment to the Constitution.

The Proposed Rule

DC Circuit Court Invalidates Significant Provisions of the DOL Association Health Plan Rules

On March 28, 2019, the U.S. District Court for the District of Columbia found significant provisions of the Department of Labor’s (DOL’s) final rule expanding the availability of association health plans (AHPs) to be unlawful. In State of New York et. al. v. United States Department of Labor, the Court held that the rule’s interpretation of “employer” to include working owners and groups without a true commonality of interest was unreasonable and, “clearly an end-run around the [Affordable Care Act]” with the purpose of “avoid[ing] the most stringent requirements of the [Affordable Care Act].” The court set aside those parts of the regulation and remanded the rule to the DOL to determine how the rule’s severability provision affects the remaining part of the rule.

The DOL is reviewing the decision and could decide to revoke the rule, revise it in a way that complies with the court’s ruling, or appeal the decision to the Court of Appeals for the D.C. Circuit.

Background
Trade associations often offer health insurance to their members. Historically, these associations identified themselves as employers or employee organizations under the Employee Retirement Income Security Act of 1974 (ERISA) to claim ERISA preemption from state insurance regulation. Then, in 1983, Congress amended ERISA to give states regulatory authority over self-insured multiple employer welfare arrangements (MEWAs) and some regulatory authority over fully insured MEWAs. AHPs are one type of MEWA.

The Affordable Care Act (ACA) added reporting requirements for MEWAs, imposed criminal penalties on MEWA fraud, and authorized the DOL to take immediate action to address fraudulent MEWAs. It also dropped an exception from the “guaranteed availability” provision of the Public Health Service Act that had previously existed for bona fide association plans. As a result, an insurer that offers coverage through an association must offer the same plan to non-members who want it (and are aware of it). Associations themselves are not subject to guaranteed availability requirements.

The ACA also defined large group, small group, and individual plans, without reference to how they were offered (i.e. whether as an AHP or otherwise). Prior to the new rule, AHPs continued to exist, but largely subject to the ACA rules. This “look through” doctrine considers only whether the participating individual or employer is obtaining individual, small group, or large group coverage – it does not “look” at the AHP as a whole to determine whether the small group or large group rules apply. This means that small group coverage obtained through an AHP was regulated under the same standards that applied to the small group market. This includes many of the ACA’s most significant small group rules, such as coverage of preexisting conditions, rating rules, and the essential health benefits requirements.

However, if an association could be treated as an employer who is sponsoring a single health plan for its members, the AHP would be regulated as a group health plan under ERISA. Group health plans are subject to various reporting, disclosure, fiduciary and other requirements imposed by ERISA, the Health Insurance Portability and Accountability Act of 1996 (HIPAA), COBRA, and some, but not all, of the Affordable Care Act’s market reforms. Group health plans are also exempt from most state regulation. Although insurers that insure group health plans are subject to state laws and regulations with respect to the insurance policies, states cannot regulate the underlying employer-health plan. As a large group health plan, an AHP would not have to comply with many of the ACA’s most significant consumer protections (such as coverage of essential health benefits or rating rules) that apply in the individual and small group markets, or many state requirements.

Prior to the new rule, the DOL had interpreted this AHP exception narrowly to apply only when a “bona fide” group of employers is bound together by a commonality of interest (other than simply providing a health plan) with vested control of the association so that they effectively operate as a single employer. Thus, eligible association members had to share a common interest, join together for purposes other than providing health insurance, exercise control over the AHP, and have one or more employees in addition to the business owner and spouse. AHPs offered by general business groups or that include individual members do not qualify, a position the DOL reaffirmed as recently as 2017.

The Final Rule
This exception—where an AHP can be treated as a group health plan under ERISA—was the target of the DOL’s final rule on AHPs, which was issued in June 2018. The DOL’s final rule made it much easier for an association to be considered a single multi-employer plan under ERISA. The final rule relaxed a long-standing “commonality of interest” requirement that associations must exist for a reason other than offering health insurance and allowed self-employed “working owners” to enroll in AHP coverage. The rule also included nondiscrimination protections that prohibit associations from conditioning membership based on a health factor (although not other factors such as gender, age, geography, and industry). The rule did not disturb state regulatory authority over AHPs but left open the possibility that the DOL would grant exemptions for AHPs from state requirements in the future.

The final rule also included a severability provision, which provides that the rest of the rule would remain operative even if parts of the rule were found to be invalid or unenforceable. The preamble cited an example regarding working owners: if a federal court rules that the working owners provision is void, this provision should be severed from the rest of the regulation and thus would not impact, for example, the ability of an association to meet the final rule’s updated commonality of interest test.

In July 2018, 12 states— California, Delaware, the District of Columbia, Kentucky, Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Virginia, and Washington —filed a lawsuit challenging the final rule for violating the Administrative Procedure Act. The states argued that the DOL’s new interpretation of “employer” was inconsistent with the text and purpose of ERISA, that the goal of the final rule was to undermine the ACA, and that the DOL was changing long-standing interpretations of ERISA to do so. The states argued that by picking and choosing the circumstances under which an association meets the definition of an “employer” under ERISA, the rule disregards the intent of Congress when adopting the ACA to establish three distinct sets of rules for three distinct markets (the individual, small group, and large group markets). The states also alleged that the rule increased the risk of fraud and harm to consumers, required states to devote significant resources to preventing that risk, and jeopardized the ability of states to adopt stronger protections.

The lawsuit asked the court to hold the AHP rule invalid, to vacate and set it aside, and to enjoin the DOL from implementing or enforcing the rule.

The Decision
Judge Bates held that the DOL failed to reasonably interpret ERISA and that significant provisions of the final rule—on bona fide associations and working owners—must be set aside. The bona fide association standard failed to meaningfully limit the types of associations that qualify to sponsor an ERISA plan. This violates Congress’s intent that only an employer association acting “in the interest of” its members falls under ERISA. The working owner provision is inconsistent with the text and purpose of ERISA, which is to regulate benefit plans that arise from employment relationships. By extending the rule to include working owners, the DOL impermissibly extended ERISA to plans outside of an employment relationship.

Judge Bates held that the states were challenging only parts of the new rule—i.e., the new standards for bona fide associations, commonality of interest, and working owners under 29 C.F.R. 2510.3-5(b), (c), and (e). Because the states did not challenge the rule’s other changes related to nondiscrimination and organizational structure, the court did not address those requirements, holding that they are “collateral” to the rule’s three main requirements. Instead of invalidating the entire rule, Judge Bates therefore remanded the rule to DOL to consider how the rule’s severability provision affects the remaining portions.

The Decision Regarding “Bona Fide Association”
Historically, the DOL wanted to ensure that an association had a “sufficiently close economic or representational nexus to the employers and employees that participate in the plan.” This analysis centered on 1) whether the association is a bona fide organization that has purposes and functions unrelated to providing benefits; 2) whether the employers share some commonality and genuine organizational relationship unrelated to providing benefits; and 3) whether the employers that participate in a benefit program exercise control over the program.

In the final rule, the DOL maintained the same three criteria—primarily purpose, commonality of interest, and control—for determining whether an association acts in the interest of an employer and is thus a bona fide employer under ERISA. However, the final rule reinterprets these criteria in a way that the Court found too significantly departs from the DOL’s prior guidance and in a way that fails to limit ERISA’s exemptions to only associations that act “in the interest of” employers. This unlawfully expands ERISA’s scope and conflicts with the statutory text. Judge Bates discussed each of these three criteria individually and then considers them together.

First, the final rule relaxed the requirement that associations exist for a reason other than offering health insurance. Under the final rule, an association’s principal purpose could be to provide benefits so long as the group or association had at least one “substantial business purpose” unrelated to providing benefits. DOL’s examples of a “substantial business purpose” range from resource-intensive activities (e.g., setting business standards or practices) to de minimis activities (e.g., publishing a newsletter).

This new interpretation of the “primary purpose” test fails to set meaningful limits on the character and activities of an association that qualifies as an “employer” under ERISA. Under the final rule, sponsoring an AHP may be the association’s only purpose so long as the association does de minimis activities that qualify as a “substantial business purpose.” Judge Bates concludes that this is “such a low bar that virtually no association could fail to meet it.” As such, the standards are too broad fail to identify defining characteristics of a subset of organizations that would fall under ERISA’s scope.

Second, employers must show a “commonality of interest” to form an association sponsoring an AHP. Under the final rule, an association can show commonality of interest among its members if they are either 1) in the same trade, industry, profession, or line of business; or 2) in the same principal place of business within the same state or a common metropolitan area even if the metro area extends across state lines. This change significantly relaxed the prior “commonality of interest” standard, making it easier for employers—tied only by being in the same line of business or geographic area—to band together and form an association for the sole purpose of offering health coverage.

Judge Bates explained, “ERISA imposes a common interest requirement, not merely a something-in-common requirement.” The geography test “effectively eviscerates” the commonality of interest required under ERISA and impermissibly exceeds the scope of the statute.

Third, the final rule required a group or association to have an organizational structure and be functionally controlled by its members, in both form and substance, either directly or by electing a board or other representatives. The control test does limit the types of associations that qualify as employers by ensuring that employer members direct the actions and decisions of the association with respect to the AHP. However, this prong fails too because it cannot overcome concerns about the lack of common interest among employers. The control test is only meaningful if employers’ interests are already aligned. If employer members have opposed interests, the control test—through, say election of officers—would only further the interests of some, but not all, employers within the association.

Collectively, these three criteria fail to limit “bona fide associations” to those acting “in the interest of” their employer members under ERISA. Under the final rule, groups of employers with no common characteristic other than presence in the same state could qualify as a single employer under ERISA so long as that group had an election-based officer structure and some incidental business-related project. This, in Judge Bates’ view, is not enough to show that an association and its members are connected by a true employment nexus. In addition, the rule would impermissibly enable groups that resemble commercial insurance providers to qualify as an “employer” for purposes of offering an AHP under ERISA, which has long been forbidden.

The DOL argued that the final rule’s nondiscrimination requirements balance its less stringent standards for commonality of interest and purpose. Judge Bates disagrees. The nondiscrimination provision governs how qualifying associations can structure their AHP premiums but does nothing to limit which associations qualify under the final rule. Because of this, the nondiscrimination provision does not impact the court’s analysis.

The Decision Regarding “Working Owners”
Historically, AHP enrollment has been limited to the association members’ employees, former employees, and their families or beneficiaries. This has meant that individuals—including sole proprietors with no common law employees—generally have not been able to enroll in group health AHPs.

The final rule expanded the availability of AHP group coverage to self-employed individuals referred to as “working owners.” Under the rule, a working owner without common law employees can qualify as both an employer and an employee for purposes of enrollment in a group health AHP. This “dual treatment” would allow a self-employed individual to be an employer (to participate in the AHP and offer group coverage) and an employee (of their own business to qualify for the health coverage offered by the AHP). Because of this, two sole proprietors without employees could band together to form an association and then offer an ERISA plan to themselves.

Judge Bates found this to be absurd. Rather than “interpreting” ERISA, the DOL rewrote the statute, ignoring the law’s definitions and structure, caselaw, and ERISA’s 40-year history of excluding employers without employees. A working owner’s membership in an association does not bring him under ERISA: joining an association cannot transform a sole proprietor into an “employer” or “employee” under the statute. Further, Congress did not intend for working owners without employees to be included under ERISA because ERISA’s focus is on benefits arising from employment relationships. Working owners employ no one: one does not have an employment relationship with oneself.

Implications
The most immediate impact of the decision is that it prevents the formation of self-insured AHPs under the new rule. The rule would have gone into effect for new self-insured AHPs beginning on April 1.
Another question is what happens to the existing AHPs that have been formed under the rule already. For example, AHPs formed on the basis of the expanded commonality of interest under the final rule will need to consider whether they can comply with the historical bona fide association requirements. In addition, because the final rule has been vacated, those AHPs offering coverage to working owners and small employers no longer qualify as ERISA plans under the rule. Since they no longer qualify as ERISA plans, they are governed under the ACA’s rules in the individual and small group market and subject to state regulation. Given this, these AHPs may need to come into compliance with the ACA’s individual and small group market protections.

Finally, States, and the DOL, may want to take enforcement action against AHPs presumably could, relying on state law or the prior “look through” doctrine. It is not yet clear what (if any) guidance the DOL, or potentially the Department of Health and Human Services, might give or whether they will announce an enforcement stance for AHPs currently offering non-ACA-compliant coverage.

In the meantime, DOL is reviewing the decision and could decide to revoke the rule altogether, revise it in a way that complies with the decision, or appeal the decision to the Court of Appeals for the D.C. Circuit.

Prior Post regarding the Final Rule

IRS Posts Explanation and Forms of Letters Used to Close Employer Mandate Inquiries

The IRS has posted an explanation of the various Letters 227, which the IRS will use to acknowledge the closure of an Employer Shared Responsibility Payment (ESRP) inquiry, or to provide the next steps to the Applicable Large Employer (ALE) regarding the proposed ESRP. There are five different 227 letters:

  • Letter 227-J acknowledges receipt of the signed agreement Form 14764, ESRP Response, and that the ESRP will be assessed. After issuance of this letter, the case will be closed. No response is required.
  • Letter 227-K acknowledges receipt of the information provided and shows the ESRP has been reduced to zero. After issuance of this letter, the case will be closed. No response is required.
  • Letter 227-L acknowledges receipt of the information provided and shows the ESRP has been revised. The letter includes an updated Form 14765 (PTC Listing) and revised calculation table. The ALE can agree or request a meeting with the manager and/or appeals.
  • Letter 227-M acknowledges receipt of information provided and shows that the ESRP did not change. The letter provides an updated Form 14765 (PTC Listing) and revised calculation table. The ALE can agree or request a meeting with the manager and/or appeals.
  • Letter 227-N acknowledges the decision reached in Appeals and shows the ESRP based on the Appeals review. After issuance of this letter, the case will be closed. No response is required.

IRS Releases Sample Notice CP 220J Notice of Assessment of Employer Mandate Penalty

The IRS has released a sample of Notice CP 220J, which the IRS will use to notify applicable large employers (ALEs) that it has charged them an employer mandate penalty under Code § 4980H for failure to offer adequate health coverage to full-time employees and their dependents.

The release of Notice CP 220J  follows last year’s release of Letter 226J (the initial letter that the IRS will use to notify employers of the assessment of proposed employer mandate penalties) and Forms 14764 (Employer’s response to proposed penalties) and 14765 (list of employees receiving premium tax credit). Employers may use Form 14765 to change information previously reported to the IRS, which could potentially reduce or eliminate employer mandate penalties.

Employers receiving a Notice CP 220J will have three choices:

  • Pay the assessment
  • File a claim for refund on Form 843, Claim for Refund and Request for
    Abatement.
  • If you want to take your case to court immediately, include a written request to issue a Notice of Claim Disallowance. Employers will then have two years from the date of the notice of disallowance to file suit in the United States District Court that has jurisdiction or the United States Court of Federal Claims.

Cadillac Tax Delayed to 2022

The legislation passed by Congress and signed by President Trump on January 23, 2018 to continue funding the government through February 8, 2018 also delays the “Cadillac Tax” another two years.

The Cadillac Tax is now not scheduled to become effective until 2022. While it is likely future Congresses will continue to delay, or perhaps eliminate the tax entirely, employers and others that sponsor Cadillac plans should continue to monitor the situation and have contingencies to deal with it if the tax does in fact go into effect.

See our prior post on this related topic: IRS Proposes Various Approaches to Cadillac Tax Implementation

Tax Cuts and Jobs Act Includes Employee Benefits Changes and Elimination of ACA Individual Mandate Penalty

The Tax Cuts and Jobs Act, which the President signed into law on December 22, 2017 enacts significant tax reforms that include a number of employee benefits changes. Significant employee benefits changes include:

Individual Mandate Repeal. 

Effective in 2019, the Act will reduce to zero the individual shared responsibility (individual mandate) penalty. This will inevitably lead to more people deciding not to purchase health insurance. Coupled with guaranteed issue, which remains the law, this will contribute to the potential “death spiral” in the individual insurance market.

Extended Rollover Period for Qualified Plan Loans. 

If a participant’s account balance in a qualified retirement plan is reduced to repay a plan loan and the amount of that offset is considered an eligible rollover distribution, the offset amount can be rolled over into an eligible retirement plan. Under current law, the  rollover must occur within 60 days. The legislation extends the 60-day deadline until the due date (including extensions) for the participant’s tax return for the year in which the amount is treated as distributed. Plan loan offset amounts qualifying for this extended deadline are limited to loan amounts that are treated as distributed solely by reason of either termination of the plan or failure to meet the loan’s repayment terms because of a severance from employment.

New Employer Tax Credit for Paid Family and Medical Leave. 

The Act creates a new tax credit for eligible employers providing paid family and medical leave to their employees. To be eligible, employers must have a written program that pays at least 50% of wages to qualified employees for at least two weeks of annual paid family and medical leave.

Eligible employers paying 50% of wages may claim a general business credit of 12.5% of wages paid for up to 12 weeks of family and medical leave a year. The credit increases to as much as 25% if the rate of payment exceeds 50%. The provision is generally effective for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020. Leave provided as vacation, personal leave, or other medical or sick leave is not considered to be family and medical leave eligible for this credit.

Moving Expense Deduction Eliminated. 

For an eight-year period starting in 2018, most employees will not be able to exclude qualified moving expense reimbursements from income or deduct moving expenses. During that period, the exclusion and deduction are preserved only for certain members of the Armed Forces on active duty who move pursuant to a military order.

Qualified Transportation Plans Eliminated. 

The Act eliminates the employer deduction for qualified transportation fringe benefits and, except as necessary for an employee’s safety, for transportation, payments, or reimbursements in connection with travel between an employee’s residence and place of employment.

The tax exclusion for qualified transportation fringe benefits is generally preserved for employees, but the exclusion for qualified bicycle commuting reimbursements is suspended and unavailable for tax years beginning after 2017 and before 2026.

Other Fringe Benefits Deductions Eliminated. 

Effective for amounts paid or incurred after 2017, the Act repeals the rule under Code § 274 that previously allowed a partial deduction for certain entertainment, amusement, and recreation expenses (including expenses for a facility used in connection with such activities) if those expenses are sufficiently related to or associated with the active conduct of the taxpayer’s business.

Also, effective after 2017, the deductibility of employee achievement awards is limited by a new definition of “tangible personal property” that denies the deduction for cash, cash equivalents, and gift cards, coupons, or certificates, except when employees can only choose from a limited array pre-selected or pre-approved by the employer.

Other nondeductible awards include—vacations, meals, lodging, theater or sports tickets, and securities.

Inflation Adjustments. 

Beginning in 2018, many dollar amounts in the Code—including some benefit-related amounts—that are currently adjusted for inflation using the Consumer Price Index for All Urban Consumers (“CPI-U”) will instead be adjusted using the Chained Consumer Price Index for All Urban Consumers (“C-CPI-U”). According to the Bureau of Labor Statistics (which determines and issues the CPI), the C-CPI-U is a closer approximation to a true cost-of-living index for most consumers, and it tends to increase at a lower rate than the CPI-U.

IRS Will Begin Assessing 2015 Employer Shared Responsibility Payments in Late 2017

The Internal Revenue Service has issued some updated Q&As explaining how it will notify employers that it intends to assess employer mandate penalties for 2015. The new Q&As (#55-58, set forth below) are part of a larger set of Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act.

Tip for employers: be on the lookout for Letter 226J from the IRS, because if you receive one of these letters you have 30 days to respond. That will not leave you much time to consult with legal counsel and formulate a response. Failure to respond will make it difficult or impossible to contest the assessment of the penalties.

The new Q&As are set forth below:

  1. How does an employer know that it owes an employer shared responsibility payment?

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

Letter 226J will include:

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

The response to Letter 226J will be due by the response date shown on Letter 226J, which generally will be 30 days from the date of Letter 226J.

Letter 226J will contain the name and contact information of a specific IRS employee that the ALE should contact if the ALE has questions about the letter.

  1. Does an employer that receives a Letter 226J proposing an employer shared responsibility payment have an opportunity to respond to the IRS about the proposed payment, including requesting a pre-assessment conference with the IRS Office of Appeals?

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

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

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

  1. How does an employer make an employer shared responsibility payment?

If, after correspondence between the ALE and the IRS or a conference with the IRS Office of Appeals, the IRS or IRS Office of Appeals determines that an ALE is liable for an employer shared responsibility payment, the IRS will assess the employer shared responsibility payment and issue a notice and demand for payment, Notice CP 220J. Notice CP 220J will include a summary of the employer shared responsibility payment and will reflect payments made, credits applied, and the balance due, if any.  That notice will instruct the ALE how to make payment, if any.  ALEs will not be required to include the employer shared responsibility payment on any tax return that they file or to make payment before notice and demand for payment.  For payment options, such as entering into an installment agreement, refer to Publication 594, The IRS Collection Process.

  1. When does the IRS plan to begin notifying employers of potential employer shared responsibility payments?

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

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

Qualified Employer Health Reimbursement Arrangements Permitted for Small Employers

The House and the Senate recently passed, and President Obama has signed, the “21st Century Cures Act”, which includes a provision exempting small employer health reimbursement arrangements (HRAs) from the Affordable Care Act’s (ACA’s) group plan rules, and from the excise tax imposed under Code Section 4980D for failure to comply with those rules. See our prior posts on the Section 4980D excise tax herehere and here. 

Background

HRAs typically provide reimbursement for medical expenses (which can include premiums for insurance coverage). HRA reimbursements are exclude-able from the employee’s income, and unused amounts roll over from one year to the next. HRAs generally are considered to be group health plans for purposes of the tax Code and ERISA.

The ACA market reforms, which generally apply to group health plans, include provisions that a group health plan (including HRAs) (1) may not establish an annual limit on the dollar amount of benefits for any individual; and (2) must provide certain preventive services without imposing any cost-sharing requirements for these services. Code Section 4980D imposes an excise tax on any failure of a group health plan to meet these requirements.

The IRS has previously distinguished between employer-funded HRAs that are “integrated” with other coverage as part of a group health plan (and which therefore can meet the annual limit rules) and so called “stand-alone” HRAs. A “stand alone” HRA  almost certainly does not meet the ACA group coverage mandates. 

The New Law

The 21st Century Cures Act provides relief from the Section 4980D excise tax effective for tax years after December 31, 2016 for small employers that sponsor a qualified small employer HRAIn addition, previous transition relief for small employers, i.e. those that are not an Applicable Large Employer (ALE) under the ACA, is extended through December 31, 2016.

Therefore, for plan years beginning on or before December 31, 2016, HRAs maintained by small employers with fewer than 50 employees will not incur the Section. 4980D excise tax even if the plans are not qualified small employer HRAs. For tax years after December 31, 2016, small employer HRAs will need to satisfy the requirements of a qualified small employer HRA.

Qualified Small Employer HRA

A qualified small employer HRA must meet all of the following requirements:

(1)  Be maintained by an employer that is not an ALE (i.e., it employs fewer than 50 employees), and does not offer a group health plan to any of its employees

(2)  Be provided on the same terms to all eligible employees. For this purpose, small employers may exclude employees who are under age 25, employees have not completed 90 days of service, part-time or seasonal employees, collective bargaining unit employees, and certain nonresident aliens.

(3)  Be funded solely by an eligible employer. No employee salary reduction contributions may be made under the HRA. 

(4)  Provide for the payment of, or reimbursement of, an eligible employee for expenses for medical care (which can include premiums) incurred by the eligible employee or the eligible employee’s family members.

(5)  The amount of payments and reimbursements do not exceed $4,950 ($10,000 if the HRA also provides for payments or reimbursements for family members of the employee). These amounts will be adjusted for cost of living increases in the future. An HRA can vary the reimbursement to a particular individual based on variations in the price of an insurance policy in the relevant individual health insurance market with respect to: (i) age or (ii) the number of family members covered by the HRA, without violating this requirement that the HRA be provided on the same terms to each eligible employee.

Coordination With Other Rules

If an employee covered by a qualified HRA does not maintain “minimum essential coverage” within the meaning of Code Section 5000A(f), they will be subject to the individual mandate tax penalty under existing law. Under the new law, their HRA reimbursements will also be taxable income to them. 

In addition, for any month that an employee is provided affordable individual health insurance coverage under a qualified HRA, he is not eligible for a premium assistance tax credit under Code Section 36B. 

Employer Reporting Requirements

For years beginning after December 31, 2016, an employer funding a qualified HRA must, not later than 90 days before the beginning of the year, provide a written notice to each eligible employee that includes:

(1) The amount of the employee’s permitted benefit under the HRA for the year; 

(2) A statement that the eligible employee should provide the amount of the employee’s permitted benefit under the HRA to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and

(3) A statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to the individual mandate tax penalty for such month, and reimbursements under the HRA may be include-able in gross income. 

For calendar years that begin after December 31, 2016, employers also have to report contributions to a qualified HRA on their employees’ W-2s. 

More… text of the 21st Century Cures Act.

Welfare Benefits Strategies For Small to Mid-Size Employers After The ACA

Lovitt & Touche’s Chris Helin has a great article out detailing two innovative approaches to dealing with the challenges posed to small and mid-sized businesses resulting from the continued rise in rates and coverage mandates under the Affordable Care Act (ACA).

Retention Accounting

Chris explains that “[w]hen you receive a quote from a carrier under a retention accounting contract instead of a fully insured contract, you are given the chance to share in the savings in a good claims year.” These contracts used to be available only to employers with more than 5000 people on their medical plan. They may now be an option even if you have as few as 100 employees on your plan.

Private Marketplace

The second approach is one on which Lovitt & Touche has taken a lead: the Private Marketplace. Not to be confused with the public exchanges, a private marketplace can be custom designed to deliver all of your welfare benefits, including medical, dental, vision, life, and disability. A private marketplace offers several innovations that employers may find attractive, including: (1) you can offer many more than just two or three plan designs within each insurance option; and (2) you can also use a defined contribution strategy and provide a specific dollar amount for each employee to spend.

Even if the ACA is repealed or significantly altered in 2017, these trends will likely continue, and they may be worth a look.

For more information read Chris’s article Here.