IRS Adjusts Affordability Percentage Under Employer Mandate

Beginning in 2015, the Affordable Care Act requires applicable large employers to offer affordable, minimum value health coverage to their full-time employees (and dependents) or pay a penalty. The Affordable Care Act measures affordability based on annual household income. Because employers have no way of knowing an employee’s household income, the Affordable Care Act provides three safe harbors that will allow employers to claim that their plans are “affordable.”   Employers familiar with these safe harbors are also familiar with the significance of the 9.5% number. It is this 9.5% number that the IRS, in Revenue Procedure 2014-37, recently increased to 9.56%.

Employers may use the 9.56% figure in its safe harbor calculations when setting premiums for the 2015 plan year. The three safe harbors are the Form W-2 safe harbor, the rate of pay safe harbor, and the federal poverty line safe harbor. First, if the employee contribution towards the self-only coverage does not exceed 9.56% of the employee’s wages listed in Box 1 of his/her Form W-2, then the coverage will be deemed to be affordable. Second, coverage is affordable if the employee contribution does not exceed 9.56% of the employee’s hourly rate of pay times 130, or the employee’s monthly salary. The third safe harbor provides that coverage is affordable if the employee contribution does not exceed 9.56% of the most recently published federal poverty level for a single individual.

While the change from 9.5% to 9.56% is not a massive change, it does serve as a reminder that what is deemed “affordable” may change from year to year.

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IRS Releases Draft Versions of Forms for Health Information Reporting by Employers

The IRS released final regulations on March 5, 2014, outlining the employer reporting requirements that will take effect for the 2015 taxable year. While the final regulations specified the type of information that will need to be reported, the actual reporting forms were not issued at that time. As a result many employers were taking a wait and see approach to the reporting requirements. We now have draft reporting forms. On July 24, 2014, the IRS released draft forms that employers will use to report on health coverage they offer to their employees. The forms are the primary mechanism used by the government to track and enforce the Affordable Care Act’s minimum essential coverage and shared responsibility requirements for employers. The first reports will be due in 2016.

There are two types of reporting requirements. First, is section 6055 reporting, which is to aid the IRS in enforcing the ACA individual mandate. The second type of reporting is section 6056 reporting, which applies to applicable large employers and is to aid in the enforcement of the shared responsibility penalties under the ACA. The IRS recently released draft forms may be found using the following hyperlinks: 1094-B (Transmittal of Health Coverage Information Return), 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns), 1095-B (Health Coverage), and 1095-C (Employer-Provided Health Insurance Offer and Coverage). The draft instructions relating to the forms have not been released. The IRS anticipates posting draft instructions to sometime in August.

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King Decision on ACA Subsidies

On July 22, 2014, two conflicting decisions on the legality of insurance subsidies provided in federally established health care exchanges were handed down. In the Halbig decision, discussed previously in this blog, the D.C. Circuit of the U.S. Court of Appeals ruled that such subsidies are not allowable on federally established exchanges. The second decision, in King v. Burwell, directly conflicted with the Halbig decision, with the Fourth Circuit of the Court of Appeals ruling that such subsidies are allowable on federally established exchanges. This case is the topic of this post.

The plaintiffs in King v. Burwell, which may be read in full here, were Virginia residents who did not wish to purchase comprehensive health insurance. Due to Virginia’s refusal to establish a state health care exchange, citizens of the state were to use the federally established exchange The plaintiffs’ opposition to the availability of insurance subsidies in federally established exchanges is linked to the individual mandate provision of the ACA. The plaintiffs argue that absent these subsidies, they would fall under the ACA’s unaffordability exemption and not be required to purchase health insurance. Due to their low income, the plaintiffs argue that the availability of these subsidies makes them subject to the individual mandate and therefore imposes an undue financial burden on them, as they will be required to either obtain insurance or pay a penalty.

The crux of the plaintiffs’ argument in King is essentially the same as that of the plaintiffs in Halbig; they believe that the language of the ACA which allows for insurance subsidies in exchanges “established by the state” prevents these subsidies from being available on federally established exchanges. However, unlike the court in Halbig, the Court found this argument unpersuasive and ruled in favor of the government’s broader interpretation of the statutory language.

The rationale behind the Fourth Circuit’s ruling is centered on the perceived ambiguity of the statutory language. The King court explains that, taken in context of the entire act, the language in question could have two reasonable interpretations. One of these interpretations is that taken by the plaintiffs, while the other is the broad interpretation presented in the IRS’ final regulation on this matter, which allows for insurance subsidies on all health care exchanges. Due to the fact that the IRS has interpretative authority, the Court explains that they are not authorized to supplant the IRS’ interpretation of the statute unless it is clearly “arbitrary, capricious, or manifestly contrary to the statute.” The Court determined that the IRS’ interpretation did not fall into any of these categories, and therefore upheld the IRS’ ruling and the legality of insurance subsidies in federally established exchanges.

This decision will be appealed, similar to the Halbig decision. Until a final decision on this issue is published (likely by the United States Supreme Court), employers should continue to proceed as if the employer penalties are applicable in states with federally facilitated exchanges.

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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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