Tech Flex. Topics Covered in this Issue:

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1 April 2014, Issue IV Tech Flex Topics Covered in this Issue: Benefits: Insurers Offering Spousal Coverage Must Offer Same-Sex Spouse Coverage IRS Opines on Correcting Health FSA Reimbursement Errors Comments Provided by IRS on HCFSA Carryover and HSA Eligibility Payroll: Supreme Court Holds Severance Pay Subject to FICA If No Legislation is Enacted Hawaii May Suspend Use of Payroll Card Nebraska Amends Wage Statement Rules Various States to Increase Minimum Wage

2 INSURERS OFFERING SPOUSAL COVERAGE MUST OFFER SAME- SEX SPOUSE COVERAGE Health and Human Services has announced that, beginning with plan or policy years beginning on or after January 1, 2015, health insurers offering non-grandfathered health coverage for opposite-sex spouses cannot deny coverage to legally married same-sex spouses. The announcement, in the form of a single frequently asked question (FAQ), clarifies final regulations issued in February 2013 that prohibit health insurers offering non-grandfathered group or individual health insurance coverage from employing marketing practices or benefit designs that discriminate on the basis of certain factors, including sexual orientation. The FAQ confirms that insurers must offer coverage to legally married same-sex spouses under the same terms and conditions that apply to opposite-sex spouses, regardless of the jurisdiction in which the policy is offered, sold, issued, in effect, or operated, or where the policyholder resides. As under other provisions of federal law, same-sex spouses will be considered legally married for purposes of this guidance if their marriage was validly entered into in a domestic or foreign jurisdiction that authorizes same-sex marriage. It is important to note that the FAQ does not require an insurer to provide coverage that is inconsistent with a group health plan s eligibility requirements or interfere with a plan sponsor s right to define spouse as it chooses for purposes of plan eligibility. Instead, it prohibits insurers from declining to offer a plan sponsor (or individual in the individual market) the option to cover same-sex spouses if desired. In part the FAQ states as follows: Q: If a health insurance issuer in the group or individual market offers coverage of an opposite-sex spouse may the issuer refuse to offer coverage of a same-sex spouse? No. Federal regulations at 45 CFR (e) provide that a health insurance issuer offering non-grandfathered group or individual health insurance coverage cannot employ marketing practices or benefit designs that discriminate on the basis of certain specified factors. One such factor is an individual s sexual orientation. As CMS has used the terms in this regulation, an issuer is considered to employ marketing practices or benefit designs that discriminate on the basis of sexual orientation if: 2

3 1. The issuers offers coverage of an opposite-sex spouse; and 2. The issuer chooses not to offer, on the same terms and conditions as those offered to an opposite-sex spouse, coverage of a same-sex spouse based on a marriage that was validly entered into in a jurisdiction where the laws authorize the marriage of two individuals of the same sex, regardless of the jurisdiction in which the insurance policy is offered, sold, issued, renewed, in effect, or operated, or where the policyholder resides. This section does not require a group health plan (or group health insurance coverage provided in connection with such plan) to provide coverage that is inconsistent with the terms of eligibility for coverage under the plan, or otherwise interfere with the ability of a plan sponsor to define a dependent spouse for purposes of eligibility for coverage under the plan. Instead, this section prohibits an issuer from choosing to decline to offer to a plan sponsor (or individual in the individual market) the option to cover same-sex spouses under the coverage on the same terms and conditions as opposite sex-spouses. [Emphasis added] For a copy of the HHS announcement please click on the link provided below. Guidance/Downloads/frequently-asked-questions-on-coverage-of-same-sexspouses.pdf IRS OPINES ON CORRECTING HEALTH FSA REIMBURSEMENT ERRORS Recently Harry Beker, Chief Counsel Health and Welfare Branch of the Internal Revenue Service provided his insight via Memorandum regarding three issues pertaining to correction procedures for improper healthcare flexible spending account (HCFSA) payments. Although it is important to note the comments by Mr. Beker were in response to a request for assistance and stipulated that this advice may not be used or cited as precedent, the comments do provide insight as to the IRS view on these matters generally. The three issues addressed and IRS comments in Memorandum are as follows: 3

4 Issue 1: Whether the correction procedures for debit cards provided in the proposed cafeteria plan regulations may be applied to improper payments from a HCFSA. IRS Comments: The correction procedures for debit card payments provided in Proposed Treasury Regulation Section (d)(7)(ii) through (v) as follows may be used to recover improper payments under a HCFSA. (ii) The employer demands that the employee repay the cafeteria plan an amount equal to the improper payment; (iii) If, after the demand for repayment of improper payment (as described in paragraph (d)(7)(ii) of this section), the employee fails to repay the amount of the improper charge, the employer withholds the amount of the improper charge from the employee's pay or other compensation, to the full extent allowed by applicable law; (iv) If any portion of the improper payment remains outstanding after attempts to recover the amount (as described in paragraph (d)(7)(ii) and (iii) of this section), the employer applies a claims substitution or offset to resolve improper payments, such as a reimbursement for a later substantiated expense claim is reduced by the amount of the improper payment. So, for example, if an employee has received an improper payment of $200 and subsequently submits a substantiated claim for $250 incurred during the same coverage period, a reimbursement for $50 is made; and (v) If, after applying all the procedures described in paragraph (d)(7)(ii) through (iv) of this section, the employee remains indebted to the employer for improper payments, the employer, consistent with its business practice, treats the improper payment as it would any other business indebtedness. Issue 2: Whether an employer may alter the order of correction procedures provided in Proposed Treasury Regulation Section (d)(7)(ii) through (v) as outlined above. IRS Comments: The employer may apply the rules from the proposed regulations (ii) through (iv) in any order but the order used must be consistently applied to all HCFSA participants. The employer may only use the correction method (v) after all of the correction methods outlined in (ii) through (iv) have been pursued by the employer. Forgiveness of improper payments as uncollectible business indebtedness should be the exception rather than a routine process. Repeated inclusion in income of improper payments suggests that proper substantiation procedures are not in place or that the payments may be a method of [impermissible] cashing out unused FSA amounts. 4

5 Issue 3: In cases in which all other correction procedures have been exhausted and the employer treats the improper payment as a business indebtedness, whether the amount of a forgiven improper payment is reported by the employer to the employee on Form W-2 or Form IRS Comments: The improper payment should be reported by the employer to the employee as wages on a Form W-2 and is reportable in the taxable year of the employee in which the indebtedness is forgiven. The amount is subject to withholding for income tax, Social Security, Medicare and the Federal Unemployment Tax Act. For a copy of Memorandum please click on the link provided below. COMMENTS PROVIDED BY IRS ON HCFSA CARRYOVER AND HSA ELIGIBILITY The Chief Counsel Health and Welfare Branch of the Internal Revenue Service, Harry Beker via Memorandum provided comments regarding issues pertaining to healthcare flexible spending account (HCFSA) carryovers and eligibility to receive or make contributions to a health savings account (HSA). Although it is important to note the comments by Mr. Beker were in response to a request for assistance and stipulated that this advice may not be used or cited as precedent, the comments do provide insight as to the IRS view on these matters generally. Background: In general, for any month an individual is covered under a high deductible health plan and has no impermissible coverage, that individual is eligible to make and receive contributions to an HSA. Impermissible coverage is any plan that pays benefits prior to the HDHP deductible being met with the exception of dental, vision or preventive expenses. Coverage under a full-purpose health HCFSA is considered impermissible coverage. However, participation in a limited-purpose flexible spending account, which only reimburses dental, vision and preventive expenses or a post deductible fullpurpose HCFSA (only pay expenses once the HDHP deductible is met), is not considered impermissible coverage. Notice allows a cafeteria plan to provide for a carryover of up to $500 of HCFSA unused funds to use in the following plan year. Consequently, an individual who was eligible to make or receive contributions to an HSA may become ineligible to do so as the carryover funds would constitute impermissible coverage. 5

6 Memorandum addresses the following seven issues regarding the up to $500 HCFSA carryover and its impact on an individual s eligibility to make or receive contributions to an HSA. Issue 1: May an otherwise HSA eligible individual receive or make contributions if the participant is in a general purpose HCFSA solely as a result of a carryover of unused amounts from the prior year? IRS Comments: An individual who is covered under a full-purpose HCFSA is not an eligible individual for purposes of making or receiving contributions to an HSA. This includes an individual who has coverage in full-purpose HCFSA solely as the result of a carryover of unused amounts in a HCFSA from the prior year. Issue 2: May an otherwise HSA eligible individual who participates in a fullpurpose HCFSA solely as a result of a carryover of unused amounts from the prior year make or receive contributions to an HSA for any month after the carryover amounts have been exhausted? IRS Comments: An individual who is covered by a full-purpose HCFSA, even solely as a result of a carryover, is not an HSA eligible individual for the entire HCFSA plan year regardless of when the carryover balance is exhausted. Issue 3: May an individual who participates in a full-purpose HCFSA and elects in the following year to participate in HSA-compatible coverage, such as a LFSA or a post-deductible HCFSA, elect to have the carryover amounts carried over to the HSA-compatible coverage? IRS Comments: There is no requirement that the unused amounts in the full-purpose HCFSA only be carried over to a full-purpose HCFSA. Consequently, an individual who enrolls in HSA-compatible coverage may carryover the amounts to the HSA-compatible coverage. However, the carryover amounts may not be carried over to non-health FSA or another type of cafeteria plan benefit. Issue 4: May an individual who participates in a full-purpose HCFSA and elects in the following year to participate in HSA-compatible coverage and elects to have the carryover amounts carried over to the HSA-compatible coverage also receive or make contributions to an HSA in the following year? IRS Comments: Yes, an individual who participates in a full-purpose HCFSA and elects in the following year to participate in HSA-compatible coverage and elects to have the carryover amounts carried over to the HSA-compatible coverage is eligible to make and receive HSA contributions assuming the individual meets all the other requirements of HSA eligibility. 6

7 Issue 5: May a cafeteria plan that offers both a full-purpose HCFSA and an HSAcompatible health FSA automatically treat an individual who elects coverage in a HDHP plan for the following year as enrolled in the HSA-compatible health FSA and carryover the funds to the HSA compatible health FSA? IRS Comments: Yes, a cafeteria plan that offers both a full-purpose HCFSA and a HSA-compatible HCFSA may automatically treat an individual who elected an HDHP for the following year as enrolled in the HSA-compatible HCFSA and carryover the amounts to the HSA-compatible HCFSA. Issue 6: May a cafeteria plan provide that an individual may decline the carryover to the following year and retain eligibility to make and receive HSA contributions? IRS Comments: Yes, a cafeteria plan may allow an individual prior to the beginning of the following year to decline or waive the carryover amount for the following year and therefore make and receive HSA contributions assuming the individual is otherwise HSA eligible. Issue 7: If an individual elects to carry over unused amounts from a full-purpose HCFSA to a HSA-compatible HCFSA, how do the uniform coverage rules, which require the maximum reimbursement from a heath FSA to be available at all times during the period of coverage, apply during the run-out period of the full-purpose HCFSA? IRS Comments: During the run-out period for the full-purpose HCFSA, the unused HCFSA amounts may be used to reimburse any eligible medical expenses incurred prior to the end of the full purpose HCFSA. Any claims covered by the HSA-compatible HCFSA must be timely reimbursed up to the amount elected for the HSA-compatible HCFSA. Any claims in excess of the elected amount may be reimbursed after the runout period when the amount of any carryover is determined. For a copy of Memorandum please click on the link provided below. 7

8 SUPREME COURT HOLDS SEVERANCE PAY SUBJECT TO FICA On March 25, 2014, the United States Supreme Court ruled in United States v. Quality Stores, Inc., ET AL unanimously in favor of the Internal Revenue Service (IRS) that severance pay is subject to the Social Security (FICA) withholding tax. The issue of whether severance pay is subject to FICA withholding has been the subject of conflicting decisions in the lower courts for a number of years. Background: The Internal Revenue Code ( Code ) defines wages in substantially the same way for purposes of income-tax withholding and for purposes of FICA in Code Sections 3401 through Sec and Code Sec. 3121(a), respectively. In general, the term means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash. The Supreme Court declared in this case that Congress intended a uniform definition of wages for purposes of FICA, Federal Unemployment Tax Act (FUTA), and income tax withholding. Code Sec. 3121(a) was subsequently amended to carry a so-called de-coupling rule, namely that nothing in the income tax withholding regulations which provides for an exclusion from wages for withholding purposes shall be construed to require a similar exclusion from wages for FICA purposes. In 2002, the Court of Federal Claims held that severance pay was not subject to FICA taxes. However, in 2008, the Court of Appeals for the Federal Circuit reversed and held that the severance pay involved in the taxpayer's various downsizing programs was subject to FICA tax. In 2012, the Court of Appeals for the Sixth Circuit reached a contrary decision in U.S. v. Quality Stores. In that case, a retail store operator (Quality), which had an involuntary chapter 11 bankruptcy petition filed against it, made severance payments to its terminated employees which were not attributable to the rendering of any particular employment service. Quality withheld federal income tax and the employees' share of FICA tax and paid the employer's share of FICA tax, but later filed for a refund. The bankruptcy court concluded that the severance payments were not wages for FICA purposes, the district court affirmed and then the Sixth Circuit affirmed. The IRS filed a petition for rehearing en banc, but it was denied. The IRS then appealed to the Supreme Court. On October 1, 2013, the Supreme Court granted certiorari over the Quality Stores case to decide the matter. While the cases were pending, many employers filed refund claims with the IRS for FICA previously paid on severance. Based upon the Supreme Court ruling the request 8

9 for refund will likely be denied. As a result of the Supreme Court ruling, employers may need to evaluate whether FICA was paid appropriately with respect to any severance payment made based upon the strength of lower court decisions during the pendency of the case. Certain types of FICA underpayments can be corrected without payment of interest or penalties if an amended Form 941-X is filed, and the tax is paid, by the end of the month following the calendar quarter in which the error is discovered. Employers that failed to pay FICA on severance pay should discuss with a tax advisor whether the underpayment can be treated as an error that was discovered when the Supreme Court issued its decision, which would enable them to file a Form 941-X by April 30, IF NO LEGISLATION IS ENACTED HAWAII MAY SUSPEND USE OF PAYROLL CARD On April 3, 2014, the State of Hawaii Department of Labor and Industrial Relations (DLIR) issued an amended notice amending the declaratory ruling issued on or about April 13, 2006, administratively allowing the use of payroll, pay or debit cards for the payment of wages to employees. The department is suspending the allowance of this payroll practice as based on an April 2006 Declaratory Ruling effective on September 1, The amended notice stated that the department is putting covered employers on notice that as of September 1, 2014, unless legislation to the contrary requires otherwise, allowance pursuant to the requirements contained in the April 2006, guidelines for the use of a payroll card shall be suspended effective September 1, Consequently, the use of payroll cards may continue until September 1, 2014 under the April 2006 rules or until new legislation regarding payroll cards is enacted and becomes effective. Note: The House and Senate committees have passed different versions of a payroll card bill. A conference committee has been formed to resolve their differences and a conformed bill is expected to be voted upon within the next few weeks. It is important to note that the original Notice was issued on March 20, 2014 and would have suspended the use of payroll cards effective May 1, 2014, however, the Amended Notice extends the effective date before employers are required to cease using payroll cards to September 1, As background, the practice currently allowed of paying employees via payroll, pay, or debit card is not expressly provided for an allowed method for the payment of wages. However, in April of 2006, the DLIR issued guidance via a Declaratory Ruling permitting paycard use for the payment of wages, subject to several conditions, including that employee participation is voluntary and in writing, and that the employee is entitled to one free withdrawal each pay period. 9

10 The DLIR stated in the Amended Notice that the April 13, 2006 Declaratory Ruling may or not be beyond the authority of the past Administration. The department notes that legislation on point, specifically House Bill 1814, of the 2014 Regular Session is currently being deliberated; therefore, the department is delaying any administrative action pending legislative action and potential review by the Governor is completed. For a copy of the Amended Notice, April 2006 Payroll Card Rules and the current version of HB 1814 please click on the links provided below. Amended Notice: Debit-Cards-eff pdf April 2006 Payroll Card Rules: HB 1814: NEBRASKA AMENDS WAGE STATEMENT RULES The state of Nebraska has now amended its rules via House Bill 560 (HB 560) on wage statements so that employers are now required to furnish employees with wage statements on each regular payday. Previously, wage statements were only required to be provided upon written request from an employee. Under the newly enacted law, wage statements must include the following information: (1) The identity of the employer. (2) The hours for which the employee was paid. However, employers do not have to provide information on hours worked for employees who are exempt from overtime under the Federal Fair Labor Standards Act unless the employer has established a policy or practice of paying to or on behalf of exempt employee s overtime, or bonus or a payment based on hours worked. (3) The wages earned by the employee. (4) The deductions made for the employee. 10

11 The statements can be provided by mail or electronically, or made available at the employee s normal place of employment during employment hours. HB 560 was approved on April 2, 2014 and is effective 30 days after adjournment of the legislative session which occurred on April 17, For a copy of HB 560, please click on the link provide below. VARIOUS STATES TO INCREASE MINIMUM WAGE The states of Connecticut, Minnesota and West Virginia have enacted legislation to increase the minimum wage as follows. Connecticut: The governor of Connecticut, Daniel P. Malloy has signed into law legislation that increases the minimum wage over the next three years from its current level of $8.70 per hour as follows: January 1, 2015 January 1, 2016 January 1, 2017 $9.15 per hour $9.60 per hour $10.10 per hour Minnesota: On April 14, 2014, Governor Mark Dayton signed a bill into law raising Minnesota s minimum wage for the first time since The bill (HF2091/SF1775), which passed in the House and Senate last week, phases in the new minimum wage over the next several years as shown below: Provision Previous Law New Minimum Wage Law Large Employer Wage $6.15/hour $8.00/hour on August 1, 2014 $9.00/hour on August 1, 2015 $9.50/hour on August 1,

12 Small Employer Wage $5.25/hour $6.50/hour on August 1, 2014 $7.25/hour on August 1, 2015 $7.75/hour on August 1, Day Training Wage (18 and 19 years old) Youth Wage (Under 18 years old) Indexed to Inflation $4.90/hour No youth wage No inflationary increases $6.50/hour on August 1, 2014 $7.25/hour on August 1, 2015 $7.75/hour on August 1, 2016 $6.50/hour on August 1, 2014 $7.25/hour on August 1, 2015 $7.75/hour on August 1, 2016 Indexing begins January 1, 2018 For additional information, please click on the fact sheet link below. West Virginia: West Virginia Governor Earl Ray Tomblin has signed legislation increasing the state minimum wage in two stages as follows from its current level of $7.25 per hour as follows: January 1, 2015 January 1, 2016 $8.00 per hour $8.75 per hour The law also increases the training wage paid to new employees under the age of 20 hired after January 1, 2015 to $6.40 per hour for the first 90 days of employment. If the federal minimum wage or training wage is higher than the state amounts, then federal law will apply. Please contact ADP National Account Services for further information at: th Ave. West Suite 600 Lynnwood, WA Phone: (425) Fax: (425) 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. **Please note that the information provided in this document is current as of the date it is originally published.** 12