Tech Flex December 2015 SPECIAL EDITION, Volume XIII NATIONAL ACCOUNT SERVICES

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1 Tech Flex December 2015 SPECIAL EDITION, Volume XIII NATIONAL ACCOUNT SERVICES

2 Topics Covered In This Issue Appropriations and PATH Acts Enacted into Law: o Permanent Transit Parity o ACA Cadillac Tax Effective Date Delayed o Future Changes to Forms W-2 IRS Releases Guidance on Health FSA Carryover and COBRA

3 3 NOTE: This Special Edition includes information on events that transpired after the release of the December 2015 Tech Flex. These events include the enactment of the Consolidated Appropriations Act of 2016 and the Protecting Americans from Tax Hikes Act of 2015 ( PATH Act ) and the release of Notice by the Internal Revenue Service. APPROPRIATIONS AND PATH ACTS ENACTED INTO LAW On December 18, 2015, President Barack Obama signed into law the Consolidated Appropriations Act of 2016 and the Protecting Americans from Tax Hikes Act of 2015 (PATH). These Acts had previously been passed by the United States House and Senate on votes of and respectively. This legislation, among numerous other things, provided for the following: Permanent Transit Parity Two Year Delay of ACA Cadillac Tax Future Changes to Forms W-2 PERMANENT TRANSIT PARITY The PATH Act implements on a permanent basis transit parity with parking. Previously transit parity had been implemented but only a temporary basis. PATH means that the same limits that an employee may receive on a tax-excluded basis (employee pre-tax salary reductions plus employer provided amounts) in a month will apply to both parking and transit expenses on a permanent basis. Historically, higher limits were provided for parking expenses than transit expenses. For example in 2015, the transit limit is $130 per month and the parking limit is $250 per month. The following is a description of the Transit Parity provision as released by the Senate Finance Committee. Section Extension of parity for exclusion from income for employer-provided mass transit and parking benefits - The provision permanently extends the maximum monthly exclusion amount for transit passes and van pool benefits so that these transportation benefits match the exclusion for qualified parking benefits. These fringe benefits are excluded from an employee s wages for payroll tax purposes and from gross income for income tax purposes. Limits for 2016 On October 21, 2015, Internal Revenue Service (IRS) announced via Revenue Procedure that the dollar limitation on employee salary reductions for contributions in 2016 for transit and parking expenses would be $130 and $255 respectively. With the enactment of PATH, the employee salary reduction limit for 2016 is $255 per month for both transit and parking expenses. It is important to note that any employer contributions count toward the monthly limit. Treasury Regulation Q/A 12 stipulates that an employee salary reduction election must be executed for a specified future date or a fixed amount of qualified transportation fringes to be provided for a specified future period (such as qualified parking to be used during a future calendar month) The election must contain the date of the election, the amount of the compensation to be reduced, and the period for which the benefit will be provided.

4 4 Consequently, absent any guidance from the IRS to the contrary, any change to the election amount (e.g., from $130 to $255) already elected by an employee for January 2016 benefits must be accomplished no later than December 31, 2015 in order to be effective for transit benefits received in January of Retroactive Effective Date PATH provides that transit parity with parking shall apply to months after December 31, Consequently the transit parity will be effective back to benefit months beginning on or after January 1, Retroactive implementation of transit parity to a past year or a year in progress has been experienced previously. Specifically, President Obama on December 19, 2014 signed the Tax Increase Prevention Act of 2014 (H.R. 5771) into law. One of the relevant provisions included in this law was the extension of Transit Parity through the end of Originally, transit parity was allowed to expire at the end of The enactment of H.R resulted in a retroactive increase in the maximum allowable monthly amount for transit from $130 to $250 for Subsequently on January 8, 2015, the IRS issued Notice (Notice), which provided guidance related to the increased monthly transit benefit exclusion from $130 per participating employee to $250 per participating employee, retroactively, for the period January 1 through December 31, In that notice, the IRS stipulated that employer and employees may not retroactively increase the monthly transit benefit for 2014 to take advantage of the increase in the excludable amount for transit benefits in However, if transit benefits were provided during 2014 in excess of $130 (up to $250), adjustments must be made to exclude the excess amount (up to $250 per month) from the employee s income and wages on Form W-2. The Notice also provided a special administrative procedure permitting employers to apply all related adjustments for 2014 to the fourth quarter 2014 Form 941, and in filing the 2014 Forms W-2, Wage and Tax Statement. It is anticipated that the IRS will be issuing similar guidance in relation to the PATH legislation and once issued, ADP will be providing you with additional information on the topic. TWO YEAR DELAY OF ACA CADILLAC TAX Title I of Division P of The Appropriations Act contains three provisions relating to the excise tax for high cost plans (Cadillac Tax) Year Delay -- Section 101 of that Title postpones the effective date of the excise tax by two years, meaning that the excise tax will not be effective until The dollar amount of what is considered a high cost health plan will be increased also to reflect the delay in the excise tax s effective date. 2. Deductibility of Excise Tax Current law provides that the excise tax paid is not deductible for tax purposes. Section 102 reverses that provision so that the payment of the excise tax is deductible. 3. Age and Gender Adjustment of Dollar Limit Under current law, the dollar amount of what is considered a high cost health plan can be adjusted based on age and gender characteristics of the employer, in a manner specified in the law. Section 103 directs the Comptroller General of the United States, in consultation with the National Association of Insurance Commissioners (NAIC) to report to the Congress on a more suitable manner of making the adjustments based on age and gender characteristics.

5 5 Background: Under the ACA as originally enacted, as of January 1, 2018, a 40 percent excise tax was to be imposed on coverage providers in months where the aggregate cost of employersponsored health coverage for the employee exceeds 1/12 of $10,200 for individual coverage and 1/12 of $27,500 for family coverage. However, the amounts are increased to $11,850 and $30,950 for retirees and high risk professions. These threshold amounts are increased by the consumer price index (CPI) plus 1 percent in 2019 and increased by the CPI for year 2020 and beyond. Coverage providers are defined to include the following: In the case of fully insured plans, the health insurer. In the case of health savings account contributions, the employer making the contributions. In the case of a self-insured plan, the person who administers the plan. For example, a third-party administrator. The coverage subject to the high cost tax includes the following: All accident and health coverage provided to the employee by the employer, even if paid for with after-tax dollars by the employee EXCEPT: o accident and disability insurance o long term care o hospital indemnity or specified disease coverage paid with after tax dollars Both non-elective and pre-tax salary reduction contributions to a health flexible spending arrangement (health FSA). Employer contributions (including employee salary reductions) to a health savings account. It is important to note that the cost of the coverage would be determined by combining the amounts that both the employer and the employee would contribute toward the purchase of the coverage. However, the cost of coverage calculation for a health FSA is determined by adding both employee and employer contributions PLUS any amount reimbursed under the health FSA in excess of the employee and employer contributions. For example, an employee elects $2,000 and contributes $1,000 prior to termination but is reimbursed $1,750 under the uniform coverage rule. The total cost of coverage for the health FSA is $1,750 Medical Device Tax The Appropriations Act implements a two-year suspension (2016 and 2017) of the 2.3% medical device tax. As background, under the ACA, effective January 1, 2013, manufactures and importers of medical devices are required to pay a 2.3 percent tax on sales of certain medical devices. Generally, under the final regulations, a taxable medical device is a device that is listed as a device with the FDA under section 510(j) of the Federal Food, Drug and Cosmetic Act, and 21 CFR part 807, pursuant to FDA requirements. The new tax does not apply to sales of eyeglasses, contact lenses, and hearing aids. The new tax also does not apply to the sale of any other devices that are of a type generally purchased by the general public at retail for individual use (the retail exemption).

6 6 Health Insurer Tax The Appropriations Act provides for a one-year suspension in 2017 of the tax on health insurers. As background, the ACA imposes a fee on each covered entity engaged in the business of providing health insurance for United States health risks. The term covered entity means an insurance company, insurance service, or insurance organization (including certain health maintenance organizations,) which is licensed to engage in the business of insurance in a State and which is subject to State law which regulates insurance. The term covered entity generally does not include a self-insured employer, a governmental entity, certain nonprofit corporations and certain voluntary employees beneficiary associations (VEBAs). The annual fee for each covered entity is equal to an amount that bears the same ratio to the applicable amount as the covered entity s net premiums written for health insurance of United States health risks during the data year taken into account bears to the aggregate net premiums written for health insurance of United States health risks of all covered entities during the data year taken into account. FUTURE CHANGES TO FORMS W-2 The newly enacted legislation provides three provisions that specifically impacted Form W-2, Wage and Tax Statement. Background Every employer engaged in a trade or business who pays remuneration, including noncash payments, of $600 or more for the year (or all amounts, if any income, social security, or Medicare tax was withheld) for services performed by an employee must file a Form W-2 for each employee from whom: Income, social security, or Medicare tax was withheld; or. Income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholding on Form W-4, Employee's Withholding Allowance Certificate. Accelerated Forms W-2 Filings: Section 201 of PATH - Modification of filing dates of returns and statements relating to employee wage information and nonemployee compensation to improve compliance. This provision requires Forms W-2, W-3, and returns or statements to report nonemployee compensation (e.g., Form 1099-MISC), to be filed on or before January 31 of the year following the calendar year to which such returns relate. Generally this the same date as the due date for employee and payee statements. The provision also provides additional time for the IRS to review refund claims based on the earned income tax credit and the refundable portion of the child tax credit in order to reduce fraud and improper payments. The provision is effective for returns and statements relating to calendar years after the date of enactment (e.g., filed in 2017).

7 7 Safe Harbor for de Minimis Errors on Forms W-2 Section 202 of PATH - Safe harbor for de minimis errors on information returns and payee statements establishes a safe harbor from penalties for the failure to file correct information returns and for failure to furnish correct payee statements by providing that if the error is $100 or less ($25 or less in the case of errors involving tax withholding), the issuer of the information return is not required to file a corrected return and no penalty is imposed. A recipient of such a return (e.g., an employee who receives a Form W-2) can elect to have a corrected return issued to them and filed with the Internal Revenue Service (IRS). The provision is effective for returns and statements required to be filed after December 31, Section 202 provides that the IRS may issue regulations interpreting these provisions, including restrictions to avoid abuse. Truncated Social Security Numbers on Forms W-2: Section 409 of PATH - Extend Internal Revenue Service authority to require truncated Social Security numbers on Form W-2. This provision authorizes the IRS to promulgate a regulation to permit employee Social Security Numbers to be truncated on Forms W-2 (e.g., XXX-XX-9999). The provision is effective immediately; however, the IRS must first issue regulations, most likely making the provision effective in 2016 (for Forms W-2 filed in 2017). IRS RELEASES GUIDANCE ON HEALTH FSA CARRYOVER AND COBRA On December 16 th, the Internal Revenue Service (IRS) published Notice , which provides clarifying guidance on the application of various provisions of the Affordable Care Act (ACA) to employer-provided health coverage. This guidance, among other topics, addresses the Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage rules and how they apply to carryover of unused amounts in healthcare flexible spending accounts (FSAs) from one year to the next pursuant to Notice The following is a summary of Notice guidance. Any unused amount remaining at the end of the plan year in a healthcare FSA that is carried over to a subsequent plan year pursuant to Notice and the particular plan provisions is properly included in determining the amount of the benefit a COBRA qualified beneficiary is entitled to receive (and therefore whether the participant may be eligible for COBRA with respect to the healthcare FSA) during the remainder of the plan year in which a qualifying event occurs. Calculating of the maximum amount a plan may charge (the 102 percent of the applicable premium) for COBRA continuation coverage is based on the applicable premium for non-cobra beneficiaries, which is the cost to the plan of providing coverage for the same period. The maximum benefit that an employee is entitled to receive under the healthcare FSA for the year does not include unused amounts carried over from a prior year. Note an employer cannot charge during the period the carryover is available if no other healthcare FSA benefit is available. If a healthcare FSA that allows carryovers of unused amounts for similarly situated non-cobra beneficiaries, then the healthcare FSA is obligated to allow carryovers by similarly situated COBRA beneficiaries, under the same

8 8 terms. However, the carryover is limited to the COBRA continuation period. Also, neither (i) the ability for those COBRA beneficiaries to elect additional salary reductions for subsequent years nor (ii) access to employer contributions during the carryover period is required. It is permissible for a healthcare FSA to limit the availability of the carryover of unused amounts (subject to the $500 limit) to individuals who have elected to participate in the healthcare FSA in the subsequent year. This limitation may be imposed even if the plan requires a minimum salary reduction election to participate in the healthcare FSA for that subsequent year. A healthcare FSA may limit carryover of unused amounts to some maximum period (e.g., carryover with no subsequent year election could be designed to continue only through the end of that year) and may require forfeiture at the exhaustion of that period. Please find below a link to Notice ADP expects to issue an Eye on Washington addressing the remaining items included in the guidance after the New Year. ADP National Account Services does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter is provided solely as a courtesy and should not be construed as legal advice. The information in this newsletter represents informational highlights and should not be considered a comprehensive review of legal and compliance activity. Your legal counsel should be consulted for updates on law and guidance that may have an impact on your organization and the specific facts related to your business. ADP, the ADP logo and IN THE BUSINESS OF YOUR SUCCESS are registered trademarks of ADP, LLC. Copyright 2014 ADP, LLC. All rights reserved. **Please note that the information provided in this document is current as of the date it is originally published.**