News & Events

07/27/10 - Interim Final Rule, “Protecting Young Adults”

07/27/10 - Age 26 or Age 27, Two Different Rules

Health Care Reform: Age 26 or Age 27, Two Different Rules

In Brief

The Health Care Reform laws mandate that an employer must make coverage available to dependents until age 26. Please refer to our earlier memorandum for details. The new law also removes the imputed income tax liability for employees whose children receive health care coverage beyond their 24th birthday and before age 27. The IRS Notice 2010-38, along with a White House press release has led to some confusion. The purpose of this memorandum is to address the IRS Notice.

The New Tax Law

The law removes the imputed income tax requirements, relieving employers from having to impute income for employer-provided health coverage to children over-age 19 who do not meet the definition of qualifying child, which requires that they be full time students and living with the taxpayer (IRC Section 152(f)(1)). The relief applies to coverage provided or continuing to be provided after March 30, 2010. Employers must treat coverage provided prior to March 30, 2010 as subject to imputed income. Please note that whether before or after March 31, 210, the cost of coverage is not subject to FICA or FUTA taxes. Technically speaking, this new law applies to IRC Sections 105 (tax free benefits), 106 (non-taxable employer contributions), and 125 (cafeteria plans). By not amending IRC Section 152 (definition of dependents), Congress makes it clear that this imputed income exclusion only applies to group health plan coverage.

Cafeteria Plan Rules

The new law modifies cafeteria plan rules to permit pre-tax contributions for coverage applicable to over-age dependents and to permit tax free benefits for over-age dependents under a health care spending account. Cafeteria plan regulations currently do not permit the addition of an over-age dependent as an opportunity to change an FSA election amount. This IRS Notice says that the IRS and Treasury intend to amend regulations (1.125-4) effective retroactively to March 30, 2010 to treat the addition of coverage for an over-age dependent up to age 27 as a qualifying status change. The employer can choose to permit the change in election but is not required to do so.

The Meaning of “Up to Age 27”

For purposes of this new law, the coverage provided is tax free through December 31 (end of the taxpayer’s tax year), for the year in which the participating dependent turns 27.

State Law Mandates

Certain states require insured plans to provide health coverage to over-age dependents beyond age 27, the limit permitted under federal law. Federal income tax rules will require the inclusion of imputed income for coverage provided beyond age 27. States with these laws have their own separate tax rules.

Action Plan

1. If an employer wants to permit a new election under the cafeteria plan with the addition of an over-age dependent, he must amend the cafeteria plan by the end of the current plan year. Although it is permitted here, the amendment appears to contradict the IRS proposed rule prohibiting retroactive cafeteria plan amendments.

2. Employers must impute income for health care coverage provided to non-qualifying dependents any time prior to March 30, 2010. The imputed income amount will appear on W-2s issued for 2010 and prior years.

3. Employers should not collect FICA or FUTA taxes.

Copyright © 2010 Alfred B. Fowler, Attorney at Law and Leavitt Benefit Services.All Rights Reserved. Reprint with permission only. This Legislative Brief is general in its nature and is no substitute for legal advice or opinion in any particular case. mike@abferisa.com
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of ( i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

07/27/10 - Non-discrimination Testing for Insured Plans

Health Care Reform: Non-discrimination Testing for Insured Plans

The BIG Change

For plan years beginning on or after September 23, 2010, insured health plans will be subject to the non-discrimination rules contained in the Internal Revenue Code Section 105(h) prohibiting a group health plan from discriminating in favor of highly compensated employees as to eligibility to participate in a plan or to the benefits provided under the plan. Please refer to the Attachment for a copy of the actual HCR provision. This new rule will not apply to grandfathered plans until and at such time the plan loses its grandfathered status (e.g. due to a change in plan design).

Past Practices

Historically, a number of employers purchased a special group health policy covering the employer’s executive staff only. The policy provided benefits supplementing the underlying group health plan by covering deductibles, co-pays, and excess over plan limits, as well as qualifying benefits not available through the basic health (including dental and vision) plans. Non-highly compensated employees typically would be ineligible to participate in the plan. Since insured group health plans were exempt from the discrimination testing rules applicable to self-funded plans, the policy could be limited to executives without IRS scrutiny.

Other Impacts

This new rule also may impact multi-state employers who have different benefit levels, eligibility rules, and contribution requirements based on business location. For example, a company based in Connecticut may have a rich health plan with no employee contributions for Connecticut employees and a plant in California with a modest health plan and high employee contributions achieving parity with what California employers offer as benefits in the same industry. The non-discrimination testing rules may require a more uniform level of benefits and contributions for all employees regardless of their business location, although there is some latitude here.

The Tax Effect

Insured group health plans must pass the tests described below. If they do not, the actual benefits provided (claims paid) become ordinary income to the employee. For example, in a discriminatory plan, the actual dollars paid out in connection with a hospital stay, dental surgeries, or even the purchase of prescription lenses for the employee or covered family member would be income to the highly compensated employee in the year the benefit amount is paid. The non-highly compensated employees remain exempt from taxation of benefits paid out.

The Eligibility Tests

A plan satisfies the eligibility requirements if the plan is available to:

1. 70% or more of all employees, or to
2. 80% or more of all the employees who are eligible to benefit under the plan if 70% or more of all employees elect to participate in the plan.

Alternatively, a plan meets the eligibility requirements if it covers a classification of employees that does not discriminate in favor of highly compensated individuals.

The 80/70 percentage test requires a minimum of 56% of employees (80% multiplied by 70%) participating in the plan. The non-discriminatory classifications test will allow reasonable classifications generally including specified job categories, compensation categories such as hourly or salaried, geographic location to some extent, and similar bona fide business criteria.

Certain non-participating employees may be excluded from the eligibility tests, including employees who have not completed three years of service; employees younger than age 25; part-time or seasonal employees; union employees; and employees who are nonresident aliens and who receive no U.S. earned income.

The Benefits Test

In addition to the eligibility rules, all benefits provided to highly compensated employees must be provided to all other participants.
Please note: the controlled group rules specify that employees of controlled groups of corporations and partnerships and employees of affiliated service groups are to be treated as employees of a single employer.

Definition of Highly Compensated

Using the same definition as for self-funded plans, a highly compensated individual is defined as one of the five highest paid officers, a shareholder who owns more than 10% in value of the stock of the employer, or among the highest paid 25% of all employees.

Action Plan

1. If you are currently a grandfathered plan and if you are considering changes to your plan now or at the time of the policy renewal, and, if you have an executive type health plan or are a multi-state employer, seek the advice of your benefit plan consultant regarding the risk of failing the IRC Section 105(h) plan discrimination testing rules. The rule becomes applicable to your plan upon the implementation of the plan change or for plan years beginning on or after September 23, 2010, whichever is later.

2. If you do not have an executive type health plan and if you offer the same benefits to all employees with the same employee contribution requirements, and if you are considering a change in plan, weigh the value of the change against the risk of becoming subject to the discrimination testing rules.

3. Watch for further official guidance.

4. Contact your benefits consultant with any questions.

07/27/10 - Small Employer Health Insurnace Credit

Health Care Reform: Small Employer Health Insurance Credit

The Basic Credit

For tax years beginning in 2010, eligible small employers may claim a tax credit on their federal income tax return for health insurance premiums paid in 2010. The tax credit provision will remain available through the 2013 tax year. Tax-exempt organizations who meet the small employer requirements will take the credit on their payroll taxes rather than on their federal income tax return.

Eligible Small Employer

Small employers who provide health care coverage to their employees may receive the credit if they meet the following criteria.
1. Have fewer than 25 Full Time Equivalent (FTE) employees for the tax year;
2. Have an annual average wage less than $50,000 per FTE;
3. Pay the employer portion of the premium on a uniform percentage basis which is the same for all participants; and,
4. The employer contribution is at least 50% of the premium cost (by coverage class; i.e. single, full family, etc.).

Calculating the Credit

The credit is based only on the employer contribution amount. It is important to note that pre-tax contributions from participants are not included as employer contributions. The maximum credit an employer can get is limited to the average premium collected for group health coverage in the state where the business is located. The Department of Health and Human Services (now hiring) will publish a chart of “average premiums” for purpose of this calculation. The actual credit, as modified by the state average premium, is up to 35% of the employer’s annual contribution in the year of the tax filing.
For 2010, there will be transitional relief to be described in IRS guidance yet to be published.

Calculating the FTE

To calculate how many Full Time Equivalent employees the employer has, the employer must determine the total number of hours worked by all employees in that tax year and divide it by “2,080” (260 work days x 8 hours). For example, with a five life group, one employee may work 2,080 hours and the remaining four employees worked half-time or 1,040 hours each (4,160 + 2,080 = 6,240 ÷ 2,080 = 3 FTE).

Reducing the Credit

The 35% of employer-paid premium amount is reduced under two scenarios:

1. The employer has more than 10 FTEs; or,
2. The average annual wage exceeds $25,000.

Based on the IRS FAQs released earlier this month, the reduction in credit is based on formulas as follows:

Excess Wages: Amount Excess = %
$25,000

FTEs in Excess of 10: Number of FTEs over 10 = %
15

The credit is then reduced by each of these percentages. For example, if the credit is $33,600 and the employer has 12 FTEs and an average wage of $30,000, the wage factor (1/5) and excess FTE (2/15) would then reduce that credit by $11,200 or 1/3.

Other Guidance

People you cannot count as employees:

o Seasonal workers
o Family members of the owner working in the business
o The owner

If the employer is a member of a controlled group of organizations, then the employer must include the employees of all controlled group employers in determining the availability of the small employer credit.

Action Plan

1. If you believe you qualify for the credit:

a. Calculate your year-to-date employee hours worked, annualize it, and see how many Full Time Equivalent employees you have.

b. Calculate your year-to-date employee payroll, annualize it, and see if it is under the $50,000 average.

c. Annualize your employer health coverage contributions toward the full premium cost. Will you contribute at least 50% of the annualized premium for 2010?

2. Review the IRS FAQs for further details.

3. Watch for further official guidance.

4. Seek the advice of your benefits consultant or tax advisor, should you have questions.

07/27/10 - The Grandfather Clause

Health Care Reform: The Grandfather Clause

The BIG Exemption

Section 1251 of the Reform Bill (attached) exempts individual and group health plans from some but not all of the requirements established under Health Care Reform. This exemption is not a blanket exemption. The exemption lasts until the plan undergoes a “change”. Unfortunately, we must wait for regulations before we will know for sure what actually constitutes a change.

Who Gets the Exemption

The exemption applies to all group health plans with at least one participant (insured or self-funded) and individual health policies in effect on March 23, 2010 (date of enactment). The exemption is not effected by:
-Policy/Plan Renewals (having no benefit changes);
-Enrollment of new or existing employees of the employer;
-Additional or removal of eligible spouse or dependents; and,
-Collective Bargaining Agreements in effect on March 23, 2010.

Applying the Extension

As you will see from the chart that follows, the exemption is not universal and not forever. Some of the big early changes brought about by Health Care Reform will apply to all plans and policies regardless of their existence on March 23, 2010. Note: PYB means “Plan Years Beginning on or After.”

Losing the Exemption

The law is mostly silent about the kind of plan changes that would result in the loss of the current plan exemption. Perhaps the only clear loss of the exemption is when a Collective Bargaining Agreement in effect on the date of enactment expires (discussed below). Although it is not clear, we believe that amending the plan to comply with Health Care Reform mandated changes (e.g. dependents to age 26) will not constitute a change that would result in the loss of exemption.
What we don’t know is how big a voluntary change must occur to terminate the exemption. Is changing a plan’s office visit co-pay from $20 per visit to $25 per visit big enough of a change? What about the elimination of the PPO plan option from a triple option (i.e. HMO, PPO, HDHP) program or the addition of a new HMO due to business expansion to a new location?

For self-funded plans, in our view, a change in stop loss limits or stop loss insurer, or a change in third party administrators do not change the plan per se, and should not result in the elimination of the exemption. However, until we have regulations, we cannot be certain of the result.

Collectively Bargained Plans

H.R. 3950 allows Collectively Bargained Agreements (CBA) ratified prior to date of enactment to remain exempt from the Health Care Reform changes specified in Subtitle A (Sections 2711-2719). CBAs will be required to comply with all others. Please refer to our chart regarding Section 2711-2719. In the event that the plan applies to multiple CBAs, the changes will not apply to the plan until the last CBA expires. Again, without regulations, we only can assume that the changes would apply as of the plan years beginning on or after the expiration of the CBA (or final CBA) or tax years beginning on or after expiration as applicable under the law.

Action Plan

1. Consult with your employee benefits professional on the timing of the changes you must comply with at this time.
2. Avoid making substantive plan changes without determining their effect on your exemption and the cost/benefit ratio resulting from the change. Mandates such as the applicability of discrimination testing or inclusion of expansive preventive care benefits do have an economic component.
3. Wait for regulations!

07/27/10 - Age 26 Rule

Health Care Reform: Age 26 Rule

You may remember all the “buzz” leading up to the passage of the Health Care Reform bills (H.R. 3590 and H.R. 4872). Post passage, the volume of buzz has grown exponentially. Unfortunately, but certainly understandably, the airwaves are filled with bad information, incomplete at best, and downright wrong at worst. At the request of Leavitt Benefit Services, we will address each of the most critical and imminent changes brought about by the Health Care Reform bills, with targeted bulletins over the next few weeks. During this process, it is possible that the Department of Health and Human Services (HHS) and the Treasury Department (IRS) will begin publishing interim rules, clarifying our obligations under the law.

Dependents Covered to Age 26

The most commonly misunderstood and most immediate piece of the new Health Care Reform legislation is the provision that group health plans must cover an employee’s dependents to age 26. I actually have talked to more than one client company that has received calls from employees requesting enrollment materials on the assumption that the provision is now in effect!

Here is What We Know

Effective Date. Health plans must begin covering eligible dependents to age 26 as of the first day of the Plan Year beginning on or after September 23, 2010 (six months after enactment).
Applicability. This provision will apply to all group health plans, whether insured or self-insured, in existence at the time of enactment as well as those who become effective subsequent to the date of enactment. In other words, for purposes of the age 26 rule, there are no grandfathered health plans.
Eligibility. Dependents are eligible for coverage regardless of marital status so long as they don’t have access to group health coverage elsewhere.
Grandchild Exception. The rule will not mandate coverage availability for grandchildren.

Discussion

1. Interim Rules. HHS will produce rules for the implementation of this provision.
2. Ambiguities. What we don’t know, based on the statutory language (attached) is whether these new “dependents” must meet the dependent child status (under IRC Section 152) or be a full-time student. We expect that HHS will clarify this in its Interim Rules.
3. The Marriage Issue. As you may know, the Health Care Reform Bill itself contained an “unmarried” requirement. The Reconciliation Bill removed this requirement. The assumption is that Congress intends to extend the additional coverage to dependents whether married or unmarried. Our opinion is that Congress agreed to allow HHS to draft its own rules with or without this requirement.
4. Michelle’s Law. Federal law now requires health coverage to continue for up to one year for students who take a medically necessary leave of absence from a post-secondary institution. Depending upon the HHS regulations, the Health Care Reform provision may eliminate the need for the federal Michelle’s law as well as any state versions of Michelle’s law.
5. Stoploss Coverage. Since most stoploss policies are casualty policies, they are not subject to the Health Care Reform laws. At present, the stoploss market could elect to limit its claims exposure to a more restrictive dependent definition. It is also possible that market forces may change their policies with regard to dependent coverage to conform to the Health Care Reform provision. Once again, we have no clear answer at this time.

Action Plan

1. Determine the effective date on which this law will apply to you (first day of your Plan Year beginning on or after September 23, 2010).
2. Contact your health care carrier(s) regarding its interpretation absent HHS regulations, and an idea of the potential rate adjustments at renewal.
3. Survey your participating employees to obtain a count of potential eligibles.
4. Wait for regulations.

Copyright © 2010 Alfred B. Fowler, Attorney at Law and Leavitt Benefit Services.All Rights Reserved. Reprint with permission only.This Legislative Brief is general in its nature and is no substitute for legal advice or opinion in any particular case. mike@abferisa.com
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of ( i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.