Health care reform requires large employers (i.e. those with 50 or more full-time and full-time equivalent employees) to provide quality/affordable health coverage to full-time employees (i.e. those that work at least 30 hours per week) or pay a penalty. The statute also requires most individuals to have health coverage or pay a penalty. The IRS is charged with assessing and collecting those amounts. To that end, the IRS has developed new forms so it can gather necessary data from employers to enforce the law.
Large employers (as previously defined) are required to prepare, distribute and file IRS Forms 1094-C and 1095-C. Small employers (i.e. those with fewer than 50 full-time and full-time equivalent employees) are not required to complete any forms UNLESS the small employer is sponsoring a self-funded health plan. In that case, the small employer has to complete, distribute and file IRS Forms 1094-B and 1095-B.
The IRS Forms 1094 and 1095 are similar to IRS Forms W-2 and W-3. IRS Form 1094 is a transmittal sheet like the W-3, and IRS Form 1095 is like a W-2. That is, the employer completes IRS Form 1095 and distributes it to the employee and then completes IRS Form 1094 and files that form and all the 1095 Forms with the IRS. The original deadline for passing out IRS Form 1095 to employees was Feb. 1, 2016, and the deadline for filing IRS Forms 1094 and 1095 with the IRS was Feb. 29, 2016, if the forms were submitted in paper format and March 31, 2016, if the forms were submitted to the IRS electronically.
The new deadline for handing out IRS Forms 1095 to employees is now March 31, 2016, and the deadline for submitting IRS Forms 1094 and 1095 to the IRS is March 31, 2016, if submitted in paper format and June 30, 2016, if submitted electronically.
The government has indicated it will not assess penalties if the employer makes a good faith attempt to comply with the new reporting requirements. However, failing to meet the new deadlines is not, according to the government, a good faith attempt. As a result, employers face potential penalties for failing to distribute and file the forms on time. The penalty can be up to $250 for each form not to exceed $3 million.
Cash Out Plans Under Attack
As health plan premiums continue to soar, cash out plans have become more popular. A typical cash out plan is where the employer pays employees to waive out of the employer’s group health plan. The IRS has taken the position that cash out plans impact the cost of coverage for purposes of the employer mandate or play or pay rules under health care reform. As previously mentioned, large employers have to offer quality/affordable health coverage to full-time employees. The amount employees have to pay for single coverage under the employer’s group health plan determines if that coverage is considered “affordable” for these purposes. This example illustrates the IRS’s latest position on cash out plans.
Assume the employer charges employees $100 per month for single coverage under the employer’s group health plan. Also assume the employer will give employees $200 per month if they waive coverage under the employer’s group health plan. The IRS is taking the position that employees who elect to participate in the employer’s group health plan are paying $300 per month for single coverage for purposes of the employer mandate or play or pay rules under health care reform. That is, the IRS is saying the employee is paying $100 per month for the coverage plus the $200 per month the employee could have gotten if he or she waived coverage.
The IRS said it plans to issue formal regulations that will require employers include the cash out amount when determining if the coverage is affordable under health care reform UNLESS the employee has to provide proof that he or she has other group health coverage (e.g. the employee is covered under his or her spouse’s group health plan) as a prerequisite for getting the additional cash. In other words, if the employee has to show proof of another group health plan, the final IRS regulations may not require the cash out amount be included in the cost of the coverage for purposes of the employer mandate or play or pay rules.
The new rules will not apply to the 2015 IRS Form 1095 going out to employees in 2016. In addition, the new rules will not apply to existing cash out plans that were in place by Dec. 16, 2015, for the 2016 calendar year. However, new cash out plans adopted after Dec. 16, 2015, will have to immediately begin including the cash out payments when determining the affordability of the coverage for purposes of the employer mandate or play or pay rules.
New Integration Rules for HRAs
HRAs are employer-funded plans that reimburse employees for medical expenses not covered by the employer’s insurance plan. The government has ruled that health reimbursement accounts or HRAs are group health plans under health care reform. As such, they have to comply with all the rules applicable to health plans. For example, the HRA has to provide unlimited annual and lifetime benefits. As a practical matter, no HRA would be able to satisfy all the rules. Therefore, the government has said that HRAs have to integrate with another group health plan. In other words, the HRA has to be linked to a group health plan that satisfies all the requirements of health care reform. Under this approach, the HRA, when combined with the group health plan, satisfies all the requirements under health care reform.
The government has recently issued rules saying that an integrated HRA can only reimburse claims incurred by the people covered under the group health plan. What this means is if the employee elected single coverage under the employer’s group health plan, then the HRA could not reimburse any claims incurred by the employee’s spouse and children. Said another way, the employee would have to elect family coverage under the employer’s group health plan for the HRA to pay claims for the employee’s family members.
Service Contract Act and Davis-Bacon Act
Those of you who do government contracting are familiar with the Service Contract Act and Davis-Bacon Act. These laws require employers to make fringe contributions either as additional wages or contributions for benefits. The IRS has ruled employers can treat those amounts as reducing the employee’s cost of health coverage for purposes of the employer mandate or play or pay rules under health care reform even if the employee takes the amount in cash. The IRS may change its position down the road, but these employers can rely on this current position for plan years beginning before Jan. 1, 2017.
2016 Health Care Reform Penalties
The penalties for not offering quality/affordable health coverage to full-time employees (i.e. those working at least 30 hours per week) are indexed. In other words, the employer mandate or play or pay penalty amounts are adjusted for inflation. The penalty for not offering any coverage to a sufficient percentage of full-time employees is listed at $2,000 for the year. For 2016, that annual amount, after inflation, is $2,160. If the employer does offer coverage to a sufficient percentage of full-time employees, but the coverage is not quality and/or affordable and a full-time employee gets a subsidy through the heath care exchange or marketplace, the penalty is listed as $3,000. For 2016, that annual penalty is $3,240 because of the inflationary factor.
EEOC Issues Proposed Wellness Rules
More employers are adopting wellness programs as a way to 1.) Encourage employees to adopt a healthier lifestyle and 2.) Reduce health plan premiums. Health care reform adopted rules governing wellness programs. Those rules are pretty complex, but spell out how employers could structure the program to comply with certain rules that preclude discrimination based on health status. The Equal Employment Opportunity Commission (EEOC) has aggressively challenged various aspects of wellness programs for quite some time claiming they were discriminatory.
Then, on Oct. 30, 2015, the EEOC issued proposed rules on wellness programs — more restrictive than ACA rules on the subject. The EEOC’s position is that wellness programs consisting of a health risk assessment or screening exam complies with the ADA only if employee participation is voluntary. However, a December 2015 federal court decision in Wisconsin disregarded the EEOC’s interpretation of the law and ruled that an employer may require compliance with a wellness program as a condition of participation in a group health plan.
The EEOC released two sets of proposed rules that are different from the rules under health care reform. The first set of EEOC rules address wellness programs and the Americans with Disabilities Act or ADA. The second set of EEOC rules talk about how the Genetic Information Nondiscrimination Act or GINA impacts wellness programs. While the rules under heath care reform are in final format, the EEOC rules are only in proposed format. Hopefully, the EEOC will modify the rules when they are released in their final version so that they more closely follow the rules under health care reform.
Paul Routh and Bob Dunlevey are attorneys at Dunlevey, Mahan + Furry. For more information, call 937.223.6003 or visit www.dmfdayton.com.