BEST PRACTICES FOR EMPLOYEE BENEFIT PLAN COMPLIANCE

Transcription

1 BEST PRACTICES FOR EMPLOYEE BENEFIT PLAN COMPLIANCE November 20, 2015 Presented by Wallingford Law, PSC J. Whitney Wallingford, Esq. Brian A. Ritchie, Esq. Wallingford Law, PSC 1050 Monarch Street, Suite 100 Lexington, KY Phone: (859) Copyright 2015 Wallingford Law, PSC All materials have been prepared for general information purposes only to permit you to learn more about the subject covered during this presentation. The information presented is not consulting, legal, tax or accounting advice, is not to be acted on as such, and is subject to change without notice.

2 1. OVERVIEW OF 403(B) PLANS 403(B) PLAN AND 457(B) PLAN COMPLIANCE ISSUES 1.1 Plan Document Requirement (a) Effective as of January 1, 2009, all 403(b) plans must have a written plan document (1) The written plan document must contain all material terms and conditions for eligibility, benefits, applicable limitations, distributions, and contracts available under the Plan. (2) The plan document must contain any optional features that are permitted in 403(b) plans (i.e., plan loans, hardship withdrawal distributions, etc.). (b) IRS Approval of Plan Documents (1) IRS has established a pre-approved plan program whereby it will issue an opinion or advisory letter to the plan sponsor (usually a vendor) which states that the plan document meets the requirements of Code section 403(b). (2) Employers which adopt a pre-approved plan document may rely on the IRS opinion or advisory letter that the form of the document meets the requirements of Code section 403(b). (3) IRS has also issued model plan language for public schools (Rev. Proc ). (4) Employers cannot apply to the IRS for an individual determination letter for their 403(b) plan. 1.2 Universal Availability Requirement (a) Universal Availability requires that all employees have the opportunity to participate in the 403(b) plan by making salary deferrals to the plan, with certain limited exceptions. (b) Employees must have an effective opportunity to make an election for salary reductions to the 403(b) plan. (1) Generally, provide written notice at least once each plan year of availability of election, period of time during which election may be made, and any other conditions on elections. (c) Exceptions to Universal Availability Requirement (1) The plan may require a minimum annual salary deferral contribution of $200 1

3 (2) The following classes of employees may be excluded from the plan: (i) Employees who normally work less than 20 hours per week (A) However - If employee works more than 1,000 hours in a year, must become eligible for plan. Employer must track hours of employees to determine who becomes eligible (B) Employer may use this exclusion only if all employees in this classification are excluded. (ii) Employees who are eligible to participate in a section 457(b) eligible governmental plan, a 401(k) plan or another 403(b) plan of the employer. (iii) Nonresident aliens with no U.S. source income (iv) Employees who are students performing services described in Code section 3121(b)(10). (d) If an employer utilizes any of the permitted exclusions, the exclusions must be set forth in the plan document. 1.3 Limitations on Employee Salary Reduction Contributions to 403(b) Plans (a) General limit - $15,000 as adjusted annually for inflation ($18,000 in 2015) (b) Catch-up contributions (1) Additional catch-up contribution of up to $6,000 in 2015 for employees age 50 and older (2) Special catch-up contribution (i) Eligibility school employees with more than 15 years of service (ii) Amount of special catch-up is lesser of the following: (A) $3,000; (B) The general catch-up limit ($18,000 in 2015) less the sum of (i) amounts deferred in prior years using special catch-up, and (ii) designated Roth contributions to 401(k) and 403(b) plans for prior years; or (C) The excess of (i) $5,000 multiplied by the employee s number of years of service, over (ii) total elective deferrals made by the employee to the 403(b) plan for prior years. 2

4 1.4 Distributions from 403(b) Plans (a) 403(b) plans are subject to minimum distribution rules under Code Section 401(a)(9) (b) Generally, elective deferrals may be distributed only on the occurrence of one of the following: (1) Severance from employment (2) Death (3) Disability (4) Attainment of age 59½ (c) Hardship withdrawals are permitted plan document must provide for them (d) Loans to participants are permitted plan document must provide for them 2. OVERVIEW OF 457(B) DEFERRED COMPENSATION PLANS 2.1 Plan Document Requirement. A 457(b) plan must have a written plan document, which addresses: (a) Who may participate; (b) Ownership of assets; (c) Limitations on deferral amounts; (d) Rules on deferral procedures; and (e) Restrictions on distributions. 2.2 Limits on Employee Elective Deferrals (a) Annual limit is $18,000 for 2015 (b) Additional catch-up contribution of up to $6,000 in 2015 may be made by participants over age 50 (c) Special 3 Year Catch-up contribution (1) A 457(b) plan may also permit a special 3 year catch-up contribution (2) Special catch-up contribution is available to a participant in the three (3) years prior to the year in which the participant attains normal retirement age under the plan 3

5 (3) Generally, the amount of the special catch-up is based on the participant s underutilized deferrals in prior years (i.e., the general deferral limitation minus the amount the participant actually deferred for a prior year). (4) Plan document must provide for this special catch-up (i) Plan document should designate a normal retirement age, or state that a participant may designate a normal retirement age within a particular age range. 2.3 Distributions from 457(b) Plans (a) Distributions from 457(b) plans are permitted upon: (1) The participant s attainment of age 70½ (2) The participant s severance from employment (whether due to death, retirement, or other reason) (3) The participant has an unforeseeable emergency (b) Loans from 457(b) plans are permitted for governmental employers 3. CORRECTING 403(B) AND 457(B) PLAN COMPLIANCE FAILURES 3.1 Correcting 403(b) Plan Errors. The Internal Revenue Service has established a program for correcting compliance failures involving retirement plans, including 403(b) plans. This program, known as the Employee Plans Compliance Resolution System ( EPCRS ) allows employers to voluntarily correct plan errors without the loss of tax qualification for the plan. EPCRS provides approved correction methods and procedures for various types of compliance failures. (a) Types of 403(b) Plan Failures. The IRS has identified four types of 403(b) plan compliance failures which may be corrected under EPCRS: (1) Plan Document Failure a 403(b) plan provision or the absence of a plan provision that violates the requirements of Code section 403(b). (2) Operational Failure a failure to follow the provisions of the 403(b) plan document, i.e., the plan is operated in a manner which is inconsistent with the plan document. (3) Demographic Failure a non-operational failure to satisfy nondiscrimination or coverage rules. (4) Employer Eligibility Failure the adoption of a 403(b) plan by an employer which is not a tax-exempt organization under Code section 501(c)(3) or a public educational organization. 4

6 (b) Correction Programs Available Under EPCRS. (1) Self-Correction Program ( SCP ). Under SCP, operational failures may be corrected without IRS approval or payment of a penalty or compliance fee to the IRS. (i) Generally, only operational failures can be corrected under SCP demographic, employer eligibility, and most plan document failures cannot be corrected using SCP. (ii) Operational failures which are insignificant may be self-corrected at any time, even if a plan is under examination by the IRS. (iii) Significant operational failures may be corrected under SCP if all of the following requirements are met: (A) The plan has established practices and procedures reasonably designed to promote and facilitate overall compliance; (B) The plan has a plan document which meets the requirements of Code section 403(b); and (C) The correction is completed or substantially completed prior to the end of the second plan year following the plan year in which the operational failure arose. (2) Voluntary Correction Program ( VCP ). All types of 403(b) failures may be corrected under VCP, which requires that the employer obtain IRS approval of the correction and pay a compliance fee to the IRS. (i) VCP Submission to IRS. The employer must make a written submission to the IRS which describes the nature of the failures and the corrections which the employer proposes. (ii) Payment of Compliance Fee. As part of the VCP submission, the employer must a pay a compliance fee to the IRS. The amount of the fee generally depends on the number of plan participants. However, VCP compliance fees are generally much less than the monetary sanction which would be imposed by the IRS if the failures were identified on audit. (iii) Issuance of Compliance Statement. If the IRS approves the proposed corrections, it will issue a Compliance Statement to the employer which states that no adverse action will be taken by the IRS with respect to the failures in question. (3) Correction on Audit ( Audit CAP ). Audit CAP is available for all types of failures which are identified by the IRS in an audit of the plan. The employer 5

7 may avoid the loss of tax benefits for the plan by correcting the failures, entering a closing agreement with the IRS, and paying a monetary sanction. The amount of the monetary sanction is generally negotiated between the employer and the IRS, and is usually a percentage of the amount the IRS could assess in taxes if the plan were disqualified because of the failures. 3.2 Correcting 457(b) Plan Errors. (a) Special Self-Correction Rule. Governmental employers sponsoring 457(b) plans may voluntarily self-correct failures, as long as the correction is completed within 180 days after the IRS notifies the employer of the failure. (b) Limited Availability of Correction with IRS Approval. 457(b) plans are generally not eligible for EPCRS. However, the IRS has indicated that it will consider requests for correction in limited circumstances outside EPCRS. (1) Because of the special self-correction rule, most employers can fully correct plan failures without IRS approval or use of EPCRS. (2) The IRS will consider correction requests for 457(b) plans on a provisional basis outside EPCRS. The IRS has complete discretion to accept or reject these requests. If accepted, the IRS will issue a special closing agreement. The IRS will not consider any issues relating to the form of a written 457(b) plan document. In making a request, the employer must indicate that they are aware of the special self-correction rule. 4. COMMON 403(B) PLAN AND 457(B) PLAN ERRORS AND FAILURES. 4.1 Plan Document Failures. A common plan error for both 403(b) plans and 457(b) plans is the failure to have a written plan document, or having a plan document which does not meet current IRS requirements. (a) 403(b) Plan Document Requirement. (1) Prior to January 1, 2009, 403(b) plans were not required to have a written plan document. (2) If an employer timely adopted a plan document prior to December 31, 2009, the employer may retroactively correct any defects in the plan document by adopting an IRS pre-approved plan document prior to the end of the remedial amendment period (which will be identified by the IRS in the future). (3) If an employer failed to adopt a plan document on or before December 31, 2009, the employer may correct the failure through VCP. (b) Terms of Plan Document and Plan Operations Must be Consistent. Employers must insure that the terms of the plan document and the plan s operations are consistent. For example, if the employer allows plan loans from the 403(b) plan but the plan document does not 6

8 permit them, an operational failure has occurred. This issue can become more complicated in the case of 457(b) plans, where there may be multiple plan documents. 4.2 Universal Availability Failures. Because it is a relatively new requirement, violations of the universal availability rules for 403(b) plans are common. (a) Universal Availability requires that all employees be allowed to participate in a 403(b) plan, with a few limited exceptions. An employer cannot impose a blanket exclusion from the plan of substitute teachers or other substitute employees. An employer may exclude employees who normally work less than 20 hours a week, but must monitor the hours of these employees and allow those who work more than 1,000 hours in a year to participate in the plan. For example, even if an employer excludes employees who work less than 20 hours a week, the employer must permit substitute teachers who work more than 1,000 hours in a year to participate in the plan. (b) Employers should maintain documentation that all eligible employees received a meaningful opportunity to make an election to participate in the plan each year. (c) Under EPCRS, universal availability failures can be corrected by the employer making a corrective contribution to each improperly excluded employee equal to 1.5% of the employee s annual compensation, as adjusted for earnings. 4.3 Deferral Election Failures. (a) Excess contributions (b) Lack of salary reduction agreements or other lack of documentation (c) Special Catch-Up Contributions (1) Must determine participant s eligibility for catch-up and the additional amount of the catch-up (2) This can require information regarding the participant s number of years of service, amount of deferrals in prior years, and may require special elections by the participant. 4.4 Distribution Failures. (a) Plan loans (1) Loans allowed in operation, but not permitted in plan document (2) Lack of appropriate loan documentation (3) Loan default issues (b) Hardship Distributions and Unforeseeable Emergency Distributions 7

9 (1) Allowed in operation, but not permitted in plan document (2) Lack of appropriate documentation (3) No verification that participant meets standards for a hardship or unforeseeable emergency distribution 5. BEST PRACTICES FOR MINIMIZING LIABILITY ON AUDIT. 5.1 Prior to Audit. (a) Plan Administration. (1) Make sure plan documents are up to date (2) Be clear regarding who has responsibility for various plan administration duties, among school system, vendors, and third party administrator (3) Establish procedures for plan administration and sharing of information among school system, vendors and third party administrator (b) Identify and Correct Plan Failures. (1) 403(b) plans- use EPCRS to correct failures (2) 457(b) plans (i) can generally self-correct without IRS approval at any time before audit, and within 180 days of IRS providing notice of a failure (ii) If employer wants additional assurances, can file submission with IRS for approval of correction (3) If a failure is self-corrected, be sure to document the correction so it can be verified by the IRS if there is a later audit of the plan. (i) The best practice is to prepare a memorandum which describes the failures and the correction, why the failure is eligible for self-correction, and any changes to the plan s administrative procedures going forward. (ii) The employer should also maintain supporting documentation of the correction (e.g., copies of Form 1099s issued to participants, copies of letters or other communications with affected employees, calculations of corrective contributions and lost earnings). (4) If the failure is fully corrected, IRS will not assess any penalty if the plan is later audited. Also, if IRS sees that the employer was proactive in identifying and correcting failures, it may not scrutinize the plan as closely on audit. 8

10 5.2 The Audit Process. (a) The employer should cooperate with IRS and provide all information requested (1) Generally, IRS will want to review payroll records, plan documents, salary deferral elections, plan loan and hardship distribution information and documentation, employee communication materials, and similar information (b) IRS will usually focus an audit on a single year initially, but if the IRS identifies a failure it can expand the audit to other years with respect to that issue (c) If you know there are issues/failures, or if IRS identifies failures in the course of examination, consider retaining legal counsel with experience in employee benefit matters to assist with audit (d) Do not assume that IRS will be lenient because employer is a school or other public/governmental employer (e) If the IRS identifies only minor or insignificant issues in the audit, it will likely: (1) permit the employer to self-correct the issue if practical, and (2) issue a closing letter identifying the issues and recommending any changes to the plan s administrative procedures and practices going forward to prevent similar issues in the future. (f) If the IRS identifies significant failures in the audit, it will require correction, a closing agreement and payment of a monetary sanction (1) The correction required by the IRS will depend on the nature of the failure. In some cases, correction may simply require the adoption of a retroactive amendment. In others, such as universal availability failures, the employer may be required to pay substantial corrective contributions to affected employees (in addition to the payment of a monetary sanction). (2) A closing agreement will be signed by the IRS and employer and will set forth the failures identified by the IRS, the corrections made by the employer, and the amount of the monetary sanction paid by the employer. (3) The monetary sanction will generally be a negotiated percentage of the amount the IRS could collect in taxes if the plan is disqualified. (4) If the employer refuses to correct the failures and enter a closing agreement, the IRS has authority to disqualify the plan, which will result in amounts contributed to the plan by employees becoming taxable. 9

11 1. GENERAL OVERVIEW. EMPLOYER REPORTING OF HEALTH COVERAGE ACA REPORTING UNDER CODE SECTION 6055 AND Overview of Reporting. The Affordable Care Act ( ACA ) created new reporting requirements under new Sections 6055 and 6056 to the Internal Revenue Code ( IRC ). IRC 6055 reporting requirements require health insurance issuers, self-insured health plan sponsors, government agencies that administer government-sponsored health insurance programs and any other entity that provides minimum essential coverage (MEC) to report information on that coverage to the IRS and covered individuals. Under IRC 6056, an applicable large employer ( ALE ) is required to file information returns with the IRS and provide statements to their fulltime employees about the health insurance coverage the employer offered. 1.2 Importance of Reporting. The reporting of the required information is essential for the government to be able to enforce the employer shared responsibility and the individual shared responsibility under the ACA. 1.3 ALE Reporting Obligations Form 1095-C. (a) IRC 6056 requires ALEs to file information returns with the IRS and provide statements to their full-time employees about the health insurance coverage the employer offered. The IRS is to use the information provided on the information return to administer the employer shared responsibility provisions under IRC 4980H. The IRS and the employees of an ALE member will use the information provided as part of the determination of whether an employee is eligible for the premium tax credit under IRC 36B. (b) The final regulations require the full-time employee s social security be included as part of the information filed with the IRS and furnished to the employee. For purposes of IRC 6056 reporting, the spouse s or dependent s social security numbers are not required, but they are required for IRC 6055 reporting. See generally footnote 9 to IRC 6056 Regulation Preamble. (c) Form 1095-C is the form to be filed by the ALE with the IRS and provided to the employee. This form contains information about the health insurance coverage offered to employees, the employee s share of the lowest cost premium and other information related to the employer responsibility provisions. (d) Form 1094-C is the form used by ALEs for transmittal of informational returns to the IRS. (e) ALEs will use Forms 1094-C and 1095-C for both fully insured and self-insured plans. 10

12 1.4 Reporting By Insurers and Non-ALE Self- Funded Plans. (a) Form 1095-B is the return to be used for reporting MEC under IRC 6055 to the IRS and for furnishing coverage information to covered individuals. Both insurers and self-funded employers that are not ALEs (do not have 50 or more full-time employees and are thus not subject to the ACA employer shared responsibility provisions) will use the Form 1095-B. (b) Form 1094-B is the transmittal form for submission of forms 1095-B to the IRS. Other entities that provide MEC such as sponsors of multiemployer plans, and providers of government-sponsored coverage (Medicare, Medicaid, CHIP, TRICARE) will also report their MEC to the IRS on Form 1095-B. (c) Form 1095-B must be furnished to the responsible individual for the coverage, which is generally the employee, former employee, or parent. The reporting must also be made to deceased individuals who may have died during the coverage year. 2. EMPLOYERS SHARED RESPONSIBILITY. 2.1 Penalties Applicable to ALE. (a) ACA added a new IRC 4980H imposing an assessable payment against an ALE. An ALE (employers with 50 or more full-time equivalent employees) 1 that does not offer minimum essential coverage ( MEC ) to employees is subject to a penalty if one or more full-time employees receive a premium tax credit or cost-sharing subsidy through an exchange. The penalty is $2,000 per full-time employee per year, with the first 30 full-time employees (80 is substituted for 30 in the 2015 transitional relief) excluded from the penalty calculation. Although the penalties are annual, they accrue monthly. (b) The ALE may also be subject to a penalty if the ALE offers its full-time employees (and their dependents) the opportunity to enroll in MEC under an eligible employer sponsored plan and one or more full-time employees is certified to the employer as having received an applicable premium tax credit or cost sharing reduction. The penalty is equal to $3,000 per year (measured monthly at 1/12 of $3,000) for each full-time employee who is certified to the employer as having received an applicable premium tax credit or cost sharing reduction with respect to that employee s purchase of health insurance for the employee on an Affordable Insurance Exchange (Exchange). (c) The penalties are not applicable to an ALE offering qualifying health coverage to at least 95% (70% for 2015, and the portion of the 2016 plan year ending for noncalendar year plans) of its full-time employees. 1 At the time of preparation of this outline Congress was considering legislation that may alter the employee threshold required to be an ALE. 11

13 (d) An employee is not eligible for subsidized coverage for any month in which the employee is offered health coverage under an eligible employer-sponsored plan that (1) provides MEC, (2) provides minimum coverage, and (3) is affordable (employee s required contribution for the lowest-cost self only minimum value coverage offered does not exceed 9.5% of the employee s household income [there are 3 safe harbors for determining affordability]). (1) W-2 safe harbor - the employee s health care premium does not exceed 9.5 percent of that employee s Form W-2 wages, reported in box 1 of the Form W-2, for the calendar year. (2) Rate of pay safe harbor - the employee s applicable health care premium does not exceed 9.5 percent of the employee s monthly wages equal to 130 hours multiplied by the lower of the employee s applicable hourly rate of pay on the first day of the coverage period or the lowest hourly rate of pay during the calendar month. (3) Federal poverty level safe harbor - the employee s applicable health care premium does not exceed 9.5 percent of the monthly equivalent of the federal poverty line for a single individual (federal poverty line in effect six months prior to the beginning of the plan year). 3. TRANSITIONAL RELIEF. Transitional relief is provided in the regulations and is outlined in the Form 1095-C Instructions (page 12). 3.1 ALE with Fewer Than 100 Full-Time Employees. ALEs with more than 50 but fewer than 100 full-time employees are not subject to the assessment penalties (See Section 2) if (1) the employer did not reduce its work force to meet the transitional relief between February 9, 2014 and December 31, 2014, and (2) the employer did not materially reduce health coverage between February 9, 2014 and December 31, Reduction of Employee Count Subject to Penalty. The ALE s no coverage penalty for 2015 is paid on full-time employees in excess of 80, rather than 30 employees (See Section 2.1(a)). 3.3 Non-Calendar Year Plans. Subject to certain limitations, non-calendar year plans are not subject to the employer shared responsibility provisions of the ACA for the plan year beginning in 2015, but the ALE is subject to the reporting obligations for the 2015 calendar year. 3.4 Determining ALE Status. (a) The employer shared responsibility requirements are applicable only to large employers" generally defined as employers having an average of 50 or more fulltime or full-time equivalent employees on business days during the preceding year. "Full-time employees" include all employees who work at least 30 hours on average each week, or a monthly equivalent of 130 hours per month. The number of "full-time equivalent employees" is determined by aggregating the hours worked by all non-full-time employees, and dividing by 120 hours. 12

14 (b) Employers with work force fluctuations can use a measurement period of 3 to 12 months, with a subsequent stability period. 3.5 Subsidy Eligibility. (a) Subsidies are available only to individuals with household incomes of at least 100 percent and up to 400 percent of the federal poverty level. The federal poverty level is a measure of income level issued annually by the Department of Health and Human Services. Federal poverty levels are used to determine your eligibility for certain programs and benefits. For 2015 the federal poverty levels are (levels are higher for Alaska and Hawaii): $11,770 for individuals $15,930 for a family of 2 $20,090 for a family of 3 $24,250 for a family of 4 $28,410 for a family of 5 $32,570 for a family of 6 $36,730 for a family of 7 $40,890 for a family of 8 (b) Subsidies are not available to individuals who are eligible for Medicaid, which may also shelter many employers from excessive penalties. (c) Subsidies will not be available to any employee whose employer offers the employee affordable coverage that provides minimum value. 4. CONTROLLED GROUP ANALYSIS. The ACA requires that the determination of the employer includes not only the single-employer under consideration, but all members of the "controlled group." See IRC 4980H(c)(2)(C)(i) and ERISA 715(a)(1). For the time being, the final ACA Regulations issued in February 2014 reserve the application of the Controlled Group rules for governmental employers and churches; yet, under the regulations, the governmental units and churches must still make a good faith effort at ACA compliance based upon the current controlled group regulations now in effect for other benefit plan requirements. 4.1 Basis of Employer Aggregation. Separate employing units will be aggregated as the single-employer utilizing the following statutory requirements: (a) IRC 414(b) (b) IRC 414(c) (c) IRC 414(m) Parent/Subsidiary Ownership; Common Control Entities; Affiliated Service Group. 4.2 Controlled Group Rules must be used for other ACA purposes: (a) Employer Mandate for coverage (50 or more employees); 13

15 (b) Determining full-time or full-time equivalent employees; (c) Reporting for Form 1095-C and Form 1094-C; (d) Automatic enrollment requirements (200 or more employees); (e) Access availability to State Exchanges (fewer than 101 employees); (f) Head count for employer penalties; and (g) Non-discrimination measurements for fully insured plans (IRC 105(h)). 4.3 Parent Subsidiary Controlled Group. Entities are treated as a single employer if the common parent employer owns, directly or indirectly, 80% or more of the stock of a for-profit corporation. In the case of non-corporate entities (limited liability companies, partnerships, etc.), the 80% ownership rule is applied to the membership interests (for LLCs) or to the capital and profits interests of a partnership. 4.4 Brother-Sister Controlled Group. A brother-sister controlled group is a group of two or more entities, in which five or fewer common owners (a common owner must be an individual, a trust, or an estate) own directly or indirectly a controlling interest (80%, but only if the common owner owns stock or equity in each entity) of each group and have effective 14

16 control (50%, but only to the extent such equity ownership is identical with respect to such entity). Example 1: Analysis: Owner Corp 1 Corp 2 A 80% 20% B 10% 50% C 5% 15% D 5% 15% TOTAL 100% 100% Step 1: Do 5 or fewer common owners own more than 80% - yes, then go to step 2 Step 2: Determine identical ownership more than 50% identical ownership - no Owner A = 20% Owner B = 10% Owner C = 5% Owner D = 5% TOTAL 40% Example 2 Owner Corp 1 Corp 2 A 12% 12% B 12% 12% C 12% 12% D 12% 12% E 13% 13% F 13% 13% G 13% 13% H 13% 13% TOTAL 100% 100% Step 1: Do 5 or fewer common owners own more than 80% - no, no need for step 2 Step 2: Determine identical ownership more than 50% identical ownership yes but failed step Evaluating Controlled Group Status. In evaluating controlled group status, the employer must also consider the ownership attribution rules. Attribution requires treating a person as owing an interest in the entity even if they are not the actual owner. IRC 1563 attribution is used in determining ownership under the ACA (required by IRC 414(b) and (c). 15

17 The following table is a general description of how the family attribution rules are applied to controlled groups. THE OWNERSHIP OF Are attributed to: INTERESTS OF: Spouse Spouse EXCEPTION: No attribution between spouses if there is no: direct ownership, participation in company, and no more than 50% of business gross income is passive investments. See 1.414(c)-4(b)(5)(ii) Minor child (under age 21) Parent Parent Minor child (under age 21) Parent Adult child (age 21 or older) ONLY IF: Adult child owns greater than 50% of that business. Adult child Parent ONLY IF: Parent owns greater than 50% of that business. Grandparent Minor or Adult child ONLY IF: Minor/Adult child owns greater than 50% of that business Minor or Adult child Grandparent ONLY IF: Grandparent owns greater than 50% of that business. Sibling None None 4.6 Affiliated Service Groups. The Affiliated Service Group rules were codified in IRC 414(m) in order to close the loophole previously common among professional service type organizations (medical practices, law firms, insurance agencies, etc.) where the service organization would utilize outside entities to supply the rank and file employees. The most typical example would be a medical practice where the physicians would be employed by the medical firm, and the physicians would form their own outside organization to hire rank and file employees necessary to operate the practice (clerks, nursing staff, billing staff, etc.). Utilizing these types of arrangements, the physicians could maintain rich benefit structures for the physicians which would not be extended to the "hired employees" of the leasing organization. 4.7 Leased Employees and Independent Contractors. The ACA Regulations define employees to include leased employees (under IRC 414(n)), as well as misclassified independent contractors. 16

18 5. GOVERNMENT AND NON-PROFIT EMPLOYERS. 5.1 Parent Subsidiary Ownership. Current law requires that a governmental or non-profit entity and its for-profit subsidiaries be treated as a single employer if the employer owns, directly or indirectly, 80% or more of the stock of a for-profit corporation. In the case of non-corporate entities (limited liability companies, partnerships, etc.), the 80% ownership rule is applied to the membership interests (for LLCs) or to the capital and profits interests of a partnership. Rarely will the Parent/Subsidiary Ownership rules be an issue with governmental entities, but it is not uncommon for non-profits to invest in for-profit subsidiaries. 5.2 Common Control Test. (a) In 2007 the Internal Revenue Service issued Treasury Regulation 1.414(c)-5 requiring the aggregation of tax-exempt employers for employee benefit plan purposes. The regulations, which were effective for plan years beginning on or after January 1, 2009, apply to all tax-exempt organizations, including governmental units. ACA now requires the application of these aggregation rules for governmental entities. (b) Common Control exists between a governmental entity and another non-profit organization if at least 80% of the directors or trustees of the non-profit organization are either representatives of, or directly or indirectly controlled by, the governmental entity. A trustee or director is treated as a representative of the governmental entity if the individual is a trustee, director, agent, or employee of the governmental entity. A trustee or director is controlled by the governmental entity if the governmental entity has the general power to remove such trustee or director and designate a new trustee or director. Whether a person has the power to designate or remove a director or trustee is based upon the facts and circumstances. Example 1: Assume that Hospital H is located in the area of City C. Hospital H is a not-forprofit organization and is managed by its Board of Directors, comprised of 10 individuals. Under H s Bylaws, 6 of the 10 directors are appointed by the C s City Council. In this example, since only 60% of the Board is appointed by City C, the entities are treated as separate entities and not as a single entity. Example 2: Assume the same facts as outlined in Example 1 above, except that 6 of the directors are appointed by City C and 2 of the remaining directors, although not appointed by City C, are employed by City C. In this example, C and H are to be treated as a single-employer because 80% of the Directors of H represent City C (6 directors are appointed by C and 2 other directors are employed by C). Example 3: Assume that City C provides 90% of the funding for a non-profit emergency medical service entity (EMS), which provides emergency services in the geographical area of City C. EMS has its own Board of Directors, none of whom either work for or are appointed by City C. Despite the high level of funding, the non-profit entity EMS would not be aggregated with City C. 17

19 Example 4: Assume the same facts set forth in Example 3, except for the fact that the initial Board for the non-profit entity (EMS) was appointed by City C, and thereafter the Board was self-sustaining with new members of the Board being elected by the current Board of Directors. In this example, even though the initial board was appointed by City C, the City does not have the continuing right to appoint or remove the directors; thus, the entities are not aggregated. Example 5: Assume the same facts as set forth in Examples 3 and 4 above, except that City C retains the right to remove one or more of the Board members, at any time and to replace the Board with new members. Because of the right of City C to remove and replace one or more of the Directors (up to all of the Directors) of EMS, the entity would be aggregated with City C. 6. EFFECTIVE AND DUE DATES FOR IRC 6056 REPORTING. 6.1 General Provisions. (a) IRC 6056 reporting requirements (Form 1095-C) are first effective for coverage offered (or not offered) in calendar year Thus, an ALE member must file information returns with the IRS and furnish statements to employees beginning in 2016, to report information about its offers of health coverage to its full-time employees for calendar year (b) IRC 6056 applies to all employers that are ALE members, regardless of whether the employer is a tax-exempt or government entity (including federal, state, local, and Indian tribal governments). (c) An employer that is not subject to the employer shared responsibility provisions of section IRC 4980H (employed fewer than 50 full-time employees) during the preceding calendar year is not required to report. (d) An employer sponsoring a self-insured plan that is not an ALE is not obligated to report under IRC 6056, but that employer is obligated to report under IRC (e) A covered employer must report information about the health coverage, if any, offered to each of its full-time employees, including whether an offer of health coverage was (or was not) made. For each full-time employee, the employer is required to file Form 1095-C with the IRS and furnish a copy of Form 1095-C to the employee, regardless of whether or not health coverage was or was not offered to the employee. (f) The return due date for filing Form 1094-C and Form 1095-C for each employee with the IRS is February 28 (March 31 if filed electronically) of the year immediately following the calendar year for which the offer of coverage information is reported. For the 2015 calendar year the returns must be filed no later than February 29, 2016, or March 31, 2016, if filed electronically. (g) An automatic 30-day extension for IRS filing is available by filing Form

20 (h) If the employer files fewer than 250 Forms 1095-C for the calendar year the employer may file either electronically or manually. Employers filing 250 or more Forms 1095-C must file electronically. Each Form 1095-C for each full-time employee is counted as a separate return, and only Form 1095-C is counted in applying the 250-return threshold. (i) The employer must furnish the statement to each full-time employee on or before January 31 of the year immediately following the calendar year to which the information relates. For the 2015 calendar year Form 1095-C must be furnished to employees no later than February 1, 2016 (January 31, 2016, being a Sunday). (j) Employee statements can be furnished electronically (with employee notice, consent and meeting current IRS hardware requirements), by mail or by hand delivery. (k) The employee cannot require that the employer furnish the statement earlier than the due date (January 31). This is different that W-2 requirements, where 26 CFR (d)(1)(i) requires the employer to furnish form W-2 to a terminated employee within 30 days of request if there is no reasonable expectation of further employment during the calendar year. 6.2 Penalties for Filing Deficiencies. (a) IRC 6721 (Failure to File Correct Informational Returns) The failure to file a return or to file a correct informational return is subject to the penalties equal to $250 per return, subject to certain statutory maximums (generally $3,000,000, but reduced in certain events). (b) IRC 6722 (Failure to Furnish Correct Payee Statement) The failure to furnish correct statements to employees is subject to similar penalties under IRC (c) IRC 6724 (Waivers, Definitions and Special Rules) The IRS has authority to waive the penalties based upon reasonable cause shown. The final reporting regulations provide short term relief for 2016 reporting (for the 2015 calendar year) through the waiver or abatement of penalties upon the showing of a good faith effort to comply. 7. REPORTING FOR COLLECTIVELY BARGAINED EMPLOYEES. 7.1 Employer Shared Responsibility. Under the final regulations for the employer shared responsibility, the IRS determined that, until further guidance, employers will be treated as having met their obligations under IRC 4980H with respect to full-time employees for whom the employer is obligated by a collective bargaining agreement to contributed on behalf of that employee to a multiemployer plan that provides coverage, but the coverage must be affordable and meet the minimum value requirements. 7.2 Reporting Obligations. Recognizing that plan administrators of multiemployer plans may have better access than a participating employer to certain information on eligible 19

21 employees required to be included as part of section IRC 6056 reporting, the final regulations permit reporting by the plan administrator rather than the ALE. Under this approach, the multiemployer plan administrator would prepare returns pertaining to the full-time employees covered by the collective bargaining agreement eligible to participate in the multiemployer plan and the ALE would prepare returns pertaining to the remaining fulltime employees (those who are not eligible to participate in a multiemployer plan). The administrator of the multiemployer plan would file a separate section 6056 return for each ALE that is a contributing employer on behalf of whom it files, providing the name, address, and identification number for both the plan and the ALE for whom it is reporting. In addition, the multiemployer plan may assist the employer in furnishing statements to the employees. 8. FORM 1095-C REPORTING METHODS. The regulations provide both a General Method and optional Alternative Methods that all ALE members may use for reporting to the IRS and for furnishing statements to full-time employees. If an ALE member cannot use the Alternative Reporting Methods for certain employees, the ALE member must use the General Method for those employees. 8.1 General Method. The General Method for reporting to the IRS and furnishing statements to full-time employees is to file Form 1095-C, including all information outlined on the form. (a) Information. The regulations provide the specific information required for reporting under IRC 6056, including: (1) Name, address and employer identification number (EIN) of the ALE; (2) Name and telephone number of a contact person; (3) Calendar year for which the information is reported; (4) Certification as to whether the ALE offered full-time employees (and dependents) the opportunity to enroll in MEC under a plan by calendar month; (5) The months during which coverage was available; (6) Each full-time employee s share of the lowest cost monthly premium (selfonly) for coverage providing; (7) Minimum value offered under a plan, by calendar month; (8) Number of full-time employees for each month during the calendar year; (9) Name, address, taxpayer identification number (generally the Social Security Number) of each full-time employee during the calendar year and the months, if any, during which the employee was covered under the plan; (10) Any other information that may be specified. 20

22 (b) Use of Offer and Coverage Indicator Codes. In order to simplify the reporting process, the IRS has provided specific indicator codes for use in reporting employee offers and coverage (line 14). The Code Series 1, Offer of Coverage, is described in the Form 1095-C Instructions (page 7), as follows: (1) 1A. Qualifying Offer: Minimum essential coverage providing minimum value offered to full-time employee with employee contribution for self-only coverage equal to or less than 9.5% mainland single federal poverty line and at least minimum essential coverage offered to spouse and dependent(s). (2) 1B. Minimum essential coverage providing minimum value offered to employee only. (3) 1C. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) (not spouse). (4) 1D. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to spouse (not dependent(s)). (5) 1E. Minimum essential coverage providing minimum value offered to employee and at least minimum essential coverage offered to dependent(s) and spouse. (6) 1F. Minimum essential coverage NOT providing minimum value offered to employee, or employee and spouse or dependent(s), or employee, spouse and dependents. (7) 1G. Offer of coverage to employee who was not a full-time employee for any month of the calendar year and who enrolled in self-insured coverage for one or more months of the calendar year. (8) 1H. No offer of coverage (employee not offered any health coverage or employee offered coverage that is not minimum essential coverage). (9) 1I. Qualifying Offer Transition Relief 2015: Employee (and spouse or dependents) received no offer of coverage, received an offer that is not a qualifying offer, or received a qualifying offer for less than 12 months. (c) Safe Harbor Codes and Other Relief. Indicator codes are provided for use in reporting on line 16 of Form 1095-C. Those codes are described on page 7 of the Form 1095-C Instructions and include: (1) 2A. Employee not employed during the month. (2) 2B. Employee not a full-time employee. 21

23 (3) 2C. Employee enrolled in coverage offered. (4) 2D. Employee in a section 4980H(b) Limited Non-Assessment Period. (5) 2E. Multiemployer interim rule relief. (6) 2F. Section 4980H affordability Form W-2 safe harbor. (7) 2G. Section 4980H affordability federal poverty line safe harbor. (8) 2H. Section 4980H affordability rate of pay safe harbor. (9) 2I. Non-calendar year transition relief applies to this employee. 8.2 Qualifying Offer Method. As an Alternative Method of reporting, the IRS regulations permit the use of a Qualifying Offer Method. The use of this alternative method is intended to ease the reporting burden for an ALE. Eligibility for use of the Qualifying Offer Method requires that the ALE certify for all months during the year in which the employee was a full-time employee the ALE (1) offered MEC providing MV at an employee cost for employee only coverage not exceeding 9.5% of the mainland single federal poverty line, and (2) offered MEC to the employee s spouse and dependents. (a) Even if the employee does not have a spouse or dependents, the certification is valid so long as the qualifying coverage would have been available had the employee had a spouse or dependents. (b) The obligation of providing information to the employee can be satisfied by either providing a copy of Form 1095-C to the employee, or a statement informing the employee that qualifying coverage was provided and the employee (and spouse and dependents) are ineligible for a premium tax credit for the 12-month period. (c) The general reporting method is to be used for employees who did not receive offers of qualifying coverage for the entire 12-month period (even if the employee was not employed for the entire 12-month period). (d) The regulations extend a transitional rule for 2015 reporting which allows the use of Alternative Methods so long as qualifying offers were made during the year to not less than 95% of the ALE s full-time employees % Offer Method. An ALE member that certifies that it has offered, for all months of the calendar year, affordable health coverage providing minimum value to at least 98% of its employees for whom it is filing a Form 1095-C, and offered minimum essential coverage to those employees dependents, is eligible for this simplified reporting procedure. 22

24 9. IRC 6055 REPORTING. 9.1 General Requirements. (a) Every person that provides MEC to an individual during a calendar year must file an information return (Form 1995-B) and transmittal form with the IRS. Form 1095-B is the return used for reporting MEC under section IRC 6055 to the IRS and for furnishing coverage information to covered individuals. Form 1095-B is transmitted to the IRS using Form 1094-B. 9.2 Filing By Insurers and Self-Funded Plan Sponsors. IRC 6055 Reporting is required of: (a) Insurers. (b) Self-funded employers that do not have 50 or more full-time employees even though they are not subject to the employer shared responsibility provisions. Form 1095-B is used to report MEC to the IRS. (c) Other entities that provide MEC such as sponsors of multiemployer plans, and providers of government-sponsored coverage (Medicare, Medicaid, CHIP, TRICARE) will also report their MEC to the IRS on Form 1095-B. (d) ALEs with self-funded plans report information required under IRC 6055 and 6056 to the IRS on Form 1095-C the form to required information to covered employees. (e) ALE members that sponsor a self-funded plan must complete Parts I and III of Form 1095-C for any employee that enrolls in the health coverage, whether or not the employee is a full-time employee. If the employee is a full-time employee, the employer must also complete Part II. Part II of the form includes information about the offer of coverage that was made to the employee, the employee s share of the lowest cost monthly premium, and other employer responsibility information. 9.3 Limited Permissible Aggregation. Each member of a controlled group must file separate Forms 1095-C for insured plans and for self-insured arrangements combining the reporting obligations under IRC 6055 and IRC However, in the case of employers that are not ALEs, on an aggregated basis, they may elect to file a combined report for the controlled group. 9.4 Reasonable Effort Requirement to Obtain TIN. The regulations require the reporting of taxpayer identification numbers ( TIN ). Many reporting entities do not routinely collect TINs and resisted the collection requirement imposed under the temporary regulations. The final regulations, while retaining TIN collection requirements, did limit the requirement to a reasonable effort. Appreciate that the lack of a TIN would be the basis of the assessment of a failure to file a complete return under IRC 6721, See Section 6.2(a). A reasonable effort standard is satisfied if the reporting entity makes a written request by December 31 of the year in 23