Assessing Employer Shared Responsibility Penalties

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Are you an applicable large employer that has received rejected Forms 1095-C from the IRS? If so, you’re not alone. The good news is that there are a few ways organizations can face the challenge.

The background: We now know that the IRS was unprepared for the 2016 employer shared responsibility information filing season, according to the Taxpayer Advocate Service 2016 Annual Report to Congress. It reports that the IRS was not equipped to test the accuracy of the information reporting data before the 2016 filing season—it anticipated receiving 77 million Forms 1095-C from ALEs while it actually received 104 million such returns by the end of last August, with 5.4% of such Forms 1095-C being rejected.

The given reasons for the rejected returns include faulty transmission validation, missing attachments, errors in reading the file or duplicate files. Congress could certainly help the IRS, and therefore help ALEs, by expanding the taxpayer identification number matching program to include health insurers and self-insured employers that are required to file Form 1095-B. But it has yet to act.

By not expanding the matching program, information return reporting leads to mismatches and unnecessary notices, which are all occurring now. This is causing concern over the possible assessment of employer shared responsibility penalties and penalties for failure to timely, and correctly, file information returns.

As of this writing, we have been unable to determine whether any of these types of penalties have been assessed, although based on the TAS, it appears that none have as of yet. The IRS explains in its Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, in Q&A no. 56, that it expects to send letters in early 2017 informing ALEs of their 2015 potential liability.

his is of particular concern to ALEs because efforts that must be taken to either correct or confirm that correct information was submitted to the IRS are costly and time-consuming. It is especially frustrating if the information provided to the IRS is correct, but due to TIN mismatches, the automatic rejection errors were “false positives.”

Practical tips for dealing with rejected returns
There are few ways, short of communicating with each employee about the rejected return, to determine whether the return is correct or whether it was rejected due to a false positive. We provide a few practical tips to navigate this latest employer shared responsibility development.

  • ALEs should revise and resubmit rejected returns if the rejection was due to faulty transmission, validation, missing attachments, error reading the file or duplicate file. Remember, an initial rejection after an IRS computer review is not the same as a notice of a penalty assessment.
  • If the rejection is more complicated, for example a Form 1095-C was rejected due to a TIN mismatch, ALEs should spot-check to see whether these are actual errors or false-positives.
  • If and when the IRS issues rejection notices with an assessment of proposed penalties, ALEs should decide whether to appeal the penalty assessment. Such notices will include instructions for appealing the rejection and penalty assessment.

With respect to information reporting that gives rise to assessments of employer shared responsibility penalties, pre-existing regulations require the IRS to inform employers of their potential liability and provide them with an opportunity to respond before any penalty is assessed or notice and demand for payment is made.
Note that ALEs reporting and employer shared responsibility assessments were slated to be effective for the 2014 calendar year, but the IRS delayed the effective date until 2015 and to 2016 for employers between 50-99 employees.

For 2015, the IRS provided eight forms of transition relief related to the assessments and reporting, and made clear in 2016 and then again in 2017 that employers that made good faith efforts to comply with information reporting and could show “reasonable cause” under Treas. Reg. § 301.6724-1, would likely be able to avoid reporting penalties.

In any event, ALEs should continue to monitor the situation, keep all documentation from the IRS and make note of any correction attempts, including for potential reasonable cause relief from penalties. ALEs should continue to respond to rejected returns and otherwise comply with all existing reporting requirements.

By
Kurt Linsenmayer, Melanie K. Curtice, Tomer Vandsburger, Employee Benefit News

Attorneys Christine A. Williams , Margret Warrick Truax , , Kiran Griffith and Anne M. Redman contributed to this story.

IRS Sets 2018 HSA Contribution Limits

iStock-636732058_fjrqzpHealth savings account caps rise $50 for self-only plans, $150 for family coverage.  The amount that individuals may contribute annually to their health savings accounts (HSAs) for self-only coverage will rise by $50 next year. For HSAs linked to family coverage, the contribution cap will rise by $150.

In Revenue Procedure 2017-37, issued May 4, the IRS provided the inflation-adjusted HSA contribution limits effective for calendar year 2018, along with minimum deductible and maximum out-of-pocket expenses for the high-deductible health plans (HDHPs) that HSAs must be coupled with.

These rate changes reflect cost-of-living adjustments, if any, and rounding rules under Internal Revenue Code Section 223.

“The contribution limits for various tax advantaged accounts for the following year are usually announced in the fall, except for HSAs, which come out in the spring,” explained Harry Sit, CEBS, who edits The Financial Buff blog. Due to a mild uptick in inflation and rounding rules, the 2018 HSA limit will have small increases, he noted.

A comparison of the 2018 and 2017 limits is shown below:

2017 HSA Contribution Limits:

Contribution and Out-of-Pocket Limits for Health Savings Accounts and High-Deductible Health Plans
  2018 2017 Change
HSA contribution limit (employer + employee) Self-only: $3,450
Family: $6,900
Self-only: $3,400
Family: $6,750
Self-only: +$50
Family: +$150
HSA catch-up contributions (age 55 or older)* $1,000 $1,000 No change**
HDHP minimum deductibles Self-only: $1,350
Family: $2,700
Self-only: $1,300
Family: $2,600
Self-only: +$50
Family: +$100
HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums) Self-only: $6,650
Family: $13,300
Self-only: $6,550
Family: $13,100
Self-only: +$100
Family: +$200
* Catch-up contributions can be made any time during the year in which the HSA participant turns 55.
** Unlike other limits, the HSA catch-up contribution amount is not indexed; any increase would require statutory change.

Age 55 Catch Up Contribution

Account holders who will be 55 or older by the end of year can contribute an additional $1,000to their HSA. “If you are married, and both of you are age 55, each of you can contribute additional $1,000,” Sit said. But there’s a catch, he added.

An HSA is in an individual’s name—there is no joint HSA even when the plan provides family coverage—so only an account holder age 55 or older can contribute the additional $1,000 in his or her own name. “If only the husband is 55 or older and the wife contributes the full family contribution limit to the HSA in her name, the husband has to open a separate account for the additional $1,000. If both husband and wife are age 55 or older, they must have two HSA accounts if they want to contribute the maximum,” Sit said.

[SHRM members-only HR Q&A: Are employer contributions to an employee’s health savings account (HSA) considered taxable income to the employee?]

Not All High-Deductible Plans Are HSA Eligible

Besides a high deductible, to qualify as an HDHP, a health insurance plan must not offer any benefit beyond preventive care before those covered by the plan (individuals or families) meet their annual deductible. “An otherwise high deductible plan fails the HSA qualification when it tries to be nice and it gives you some benefits before you meet the deductible,” Sit explained. For instance, if the plan provides coverage in the following areas before the individual or family satisfies their deductible, it is not HSA-eligible.

  • Prescription drugs. Plans may not cover nonpreventive prescription drugs with only a co-pay before an individual or family meets the annual deductible.
  • Office visits. Excluding preventive care such as physical checkups or immunizations, plans may not cover office visits with only a co-pay, without having to meet the annual deductible first.
  • Emergency. Plans may not cover emergency services with a co-pay outside the deductible.

Besides the minimum deductible, the out-of-pocket maximum of an HSA-eligible plan also can’t be higher than an inflation-adjusted number published by the IRS every year. “If your plan has a high deductible and a high out-of-pocket maximum, higher than the IRS published number, it’s also not HSA-eligible,” Sit said.

Coverage of Adult Children

While the Affordable Care Act (ACA) allows parents to add their adult children (up to age 26) to their health plans, the IRS has not changed its definition of a dependent for health savings accounts. This means that an employee whose 24-year-old child is covered on her HSA-qualified health plan is not eligible to use HSA funds to pay that child’s medical bills.

If account holders can’t claim a child as a dependent on their tax returns, then they can’t spend HSA dollars on services provided to that child. Under the IRS definition, a dependent is a qualifying child (daughter, son, stepchild, sibling or stepsibling, or any descendant of these) who:

  • Has the same principal place of abode as the covered employee for more than one-half of the taxable year.
  • Has not provided more than one-half of his or her own support during the taxable year.
  • Is not yet 19 (or, if a student, not yet 24) at the end of the tax year, or is permanently and totally disabled.

Affordable Care Act Limits Differ

There are two sets of limits on out-of-pocket expenses that employers should keep in mind, which can be a source of confusion.

Starting in 2015, the Department of Health and Human Services (HHS) established annual out-of-pocket or cost-sharing limits under the ACA, applying to essential health benefits covered by a plan (grandfathered plans are not subject to the ACA’s cost-sharing limits).

The ACA’s annual out-of-pocket maximums have been slightly higher than the IRS’s out-of-pocket limits on HSA-qualified HDHPs. To qualify as an HDHP, a plan must comply with the lower out-of-pocket maximum for HDHPs.

HHS published its 2018 ACA out-of-pocket limits in the Federal Register on Dec. 22, 2016, in itsNotice of Benefit and Payment Parameters for 2018 final rule.

“The ACA requires the out-of-pocket maximum to be updated annually based on the percent increase in average premiums per person for health insurance coverage,” explains an ACA compliance bulletin by the Stellar Benefits Group in Solon, Ohio, which provides an overview of the HHS’s 2018 updates.

Below is a comparison of the two sets of limits.

 

2018

2017

Out-of-pocket limits for ACA-compliant plans (set by HHS)

Self-only: $7,350

Family: $14,700

Self-only: $7,150

Family: $14,300

Out-of-pocket limits for HSA-qualified HDHPs (set by IRS)

Self-only: $6,650

Family: $13,300

Self-only: $6,550

Family: $13,100

 

Beginning in 2016, the ACA’s self-only annual limit on cost-sharing applies to each covered individual, regardless of whether the individual is enrolled in self-only coverage or family coverage.

By Stephen Miller, CEBS May 5, 2017

Does Your Employee Handbook Need a Midyear Checkup?

By Lisa Nagele-Piazza, SHRM-SCP, J.D.
May 8, 2017

handbookNew workplace laws on minimum wage, paid sick leave, criminal background investigations and more are popping up all the time—and they don’t always take effect at the beginning of a new year. HR professionals need to communicate these changes with their workforce as the laws become effective, but how often should you revise your employee handbook? Employment attorneys told SHRM Online that the answer depends on a few factors.

The frequency of handbook reviews may depend on how big the employer is and how many states it operates in, said Lucas Asper, an attorney with Ogletree Deakins in Greenville, S.C.

HR professionals should also consider the purpose that the handbook serves for the organization—which varies from employer to employer, he noted. Some businesses just want to cover the minimum that is required by law. Others might use the handbook as a summary of all the applicable workplace laws that the HR and management teams rely on when providing guidance. If that’s the case, they’ll want to be extra careful about making sure the information is accurate and up-to-date, Asper said.

“Updates should be considered at a minimum on an annual basis,” said Stephanie Peet and Timothy McCarthy, attorneys with Jackson Lewis in Philadelphia, in an e-mail to SHRM Online. “However, sometimes there are drastic changes in applicable laws that necessitate an immediate change.”

As an example, they said, if Congress were to amend Title VII of the Civil Rights Act of 1964 to expressly include sexual orientation as a protected characteristic, employers would need to ensure that sexual orientation is covered in their equal employment opportunity policy and make revisions if needed.

That’s why a midyear review is a good idea. “Employers should make an effort to stay abreast of changes in applicable labor and employment laws on an ongoing basis,” Peet and McCarthy suggested.

If there are any significant changes to the laws that affect a particular employer’s workforce, the handbook should be reviewed to ensure that the company’s policies are in line with those changes.

Notice Is Key

When a new law takes effect, it is vital to give employees notice, Asper said. But that notice doesn’t always have to be provided through a formal handbook update.

For midyear changes in the law, employers may want to consider stand-alone notifications or policy revisions, he added.

Asper said that in many situations, a state-specific addendum will make sense for multistate employers. The employer can send an addendum to the applicable workers in California or Wisconsin, for example, instead of rolling out an entirely new handbook. “That’s the best way to capture state and local changes,” he said.

Peet and McCarthy noted that handbook updates and stand-alone policies should be distributed with an acknowledgment that employees should sign and date. The acknowledgment should clearly identify the version of the handbook or policy that it relates to, they said.

“In addition, providing digital access to handbooks and policies, where feasible, is advantageous to both employees and employers,” they added. “Employees are inevitably becoming more tech-savvy and will be more likely to review and utilize a digitally accessible handbook.”

Electronic handbooks also make it easier for employers to update, edit and distribute critical information.

Changes to Watch

If an employer hasn’t updated its handbook in more than a year, it’s probably time to do a full-blown review with the assistance of counsel, Asper said.

That’s because there have been a number of developments in workplace law recently. At the federal level, for example, there were many National Labor Relations Board decisions that affected employment policies.

Employers also should track the ongoing status of the now-halted federal overtime rule, which would have raised the salary threshold for exempt white-collar workers.

Employers can use a midyear handbook review as an opportunity to look at job descriptions and corresponding Fair Labor Standards Act designations, Peet and McCarthy said.

At the state and local level, employers need to look for new minimum wage, paid-family-leave and paid-sick-leave laws, to name a few.

Not a lot of federal action is anticipated in the next few years, so a lot of the big policy modifications will likely be based on state and local changes, Asper said.

Philadelphia and other jurisdictions throughout the country have been considering and enacting legislation banning employer inquiries into applicants’ salary histories. These laws are significant because they will require many employers to change the way they engage in the recruiting process from the application stage forward, Peet and McCarthy said.

“State and local ‘ban-the-box’ laws that restrict the extent to which criminal backgrounds may be considered in the hiring process are also cropping up rapidly,” they added.

 

Affordable Care Act Compliance: IRS Releases Draft 2016 Employer Reporting Forms and Instructions

August 18, 2016 – Amy Gordon 

ACAOn August 2, the Internal Revenue Service (IRS) released revised draft Forms 1094-C and 1095-C, and draft instructions for completing these forms for the 2016 reporting year (see here). Although these are not final versions, it is important for employers to review the updates and changes from the 2015 forms and instructions as they prepare for the 2016 filings.

Background

The Affordable Care Act (ACA) created new reporting requirements under Sections 6055 and 6056 of the Internal Revenue Code (Code). The new rules require an applicable large employer (ALE) to report, on IRS Forms 1094-C and 1095-C, information about offers of health insurance coverage to full-time employees (FTEs) and the provision of minimum essential coverage (MEC). The Form 1094-C is also referred to as the “authoritative transmittal.” For 2016, an ALE is generally an employer with 50 or more FTE equivalents. Under Code Section 6056, an ALE must annually file with the IRS a report listing the offers of coverage made to its FTEs during the reporting year. In addition, ALEs must furnish a related statement of coverage information to FTEs. Under Code Section 6055, employers (including ALEs) who provide MEC under self-insured plans must also report MEC information for each individual covered under the employer’s self-insured plan. ALE status is determined on a controlled group basis, and each member of the controlled group is an “ALE Member” with an independent responsibility to file a Form 1094-C and Form 1095-Cs. Generally, the reporting is required at the employer identification number (EIN) level.

Under Code Section 6055, employers that are not ALEs must report MEC information on Forms 1094-B and 1095-B. Although these forms were also revised recently, draft instructions for completing these forms have not yet been released.

Highlights of Changes

While the draft 2016 Forms 1094-C and 1095-C and related instructions are similar to the 2015 forms and instructions, there are several notable changes, including the following:

  • Forms 1094-C/Authoritative Transmittal: The draft instructions clarify that each ALE Member should only file one authoritative transmittal, even if multiple Forms 1094-C are filed by the ALE Member. The draft instructions contain examples illustrating this requirement. An authoritative transmittal should not be filed on behalf of an aggregated group of ALE Members. An ALE Member’s contact person on the Form 1094-C may be different than the contact information on the Form 1095-C.
  • Required Form 1094-C and Form 1095-C Corrections: The draft instructions revise the list of items requiring a corrected Form 1094-C and 1095-C. Under the list in the draft instructions, an ALE Member must file a corrected Form 1094-C authoritative transmittal if the original transmittal contained an error in the name or EIN of other ALE Members of the ALE controlled group, and changes the requirement that a corrected Form 1095-C be filed due to an error in premium amount on the original Form 1095-C to a requirement that a corrected Form 1095-C be filed due to an error in the “Employee Required Contribution” on the original.
  • Employee Required Contribution: The draft instructions include the new term “Employee Required Contribution,” defined as the employee’s share of the monthly cost for the lowest-cost self-only minimum essential coverage providing minimum value that is offered to the employee by the ALE Member. The instructions further clarify that the employee share is the portion of the monthly cost that would be paid by the employee for self-only coverage, whether paid through salary reduction or otherwise.
  • Transition Relief: In 2015, “Section 4980H Transition Relief” exempted ALE Members with non-calendar year plans and 50-99 FTE equivalents from penalties under Code Section 4980H, and for ALE Members with 100 or more FTE equivalents, decreased the requirement to offer health coverage to FTEs from 95 percent of FTEs to 70 percent of FTEs. For 2016, this transition relief only applies for non-calendar year plans, and only for months in 2016 that fall within the plan year that commences in 2015. The Qualifying Offer Method Transition Relief is not applicable in 2016 under the draft instructions. Therefore, an employer may only use the Qualifying Offer Method in 2016 if the FTE had an offer of affordable, minimum value MEC for all 12 months of the plan year using the rate of pay affordability safe harbor.
  • Calculating FTE Count: The draft instructions provide additional guidance for calculating an ALE Member’s number of FTEs for purposes of completing Form 1094-C. Specifically, the instructions provide that an employee should be counted as an FTE for a month if the employee satisfied the definition of FTE under the monthly measurement period (if applicable) on any day of the month. If the ALE Member uses the look-back measurement method to determine FTE status, the ALE Member must include as FTEs individuals in stability periods during which the individual is to be treated as an FTE. The instructions also clarify that an ALE Member should use the Code Section 4980H definition of “full-time employee” to determine the number of FTEs for a month and not any other definition of the term used by the employer.
  • Form 1095-C Coding Changes: Various changes or clarifications were made to the Codes used on the Form 1095-C. For example, the draft instructions add new Code 1J and 1K for Line 14 to reflect “conditional offers of spousal coverage”, which are offers subject to one or more reasonable, objective conditions, including an offer to cover an employee’s spouse only if the spouse is not eligible for coverage under Medicare or a group health plan sponsored by another employer. 
  • Reporting COBRA Coverage: The draft instructions provide new guidance for reporting COBRA continuation coverage information on Form 1095-C. For employees who remain employed by an ALE Member after a reduction in hours, offers of COBRA coverage should continue to be reported as in 2015. For employees who terminate employment, coverage should be reported on the Form 1095-C as “no offer” (Code 1H) on Line 14 for each month the offer of COBRA coverage applies, and “employee not employed” (Code 2A) on Line 16.
  • Reporting Post-Employment (Non-COBRA) Coverage: The draft instructions provide that an offer of post-employment coverage to a former employee (or the former employee’s spouse or dependents) for coverage effective after the employee’s termination of employment should not be reported as an offer of coverage on Line 14. If the ALE Member is required to file a Form 1095-C for the former employee because the individual terminated in 2016 but was employed during one or more months in 2016, Code 1H should be used on Line 14, and Code 2A on Line 16 should be used for any month in which the post-employment offer of coverage applies.
  • Multiemployer Plans: The draft instructions continue for 2016 the multiemployer plan interim guidance from the 2015 reporting year. Employers with employees subject to a collective bargaining agreement can treat those employees as having received an offer of health coverage if under the agreement the employer is obligated to contribute to a multiemployer plan, and coverage under the multiemployer plan is affordable, has minimum value and offers dependent coverage>.

When to File

In general, employers must file Forms 1094-C and 1095-C by February 28 (March 31 if filing electronically) of the year following the calendar year to which the return relates. For the 2016 calendar year, the forms are required to be filed by February 28, 2017, or March 31, 2017, if filing electronically.

An ALE Member must furnish a Form 1095-C to each of its FTEs by January 31 of the year following to which the return applies. Forms 1095-C for the 2016 calendar year must be furnished by January 31, 2017.  

Next Steps

The 2016 forms are draft versions only and should not be filed with the IRS or relied upon for filing. Employers should review the updates and changes from 2015 instructions as they prepare for the 2016 filings.

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