Death and Taxes for Qualified Plans

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An IRS plan audit uniquely focuses an employer’s mind on the core identity of its qualified retirement plan, which is that of a tax exempt organization, but one whose exemption (or “qualification”) requirements are far pickier than those applicable to one’s favorite charity. Any single material operational violation or non-conforming written plan provision risks disqualification and loss of the related special tax benefits.

And disqualification was in fact the Tax Court’s ruling in Family Chiropractic Sports Injury & Rehab Clinic, Inc. v. Commissioner, decided January 19, 2016. The plan victim was an Employee Stock Ownership Plan (ESOP), a type of qualified plan primarily designed to invest in the stock of the employer and whose sole participants were a divorced chiropractor and his exwife. Without acknowledging the ESOP’s ownership of virtually all of the stock of the company sponsor, the couple’s divorce decree awarded each one-half of the plan sponsor’s outstanding stock. By later documents the ex-wife transferred all of her ESOP share account to her former husband’s ESOP account. Plan disqualification was held effective as of the date of that transfer principally because: (1) it was not pursuant to a properly approved qualified domestic relations order (QDRO) and, therefore, violated the anti-alienation rules of the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code – which generally prohibit assignment of a participant’s plan benefit before it is properly distributed under the plan, and, independently, (2) the transfer violated the terms of the ESOP plan document regarding the distribution rights of participants.

In addition to ERISA fiduciary liability, the consequences of disqualification include, for open tax assessment years (generally three years back), taxes on the income of the plan’s trust, taxation of participants on vested undistributed benefits, taxation of otherwise tax-free rollovers from the plan, and disallowance or deferral of the plan sponsor’s deductions for contributions to the plan. In an IRS plan audit, a plan sponsor can avoid disqualification by not only fixing the mistake financially, but also paying as a sanction a negotiated percentage of the income tax amounts described above – potentially quite expensive, but normally far preferable to actual disqualification, which occurs only rarely.

Fortunately, the IRS’s Voluntary Correction Program (VCP) and other IRS Employee Plans Compliance Resolution System (EPCRS) correction procedures can reduce exposure resulting from the inevitable plan failures. But these procedures are most attractive when the employer discovers the failures and can voluntarily propose correction before the IRS announces an audit. Also, no standard IRS correction procedure exists to remedy a transfer of a plan benefit by a participant outside of the QDRO rules. In Family Chiropractic, undoing the illegal assignment of the ex-wife’s ESOP account may have simply been unacceptable to the IRS and the parties under the circumstances.

Disqualification exposure is reduced through regular administrative and legal review of plan operations in order to discover and deal with failures before the IRS does. IRS officials have stated that an employer’s probability of plan audit is reduced if the annual Form 5500 does not contain blank fields, internal inconsistencies, large unvested benefits for terminated participants (a partial termination risk), or substantial amounts of hard-to-value “other” assets.

IRS Reporting: Now What?

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Applicable large employers and self-funded employers of all sizes have now completed the first round of required IRS reporting under the Patient Protection and Affordable Care Act (ACA). The ACA requires individuals to have health insurance, while applicable large employers (ALEs) are required to offer health benefits to their full-time employees. In order for the IRS to verify that (1) individuals have the required minimum essential coverage, (2) individuals who request premium tax credits are entitled to them, and (3) ALEs are meeting their shared responsibility (play or pay) obligations, employers with 50 or more full-time or full-time equivalent employees and insurers were required to report on the health coverage they offered. Similarly, insurers and employers with less than 50 full time employees but that have a self-funded plan also have reporting obligations. All of this reporting is done on IRS Forms 1094-B, 1095-B, 1094-C and 1095-C.

Now that the first set of forms has been completed, many employers are wondering what the next steps are. Employers that did not fulfill all of their obligations under the employer shared responsibility provision (play or pay) might owe a penalty to the IRS. A penalty will be owed in regard to the 2015 plan year if:

  • The employer does not offer health coverage or offers coverage to fewer than 70 percent of its full-time employees and the dependents of those employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on a Marketplace; or
  • The employer offers health coverage to all or at least 70 percent of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on a Marketplace, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value.
As of March 2016, the only information from the IRS on the payment of these penalties is as follows:

The IRS will adopt procedures that ensure employers receive certification that one or more employees have received a premium tax credit. The IRS will contact employers to inform them of their potential liability and provide them an opportunity to respond before any liability is assessed or notice and demand for payment is made. The contact for a given calendar year will not occur until after the due date for employees to file individual tax returns for that year claiming premium tax credits and after the due date for applicable large employers to file the information returns identifying their full-time employees and describing the coverage that was offered (if any).

If it is determined that an employer is liable for an Employer Shared Responsibility payment after the employer has responded to the initial IRS contact, the IRS will send a notice and demand for payment. That notice will instruct the employer on how to make the payment. Employers will not be required to include the Employer Shared Responsibility payment on any tax return that they file.

Exchange Notification "Employer Notice Program"

The penalty is only triggered if an employee, who either was not offered coverage, or who was not offered affordable, minimum value, or minimum essential coverage, goes to the Exchange and gets a subsidy or "advance premium tax credit."

Although the IRS has not completely determined its system for penalty assessment, it does have a system to notify employers when one of their employees enrolls in Exchange coverage and is eligible to receive advance payment of the premium tax credit. The Marketplace notice will identify the employee, that he or she is eligible for the tax credit, that this could trigger a penalty on the part of the employer, and that the employer may appeal the decision. Employers are strictly prohibited from retaliating against an employee for going to the Exchange or receiving a tax credit.

The IRS has a four-page Employer Appeal Request form, which must be submitted within 90 days of receipt of a Marketplace notice. The form asks for basic information about the employer, provides a place to identify a secondary contact, and asks for the employer to explain why it is appealing the determination that the employee is eligible for premium assistance.

Alternatively, the employer can send a letter requesting an appeal. An employer must submit an appeal with the following information:

  • Business name
  • Employer ID Number (EIN)
  • Employer's primary contact name, phone number and address
  • The reason for the appeal
  • Information from the Marketplace notice received, including date and employee information
Employers must then mail the appeal request form or letter and a copy of the Marketplace notice to:

Health Insurance Marketplace
Department of Health and Human Services
465 Industrial Blvd.
London, KY 40750-0061

This appeal will not determine if the employer owes a fee, but could help prevent employees from erroneously obtaining an advance premium tax credit, which in turn could provide the employer with information about whether or not it might owe a penalty. By preventing employees from incorrectly obtaining the advance premium tax credit, employers could lessen the chance of being asked to provide further information to the IRS to prove they met their obligations under the employer shared responsibility requirements.


Employers should keep in mind that, in order to consider their offer of coverage affordable, they must meet the requirements of one of three affordability safe harbors. Affordability may be met under any of these criteria:

  • The W-2 test, which requires that the employee's cost not exceed 9.5 percent (indexed) of the employee's income as reported in Box 1 of the W-2.
  • The rate of pay method, which requires that the employee's cost not exceed 9.5 percent (indexed) of the lowest hourly rate paid to the employee, multiplied by 130 hours per month.
  • The federal poverty line test, which requires that the employee's cost not exceed 9.5 percent (indexed) of federal poverty rate (or about $93/month for 2015).
In some rare instances an employer might meet the requirements of an affordability safe harbor, but based on unique factors in an employee's household, the employee will be eligible for premium assistance (a tax subsidy or an advance premium tax credit) because the coverage is not affordable in relation to their household income. This situation would not trigger a penalty for the employer, so long as it met the requirements of one of the three affordability safe harbors. As a best practice, employers should have documentation that their offer of coverage fulfilled the requirements of their chosen affordability safe harbor.

When it comes to the "Cadillac" tax, there's no escaping death and taxes

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The 2015 UBA Health Plan Survey data reveals who will not escape the 40% excise tax to take effect in 2020. The “Cadillac” tax, now called the excise tax, was originally set to start in 2018, but legislation passed the end of 2015 delayed the start date by two years.

The Patient Protection and Affordable Care Act (ACA) mandated that plans providing coverage that exceeds a threshold value, currently set at annual premiums of $10,200 or more for single coverage or $27,500 for other than single coverage, would be subject to this excise tax of 40%. The thresholds will need to be adjusted for inflation for 2020.

The excise tax was originally intended to be based on ”richer” benefit plans, however, industry experts have been quick to point out that premiums have little to do with the benefit plan design. The age, claims history, geography, and other demographics of group members are more relevant to premium cost.

For example, more remote locations will have higher insurance premium costs due to higher transportation (ambulance, either land or air) claims. Due to their location, 87% of plans in Alaska will be facing the excise tax as of 2020. That state’s current average deductible is more than $1,900, and the current out-of-pocket maximum is just under $4,700. Similarly, 71% of Wyoming employers will also be facing the excise tax, with a current average deductible of $2,125 and a maximum out-of-pocket cost of almost $5,000. Conversely, for New Mexico employers, with a current average deductible of $250, and an average out-of-pocket maximum of less than $1,900, only 33% of their groups will be facing the excise tax.

Health insurance premiums are also directly related to the cost of medical care. Employers with an aging workforce face an uphill battle as there is little they can do to directly affect their premiums without strong nurse coaching and care management programs. The same is true for a group with higher than average claims. Industries that are aging faster than others face steep excise taxes as seen below.

 Industry Plans Subject to
Cadillac Tax in 2020
Current Average
 Fitness and Recreational Sports Centers 32% $2,222
 Insurance Agencies and Brokerages 34% $2,000
 Banking/Financial 47% $1,535
 Nonprofits/Civic/Community Organizations/Unions 50% $1,487
 Schools - Elementary/Secondary/Colleges/Universities 52% $1,258
 Offices of Lawyers 56% $1,647
 Government/Police/Fire/Political Subdivisions 59% $1,332
 Cemeteries/Funeral Homes 72% $1,264
 Dry Cleaning/Laundry 82% $1,993
 Bus and Other Motor Vehicle Transit Systems/Other
Urban Transit Systems/Commuter Rail
93%   $900

Cemeteries and funeral homes, as well as dry cleaners and laundries, representing mostly small ”Main Street America” companies, will likely drop their coverage, as 72% and 82%, respectively, face the excise tax as of 2020. This gives new meaning to the expressions “there’s no escaping death and taxes” and “getting taken to the cleaners!” Small business employers typically have fewer than 50 employees, so there is no penalty if they drop coverage. Many in these industries will likely add to the rolls of citizens across the country claiming advanced premium tax credits on the insurance Marketplaces, adding to the cost of the ACA for other taxpayers.

Larger companies will also face the dilemma of paying the fines for not offering coverage versus paying premiums and the excise taxes. The table below shows several applicable large employers (ALEs) that would benefit from dropping coverage and paying the per-person fine. The excise taxes on the first example are higher than the employer dropping the coverage and paying the employer shared responsibility per-employee penalty, which is likely to be approximately $3,000 in 2020 (depending on adjustments for inflation).

 State No. of
 Industry 2020
 Wisconsin 85  Civic & Social Organization $18,827 $64,021 $5,000 $6,350
 Alaska 120  Real Estate Credit $16,937 $50,165 $6,350 $6,350
 Ohio 80  Other Individual & Family Services $15,426 $47,821 $4,000 $6,350
 Virginia 200  Trucking $11,047 $36,479 $2,000 $4,500

These employers want to retain good workers and provide medical insurance benefits, but at some point may not be able to keep up with the cost of coverage.

The premiums in these examples assume a 6% annual increase and only count the actual premium dollars, not any other account-based benefits offered. At this time, proposed regulations for the excise tax would also include flexible spending account (FSA) contributions by employees, health reimbursement arrangement (HRA) contributions by employers, and health savings account (HSA) contributions by either the employer or the employee. Several of the employers in the examples above offer one or more account-based benefits to help offset the high out-of-pocket maximums on their plans. The account-based plans will be the first benefits cut if the excise tax remains in effect. These citizens will be hurt financially, as the account-based plans may be their only way to help fund those high out-of-pocket costs.

Health insurance is expensive because health care is expensive. Until we can truly tackle rising health care and prescription costs, insurance premiums will continue to rise faster than general inflation. With more and more people taking monthly prescriptions which cost thousands or even tens of thousands of dollars each month, health insurance premiums will continue to be driven upward, and the number of employers facing the excise tax will grow even faster. The cost of healthcare must be addressed first and foremost, with transparency of costs being a key factor, in order to make any strides on leveling out premium increases.

To compare your health plan costs against those in your industry, region and size bracket, request a custom benchmark from Hierl!

Technology: Protect More Than Just Your Employee's Health

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As competition heats up in the job market, companies are always searching for that one great perk that might sway a potential candidate to choose them over anyone else. Whether it's health insurance, retirement, paid time off, or even wellness, there's something that's more in demand today than there was yesterday. Companies now have a new benefit they can more easily provide to their employees -- identity theft protection.

According to an article on the website of Employee Benefit News titled, "Regulatory Clarity Makes ID Protection A More Attractive Employee Benefit," identity theft is not only the fastest growing crime in America, but also the fastest growing consumer complaint. The article states that more than 13 million Americans have their identity stolen every year. That equates to one person every three seconds.
Offering this type of theft protection to employees was only given a passing glance by companies a few years ago and was unheard of more than a decade ago. Yet today, employees are signing up for this protection themselves and looking to employers to add it as one of their benefits.

Fortunately, the IRS tried to clear up any confusion regarding how employees would be taxed for this perk if offered by their employer. By doing so, it paved the way for companies to reconsider this benefit. Before the end of 2015, the IRS said it would allow preferential tax treatment for employer-provided identity theft benefits regardless of whether there was an actual breach in data. Previously, this was only available if there was a data breach and then only if an individual's personal information might have been affected.

According to the article, it's anticipated that identity theft protection will be one of the fastest growing voluntary benefits. In addition, identity theft is, regrettably, most likely here to stay so it behooves companies to get ahead of the curve and offer it to their employees before a competitor does. Besides the benefit to employees of protection in the event of identity theft and assistance in restoring their identity, it also benefits employers. This is because an employee will be able to concentrate more on his or her job instead of worrying how they're going to fix the problem or even take time off from work.

The good news for both employer and employee is that if identity theft protection is offered, it should not increase their federal tax liability. State and local taxes may still apply and there are other exclusions such as if cash is received in lieu of protection. Because of all the various implications all parties should consult with a tax professional before implementing these benefits.

Compliance Recap: January 2016

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January was a very quiet month for compliance, on the heels of the multitude of delays that came at the end of December 2015. The IRS updated its FAQs related to 6055 and 6056 reporting under the Affordable Care Act (ACA).

UBA Guides and Compliance Documents

UBA updated the popular "Play or Pay Penalty and Counting Employees Guide" to reflect updates to affordability percentages; indexed penalty amounts; expiration of certain transition relief; information for educational institutions; clarifications on how disability and workers' compensation is factored into full time status determination; inclusion of flex credits, HRAs, and opt-out waivers when calculating affordability; and clarification on how to factor wellness incentives or penalties into affordability.

UBA created a reference chart on the applicable 2015 and 2016 ACA affordability percentages and indexed dollar amounts.

UBA updated the previously shared template letter that employers may use to draft written communication to employees regarding what to expect in relation to IRS Forms 1095-B and 1095-C, and what employees should do with a form or forms they receive.

UBA created a template consent form that employers may provide to employees, so that employees may consent to receive their employer-provided 1095-C or 1095-B forms electronically.

UBA has updated a previously-written guide on how to handle leaves of absence under the ACA rules for applicable large employers.

IRS Updates FAQs

The long-standing IRS FAQs related to reporting under sections 6055 and 6056 on requirements provided by the Patient Protection and Affordable Care Act (ACA) have been updated in January 2016 to reflect new information. Final instructions for both the 1094-B and 1095-B and the 1094-C and 1095-C were released in September 2015, as were the final forms for 1094-B, 1095-B, 1094-C, and 1095-C. On December 28, 2015, in Notice 2016-04, the IRS extended the information reporting due dates for insurers, self-insuring employers, other health coverage providers and applicable large employers. The updated FAQs take the information from Notice 2016-04 into account.

The 6056 FAQ, which discusses information reporting for applicable large employers (ALEs), and the6055 FAQ, which discusses reporting on minimum essential coverage (MEC), clarify that the deadlines for fixing mistakes on forms has been extended due to the overall extension for information reporting. For statements furnished to individuals under sections 6055 and 6056, any failures that reporting entities correct by April 30 and October 1, 2016, respectively, will be subject to reduced penalties.

The 6056 FAQ also clarified that an employer may only issue one 1095-C per full-time employee.

Question of the Month

Q. May an ALE use wellness incentives when determining its plan's affordability?

A. When calculating affordability of employer coverage when incentives or penalties are offered through a wellness program, employers must assume each employee fails to satisfy the requirements of the wellness program, unless it is a non-discriminatory wellness program related to tobacco use. For nondiscriminatory tobacco use incentives, the affordability calculation can assume all employees earn the incentive or are not charged the penalty.

ACA Penalties and Taxes and Fees — Oh My!

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Employers breathed a sign of relief when the looming Cadillac tax was delayed. But are you subject to other fees and penalties under the ACA? The ACA has introduced a multitude of new fees that employers must pay, in addition to penalties for non-compliance with employer shared responsibility rules. These dollar amounts change annually, as does the percentage amount used to calculate affordability in relation to the ACA. UBA’s new ACA Advisor, “Patient Protection and Affordable Care Act Fees, Penalties” gives a quick reference summary of the key 2015 and 2016 fees and penalties associated with the ACA.

For more detail, a recent IRS Notice (read the complete UBA analysis of this “potpourri” update) reviewed penalties and calculations related to affordability. Currently, the affordability of coverage is defined as costing no more that 9.5 percent of household income (or 9.5 percent of wages or of the federal poverty level) and it is adjusted annually. The IRS will be amending regulations to reflect these adjustment amounts and will update the percentage via IRS notice in future years. For 2015 this is set at 9.56 percent and for 2016 it is set at 9.66 percent.

Under the ACA, an Applicable Large Employer (ALE) must offer minimum essential coverage to most of its full-time employees (and dependents) or pay a $2,000 per year ($166.67 per month), indexed, penalty on all of its full-time employees, if even one employee receives a premium tax credit. An ALE must also offer minimum value, affordable coverage to its full-time employees or pay a penalty of $3,000 a year ($250 per month), indexed.

The indexed amounts for the $2,000 penalty, based on calendar years, are:

2015: $2080

2016: $2160

The indexed amounts for the $3,000 penalty, based on calendar years, are:

2015: $3,120

2016: $3,240

Under the ACA, any hour for which an employee is paid or entitled to payment must be counted as an hour of service. This includes:

  • An hour worked
  • Vacation
  • Holiday
  • Sick time
  • Incapacity (including disability)
  • Layoff
  • Jury duty
  • Military duty
  • Paid leave

These rules are intended to mimic other federal regulations, but are not intended to credit hours to individuals who are terminated from employment. The IRS clarified that an hour of service does not include:

  • An hour for which an employee is paid during which no duties are performed, if the payment is made to comply with workers’ compensation, unemployment, or disability insurance laws.
  • An hour of service for a payment which reimburses an employee for medical or medically related expense incurred by the employee.

The IRS confirmed that there is no 501-hour limit on hours of service required to be credited to an employee on account of a continuous period of time during which the employee performs no service, if the hours would otherwise qualify as hours of service (such as for a leave of absence).

Periods during which an individual is not performing services but is receiving payments from short-term disability or long-term disability will result in hours of service, if the individual retains status as an employee, unless the payments are made from an arrangement to which the employer did not contribute directly or indirectly. Disability paid for by the employee with after-tax contributions would be an arrangement to which the employer did not contribute, and would not result in hours of service. Workers’ compensation payments under state or local government programs are not hours of service.

Even if you have mastered the affordability provisions and penalty calculation, download UBA’s quick reference guide to keep a summary of all the ACA fees and penalties handy, including the Transitional Reinsurance Fee (TRF) and the Patient-Centered Outcomes/Comparative Effectiveness Fee (PCORI)—and the myriad of due dates.

What employees need to know now to file tax forms for PPACA

Original post

The Patient Protection and Affordable Care Act (PPACA) reporting deadlines are rapidly approaching, presenting a major administrative burden for employers who face penalties for failing to report in a timely and accurate manner.

While there has been significant discussion of employer roles and responsibilities, employees have been largely left out of the equation.

However, many employees will soon be receiving new forms that are critical to their ability to file their tax returns and to their employers’ ability to accurately fulfill their own reporting requirements.  Among these are Forms 1095-A, 1095-B, and 1095-C.

With this in mind, it is important for employers to educate individual taxpayers on what they are required to do and when and how to complete these requirements in the easiest and most efficient manner.


The most commonly received form will be the new 1095-C, which millions of Americans will be receiving for the first time this year.

This new government form is used to tell the Internal Revenue Service that you were eligible for insurance coverage under the Affordable Care Act and whether you took advantage of or waived this coverage.

This form will be sent by employers no later than March 31 to all eligible full-time employees who worked for a company with a total of 100 or more full-time or full-time equivalent employees in 2015. For the purposes of this form, full-time is any employee working 30 or more hours per week or 130 hours in a calendar month.

According to the IRS guidance, Form 1095-C helps to determine whether both the employer and the employee have complied with the “shared responsibility” clause of the ACA.

The form also determines whether an individual or family qualifies for the Premium Tax Credit, which reduces the burden of purchasing health insurance.

Anyone who does not have coverage elsewhere and chose to decline employer-sponsored health care coverage will be required to pay a penalty for not carrying coverage--this penalty will be assessed on their tax return.

For 2015, the penalty for declining all health care coverage is $325 per uninsured adult and $162.50 per uninsured child or 2 percent of household income, whichever is greater up to a family maximum of $975.

The penalty will increase to $695 per uninsured adult and $347.50 per child or 2.5 percent of household income up to a family maximum of $2,085 in 2016, and will continue to rise with inflation year-over-year.

However, the IRS offers special exemptions based on income, circumstance and membership in certain groups, so those without coverage should research their options or consult a tax professional. (The most common exemption is for those who declined employer-sponsored coverage that would have cost more than 8 percent of their total household income.)

Health care exemptions can be claimed by filing IRS form 8965 with your taxes. As previously noted, the form also determines who may be eligible for premium credits to help defray the expense of coverage.

Employers are required to submit insurance coverage information, along with social security numbers and other identifying employee information to the IRS, and employee failure to disclose a waiver of coverage may result in an audit and penalties greater than the ACA individual mandate penalty.


Form 1095-B essentially serves the same purpose as form 1095-c, but is used by and sent to employees of companies with fewer than 100 employees.

It may also be sent directly by an insurer to certify that individuals/families had non-employer sponsored coverage in place in 2015.  This coverage may have come from:

  • Government health care plans such as Medicare Part A, Medicare Advantage, Medicaid, the Children's Health Insurance Program, and Tricare for military members, veterans’ medical benefits and plans for Peace Corps volunteers.
  • Health coverage purchased through the "Marketplace" -- Web-based federal and state insurance markets set up under the Affordable Care Act.
  • Any individual health insurance policy in place before the Affordable Care Act took effect.

Depending on the way a health care plan is structured, some employees may receive both a 1095-B and a 1095-C.


Form 1095-A is only applicable to those who purchased their health care coverage through ACA’s health care exchanges.

This form plays a critical role in reconciling the Advanced Premium Tax Credits (also known as APTCs)--a yearly stipend based on modified adjusted gross income designed to help lower-income individuals and families defray the cost of purchasing exchange-based health insurance--for 2015 and in determining future credits for 2016.

Per IRS and ACA requirements, any excess APTC received in the previous year must be repaid through income tax.

What to do with these forms

Like the more familiar W-2 or 1099 forms, the 1095-A, B, and C will be needed to file a 2015 tax return for anyone who receives it.

Those using a tax preparer will need to bring it with them along with their other filing documents, and those doing their own taxes or using tax preparation software will need to keep this document with their tax records in case of any further inquiry /audit by the IRS.

Help is available

Of course, this is just one important factor in gaining a more thorough understanding of the complexities of the ACA.  While the IRS has worked to streamline the process as much as possible, many employers and employees are struggling to understand and keep pace with changing requirements.

However, for quick questions, there are many good resources available to both employers and employees.  One of the best is the IRS website.

As in all tax-related issues, the most important factors in handling ACA reporting for all groups are to know what’s coming, prepare in advance, keep excellent records, take note of deadlines and avail yourself of helpful resources.

ACA Cadillac Tax: IRS Issues Next Installment of Preliminary Guidance

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In February, employers, administrators and others got to see some preliminary thoughts the Internal Revenue Service (IRS) has about the so-called “Cadillac Tax,” included in the Affordable Care Act (ACA). That initial glimpse came when the IRS issued Notice 2015-16. At the end of July, the IRS issued its second installment, Notice 2015-52. After considering the comments its receives in connection with both Notices, the IRS expects to issue proposed regulations, at which time comments will again be requested and considered before any final rules are imposed. If you would like to send comments to the IRS concerning any of the proposals in Notice 2015-52, email those comments to with “Notice 2015-52” in the subject line no later than October 1, 2015.

What is the “Cadillac Tax?”

The ACA added a new excise tax under section 4980I of the Internal Revenue Code (“Code”) that applies to tax years after December 31, 2017. The tax seeks to discourage high-cost health plans and applies, in general, when the aggregate cost of employer-sponsored coverage – referred to as “applicable coverage” – exceeds a statutory dollar limit. That excess is subject to a 40 percent nondeductible excise tax.

Notice 2015-15

IRS Notice 2015-16 describes potential approaches regarding a number of issues under Code § 4980I. These include (1) the definition of applicable coverage, (2) the determination of the cost of applicable coverage, and (3) the application of the dollar limit to the cost of applicable coverage to determine any excess benefit subject to the excise tax. Read a more detailed discussion of the contents of that notice.

Notice 2015-52

Notice 2015-52 builds on Notice 2015-16 by addressing additional issues under § 4980I, including:

  • Who is liable for the excise tax

The liability for the tax will fall on “coverage providers.” For insured plans, this generally will be insurance carriers. For coverage under HSAs or Archer MSAs, the coverage provider will be employers. The third category of coverage provider is “the person that administers the plan benefits.” This category will capture self-funded plans, but the IRS is not sure how it should be defined and seeks comments on two approaches discussed in the Notice.

  • Issues for employers that are part of groups of organizations under common control

The IRS recognizes that for employers that are part of controlled groups, a number of issues will have to be addressed. These include identifying (1) the coverage made available by employers in the group, (2) the employers that will be responsible to calculate and report the excess benefit, and (3) the employers liable for improperly calculating the tax. The IRS requests comments on all of these issues.

  • Pass-throughs and gross-ups concerning the tax

The IRS recognizes that coverage providers liable for the tax may, nonetheless, pass the cost of the tax along to others that may reimburse the coverage provider for having to pay the tax. The IRS addresses the tax treatment of these pass-throughs and reimbursement payments, including how to calculate gross-ups of those payments for tax purposes.

  • Notice and payment of the tax

Under Code § 4980I, employers must (1) calculate the excess benefit subject to the tax and the share of that excess benefit for each coverage provider, and (2) notify the IRS and the coverage providers of those amounts. The IRS is looking for input on the form and timing of those notice requirements, among other issues. Also, as with the PCORI fee, the IRS intends to designate Form 720 as the method to pay the tax.

Simplifying the Administration of Cafeteria Plan Election Changes

Originally posted by

Election change requests are the most rule-centric item encountered in the day-to-day administration of a cafeteria plan. Most cafeteria plans, although not required to do so, allow election changes to the fullest extent permitted by law. But what makes these requests so tedious is the fact that administrators and employees must ‘prove the exception’ to the general rule that cafeteria plan elections are irrevocable and cannot be modified mid-year.

Usually, employees will request a change to their cafeteria plan election for a “life event” that is fairly straightforward – e.g., marriage, divorce, new child, etc. But for other “change in status” events, the governing IRS regulations can be nuanced with no definitive answer as to whether an election change is permitted. While implementing administrative procedures to help make these determinations is important, the process is incomplete without a general understanding of the change in status rules to fill in the gaps.

The Change in Status Regulations

Although its name sounds like a George Orwell novel, the “life events” described in the Change in Status Regulations are much more mundane. The IRS has identified six categories of change in status events in the regulations. These are: (1) a change in legal marital status; (2) a change in the number of dependents; (3) a change in employment status; (4) when a dependent satisfies or ceases to satisfy dependent eligibility requirements; (5) a change in residence, and; (6) the start or termination of an adoption proceeding (where adoption assistance is provided through the cafeteria plan).

Any event not falling within one of these six event categories cannot serve as the basis for an election change. However, the Change in Status Regulations do not provide a complete list of permissible events within each category. For example, the change in employment status category describes events where the employee, employee’s spouse, or the employee’s dependent loses or gains eligibility status for the applicable benefit. Terminations, new jobs, leaves of absence, and changes in worksite are all identified as a change in employment status event. But a change in employment event may also occur if a spouse loses coverage due to a reduction of hours or an employee becomes eligible for benefits at a second employer.

An employee walks into HR . . .

From a plan administration perspective, the first consideration should be whether the terms of the cafeteria plan permit a change to the election for the event that occurred. Cafeteria plans are permitted to allow an election change for any of the events covered by the Change in Status Regulations, but are not required to do so. Instead, plan sponsors may restrict the number of event categories or narrow the types of events where an election change is allowed in each category. What the cafeteria plan cannot do is create additional event categories or have more lenient requirements than the Change in Status Regulations.

The eligibility criteria for the underlying insurance policies and plan documents of the component benefits should also be reviewed. These documents are critical in the determination process because the IRS requires that an election change be consistent with the change in status event (which must have already occurred). Generally, the consistency requirement means the election change must reflect the event. For example, a recently divorced employee’s election change request to move from employee-only to family coverage would not be “consistent” with the divorce and the request should be denied.

Administrators should then substantiate the reason for the change in election. This requirement may be satisfied by obtaining an employee’s certification that the event occurred and, unless there is reason to believe it did not, no additional follow-up is required.

Once the employee has certified the date of the event, administrators should re-visit the plan document to determine whether the change request is subject to any time requirements. Cafeteria plans normally impose a 30-60 day window for requesting the election change. Plans with extended time limits, or none at all, may find it difficult to satisfy the consistency requirement because there may no longer be a causal connection between the change in status event and election change request.

Additional Considerations

Change in status events are not the only occasions where cafeteria plan participants may be permitted to revoke or modify an election, although they are the most common. Events such as changes to the cost or coverage of a group health plan, HIPAA special enrollment rights, FMLA, COBRA qualifying events, and funding of an HSA with pre-tax contributions all have unique rules and considerations. Some events may allow an election change for one component benefit of the cafeteria plan but not the other (e.g., dependent care FSA vs. health FSA) or affect an employee’s ability to make pre-tax contribution.

Even the most detailed procedures and checklists will not exhaust all of the variables administrators must account for when reviewing election change requests. However, using a checklist or similar document will focus your approval determination toward ensuring that a cafeteria plan election change is permitted and meets the IRS’s requirements. Unique circumstances are bound to occur within any workforce and a consistent process will aide in the identification of issues that need to be considered further or require the assistance of legal counsel.

IRS Makes it Riskier to Maintain Individually-Designed Retirement Plans

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The Internal Revenue Service just made it riskier to maintain a tax-qualified individually-designed retirement plan by eliminating the five-year determination letter remedial amendment cycle for these plans, effective January 1, 2017.

Although determination letters are not required for retirement plans to maintain tax-qualified status under the Internal Revenue Code, virtually all employers sponsoring individually-designed retirement plans have long relied on the Internal Revenue Service’s favorable determinations that their plans meet the Code’s and the IRS’ vexingly complex – and ever-changing – technical document requirements. A plan risks losing tax-qualified status (and all the favorable tax treatment that goes along with that status) if the plan document is not timely amended to reflect frequent, sometimes obscure, Code and regulatory changes. In light of that, the IRS has long offered a program for reviewing and approving those plan documents – often conditioning its favorable determination letter on the employer’s adoption of one or more corrective technical amendments. The current program, established in 2005, has provided for a five-year remedial amendment cycle which effectively extended the period of time during which a plan could be amended under certain circumstances to retroactively comply with the ever-changing qualification requirements. Under this determination letter program, employers have filed for determination letters for their individually-designed plans every five years and had an opportunity to fix plan document issues raised by the IRS on review.

The IRS announced elimination of the five-year determination letter remedial amendment cycle in Announcement 2015-19 and said that determination letters for individually-designed plans will be limited to new plans and terminating plans. A transition rule applies for certain plans currently in the five-year cycle (i.e., employers with “Cycle E” or “Cycle A” plans may still file for determination letters) but, effective July 21, 2015, the IRS will not accept off-cycle applications except for new plans and terminating plans.

The IRS said that plan sponsors will be permitted to submit determination letter applications “in certain other limited circumstances that will be determined by Treasury and the IRS” but did not give a hint as to what those circumstances might be. The IRS intends to periodically request comments from the public on what those circumstances ought to be and to then identify those circumstances in future guidance.

In addition, the IRS said that it is “considering ways to make it easier for plan sponsors to comply with the qualified plan document requirements” which might include providing model amendments, not requiring amendments for irrelevant technical changes, or permitting more liberal incorporation by reference.

Comments on the issues raised in the Announcement – e.g., what changes should be made to the standard remedial amendment period rule, what considerations ought to be taken into account regarding interim amendments, and what assistance should be given to plan sponsors wishing to convert to pre-approved plans – may be submitted to the IRS until October 1, 2015.