2015 YEAR-END
TAX GUIDE
Patient Protection & Affordable Care Act 2015 Update

A number of developments occurred in 2015, relating to the Patient Protection and Affordable Care Act (ACA) which affect:

  1. The Individual Mandate
  2. Shared Responsibility Payments for Large Employers
  3. Reporting requirements on Large Employers
  4. Health care plan design for employers, in general

THE INDIVIDUAL MANDATE

2015 saw the first filings of federal income tax returns (for the 2014 tax year) where taxpayers were required to state whether they and their dependents had medical coverage, for the full year. Those taxpayers failing to indicate they had such coverage were required to either:

  1. Claim an exemption for some or all of 2014 on Form 8965
  2. Make a shared responsibility payment for any month in which there was no health care coverage and no exemption applied.

The shared responsibility payment for failing to have adequate coverage is increasing for 2015. The payment for failure to have Minimum Essential Coverage for 2014 was the greater of $95 for an adult (up to $285 for a family) or 1% of Household Income (essentially the combined income of a taxpayer, dependents and spouse, if a joint return is filed) over the filing threshold for the tax year. This payment increased in 2015 to the greater of $325 for an adult (up to $975 for a family) or 2% of Household Income in excess of the filing threshold for 2015. The payment will increase again in 2016 to $695 for an adult ($2,085 for a family) or 3% of Household Income over the filing threshold. For each year, the penalty is capped at the national average cost of a Bronze plan under ACA.

2015 also saw a number of issues arise with respect to the Premium Tax Subsidy. Under the Affordable Care Act, the government pays a portion of Exchange-based premiums for insureds with income between 100% and 400% of the Federal Poverty Level who either: a) are not eligible for employer-provided Minimum Essential Coverage, or b) are eligible for employer-provided Minimum Essential Coverage but such coverage is either unaffordable or does not provide “minimum value.” The government-provided subsidy is accomplished through a tax credit which is calculated on the taxpayer’s federal income tax return.

The intention of the law is to encourage states to set up Exchanges through which residents can purchase health insurance. However, most states declined to set up Exchanges, so Federal Exchanges were created to provide the insurance products. Since the text of the law explicitly states that the premium tax credit is to be provided by State Exchanges, opponents of the law argued that those acquiring insurance under a federally run Exchange were not entitled to the credit.

After contrary decisions in two circuit courts, the issue was brought to the U.S Supreme Court, which issued a 6 to 3 ruling in June 2015 that the Premium Tax Subsidy applies even to those getting coverage under a federally-run Exchange. A different result would have raised a number of questions. Since many individuals on Federal Exchanges had already filed their tax returns and taken the credit, would they owe money back to the government? Would Congress craft a one-year exception for 2014 to allow these persons the benefit from the tax credit? Additionally, some governors who had refused to set up State Exchanges were, in anticipation of the Supreme Court ruling, adverse to the Administration, discussing the option of creating new State Exchanges so that their residents could get the tax benefit. The Supreme Court decision avoided the needto address these political issues.

One impact of the Supreme Court decision is that the Employer Mandate for Applicable Large Employers is effective for employers located in states with Federal Exchanges. A shared responsibility payment can be assessed on an Applicable Larger Employer only if a full-time employee gets coverage under an Exchange and qualifies for the Premium Tax Credit. If the credits were barred for employees on a Federal Exchange, then the triggering event for the employer penalty could not occur in these states. For this reason, the Supreme Court case was brought primarily by business interests.

Some individuals filing their 2014 income tax returns experienced a problem with taking the benefit of the credit in advance. On enrollment into an Exchange health policy, the potential premium tax credit is estimated. The estimate is generally based on a prior year’s income with adjustments for expected changes in the current year. An individual who is expected to be eligible for the credit is given a choice of: a) paying the health insurance premium in full and taking the credit on the filing of the tax return for the year, or b) getting an advance of all or a portion of the expected tax credit through a reduction of the monthly premiums. If the latter method is selected, there is a “true-up” on the filing of the tax return. If the total of the monthly subsidies exceeds the tax credit calculated on the tax return (based on actual income figures for the tax year), then the difference is owed back to IRS. For 2014, the amount owed back under this rule was subject to caps, and this caused the selection of monthly subsidies to be a better choice, even if there was a payment due back to the government. The caps for single filers were $300 where Household Income was less than 200% of Federal Poverty Level (FPL); $750 if between 200% and 300% FPL; and $1,250 if between 300% and 400% of FPL. The caps were doubled for those using a different filing status. The same caps will apply for 2015.

EMPLOYER MANDATE (SHARED RESPONSIBILITY PAYMENT FOR APPLICABLE LARGE EMPLOYERS)

A number of developments have occurred in 2015 with respect to the application of the ACA to Applicable Large Employers, including the issuance of final regulations and IRS guidance.

An Applicable Large Employer (ALE) is subject to penalties (commonly referred to as a “shared responsibility payment” or a “pay-or-play” penalty) when a full-time employee with Household Income between 100%-400% FPL meeting certain requirements receives a tax credit from the government to buy coverage through a public Exchange and receives a tax premium credit. Such employee is eligible for the credit if he/she either (i) is not offered employer group health plan coverage (including dependent coverage), or (ii) is offered employer group health plan coverage which is either unaffordable (based on the employee’s required participation in the lowest cost single-only coverage exceeding 9.5% of Household Income) or does not provide “Minimum Value.” Note that the penalty applies only where an actual full-time employee gets subsidized coverage under a government Exchange and does not apply where full-time equivalent employees get such coverage.

An Applicable Large Employer is one with 50 or more full-time equivalent employees in the prior calendar year. A full-time employee is one who works on average 30 hours per week or 130 hours per month. Other employees not meeting this definition (non-full time employees) have their hours counted for a month and divided by 120 to produce the number of full-time equivalent employees. The number of full-time equivalent employees is added to the actual number of full-time employees to determine if the 50-employee limit is satisfied. In making this determination, related employers (i.e., members of controlled groups of businesses or affiliated service groups) must aggregate their employees. While the ACA Employer Mandate rules were originally scheduled to apply on January 1, 2014, their implementation was delayed by the Administration until 2015. The final regulations provide a number of transition rules which can delay the application of the penalty.

  1. Fiscal Year Plans: Since many health plans are offered on a non-calendar year basis, IRS offered relief from the application of the penalty for the months in 2015 prior to the start of the 2015 plan year. There are three different types of relief under this transition rule. However, the exception does not apply to all fiscal year plans. In order to benefit, the ALE must have maintained a non-calendar year plan as of December 27, 2012 and not have modified the plan after that date so that the plan begins at a later date.
  1. The first exception applies to particular employees who would have been eligible for coverage under the terms of the plan in effect on February 9, 2014 (whether or not coverage is taken). There is no penalty for failure to cover such employee for months in 2015 before the start of the 2015 plan so long as “minimum value” coverage is offered to such employee no later than the first day of the 2015 plan year.

    The other two exceptions apply where the employer had broad range plans based on total employees or full-time employees.

  2. The exception with respect to all employees provides that if the employer had, as of any date in the 12 months ending on February 9, 2014, at least 25% of all of its employees covered under the plan; or offered coverage under the plan to at least 33% of its employees during the open enrollment period that ended most recently before February 9, 2014; then no penalty applies to employees before the start of the 2015 plan who are offered "minimum value" coverage no later than the first day of the 2015 plan year.

  3. The exception based on full-time employees is similar to that discussed in (b) above, except that it looks only at full-time employees (instead of all employees) and uses different percentages: 33% of full-time employees covered (instead of 25%) and 50% of fulltime employees offered coverage (instead of 33%).
  1. Medium-Large Employers: Employers with 50 to 99 full-time equivalent employees in 2014 who meet certain criteria will not be subject to the Large Employer penalty until 2016. To take advantage of this extension, the employer must maintain the overall workforce size and hours of service from February 2, 2014 to December 31, 2014. This rule is intended to discourage a reduction in workforce or shifting of employees from full-time to part-time. However, adjustments due to bona fide business reasons will not affect eligibility. Additionally, the employer cannot eliminate or materially reduce the healthcare coverage in effect on February 9, 2014 through the end of the plan year which begins in 2015. To satisfy this latter condition, the employer must continue to offer coverage to eligible employees and contribute either (a) 95% of the dollar amount of the contribution for single coverage, or (b) the same or higher percentage of single coverage in effect on February 29, 2014. The employer must maintain a Minimum Value Plan and not alter or reduce the class of employees who were eligible for coverage on February 9, 2014. Employers with 50 to 99 full-time equivalent employees who do not meet these conditions are subject to the Applicable Large Employer rules on January 1, 2015.

  2. Determining Large Employer Status: Determination of large employer status for any year is normally based on the number of full-time and full-time equivalent employees in the prior calendar year. This requires averaging the number of each for every month in the prior calendar year. The final regulations provide that for 2015 (and for 2016 for certain Medium Large Employers who will be subject to the Large Employer rules for the first time in that year), the employer can select a timeframe of at least six consecutive months in the prior calendar year to determine Large Employer status. This may produce some important planning opportunities for employers nearing the 50 and 100 employee levels, whose employment levels shift during the year.

  3. Large Employer Penalties for ALE with 100 or more employees: The ACA provides two different penalties on Large Employers. One of these penalties applies to an ALE who does not provide insurance coverage to employees. The annual penalty equals $2,000 times the total number of actual full-time employees over 30. For 2015, this 30-person exclusion is increased to 80 for employers with 100 or more employees.

  4. Coverage Rule: Under the ACA, an employer is considered to provide coverage to its employees where it offers coverage to 95% of full-time employees and their dependents ["Coverage Threshold"]. Generally, coverage must begin within 90 days of the date of service. For 2015, the Coverage Threshold is reduced to 70% of full-time employees and their dependents.

REPORTING REQUIREMENTS

IRC section 6056 requires an Applicable Large Employer to file information returns with respect to its full-time employees for 2015. Even employers who are exempted from the Applicable Large Employer penalties under the transition rules discussed above are still required to file these information returns.

Applicable Large Employers will be required to file a Form 1094-C to the IRS and form 1095-C Individual Statements to each full-time employee. Recent trade bill legislation increased the penalties for failure to file information returns, which include the ACA information returns. A $250 penalty can apply to a failure to file the form with IRS with a total cap of $3 million. An additional $250 penalty can apply to a failure to provide the corresponding form to the employee, subject to the same overall cap. Smaller caps apply to small businesses. If there is an intentional disregard of the filing requirements, IRS can assess this penalty of$500 or 10% of the total amount required to be reported, if greater.

The IRS issued guidance concerning these annual requirements and drafts of the information returns. The forms will be filed first in 2016, providing 2015 data. The provide the type of information required includes:

  • Name, address, EIN of employer.
  • Address and phone number of employer contact person.
  • Calendar year.
  • Certification as to whether full-time employees and their dependents could enroll in Minimum Essential Coverage.
  • Number of full-time employees by month.
  • For each full-time employee: a) months MEC is offered, b) employer share of the lowest cost premium for self-only coverage, c) name, address and social security number and months employee was covered under the plan.
  • Certain Indicator Codes providing other information required.

The Service has determined that if the employer files 250 of these forms with the IRS, the Large Employer forms will be required to be filed electronically.

IRS has posted additional guidance concerning the filing of Affordable Care Act Information Returns (AIR). It has published in draft form:

  • Publication 5165: Guide for Electronically Filing Affordable Care Act Information Returns (AIR) for Software evelopers and Transmitters.
  • Publication 5164: Test Package for Electronic Filers of Affordable Care Act Information Returns.
  • An Air Submission and Reference Guide.
Each of these is to be finalized later in the year. AIR refers specifically to the electronic system developed to accept electronic filings of the Forms 1094-B, 1095-B, 1094-C and 1095-C. AIR will process the submissions and provide a status and acknowledgement for “transmitters” and “issuers.” A transmitter is a third party sending the electronic information return data directly to IRS on behalf of a business which is required to file. An issuer is a business filing its own ACA information return regardless of whether it is required to file electronically (transmitting 250 or more of the same type of information return) or it is voluntarily filing electronically. IRS has created a process for filers to qualify to file the forms electronically:
  1. Responsible officials and contacts for transmitters and issuers must register in IRS e-services with their personal information.
  2. A responsible official for the organization will initiate and sign the ACA information return application for the transmitter’s or issuer’s ACA Transmitter Control Code (TCC).
  3. Testing is required. Under Publication 5164, test files must be submitted in the XML format, and the submitter must verify that IRS processed the transmission and returned a receipt ID, acknowledgement and associated error file.

All affected employers should begin considering the process that will be used for filing the forms electronically (either required or voluntary).

  • If an applicable large employer is using a third party transmitter (e.g., payroll vendor, CPA firm, or other entity), it will not have to take much action other than to confirm the role of the third party as a transmitter.
  • If an applicable large employer intends to electronically file the forms itself, then it must take the steps discussed above in order to be able to file.

Those familiar with using the IRS Filing Information Returns Electronically (FIRE) system must note that this system does not support the filing of the ACA Information Returns. Transmitters and issuers must use the AIR system and cannot use FIRE.

HEALTH CARE PLAN DESIGN FOR EMPLOYERS IN GENERAL

Based upon the discussion above, employers with fewer than 50 full-time and full-time equivalent employers could believe that they are not affected by the ACA rules.

Potential $36,500 Penalty per Employee: When the ACA removed pre-existing condition restrictions from individual policies, many employers considered using a “defined contribution” strategy where employees would purchase individual health insurance policies and the employer would provide a fixed dollar amount to assist paying the premiums. This would allow employees to get a potentially lower cost plan or one tailored to their particular needs. The employer contribution towards an employee’s health plan would be fixed and, based on decades of tax law, the employer contribution would be nontaxable to the employee.

In 2013, IRS and Department of Labor issued guidance concerning employer payments of all or a portion of employee costs for individual health insurance policies (IRS Notice 2013-54 and DOL Technical Release 2013-3, which are identical). Both agencies considered whether these arrangements satisfied ACA “market reforms,” specifically, 1) the ban on annual dollar limits, and 2) provision of preventative care. The guidance concludes that there are no problems where an employer pays for or provides reimbursement for employee health insurance under an employer-sponsored group health insurance plan. In this case, the benefit can be provided pre-tax, and the reimbursement program will not be viewed separately from the underlying insurance. The group health insurance, which should conform to the required market reforms, is viewed together with the employer program.

A problem arises where the employer pays for employee costs of individual health policies. In this situation, the employer reimbursement program (whether the employer pays the premium directly or reimburses the employee for the cost) is considered a group health plan under the ACA and must separately comply with the ACA market reforms. The individual policies (which should conform to the new ACA rules) cannot be integrated with the reimbursement program in determining compliance with the new market reforms. Since the reimbursement program will fail the new requirements, this can expose the employer to a potential penalty of $100 per day per employee ($36,500 for the year). The market reform penalty includes a reasonable cause exception.

The prior guidance provided that certain arrangements can be excluded from this rule – i.e., an employer-sponsored arrangement under which an employee can choose either cash or an after-tax amount to be applied toward the individual health coverage. Some interpreted this guidance to mean that an after-tax benefit provided to the employee would not subject the employer to the $100 per day penalty. However, DOL and IRS issued separate Q&A notices at the end of 2014, providing that this conclusion may not be correct and that even after-tax benefits may be subject to the penalty.

In Notice 2015-17, while providing limited relief for 2014 and part of 2015 for certain employers, IRS still asserts that payments of all or part of the employees’ costs of individual health insurance (whether by a direct payment to the insurer or payment to reimburse employees) constitute a group health plan under the ACA. These reimbursement or payment programs cannot satisfy all of the market reforms required under the law and will cause imposition of the $100 per day penalty. The program remains a group health plan where the payment is linked to the purchase of individual health insurance.

The safe strategy is to make any reimbursement completely independent of the employee receiving health coverage and not to have the amount related to the employee’s cost of insurance.

The Notice provides relief from the penalty for 2014 and the period January 1 through June 30, 2015 for employers who are not Applicable Large Employers (ALEs). However, a penalty can apply for these employers after June 30, 2015. Employers subject to this relief do not have to file the new Form 8928, which is used to calculate the penalty for noncompliance with the new ACA Market Reforms.

However, relief is not extended to those who would be Applicable Large Employers. Since the $100 per day penalty can be abated under a reasonable cause provision, one approach is to file the Form 8928 with a zero penalty and include a request for abatement of the penalty.

The IRS position on employer reimbursements raised a technical issue for S corporations. A two percent shareholder must report payments made for health insurance by the corporation on its behalf as a taxable reimbursement. The individual is allowed a deduction in determining adjusted gross income on his/her individual tax return for the cost of self-employed health insurance. The question is whether, since the amount is treated like an employer reimbursement, this will cause imposition of the $100 per day penalty. In Notice 2015-17, IRS provided that until additional guidance is issued, but at least through 2015, the $100 per day penalty for market reform failures will not apply.

Many business groups have been lobbying Congress to pass legislation which would reverse this position on employer reimbursements.

CADILLAC PLAN EXCISE TAX

A revenue-raising provision of the ACA, referred to as the “Cadillac Tax,” takes effect in 2018. A 40% excise tax is imposed on the cost of coverage for health plans which exceed $10,200 for individual coverage and $27,500 for family coverage. Unfortunately, these costs do not necessarily apply solely to “rich” plans - particularly in certain areas of the country.

The excise tax is payable by health insurance issuers and sponsors of self-funded plans. It is unclear how insurance companies will allocate these costs – i.e., whether they will be spread across a group of policies or allocated specifically to “high benefit” plans. Assuming a direct allocation will be used, some employers are considering reducing benefits provided by their plans so as to avoid this tax. While the tax does not apply until 2018, many employers are considering current cuts to benefits so that employees will not experience a massive slash of benefits between 2017 and 2018. This includes increasing deductibles and out-of-pocket costs.

The Cadillac Tax has been the focus of discussion by the 2016 presidential candidates. Senator Sanders has said that he will work to repeal this tax. Hillary Clinton has said that she is open to changes in the law, including this tax. The Republican candidates are all committed to repealing the entire bill. This raises a question of whether there can be Congressional cooperation in changing only a part of the law (e.g., a repeal of the Cadillac Tax).