Line 15: Defined contribution and opt-out arrangements

Transcription

1 ACA Tip #14 Line 15: Defined contribution and opt-out arrangements Two other plan designs that can cause headaches when determining the correct amount to report on Line 15 of the 1095C are defined contribution plans (i.e. total comp plans, flex credit plans, and true cafeteria plans) and opt-out arrangements. First, some definitions: Defined contribution/total comp/flex credit plans Defined contribution plans have become popular lately, but that term is often used to refer to a lot of very different plan designs. In this context, we are using the term to refer to a plan design where employees are allocated a specific dollar amount of employer contributions (typically referred to as flex credits) which employees can then elect to apply to a wide variety of different benefits like health, dental, vision, health flex spending accounts (FSAs), dependent care assistance programs (DCAPs), life, short- and long-term disability (STD and LTD) policies, vacation/pto, etc. The precise list of benefits on which the flex credits can be spent and any restrictions on the use of those credits vary from plan to plan. If the flex credits are insufficient to cover the cost of benefits elected, the employee pays the difference, usually through pre-tax payroll deductions. Employees may or may not be allowed to receive any unused flex credits as cash, either dollar-for-dollar or on a discounted basis. In most cases flex credits must be run through a cafeteria plan to avoid adverse tax consequences. Opt-out arrangements/cash-in-lieu plans An opt-out arrangement (also referred to as a cash-in-lieu plan) is a plan design where an employee who is otherwise eligible for coverage under the health plan receives some amount of taxable compensation (an opt-out payment) in exchange for agreeing to waive that coverage. If the only requirement the employee must satisfy to receive the opt-out payment is to waive coverage on the employer s plan, the arrangement is called an unconditional opt-out arrangement. If the employee must satisfy additional conditions to receive the opt-out payment (e.g. provide proof of other health coverage) then the arrangement is called a conditional opt-out arrangement. As with our last two tips, we are going to look at several different employers, each with different premium contribution structures. Again, to keep things simple and focus on Line 15, we will make a few assumptions that will apply to each of our example employers: All employees are ACA full-time (ACA-FT) All plans provide minimum value (MV) coverage All plans offer coverage to eligible employees spouses and dependents Investments, securities and insurance products: NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT A DEPOSIT Please see final page for important disclosure information >>

2 Line 15: Defined contribution and opt-out arrangements Page 2 of 5 All employees elections remain fixed throughout the year and there are no other changes that would affect the codes reported on Line 14 and 16 All flex credits and cash-in-lieu benefits are running through the cafeteria plan and are properly documented in the cafeteria plan documents Employer 1: Kitchen Sync Kitchen Sync offers a defined contribution plan where employees receive $1,000 a month in flex credits which can be spent on the following benefits: Health (single or family) Dental (single or family) Vision (single or family) STD and LTD (employee only) Health FSA (capped at $500 per year) DCAP Any unused flex credits can be taken as cash compensation at a 50% discount. Kitchen Sync offers one fully insured health plan under the defined contribution plan. The cost of single coverage before applying any flex credits is $600 per month; the cost of family coverage before applying any flex credits is $1,500 per month. Earl elects family coverage on the health and dental plans; STD and LTD coverage; a DCAP contribution; and waives all other coverage. The $1,000 flex credits are applied toward the cost of health coverage and Earl pays the balance of the cost for his health and other coverage through pre-tax payroll deductions. Fiona elects single coverage on the health, dental and vision plan and waives all other coverage. The $1,000 flex credits fully cover the cost of Fiona s health, dental and vision coverage and she receives the remaining flex credits as taxable cash compensation, discounted at 50%. The reporting issue created by a defined contribution plan is to what extent are the flex credits counted when determining the lowest cost single health coverage available to the employee. Do we apply all of the credits to the health plan first? Do we allocate a pro rata share of the credits to the health plan? Do we use the employee s actual election to determine how to apply the credits? Or do we apply none of the credits and report the full cost of single coverage? There are three conditions that must be met in order to count the flex credits towards the employee cost of single coverage. The flex credits: Must be able to be used to purchase minimum essential coverage (MEC) Can only be used to purchase benefits that cover medical expenses under 213 of the tax code (e.g. health, dental, vision, etc.) Cannot be received as cash or other forms of taxable compensation (e.g. vacation/pto days) If all of these conditions are met, then all of the flex credits are applied towards the cost of single coverage on the health plan. If any of the conditions are not met, then none of the flex credits are applied to the cost of single coverage.

3 Line 15: Defined contribution and opt-out arrangements Page 3 of 5 So if we look at Kitchen Sync s plan, the flex credits: Can be used to purchase MEC health coverage Can be used to purchase non- 213 benefits (STD/LTD, DCAP) Can be received as cash Kitchen Sync s plan fails two out of the three conditions necessary to be allowed to count flex credits towards the cost of coverage, therefore none of the flex credits can be applied to the cost of single coverage. The amount reported on Line 15 is the full cost of single coverage on Kitchen Sync s health plan ($600) regardless of the employee s actual election of how to spend their flex credits. Earl and Fiona Employer 2: Narrow Tailors Narrow Tailors offers a defined contribution plan where employees receive $1,000 a month in flex credits which can be spent on the following benefits: Health (single or family) Dental (single or family) Vision (single or family) Health FSA (capped at $500 per year) Narrow Tailors provides employer paid STD/LTD coverage; employees do not spend their flex credits to obtain such coverage. Employees may also elect DCAP coverage, but must pay for those benefits themselves. They cannot apply flex credits towards the DCAP. Any unused flex credits are forfeited and cannot be received as cash. Narrow Tailors offers one fully-insured health plan under the defined contribution plan. The cost of single coverage before applying any flex credits is $600 per month; the cost of family coverage before applying any flex credits is $1,500 per month. Earl elects family coverage on the health and dental plans; a DCAP contribution; and waives all other coverage. The $1,000 flex credits are applied toward the cost of health coverage and Earl pays the balance of the cost for his health and other coverage through pre-tax payroll deductions. Fiona elects single coverage on the health, dental and vision plan and waives all other coverage. The $1,000 flex credits fully cover the cost of Fiona s health, dental and vision coverage and she forfeits her remaining flex credits. Narrow Tailors defined contribution plan does satisfy the requirements to count the flex credits towards the cost of coverage. The flex credits: Can be used to purchase MEC health coverage Can only be used to purchase 213 benefits (health, dental, vision, Health FSA) Cannot be received as cash or other taxable compensation

4 Line 15: Defined contribution and opt-out arrangements Page 4 of 5 So Narrow Tailors is allowed to take into account the flex credits when determining the cost of coverage to report on Line 15. Since those flex credits exceed the cost of single coverage on the lowest cost plan, the amount reported on Line 15 is $0.00 (do not leave Line 15 blank if employees make no contribution to the cost of single coverage; you must enter 0.00 ). Earl and Fiona Employer 3: Cashes, Inc. Cashes offers one health plan. The employee cost of single coverage on Cashes plan is $100 per month and the cost of family coverage is $500 per month. Employees who waive coverage on Cashes plan receive an opt-out payment of $50 per month. Earl enrolls in single coverage on Cashes health plan. Fiona waives coverage on Cashes plan and receives an additional $50 per month in taxable compensation. In an unconditional opt-out arrangement, an employee who elects health coverage not only pays the premium cost of enrolling on the health plan but is also giving up the additional compensation they would receive if they had waived coverage and received the opt-out payment. Therefore the true cost of enrolling in single coverage on the health plan is the premium cost plus the amount of the opt-out payment. Take Earl for example he enrolled in single coverage which costs him $100 a month. But by enrolling on the health plan he also had to give up the extra $50 a month in compensation that Fiona receives for waiving coverage. In other words, the real cost to Earl (or any other employee) of enrolling in single coverage is $150 $100 in direct premium contribution and $50 in lost compensation. So for an unconditional opt-out arrangement the amount of the opt-out payment must be added to the employee health plan contribution when reporting the cost of coverage on Line 15. But the IRS has indicated that if the opt-out arrangement is conditional then the opt-payment does not need to be added to the cost of coverage. Unconditional opt-out arrangement Earl

5 Line 15: Defined contribution and opt-out arrangements Page 5 of 5 Fiona Conditional opt-out arrangement Earl Fiona Temporary relief The IRS has provided temporary relief for employers with unconditional opt-out arrangements that were in effect on December 16, 2015; these employers are not required to add the opt-out payment to the cost of coverage when reporting the cost of coverage on the 1095C. Click here to access the archive of ACA reporting tip articles. For more information, contact us. Investments, securities and insurance products: Phone: Info@AssociatedBRC.com NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT A DEPOSIT Insurance products are offered by licensed agents of Associated Financial Group, LLC (d/b/a Associated BRC Insurance Solutions in California). The financial consultants at Associated Financial Group are registered representatives with, and securities and advisory services are offered through LPL Financial LPL, a registered investment advisor and member FINRA/SIPC. Associated Financial Group uses Associated Benefits and Risk Consulting ( ABRC ) as a marketing name. ABRC is a wholly-owned subsidiary of Associated Bank, N.A. ( AB ). AB is a wholly-owned subsidiary of Associated Banc-Corp ( AB-C ). LPL is NOT an affiliate of either AB or AB-C. AB-C and its subsidiaries do not provide tax, legal, or accounting advice. Please consult with your tax, legal, or accounting advisors regarding your individual situation. ABRC s standard of care and legal duty to the insured in providing insurance products and services is to follow the instructions of the insured, in good faith. Copyright 2017 by Associated Financial Group, LLC. (12/17)