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1 CHAPTER 7 TAX TREATMENT OF WELFARE BENEFIT PLANS 2017 MIDWINTER MEETING AUSTIN TX FEBRUARY 8 11, 2017 AMERICAN BAR ASSOCIATION SECTION OF LABOR AND EMPLOYMENT LAW EMPLOYEE BENEFITS COMMITTEE SUBMITTED BY: KATHRYN BAKICH, ESQ. THE SEGAL COMPANY WASHINGTON, DC NEUTRAL CO-CHAIR RHONA LYONS, ESQ. SCHUCHAT, COOK & WERNER ST. LOUIS, MO UNION CO-CHAIR SARAH R. JOHNSON, ESQ. HOLIFIELD JANICH RACHAL & ASSOCIATES, PLLC KNOXVILLE, TN EMPLOYER CO-CHAIR CONTRIBUTORS: ASHLEY TROTTO KENNERLY MONTGOMERY & FINLEY, PC KNOXVILLE, TN WILLIAM E. MASON KENNERLY MONTGOMERY & FINLEY, PC KNOXVILLE, TN 1

2 II. Employee and Beneficiary Tax Treatment C. Cafeteria Plans 7. Nondiscrimination Rules As discussed in the Main Volume, a cafeteria plan is prohibited from discriminating in favor of highly compensated individuals (HCIs). For 2017, HCIs are officers, more-than-5- percent owners, and employees earning more than $120,000 (indexed). 1 For 2017, key employees are officers with annual compensation greater than $175,000 (indexed), more-than-5- percent owners of the employer, and more-than-1-percent owners of the employer with compensation over $150,000 (not indexed). 2 D. Health Reimbursement Arrangements The 21st Century Cures Act establishes a new type of HRA called the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), effective for years beginning after December 31, Small employers may offer a QSEHRA if they are not subject to the Affordable Care Act s employer shared responsibility provisions. 4 This generally includes employers that employ fewer than 50 full-time or full-time equivalent (FTE) employees during the previous calendar year. An employer that uses a QSEHRA may not offer a group health plan to any of its employees. Like existing HRAs, only employer contributions may be used to fund the account. No salary reductions are permitted. The maximum reimbursement from the QSEHRA for an individual is $4,950 per year ($10,000 per year for family coverage), indexed annually. 5 Reimbursement amounts offered under the plan must generally be the same for all eligible employees, although the statute permits some differences in specific situations, including for collectively bargained employees, but may vary if the difference is because of the age-based price of individual insurance coverage or the number of family members covered under the insurance arrangement. In considering whether reimbursement is the same for all eligible employees, the employer may exclude the following employees as described in IRC Section 105(h)(3)(B), substituting 90 days for three years in clause (i): Employees who have not worked for 90 days; Employees who have not attained age 25; Part-time or seasonal employees; Employees covered by a collective bargaining agreement; and 1 IRS Notice , I.R.B. 725; see Prop. Treas. Reg (a)(9). 2 IRS Notice , I.R.B. 725; see Prop. Treas. Reg (a)(10). 3 Pub. Law , Section 18001, amending Sections 106 and 9831 of the Internal Revenue Code. 4 IRC 9831(d)(3)(B). 5 IRC 9831(d)(2)(B)(iii). 2

3 Employees who are nonresident aliens and who receive no US-earned income. 6 The QSEHRA may reimburse employees and their dependents for qualified medical expenses, as defined under IRC Section 213(d). This would include expenses for unreimbursed medical expenses (e.g., deductibles, coinsurance and copayments) as well as premiums for health coverage, including individual insurance premiums and coverage purchased on a state Exchange or the federal Marketplace. Premiums for other coverage such as vision or dental coverage could also be reimbursed. An employee would be required to have minimum essential coverage if he or she has a QSEHRA. If not, the value of the QSEHRA would be included in the employee s income. Employers would be required to provide a notice to eligible employees not later than 90 days before the beginning of the year, which must include the following: a description of the amount of the benefit; a statement that the employee should provide that information to any health insurance Exchange/Marketplace to which the employee applies for a premium assistance tax credit; and a statement concerning the employee s obligation under the Affordable Care Act individual mandate to obtain health coverage. 7 Failure to provide the notice would result in an excise tax penalty of $50 per employee up to a maximum of $2,500. Employers would also have to report the amount of the contribution on an employee s Form W-2. A QSEHRA is not subject to ERISA or to the group health plan provisions of the Affordable Care Act. It is also not subject to the continuation coverage provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA). The Act addresses the impact of a QSEHRA on an employee s right to obtain subsidized coverage under a state Exchange or federal Marketplace. 8 It provides that an employee is only eligible for a premium assistance tax credit if the cost of purchasing standard coverage from an Exchange/Marketplace using funds from the QSEHRA is not affordable, and the Act includes a formula to use to calculate affordability. Generally, the higher the amount of the QSEHRA, the less likely that an employee would be able to obtain a premium assistance tax credit to assist with the purchase of coverage in a state Exchange or the federal Marketplace. The Act does not address whether other Affordable Care Act subsidies, such as the cost-sharing subsidies, would be available to those who have a QSEHRA. E. Flexible Spending Arrangements For the taxable years beginning in 2017, the dollar limitation on voluntary employee salary reductions for contributions to health flexible spending arrangements is $2, F. Health Savings Accounts 1. Eligibility The Main Volume explains that tax-qualified contributions to HSAs may be made only for eligible individuals, i.e., those enrolled in high-deductible health plans (HDHPs) with defined minimum annual deductibles and allowable annual out-of-pocket limits. For 2017, the 6 IRC 9831(d)(3)(A). 7 IRC 9831(d)(4). 8 IRC 106(g). 45 Rev. Proc

4 minimum annual deductibles for an HDHP are $1,300 for individual coverage and $2,600 for family coverage. 10 The allowable annual out-of-pocket limits (excluding premiums) for 2017 are $6,550 for an individual and $13,100 for family coverage. 11 The Main Volume also explains that contributions to HSAs are subject to contribution limits. For calendar year 2017, the maximum annual contribution to an HSA for an individual with self-only coverage under an HDHP is $3,400 with an additional $1,000 catch-up contribution for individuals 55 and older. 12 The maximum annual contribution to an HSA for an individual with HDHP family coverage is $6,750 with an additional $1,000 catch-up contribution for individuals 55 and older. 13 J. Adoption Assistance Programs 2. Limitations on Excludable Amount For taxable years beginning in 2017, the maximum amount that can be excluded for each child, including a child with special needs, is $13, For taxable years beginning in 2016, the amount excludable from an employee s gross income begins to phase out for taxpayers with modified adjusted gross income in excess of $203,540 and is completely phased out for taxpayers with modified adjusted gross income of $243,540 or more. 15 K. Code Section 132 Benefits 6. Qualified Transportation Fringe Benefits For taxable years beginning in 2017, the adjusted maximum monthly excludable amount for the aggregate of transportation in a commuter highway vehicle and any transit pass is $255 and the adjusted maximum monthly excludable amount for qualified parking is $ J. Archer Medical Savings Accounts 8. High-Deductible Health Plans As explained in the Main Volume, participation in an Archer medical savings account is conditioned on coverage under a high-deductible health plan. For 2017, this means a plan that provides 1. individual coverage with an annual deductible that is not less than $2,250 and not more than $3,350, and a maximum annual out-of-pocket limitation of $4,500; or 2. family coverage with an annual deductible that is not less than $4,500 and not more than $6,750, and a maximum annual out-of-pocket limitation of $8, Rev. Proc Rev. Proc Rev. Proc

5 IV. A. Shared Responsibility Requirements Affordable Care Act Tax Provisions 1. Employer Shared Responsibility Requirements Code Section 4980H d. Assessable Payments under Code Section 4980H(b) ii Affordability The Treasury Department and the Internal Revenue Service (IRS) issued a proposed rule on opt-out payments offered by employers to employees who decline group health coverage. 18 An opt-out payment is narrowly defined as a payment that is made only when an employee declines coverage under the group health plan. The proposed rule affects when cash opt-out payments change the amount employees are required to pay for their health care contribution when determining whether premiums are considered affordable under the Affordable Care Act s employer shared responsibility penalty and related reporting requirements. However, the rule has not yet been finalized as of this date. The proposed rule addresses opt-out payments and when those payments increase the amount of the employee s required contribution. The general rule is that an opt-out payment increases the amount of the required contribution for health coverage for all employees. However, under the proposed rule, an opt-out payment will not be treated as increasing the amount of the employee s required contribution only if the arrangement meets all of the following conditions: The employee provides reasonable evidence (e.g., an attestation) that (1) the employee and every person in the employee s expected tax family have or will have minimum essential coverage for the period of coverage to which the opt-out payment applies, and (2) the minimum essential coverage they have or will have is not individual market coverage, whether obtained through the individual insurance market or a Marketplace or state Exchange. A requirement to have other group coverage (e.g., through a spouse s employer) would be acceptable, but the plan terms should nonetheless specify that the opt-out payment will not be paid to any employee whose other coverage is individual market coverage. The reasonable evidence is provided at least every plan year (preferably during an open enrollment period or just after the plan year starts). No payment can be made if the employer knows or has reason to know that the employee (or any member of the tax family) does not actually have the alternative coverage (e.g., through a spouse s employer). The proposed effective date is the plan year beginning on or after January 1, However, there is a delayed effective date for opt-out arrangements that are required under the terms of a collective bargaining agreement in effect before December 16, For such bargained arrangements, the new rule will not apply until the later of the beginning of the first plan year that begins following the expiration of the collective bargaining agreement (disregarding any extensions) or the applicability date of the final rule on opt-out payments Fed. Reg (July 8, 2016) 5

6 B. Informational Reporting Requirements 1. Information Reporting by Applicable Large Employers Code Section Information Reporting of Minimum Essential Coverage Code Section 6055 On November 18, 2016, the Treasury Department and Internal Revenue Service (IRS) published Notice , which extended by 30 days the deadline for providing the 2016 Forms 1095-B and 1095-C to plan participants. The new deadline is March 2, Notice also extended to the 2016 reporting year the good-faith penalty relief that was in place for the 2015 reporting year. This penalty relief applies to incorrect or incomplete information (including taxpayer identification numbers and dates of birth), but it only protects reporting entities that can show they made good-faith efforts to comply with the reporting requirements and that met the applicable deadlines (including the new March 2 deadline). Notice does not extend the deadlines for filing these forms (and the applicable transmittal forms) with the IRS; those deadlines are still February 28, 2017 for paper returns and March 31, 2017, if filing electronically. While the Treasury/IRS determined there was no need for an extension of this filing deadline generally, individual plans or employers may still request an extension. Notice also provides guidance to individuals who might not receive a Form 1095-B or Form 1095-C by the time they file their 2016 tax returns. Individuals who rely upon other information received from employers or health plans need not amend their tax returns once they receive their forms. For 2016, IRS Instructions state that large employers will be required to report conditional offers of coverage to spouses. A conditional offer is an offer of coverage that is subject to one or more reasonable, objective conditions (e.g., an offer to cover an employee s spouse only if the spouse is not eligible for coverage under Medicare or a group health plan sponsored by another employer). The instructions provide two new indicator codes that must be used for reporting these conditional offers in line 14 of Form 1095-C. A proposed rule sets out a new schedule that reporting entities will need to follow when soliciting Taxpayer Identification Numbers (TINs) (typically, Social Security numbers) from participants or dependents. 19 Under the proposed rule, if the coverage application or enrollment form asks for TINs, the reporting entity s initial TIN solicitation is made at the time the reporting entity receives a substantially complete application for coverage. If a TIN is not provided, the reporting entity must make a second solicitation within 75 days of the initial one. If a TIN is still not received, the entity must ask again by December 31 of the year after the initial solicitation was made. The proposed rule also states that it is sufficient to ask the responsible individual (e.g., the participant) for the TINs of his/her dependents. Pending issuance of a final rule, reporting entities may follow the solicitation schedule in the proposed rule or the one set out last year in Notice Federal Register (August 2, 2016). 6

7 C. Tax Credits 1. Health Insurance Premium Assistance Tax Credit for Individuals Code Section 36B As discussed in the Main Volume, individuals who purchase health insurance coverage through a health insurance exchange created under the Affordable Care Act may be eligible for financial assistance in the form of a premium tax credit or cost-sharing reduction, if certain conditions are met. The U.S. House of Representatives has brought suit alleging that the Secretaries of Health and Human Services and of the Treasury acted unconstitutionally by spending unappropriated funds to pay cost-sharing reductions under the ACA. As a preliminary matter, the U.S. District Court for the District of Columbia held that the House of Representatives has standing to pursue these allegations. 20 In May 2016, D.C. District Court agreed and enjoined the use of unappropriated monies to fund reimbursements due to insurers under Section The injunction was stayed pending appeal. 2. Small Business Tax Credit Code Section 45R As the Main Volume explains, starting in 2014, eligible small employers may claim a maximum tax credit of 50 percent (35 percent for tax-exempt eligible employers) for up to two consecutive years if they offer qualified health plan coverage to their employees through a SHOP Exchange. The amount determined under Code Section 45R(d)(3)(B) for taxable years beginning in 2016 is $26,200 (indexed). 22 This amount is used under Code Section 45R(c) for limiting the small employer health insurance credit and under Code Section 45R(d)(1)(B) for determining who is an eligible small employer for purposes of the credit. The maximum average annual wages for employees to qualify as an eligible small employer for 2017 is $52,400 (indexed). D. Excise Taxes and Fees 3. Patient-Centered Outcomes Research Trust Fee As discussed in the Main Volume, fees to fund the Patient-Centered Outcomes Research Institute (PCORI) are imposed on insured and self-insured health plans and certain governmental entities. For plan and policy years that end on or after October 1, 2016, and before October 1, 2017, the fee will be $2.26 per covered life U.S. House of Representatives v. Burwell, 130 F. Supp. 3d 53 (D.D.C. 2015) F. Supp. 3d 165 (D.D.C. 2016), 22 Rev. Proc IRS Notice