New Trade Bill Escalates ACA Reporting Penalties, Resuscitates Health Coverage Tax Credit

Posted by on July 2, 2015 | Be the First to Comment

The trade bill signed into law this week included provisions steeply increasing the penalties related to employers’ Affordable Care Act (ACA) reporting (e.g., reporting required to be done on Forms 1094-C and 1095-C).

The bill also reinstated the trade-related Health Coverage Tax Credit (the “HCTC”), which had expired on Dec. 31, 2013. We previously thought the HCTC’s 2013 demise was permanent. Like an insufficiently dismembered zombie, however, it is once again active. Moreover, it’s slated to remain available through the end of 2019.

Lockton Comment: The HCTC is a seldom-encountered health insurance subsidy program entirely different from the subsidies available through the insurance exchanges under the Affordable Care Act. The interaction of the HCTC with the exchange subsidies and COBRA administration is discussed below.

The High Cost of Noncompliance Keeps Going Up

Employers probably didn’t need an additional incentive for doing their best to comply with the ACA reporting requirements (most employers will complete, provide and file Forms 1094-C and 1095-C for this purpose). But just in case an additional incentive was needed, the trade bill made steep increases in the penalties for reporting failures. These increased penalties also apply to other information returns and filings, such as W-2s, and are effective for reporting required to be filed or furnished after 2015. For example, the increased penalties would apply to the first year’s filings under the ACA, which relate to 2015, but are due in early 2016.

  • The general penalty for failure to file a required information return with the IRS (which is subject to reduction, waiver or increase for various reasons) will increase from $100 per return to $250 per return.
  • The cap on the total amount of penalties for such failures during a calendar year will increase from $1,500,000 to $3,000,000.
  • If a failure relates to both an information return (e.g., a Form 1095-C required to be filed with the IRS) and a payee statement (e.g., that same Form 1095-C required to be furnished to the individual), these penalties are doubled.
  • If a failure is caused by intentional disregard, the new $250 penalty noted above is doubled to $500 for each failure, and no cap applies to limit the amount of penalties that can be applied with respect to that calendar year.

As you consider these increases, keep in mind that these do not affect the IRS’s enforcement policy for the first year of ACA filing. Specifically, the IRS will not penalize employers “that can show they make good faith efforts to comply with the [ACA] reporting requirements.” So, we still have the “good faith efforts” standard, but the penalties that will apply if that standard is not met are much more severe.

What are good faith efforts? If the employer attempts to complete the forms, but the information reported is incorrect or incomplete, that reporting failure may be excused under the IRS enforcement policy. If, however, the employer does not file or provide a required form by the deadline, it seems that the good faith standard would not apply.

Remember the HCTC

The HCTC is a tax credit available to certain workers who lose their jobs due to foreign competition. For those who qualify, it covers 72.5 percent of eligible healthcare costs. Since most employers have absolutely no compliance issues related to the HCTC, many benefits professionals have never encountered it.

The HCTC sometimes affects employers’ health plans because COBRA coverage is one type of coverage for which a qualifying individual can receive the HCTC. Those effects might include:

  • Unless the employer is virtually certain that none of its employees will become eligible for the HCTC, it should include information regarding the HCTC in the COBRA election notices it provides.
  • In some cases, a former employee who was offered COBRA following his trade-related termination of employment but did not elect it must be allowed a second opportunity to elect COBRA upon becoming eligible for the HCTC.
  • An individual who qualifies for the HCTC may receive it by paying premiums for COBRA or other eligible coverage and then claiming the HCTC with respect to those payments on his or her individual tax return. Such employees may ask the former employer or the plan for documents showing their premium payments.
  • Alternatively, if the plan providing the eligible COBRA coverage elects to participate in the “HCTC Program” (there’s no requirement for the plan to do so), the federal government will provide the HCTC by paying part of the qualifying individual’s health coverage premiums as they come due.
  • Unless the plan has elected to participate in the HCTC program, the HCTC seldom affects day-to-day COBRA administration under employer plans.

It’s All Coming Back…With a Few Tweaks

Under the HCTC as reinstated,all of the COBRA interactions noted above remain the same. Because there have been a number of changes in other laws, however, employers’ compliance concerns in connection with the HCTC have also changed since it was last in effect.

  • The ACA now prohibits all preexisting condition exclusions and limitations, so a previous HCTC rule bridging 63- day or longer breaks in creditable coverage no longer applies.
  • HCTC rules requiring that employers provide extended periods of COBRA coverage to certain HCTC recipients were not extended beyond their Dec. 31, 2013, expiration date.
  • A new provision explains that a qualifying individual cannot receive the HCTC with respect to coverage purchased through an insurance exchange. It also explains the adjustments that an individual will make on his tax return if he receives the HCTC and also receives a subsidy through an insurance exchange.

With the 2014 advent of federally subsidized health insurance through the insurance exchanges, we thought that the HCTC might have exited permanently at its Dec. 31, 2013 expiration. Apparently, both the HCTC and the exchange subsidy are needed because they function differently (for example, the HCTC is available regardless of income and there is no employer penalty related to an individual qualifying for the HCTC).

Submitting Your Own ACA Reporting Forms? The IRS has Homework for You!

Posted by on July 1, 2015 | Be the First to Comment

The steady drumbeat announcing the coming leviathan of Affordable Care Act-related employer reporting continues to grow louder, even as we wait for the IRS to issue the final forms and instructions that will be used for reporting 2015 information in early 2016.

This week the IRS provided additional information on the process for submitting reporting forms to the IRS and opened up the second step in the process for obtaining the necessary credentials to file. The electronic filing system known as the ACA Information Return (AIR) system is significantly more complex than merely uploading a PDF file containing the pertinent information and will require a concerted effort to comply with parameters established by the IRS.

Lockton Comment: As detailed in our Alert, insurers and employers with 50 or more full-time and full-time equivalent employees are required to file information returns with the IRS to show which individuals complied with the ACA’s individual mandate and which employers complied with the employer mandate. This reporting is accomplished through IRS Forms 1094-B, 1094-C, 1095-B, and 1095-C (Reporting Forms).

Reporting Forms reflecting 2015 information are due to the IRS by February 29, 2016, or March 31, 2016, if the Reporting Forms are submitted electronically. Employers that are required to file at least 250 Reporting Forms are required to file electronically, though the IRS encourages all employers to electronically file.

Employers submitting their own Reporting Forms, third parties submitting Reporting Forms on behalf of others, and developers of filing software (combined, Submitting Entities) are required to complete the following steps prior to being able to electronically submit any Reporting Forms:

  1. Register with the IRS’s e-services website (Note: This process requires submission of personal information about the person registering for the Submitting Entity);
  2. Obtain an AIR Transmitter Control Code (TCC), a unique identifier authorizing each Submitting Entity to submit the Reporting Forms, and
  3. Pass a series of technical/system tests to ensure that Reporting Forms will be properly submitted when due.

Submitting Entities are now able to complete the first two steps, and we anticipate the third step will become available later this year.

Conflicting guidance suggests that employers submitting their own paper Reporting Forms may need to complete the first two steps but not the third step. This seems like unnecessary work for employers submitting paper forms, and we hope future guidance provides additional clarity.

We expect that most employers will not need to complete this process, because they will rely on a third party to submit on their behalf. Frankly, avoiding the need to complete this process is one more good reason for employers to use a third-party vendor to help populate and submit the Reporting Forms.

For those employers that plan to electronically submit on their own Reporting Forms, we see wisdom in waiting until later this year to begin the registration and testing process. The process is brand new, and like the HPID and TRF processes before it, we expect that changes will be made and additional guidance will become available over the next several weeks and months. Further, while the IRS has indicated that there will be no delay for reporting, we are still hopeful that the IRS will change its tune and issue a delay later this year.

The IRS has developed a website for those Submitting Entities that want to get an early start on the registration process. Among other information, this site contains links to the e-services registration page, a tutorial for obtaining a TCC and draft publications discussing the anticipated technical/system requirements for submission.

ICYMI: Supreme Court Keeps Subsidies – and the Employer Mandate – Alive

Posted by on June 25, 2015 | Be the First to Comment

The SupremSupreme Court signe Court today concluded that the ACA’s reference to exchanges established by “the State” is ambiguous. Does it mean one of the 50 states? Does it include the federal government’s exchange? The Court applied long-standing rules for resolving or interpreting ambiguous statutory language. Another rule of statutory interpretation calls for the Court to consider whether a given interpretation “produces a substantive effect that is compatible with the rest of the law.”

In short: subsidies will live on, as will the employer mandate.

Today’s decision removes the uncertainty surrounding the fate of the employer mandate in the 34 states depending on the federally-operated marketplace for employers doing business in one or more of those states.

The employer mandate is alive and well. Please click to read more analysis of the Supreme Court’s decision.

CMS Unable to Verify Legitimacy of Four Months Worth of Subsidy Payments…to the Tune of $12.8 Billion

Posted by on June 19, 2015 | Be the First to Comment

A blistering report this week by the Department of Health and Human Service’s (HHS) Office of the Inspector General found shockingly poor accountability efforts by the Centers for Medicare and Medicaid Services (CMS) related to its payment of Affordable Care Act (ACA) health insurance subsidies to insurance companies. The report found that “CMS did not have systems in place to ensure that [subsidy] payments were made on behalf of confirmed enrollees and in the correct amounts.” Equally shocking, the report found that CMS does not plan to perform a timely reconciliation of these subsidy payments.

iStock_000007993554_SmallThe report found that CMS’s lax (and in some cases, non-existent) approach to verifying the accuracy and legitimacy of subsidy payments to insurers put $2.8 billion of taxpayer-provided funds at risk over just a four-month period beginning in January 2014. Assuming CMS’s troubles continued through the same period this year, the agency is basically unable to verify the legitimacy of more than $11 billion in subsidy payments to insurers.

Subsidies under the ACA come in two basic forms: advance tax credits that help individuals pay their premiums for individual market coverage (the premium subsidies are paid directly by CMS to the insurer selected by the subsidy recipient) and payments to insurers to shrink the insureds’ deductibles and other cost-sharing requirements under their policies. Eligibility for these subsidies depends on a number of factors, including whether the individuals were offered or enrolled in employment-based coverage. The amount of the subsidies depends on the individual’s household income (basically, adjusted gross income).

This isn’t going to get any better any time soon. Employer and insurer reporting of health plan enrollments, and employer reporting of coverage offers to full-time employees and dependents, commence early next year (for the 2015 calendar year). This reporting should allow the IRS and HHS to begin to connect some of the many dots that today cannot be connected. For example, once the IRS is able to determine whether an employer offered minimum value and affordable coverage to a full-time employee, it can conclude the employee (and in many cases, his or her dependents) were ineligible for subsidy payments, even if they declined the employer’s offer.

But even then, the IRS will merely be in the position to try to chase down the illegitimate subsidy recipients…the front door to those subsidies remains largely unlocked and unattended. And the IRS is not even asking employers to report on coverage offers made to part-time employees, even though certain coverage offers made to them would disqualify them from subsidy eligibility.

The Inspector General Report

The Inspector General (IG) report determined that CMS’s internal controls for calculating and authorizing financial assistance payments were not effective. Specifically, the IG found that:

  • CMS’s reliance on insurance company attestations did not ensure that advance cost-sharing reduction payment rates were appropriate.
  • CMS did not have systems in place to ensure that financial assistance payments were made on behalf of confirmed enrollees, and in the correct amounts.
  • CMS did not have systems in place for state marketplaces to submit enrollee eligibility data for financial assistance payments.
  • CMS did not always follow its own guidance for calculating advance cost-sharing reduction payments and does not plan to perform a timely reconciliation of these payments.

The IG found that these internal control deficiencies limited CMS’s ability to make accurate payments to insurers selling policies through one or more of the health insurance marketplaces. On the basis of sample results, the IG concluded that CMS’s system of internal controls could not ensure that CMS correctly made financial assistance payments during the period January through April 2014. The report noted that “without effective internal controls for ensuring that financial assistance payments are calculated and applied correctly, a significant amount of Federal funds are at risk.”

The IG made five recommendations to CMS to improve its processes. CMS apparently concurred with three of the five recommendations, and generally agreed with the two others but indicated that the two other recommendations are no longer applicable because of regulatory action. The IG, however, maintains that its findings and recommendations remain valid.

Confusion at the Intersection of Employers, Union-Affiliated Coverage and ACA Tax Reporting

Posted by on May 27, 2015 | Be the First to Comment

Many employers do not cover their collectively bargained (union) employees under the employer-sponsored health plan. Instead, the employers send contributions, usually for each hour of work performed by a bargaining unit employee, to a national or local union-affiliated health and welfare trust fund, to subsidize health coverage through the fund (these funds were authorized by a federal law often referred to as the “Taft-Hartley Act” and so are known as “Taft-Hartley funds”). Examples of Taft-Hartley funds include national funds, like the Teamsters Health and Welfare Fund, as well as local funds, such as the Pipe Fitters Local 533 Health and Welfare Fund. As a practical matter, employers simply send the contributions off to the fund and are then largely out of the picture.

The Affordable Care Act (ACA) requires many employers to report, beginning in early 2016 for the 2015 calendar year, coverage offered to full-time employees, to demonstrate the employers’ compliance with the ACA’s employer mandate. Where the employer provides self-insured coverage to employees (whether or not full-time), it must report the fact of coverage actually supplied to these employees – and non-employees, like partners or retirees – and their covered dependents, so these individuals can demonstrate compliance with the ACA’s individual mandate.

The reporting of coverage offers to full-time employees is accomplished in Part II of Form 1095-C. The reporting of self-insured coverage actually supplied to an individual is accomplished in Part III of Form 1095-C or, in the case of non-employees like partners and retirees, in Part III of Form 1095-C or in Form 1095-B, at the employer’s choice. If the employer’s coverage is insured, the insurance company will report the fact of actual coverage on Form 1095-B, and the employer simply uses Part II of Form 1095-C to report offers made to its full-time employees.

What’s a Contributing Employer to Do?  

But how and what does an employer report coverage offered or supplied to its employees by a Taft-Hartley fund, where the employer is contributing to the fund but not offering its own plan to some or all of its bargaining unit employees?

Where the Taft-Hartley fund is providing self-insured health coverage to the employer’s bargaining unit employees, the fund – just like an insurance company – will be obligated to issue a Form 1095-B that indicates the employee’s and covered dependents’ Social Security numbers and months of coverage for the reporting year. If the fund’s coverage is insured, the carrier issues the Form 1095-B. In short, the employer does not report on the fund’s coverage actually supplied to its bargaining unit employees.

But the employer does need to prove its compliance with the ACA’s employer mandate with respect to its full-time bargaining unit employees. Happily, in most cases the employer will be able to take credit for the Taft-Hartley fund’s offer of coverage, as long as the employer is making contributions to the fund on behalf of the employee, and the fund offers at least minimum value coverage to the employee and at least minimum essential coverage (MEC) to the employee’s children.

Where these conditions are met, the employer is entitled to claim “multiemployer relief” in Part II of Form 1095-C, apparently without regard to whether the full-time bargaining unit employee is eligible for the Taft-Hartley fund’s coverage.

What are the contributing employer’s responsibilities for completing the employee’s Form 1095-C, specifically with respect to Part II, lines 14-16, where the employer reports coverage offers (line 14), reports the lowest cost of self-only minimum value coverage offered to the employee (line 15) and claims certain reporting relief (line 16)?

The short answer is we don’t know all the details yet. It’s clear the employer may claim multiemployer relief against its employer mandate obligation, even where the employee isn’t eligible for the Taft-Hartley fund’s coverage. In this regard, the employee’s eligibility for that coverage is irrelevant.

But challenges are looming. The IRS still wants to know whether and when the employee is actually eligible for the fund’s coverage, and whether the coverage meets the ACA’s minimum value and affordability standards, because those facts will dictate the employee’s eligibility (or ineligibility) for subsidies in a public health insurance exchange.

Unfortunately, it appears the IRS may want the employer to report that information…which implies a likely obligation on the part of the contributing employer to collect information from the fund regarding when an employee is offered (i.e., becomes eligible for) coverage and whether that coverage is affordable and has a minimum value. This might be a significant headache for employers who contribute to union-affiliated programs and who have not, to date, been required to coordinate health coverage matters with the program that actually provides the coverage.

While the final IRS regulations on ACA tax reporting provide multiemployer transition relief for employers who contribute to Taft-Hartley funds, the 2014 version of the instructions to the Form 1095-C does not completely unlock the mysteries of exactly what an employer needs to report. Further, IRS officials have informally indicated that employers will be required to coordinate with the fund for ACA reporting purposes despite the instructions hinting otherwise.

Possible Outcomes for Employers after More IRS Guidance 

Described below are possible reporting scenarios that may be required by the IRS (from the most favorable outcome for employers, to the least favorable outcome):

  • Code 2E (“multiemployer relief”) entered on line 16. Line 15 left blank. Line 14 left blank or reflects code 1H (“no offer of coverage”). The instructions indicate that Code 2E is used “for any month for which the multiemployer interim relief applies for that employee.” Although not entirely clear, the instructions can be read to excuse the employer from having to enter any information on lines 14 and 15. Alternatively, it’s possible the employer could leave line 15 blank and insert Code 1H (“no offer of coverage”) on line 14, because the union is offering the coverage, not the employer. This is the best outcome for employers, but IRS officials have informally indicated they do not agree. 
  • Code 2C (“employee enrolled”) entered on line 16 for months when employee enrolled in fund coverage, else Code 2E (“multiemployer relief”). Line 15 left blank. Line 14 shows Code 1H (“no offer of coverage”). This alternative would require the employer to know, for each month, whether or not the employee was enrolled in the fund’s coverage. However, on line 14, the employer would be spared from having to report the type of coverage offered by the fund (e.g., was it minimum value, and was it offered to the employee’s spouse and children?) nor would it have to report the cost of employee-only coverage on line 15. 
  • Code 2C (“employee enrolled”) entered on line 16 for months when employee was enrolled in coverage, else Code 2E (“multiemployer relief”). Line 15 indicates cost of employee-only coverage. Line 14 shows Code 1E (“offer of minimum value coverage to employee, and at least MEC to children and spouse”) or other code indicating an offer of coverage to employee and family members (e.g., 1C, 1D, etc.)  This is the least favorable outcome for employers because it would require the employer to determine for each month whether 1) coverage was offered by the fund, 2) the type of coverage offered and whether the employee enrolled, and 3) the employee’s contribution for the lowest cost self-only option providing minimum value.

Clarity May Come with 2015 Instructions 

For now, employers will need to wait and see if the yet-unreleased 2015 instructions clarify these issues. In the meantime, employers will need to consider administrative issues related to coordinating these ACA tax reporting issues with a Taft-Hartley fund. These funds are trusteed by representatives from both the union and participating employers, so employers have some voice in ensuring timely and accurate communication with the fund office.