The Shaky Future of the ACA Employer Penalty After Halbig

In a previous post, we discussed the murky legal status of insurance subsidies in federally established insurance exchanges. This post will focus on the July 22, 2014 decision in Halbig v. Burwell and the impact this ruling will have if it is upheld.

Yesterday, in a potentially landmark decision, the D.C. Circuit of the U.S. Court of Appeals ruled that federally established health care exchanges are not authorized to provide insurance subsidies. The case centered on language of the Affordable Care Act (“ACA”) which, on its face, limits the availability of insurance subsidies to state-established exchanges. The language in question, found in Section 36B of the Internal Revenue Code, made tax credits available as a subsidy for individuals purchasing health insurance through marketplace which were “established by the State.”

The appellants, a group of individuals and employers residing in states without state-established exchanges, argued that this language prohibited the offering of insurance subsidies on federal exchanges; the government argued that the broad interpretation of this language, as interpreted and promulgated by the IRS in a final regulation on this issue, should be used to allow federal exchanges to offer insurance subsidies. With its ruling in Halbig, the Court sided with the appellants and held that the ACA “unambiguously restricts the . . . subsidy to insurance purchased on Exchanges ‘established by the State’. . .”

The crux of the Court’s ruling relied on the language of the ACA itself. As noted above, the ACA provides that subsidies should be available for plans “enrolled in through an exchange established by the state;” it makes no mention of these subsidies being provided in federal exchanges. The government argued that by allowing the federal government to establish exchanges in the states which failed to do so, the ACA made federal exchanges equivalent to the state exchanges, thus allowing subsidies to be provided within these exchanges. However, the Court rejected this argument. Additionally, the court rejected the government’s arguments that a narrow construction would make other provisions of the ACA unworkable and that a narrow interpretation would be contradictory to the law’s purpose and legislative history.

The federal government intends to appeal the Court’s decision. However, if this decision is ultimately upheld, it would have a material impact on the employer shared responsibility penalty under the ACA. The employer penalty, which will be effective January 1, 2015, will impact applicable large employers that have at least one full-time employee who receives a subsidy through the new insurance exchanges. If the Halbig decision is upheld, employers in the thirty-four states utilizing federally established exchanges would not be subject to this penalty.

As noted in yesterday’s blog, the Fourth Circuit issued a conflicting ruling on the same issue within hours of the Halbig decision. Accordingly, the current status of insurance subsidies and employer penalties in states with federally established exchanges is unclear. The next step is likely an en banc review of the Halbig decision by the D.C. Circuit; however, there is a good chance that this issue will ultimately be decided by the Supreme Court. If the Halbig decision is ultimately upheld, it will provide significant relief to large employers in the thirty-four states without state-established exchanges. It is important to note, however, that while the issue is on appeal, the administration has stated that these subsidies still will be available on all exchanges; therefore, employers must still comply with the mandate until a final ruling is made on this issue

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Conflicting Federal Rulings Issued Today on ACA

Earlier today, two circuits of the U.S. Court of Appeals handed down conflicting rulings regarding the legality of insurance subsidies offered in connection with federally facilitated exchanges. The controversy surrounding these subsidies involves language found in the Affordable Care Act (“ACA”) which provides that subsidies are available to individuals purchasing insurance through exchanges “established by the State.” The IRS interpreted this language broadly to allow for subsidies to be offered with both state and federally facilitated exchanges.  The plaintiffs in both cases believe that the IRS exceeded its authority in expanding subsidies to states with federally facilitated exchanges, thereby unfairly exposing applicable large employers in those states to shared responsibility penalties.

In Halbig v. Burwell, the U.S. Court of Appeals for the District of Columbia held that the language of the ACA allowing for insurance subsidies in state operated exchanges did not apply to federally facilitated exchanges. However, only hours later, in King v. Burwell, the Fourth Circuit sided with the government and upheld the legality of insurance subsidies in connection with federally facilitated exchanges.

The conflicting results are due to differing interpretations of the statutory language. The Halbig Court, which struck down subsidies in connection with federal exchanges, relied on the actual language of the statute. This court determined that the language was unambiguous and restricted subsidies to insurance purchased on exchanges “established by the State.” Conversely, the King Court found the language of the statute to be ambiguous and “subject to multiple interpretations.” Due to this, the Court gave deference to the government’s broad interpretation of the language, and upheld the IRS final rule on the issue, which allowed for subsidies to be provided on both state and federal exchanges.

Both of today’s decisions will be appealed. In addition, we are still awaiting a decision from the federal court in Indianapolis in State of Indiana v. IRS, which involves similar arguments raised by the state and thirty-nine Indiana public schools. The public schools in State of Indiana v. IRS are represented by Bose McKinney & Evans LLP.  (State v. IRS – Amended Complaint)   For now, employers should continue to assume that the shared responsibility penalties will be effective January 1, 2015. Ultimately, the United States Supreme Court may need to determine whether the IRS may validly impose penalties upon employers located in states that do not operate a state-based exchange.

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Health Plan Identifier Deadline Approaching

Large self-funded health plans are required to obtain a Health Plan Identifier (“HPID”) by November 5, 2014. Small self-funded health plans, with annual claims of $5 million or less, have an extra year until November 5, 2015. If an employer maintains a fully insured plan, the insurance company will be responsible for obtaining the HPID.

The HPID is a 10-digit numeric code assigned to health plans in an effort to standardize the transaction process for health care services. For the purposes of the HPID, there are two classes of health plans: (1) controlling health plans (“CHP”) and (2) subhealth plans (“SHP”). CHPs are health plans that control their own business activities or are controlled by an entity that is not a health plan; CHPs are required to obtain HPIDs. SHPs are health plans whose business activities are directed by a CHP; they are not required to get a HPID, but may do so at the direction of its controlling CHP or on its own accord.

In order to obtain a HPID, health plans should apply through HHS’ Health Plan and Other Entity Enumeration System (“HOPES”). In order to do so, an organization must register in the Health Insurance Oversight System (“HIOS”) within HOPES, access the user management role, select the application type, complete the application and have the application reviewed by the organization’s authorizing official. Once this process is completed, and the applications are approved by the organization’s authorizing official, the system will provide a HPID.

The date for full implementation of HPIDs in standard transactions is November 7, 2016. On this date, all covered entities are required to use the HPID in standard transactions involving health plans possessing an identifier. More information concerning HPIDs and the registration process for obtaining one can be found here.

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Final Regulations on Qualified Longevity Annuity Contracts (Distributions exempt from RMD Rules)

On July 2, 2014, the IRS issued final regulations concerning qualified longevity annuity contracts (“QLACs”) and how these are to be treated under the required minimum distribution (RMD) that apply to qualified retirement plans. The final regulations are effective immediately, and, when applicable allow for QLACs to be exempt from the RMD rules.

The increase in average life expectancy of Americans increases the likelihood that more retirees will outlive their retirement savings. To combat this potential problem, many retirees have begun to purchase longevity annuities, which provide a steady stream of retirement income and provide protection against the risk of a retiree outliving his or her savings. Prior to the IRS’s issuance of the final regulations, an acquisition of these annuity contracts within a qualified retirement plan was problematic. In particular, before the issuance of the regulations, the value of any annuity held in the account of a plan participant was includible in calculating a participant’s RMD. However, if the value of the annuity represented the primary value of the participant’s account, the participant could be faced with the possibility that he/she did not have other funds in his/her account to make the necessary RMD because of the annuity’s fixed payment schedule.

The final regulations provide a solution to this issue. Pursuant to the final regulations, any QLACs purchased on or after July 2, 2014, by a participant in a defined contribution, 403(b), or 457(b) plan or the owner of a non-Roth IRA may be exempted from RMD rules. This means that, so long as the annuity meets the requirements to be a QLAC, the value of the annuity will not be included when calculating RMD payments, thereby eliminating the concern about insufficient funding for RMD payments.

It is important to note that not all longevity annuity contracts will be considered QLACs. To qualify as a QLAC, an annuity must meet seven requirements:

  1. The annuity must be purchased from an insurance company;
  2. Annuity payments must begin no later than the first day of the month following the employee’s 85th birthday;
  3. The annuity contract’s premiums cannot exceed the lesser of 25% of the employee’s retirement plan account balance on the date of the payment or $125,000;
  4. The annuity contract cannot include any features that would provide for lump sum distribution or cash surrender rights;
  5. The annuity contract must state that it is intended to be a QLAC;
  6. Death benefits must meet the requirements laid out in the final regulations, which vary depending on who the beneficiary is and when the spouse dies; and
  7. The annuity cannot be a variable annuity.

With the enactment of the final regulations, the IRS has provided a new way for retirees to ensure sufficient funding for their retired lives. However, employers sponsoring qualified retirement plans are under no requirement to offer QLACs as part of such plans. Employers considering offering QLACs should weigh the benefit of adding the product to the employer-sponsored retirement plan against the out-of-pocket and administrative cost of making such an offer. For more information on the QLACs, the final regulations can be found, in full, here.

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New 1023-EZ Form

On July 1, 2014, the IRS introduced Form 1023-EZ.  This form is a shorter (only three pages) version of Form 1023 (26 pages), which is the application used by charities seeking recognition of tax-exempt status under section 501(c)(3) of the Internal Revenue Code.  This new form streamlines the filing process for smaller charities and reduces the costs involved in the process.

In a press release concerning the new form, the IRS stated that most new charities with gross receipts of $50,000 or less and assets of $250,000 or less will be eligible to use the short form application.  (Apparently, such charities make up nearly 70% of all applicants for tax-exempt status.)  Prior to the release of 1023-EZ, small charities had to go through the same drawn-out application process of larger charities.

In addition to providing small charities with a less strenuous application process, Form 1023-EZ also provides these charities with an opportunity to save money, both in the expense incurred in preparing the application and the filing, user, fee payable to the IRS.  When filing the current Form 1023, a user fee of $850 was due if the organization’s annual gross receipts averaged or were anticipated to average more than $10,000.  When filing Form 1023-EZ, eligible charities will only be required to pay a $400 user fee, i.e., a savings of $450.

The creation of Form 1023-EZ also establishes a faster path to receiving IRS tax-exempt recognition.  There is a current backlog of more than 60,000 tax exempt applications within the IRS.  Because considerably less information is required by Form 1023-EZ,  less time will be required of IRS personnel to review the application, which should then result in the IRS completing their and issuing tax-exempt determinations over a much shorter timeframe.

Those interested in learning whether an organization is eligible for using Form 1023-EZ should complete the Form 1023-EZ Eligibility Worksheet found here.

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2015 Open Enrollment for the Health Insurance Marketplace Begins November 15, 2014

The Health Insurance Marketplace open enrollment for 2015 health insurance coverage begins November 15, 2014 and ends February 15, 2015. This means that anyone who failed to enroll during the 2014 open enrollment period, which ended on March 31, 2014, will have another opportunity to enroll through the Marketplace. Prior to the November open enrollment period, individuals seeking coverage may be able to enroll through a special enrollment period or through enrolling in Medicaid or CHIP.

In order to qualify for a special enrollment period, an individual will have to demonstrate that a qualifying life event has occurred or that a complex situation has arisen in relation to previously applying in the Marketplace. Qualifying life events include, for example, marriage or divorce; having a baby or adopting a child; moving your residence; gaining citizenship; or losing other health coverage. Anyone who believes they qualify for a special enrollment period may apply for special enrollment within sixty days of the qualifying event through healthcare.gov.

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Final Rule on Bona Fide Orientation Periods and the 90-Day Waiting Period Limitation

The 2010 enactment of the Affordable Care Act (“ACA”) added provisions to the Public Health Service Act (“PHS”), the Internal Revenue Code (“the Code”) and ERISA. Chief among these changes was the prohibition against waiting periods of more than 90 days for extending health coverage to eligible employees. In February of 2014, the IRS, EBSA, and Department of Health and Human Services published final regulations on the 90 day wait period limitation, and applied it to all group health plans with plan years beginning on or after January 1, 2014. This meant that employers could no longer impose waiting periods in excess of 90 days on otherwise eligible employees’ participation in employer-sponsored health insurance.

In February, the departments also published proposed regulations concerning reasonable, bona fide, employment-based orientation periods and how these would be handled in relation to the waiting period. On June 25, 2014, the departments released the final regulations concerning such orientation periods.

The final regulations explain that permissible orientation periods will not count toward the 90 day limitation. The final rule explains that this is due to the fact that most orientation programs are necessary, and are not put in place solely to subvert the 90 day waiting period limitation. However, not all orientation periods will prevent the 90 day clock from running, as the final rules limit both the type of orientation periods which will be deemed “permissible” and the time such orientation periods can last.

The final regulations limit permissible orientation periods to those which are reasonable, bona fide and employment-based. The final regulations state that the departments do not wish to question the reasonableness of short, bona fide orientation periods. Due to this, the final regulations provide a concrete maximum amount of time of one month for such orientation periods. This was done to prevent employers from abusing the 90 day limitation by having extended orientation periods. The final regulations explain that “one month,” for the purpose of the rule, is determined by adding one calendar month to employee’s start date, and subtracting one calendar day; under the final regulations, the 90 day wait period limitation begins running no later than this date. For example, if an employee begins working with an organization on May 3, any orientation period must end by June 2, and the 90 day wait limit begins to accrue on that date.

It is important to note that, while this rule applies to large employers, it does not relieve them from the responsibilities of the shared responsibility provisions. Therefore, it is possible for a large employer to be in compliance with this rule but still be subject to the shared responsibility penalty.

Employers interested in learning more about the final regulations can find them here. In response to the final regulations, employer should review their group health plans and ensure that their orientation period, if one exists, is both bona fide and no longer than one month. Additionally, employers need to review their policies to insure that their plan is not in violation of the 90 day maximum limitation, in light of the final rule on orientation periods.

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