When Will They Stop Changing the Rules for Employee Benefits?

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1 When Will They Stop Changing the Rules for Employee Benefits? Presented by: Daniel Kopti National Practice Employee Benefits Compliance Advisor Wells Fargo Insurance Services USA, Inc. January 10,

2 Disclosures The material is provided for informational purposes only based on our understanding of applicable guidance in effect at the time of publication, and should not be construed as ERISA, tax, or legal advice. Customers and other interested parties must consult and rely solely upon their own independent advisors regarding their particular situation and the concepts presented here. Although care has been taken in preparing and presenting this material accurately (based on the laws and regulations, and judicial and administrative interpretations thereof, as of the date set forth above), Wells Fargo Insurance Services USA, Inc. disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it, and any responsibility to update this material for subsequent developments. To comply with IRS regulations, we are required to notify you that any advice contained in this material that concerns federal tax issues was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any matters addressed herein. Products and services are offered through Wells Fargo Insurance Services USA, Inc., a non-bank insurance agency affiliate of Wells Fargo & Company, and are underwritten by unaffiliated insurance companies. Some services may require additional fees and may be offered directly through third-party providers. Banking and insurance decisions are made independently and do not influence each other Wells Fargo Insurance Services USA, Inc. All rights reserved. No reprints without permission. 1

3 Today s agenda Trump Administration Flores Case on Overtime Pay ACA Affordability IRS Form 1095-C Reporting Employer Appeal Notices Cadillac Tax Questions 2

4 Trump Administration 3

5 Trump Administration Numerous proposals to repeal and replace the Affordable Care Act Republicans cannot override filibuster in the Senate But reconciliation bills are not subject to filibuster President Trump can take executive action What s at stake ACA rules affecting employers and employees ACA market-reform standards (including coverage of employee s children up to age 26) ACA employer shared responsibility (including Form 1095-C) ACA fees and taxes (including Cadillac tax) What s at stake Non-ACA rules affecting employers and employees Employees not taxed on employer contributions for healthcare Pre-tax employee contributions for healthcare 4

6 Flores Case on Overtime Pay 5

7 Flores Case on Overtime Pay Tale of two non-exempt employees: Chris Christine Employer Name Employer ABC Employer XYZ Compensation $50,000 per year $55,000 per year Payroll Deduction for Medical Plan Net Pay If Covered by Plan Opt-Out Payment $5,000 per year Net Pay If Not Covered by Plan $0 per year $5,000 per year $50,000 per year $50,000 per year $0 per year $55,000 per year $55,000 per year 6

8 Flores Case on Overtime Pay Facts of case Employer maintained a group medical plan for employees Employees who opted-out of the plan (with proof of other medical coverage) received $1, per month (in 2012) Ninth Circuit decided case on June 2, 2016 On June 16, the employer filed a petition for rehearing by the 3- judge panel, and a petition for rehearing en banc On August 23, Ninth Circuit denied the employer s petition for rehearing by the panel, and its petition for rehearing en banc On June 21, the City Council authorized the filing of a petition for writ of certiorari with the U.S. Supreme Court 7

9 Flores Case on Overtime Pay Issue #1: Employees who opt out of the group medical plan Are their cash-in-lieu of benefits payments included in their regular rate of pay for overtime purposes? Section 207(e)(2) of the Fair Labor Standards Act states: payments to an employee which are not made as compensation for his hours of employment are excluded from the regular rate of pay Ninth Circuit concludes FLSA section 207(e)(2) does not apply; cash-in-lieu of benefits payments are included in regular rate of pay for purposes of calculating overtime pay 8

10 Flores Case on Overtime Pay Issue #2: Employees who elect coverage under the group medical plan Are cash-in-lieu of benefits payments included in their regular rate of pay for overtime purposes even though they never received the payments as cash? Section 207(e)(4) of the Fair Labor Standards Act states: contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide plan for providing oldage, retirement, life, accident, or health insurance or similar benefits for employees are excluded from regular rate of pay U.S. Labor Department states that a plan will not qualify as a bona fide plan if employees receive more than an incidental payment in cash DOL also states that cash-in-lieu of benefits payments are incidental to a bona fide plan if they account for no more than 20% of the employer s total contributions on a plan-wide basis 9

11 Flores Case on Overtime Pay Year Opt-Out Payments to Employees Employer Contributions To Medical Plan Percent Paid in Cash to Employees 2009 $1,116,486 $1,272, % 2010 $1,086,203 $1,449, % 2011 $1,138,074 $1,452, % 2012 $1,213,881 $1,472, % Ninth Circuit concludes that the employer does not have a bona fide plan, because more than 40% of the employer s total contributions under the plan are paid directly to employees as cash, which the court decided is more than incidental; as a result, all employer contributions for plan coverage are included in regular rate of pay for overtime purposes 10

12 Flores Case on Overtime Pay Strategies for handling cash-in-lieu of benefits payments: Maintain the status quo, and include cash-in-lieu of benefits payments in employees regular rate of pay for overtime purposes Eliminate cash-in-lieu of benefits payments Trim the cash-in-lieu of benefits payments so that they become incidental to a bona fide plan; as a result, employees electing coverage do not have their regular rate of pay increased by the cash-in-lieu of benefits payments Replace the cash-in-lieu of benefits program with flex dollars that can pay for healthcare coverage (medical, dental, or vision care) Combine the above in a hybrid approach 11

13 ACA Affordability 12

14 ACA Affordability 13

15 ACA Affordability Tale of two non-exempt employees: Chris Christine Employer Name Employer ABC Employer XYZ Compensation $50,000 per year $55,000 per year Payroll Deduction for Medical Plan Net Pay If Covered by Plan Opt-Out Payment $5,000 per year Net Pay If Not Covered by Plan $0 per year $5,000 per year $50,000 per year $50,000 per year $0 per year $55,000 per year $55,000 per year 14

16 ACA Affordability General rule for opt-out payments Opt-out payments are treated as a Required Employee Contributions for purposes of line 15 on Form 1095-C, whether or not the employee opts out of the employer s group medical plan This general rule is subject to two important exceptions: Temporary grandfathered rule Eligible opt-out arrangements 15

17 ACA Affordability Temporary grandfathered rule Opt-out payments are not treated as Required Employee Contributions if they are available to the employee under an opt-out arrangement adopted on or before December 16, 2015, that meets at least one of the following requirements: The employer offered the opt-out arrangement (or a substantially similar arrangement) with respect to health coverage provided for a plan year that included December 16, 2015; or A board, committee, or similar body, or an authorized officer of the employer, specifically adopted the opt-out arrangement before December 16, 2015; or The employer had provided written communications to employees on or before December 16, 2015, indicating that the opt-out arrangement would be offered to employees at some time in the future 16

18 ACA Affordability Example of temporary grandfathered rule - an opt-out payment required under the terms of a collective bargaining agreement that was in effect before December 16, 2015 In this example, the opt-out payments would not be treated as Required Employee Contributions until the start of the next plan year after the collective bargaining agreement expires Does the temporary grandfathered rule apply to other types of agreements covering employees that are similar to collective bargaining agreements (for example, a memorandum of understanding)? Proposed regulations mention the issue, and state that final regulations are expected to address it 17

19 ACA Affordability Eligible opt-out arrangements Opt-out payments available to employees under an eligible opt-out arrangement are not treated as Required Employee Contributions if they are part of an eligible opt-out arrangement that meets all of the following requirements: The employee must provide reasonable evidence that he/she and all individuals in the employee s tax family (i.e. those for whom he/she expects to claim a personal tax exemption) have minimum essential coverage from an acceptable alternate source The employee must provide reasonable evidence of the alternate coverage at least annually The opt-out payment may not be paid if the employer knows that the employee or a member of his/her tax family does not have minimum essential coverage from an acceptable alternate source 18

20 ACA Affordability What is alternate coverage? It is minimum essential coverage from any source other than the individual market, whether or not from the insurance marketplace (like Covered California) Examples of alternate coverage another employer s group medical plan, retiree medical plan, Medicare, Tri-Care, Medi- Cal (or Medicaid) What is reasonable evidence of alternate coverage? Employee s attestation (or affidavit) is sufficient, unless the employer knows -- or has reason to know -- that the attestation is incorrect The employer may require proof of coverage other than an attestation (or affidavit) 19

21 ACA Affordability When is the employer required to obtain evidence of alternate coverage? Evidence must be provided as part of regular annual open enrollment (or within a reasonable time before the period of coverage begins) Exception: The arrangement can require evidence of alternative coverage after the plan year begins, to enable the employee to obtain evidence of medical coverage from another source Note that an eligible opt-out arrangement may be adopted after December 16, 2015 (i.e. it is not required to meet the temporary grandfathered rule) 20

22 ACA Affordability Full-flex cafeteria plan can result in Required Employee Contributions on line 15 of Form 1095-C Employer makes flex dollars available to employees as part of a section 125 cafeteria plan If the flex dollars are health flex contributions, they are not included on line 15 If the flex dollars are non-health flex contributions, they are included on line 15 21

23 ACA Affordability Flex dollars are health flex contributions if they meet one or both of the following requirements: Employees may use the flex dollars only to pay for minimum essential coverage and other health care expenses (i.e. medical, dental, and/or vision care) Employees may not receive the flex dollars as cash All other flex dollars are considered non-health flex contributions that must be reported as Required Employee Contributions on line 15 of Form 1095-C Examples of non-health flex contributions: flex dollars that may be used to pay for life insurance, or a 457 plan, or received as cash (if the employee opts out of the medical plan or has extra flex dollars left over after enrolling in the plan) 22

24 ACA Affordability Issues facing employers: If the employer has an opt-out arrangement, when should it convert to an eligible opt-out arrangement? Should employees be required to show proof of other medical coverage before they can obtain opt-out payments, in addition to signing an attestation form? If the employer has a full-flex cafeteria plan, should it amend the plan to include health flex contributions only? 23

25 IRS Form 1095-C Reporting 24

26 IRS Form 1095-C Reporting 25

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28 IRS Form 1095-C Reporting After an employer files Form 1095-C (and the transmittal Form 1094-C) with IRS, what happens next? IRS may audit the employer to confirm the accuracy of the ACA information reports IRS will use the ACA information reports to determine whether the employer is liable for a penalty under ACA employer shared responsibility (also called employer play-or-pay ) Filing Year IRS Deadline /31/2016 (paper filing) 6/30/2016 (electronic filing) /28/2017 (paper filing) 3/31/2017 (electronic filing) Statute of Limitations 5/31/2019 6/30/2019 2/28/2020 3/31/

29 IRS Form 1095-C Reporting If IRS conducts an audit before expiration of the statute of limitations, can the employer prove the following? Issue All employees who received Form W-2 for the year were properly classified as ACA fulltime or not ACA full-time for each month of the calendar year (including new hires and leaves of absence) All ACA full-time employees received an offer of coverage under the group medical plan (especially if they waived coverage) Proof Payroll records showing hours of service Evidence of enrollment in group medical plan; employee election forms showing waiver of coverage 28

30 IRS Form 1095-C Reporting If IRS conducts an audit before expiration of the statute of limitations, can the employer prove the following? Issue The Required Employee Contribution for each ACA fulltime employee who is offered coverage under the employer s group medical plan The employer s group medical plan satisfies the ACA s minimum value requirement Form 1095-C was provided to every ACA full-time employee on a timely basis Proof Open enrollment materials, payroll records Summary plan description, evidence-of-coverage insurance booklet, summary of benefits and coverage Employer records showing dates and method of delivery, who sent and who received the document 29

31 Employer Appeal Notices 30

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34 Employer Appeal Notices Employers have received over 470,000 employer appeal notices from Covered California and other insurance marketplaces since June 2016, and will continue to receive them in the future The notice states that the employer: May have to pay an ACA penalty to IRS Has an opportunity to file an appeal with the marketplace 33 33

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39 Employer Appeal Notices Why is the marketplace sending an employer appeal notice to the employer? Employee has applied for a qualified health plan (i.e. individual health insurance policy) from the insurance marketplace Employee has provided the marketplace with information about the employer (including its address), his/her earnings, and eligibility/coverage under the employer s medical plan Insurance marketplace has made a preliminary determination (based on the employee s information) that the employee is eligible for advance payment of premium tax credits to help pay for his/her qualified health plan Insurance marketplace wants the employer to confirm the accuracy of the employee s information that is the purpose of the employer appeal notice 38

40 Employer Appeal Notices Is the employer required by law to respond with an employer appeal? No, the insurance marketplace cannot compel the employer Will the employer have to pay an ACA penalty if it fails to submit an employer appeal? No, only IRS (not the insurance marketplace) can assess an ACA penalty against the employer But whenever IRS provides premium tax credits to help pay for an employee s qualified health plan, IRS may want to know whether the employer properly handled its ACA obligations Should the employer respond to an employer appeal anyway? Yes, to provide accurate information to the insurance marketplace in determining the advance payment of premium tax credits to its employee 39

41 Employer Appeal Notices What to include in the employer appeal: Issue Current year s job-based income Eligibility and coverage under the group medical plan (including start and end dates) Employee s required contribution for coverage under the group medical plan Whether the group medical plan satisfies the ACA s minimum value requirement Documentation or Proof Employee s pay stub Employee s election form or waiver of coverage Rate sheet from open enrollment materials Summary of Benefits and Coverage 40

42 Cadillac Tax 41

43 Cadillac Tax Affordable Care Act imposes a 40% excise tax on high cost employer-sponsored health coverage Originally effective January 1, 2018 Postponed until January 1, % excise tax applies to the extent that the total dollar cost of an employee s health coverage exceeds a threshold dollar amount $10,200 for single coverage/$27,500 for non-single coverage (indexed for general rate of inflation, not healthcare inflation) Many exceptions exist for special groups of employees Calculated by the employer; paid by the insurance carrier for insured plans, and by the employer for self-insured plans Encourages employers to offer lower-cost health plans to employees 42

44 Cadillac Tax Subject to the tax Not subject to the tax Insured and self-insured medical coverage (for active employees, retirees, and their surviving spouses) Integrated self-funded dental and vision plans Health Flexible Spending Accounts (FSAs) Health Savings Accounts (HSAs)- employer and employee pre-tax contributions to HSAs Health Reimbursement Arrangements (HRAs) Governmental plans On-site clinics (providing more than minimal benefits) Multiemployer plans (union trusts) Executive physical programs Any of the following plans if paid by the employer for its employees or paid by the employee with pre-tax dollars: hospital indemnity, critical illness, hospital confinement, cancer insurance Fully-insured dental and vision plans Stand-alone, self-funded dental and vision plans (pending final guidance from the IRS) Long term and short term disability plans, AD&D insurance, and life insurance Long-term care insurance Liability insurance including automobile and general liability insurance Workers compensation or similar insurance Automobile medical payment insurance Credit-only insurance Other insurance coverage under which benefits for medical care are secondary or incidental to other insurance benefits Employee after-tax contributions to Health Savings Accounts Employee after-tax contributions to purchase hospital indemnity, critical illness, hospital confinement, cancer insurance 43

45 Questions? 44