IRS Proposes New Safe Harbors for Individual Coverage HRAs
On September 30, 2019, the IRS proposed regulations regarding the application of the ACA’s employer shared responsibility provisions (also known as the employer mandate) to HRAs integrated with individual health insurance coverage or Medicare, known as individual coverage HRAs (ICHRAs). The guidance also addressed the application of the self-insured plan (Section 105(h)) non-discrimination rules to ICHRAs. The proposed rules supplement the June 2019 final regulations, which permitted the use of ICHRAs effective January 1, 2020, and subsequent related guidance under IRS Notice 2018-88.
As background, an HRA is an employer-funded, account-based group health plan that allows for payment of employee medical expenses on a tax-advantaged basis (the HRA reimbursements are not included in the employee’s gross income). In order to comply with the ACA mandates applicable to group health plans, such as the prohibition against annual or lifetime limits for essential health benefits and the provision of preventive care without cost sharing, HRAs previously needed to be integrated with an ACA compliant group health plan. This meant that stand-alone HRAs were generally prohibited. However, the June 2019 final rules introduced the ICHRA, which allowed for the integration of HRAs with individual health insurance coverage, provided certain conditions are satisfied.
Applicable large employers (those with 50 or more full-time employees, including full time equivalents) during the preceding calendar year) that sponsor ICHRAs must still satisfy the ACA employer shared responsibility mandates to avoid tax penalties. The penalties can arise if an employee receives a premium tax credit through the ACA marketplace because he or she was not offered employer-sponsored MEC that is of MV and is affordable. To avoid penalties, the employers must offer such coverage to at least 95% of full-time employees and their children until age 26. The IRS has indicated that an employer’s offer of an ICHRA is an offer of MEC. Satisfying the affordability condition is more challenging.
Prior IRS guidance provided that an ICHRA is deemed affordable if the benefit makes the lowest cost individual silver policy in an ACA exchange rating area affordable to an employee who resides there. By definition, the silver plan would cover at least 60% of required costs and thus also meet the minimum value standard. ICHRA coverage is considered affordable if the employee's required monthly contribution (that is, premium cost-HRA benefit) does not exceed 9.78% (for 2020) of the employee's household income. When determining affordability for employer mandate purposes, an employer can use any of the previously established safe harbors (specifically, Form W-2 wages, rate of pay, and federal poverty line), provided that the application is uniform and consistent for any acceptable classification of employees.
However, the previous guidance failed to adequately address the inherent complexities of applying the affordability requirement to a diverse employee group, whose members would be purchasing individual coverage. For example, employees could reside in different rating areas, so premiums for the lowest cost silver plan could vary dramatically. Costs could also differ based upon ages of the employees themselves. Additionally, the premiums for the lowest cost silver plan on the exchange are typically not known until October, which makes it difficult for employers to plan and fund for ICHRAs prior to the start of the plan year.
In an effort to address these concerns, the new proposed regulations provide optional safe harbors and clarification regarding the affordability determination. First, the guidance provides a location safe harbor for ascertaining the lowest cost silver plan. This safe harbor allows an employer to use the ACA rating area for an employee’s primary site of employment instead of the employee’s residence. The primary site of employment is the location where the employer reasonably expects the employee to perform services as of the first day of the ICHRA plan year (or coverage date, if later). For remote workers, the location would be the site from which they actually work, unless they are required to periodically report to the employer’s work site, which would then be considered the employee’s primary site. A permanent change in employee work sites must be taken into account for affordability purposes by the first day of the second month following the employee’s relocation.
Second, the IRS declined to provide an age-based safe harbor. The IRS was concerned that employees older than a set safe harbor age may not find their cost of coverage affordable and receive tax credits on the exchange, although the employer would be deemed to have satisfied the affordability mandate. However, for a particular rating area, an employer is permitted to use the lowest cost silver plan for employees in the lowest age bracket as the base plan for determining affordability. For older employees, the employer could then use the price of that plan for the applicable age bracket to determine affordability (regardless of whether a less expensive silver plan was available for the age group). The guidance also clarifies that for affordability purposes, an employer should use the employee’s age on the first day of the plan year (or his or her date of coverage, if later).
Third, the proposed rules introduce a look-back month safe harbor that allow employers with calendar year ICHRAs to base the monthly cost of the cheapest silver policy for a year on the cost of that policy as of the first day of the previous year. So, an employer offering an ICHRA with a plan year beginning January 1, 2020, could use the exchange rates as of January 1, 2019. Non-calendar year plans could use the rates as of January 1 of the current year.
Fourth, the IRS emphasizes that an employer electing to use any of the optional safe harbors must apply the chosen method uniformly and consistently for all employees in a class. The permitted classes are as specified in the June 2019 final ICHRA rules, which include salaried vs. hourly; full time vs. part time; bargaining unit vs. non-bargaining unit; seasonal vs. regular; and employees in one rating area, state, or region vs. another. The guidance also confirms that employers can report employee required contributions (for Forms 1094-C and 1095-C) based upon the safe harbors and that premiums for affordability purposes do not need to reflect tobacco surcharges or wellness incentives, unless the wellness program incentive relates exclusively to tobacco use, in which case the incentive is treated as earned. Additionally, the proposed rules allow employers to rely upon the accuracy of the premium information made available by the government marketplace.
Finally, the IRS provides clarification regarding the application of the Section 105(h) nondiscrimination rules to ICHRAs. These rules generally apply to self-insured health plans and prohibit discrimination in favor of highly compensated individuals (HCIs), which include the five highest paid officers, more-than-10% shareholders/owners and the highest-paid 25% of all employees. However, if an ICHRA only reimburses insurance premiums (and not other medical expenses), it is treated as an insured plan and not subject to the Section 105(h) rules. The rules propose two nondiscrimination safe harbors. First, the maximum ICHRA contribution can vary within a class of employees if the variation applies under the same terms to all within the class, and between classes if each class is a permitted class under the ICHRA rules. Second, ICHRA designs can vary contributions based upon family size and age (provided the maximum contribution for the oldest participant does not exceed three times the amount for the youngest participant), without the plan automatically being deemed as discriminatory. However, the guidance notes that an ICHRA that is not discriminatory in design could still fail the Section 105(h) test, if HCIs actually benefit disproportionately to non-HCIs.
Employers who are considering adopting ICHRAs should review the new guidance and speak with their benefit consultants. Organizations planning to offer ICHRAs effective January 1, 2020, can use the 2019 exchange rates – as outlined above – for purposes of setting contribution and funding levels.
Some large employers may find the new safe harbors helpful in satisfying the ACA shared responsibility provisions. In particular, the rules provide some simplifications for determining affordability for employees that reside in diverse geographic locations. However, it is unclear if the proposed regulations adequately address the administrative concerns of potential ICHRA plan sponsors.
The IRS has requested comments on the proposed rules by late December. However, employers can generally rely on the guidance in designing ICHRA options for 2020. The proposed rules will remain effective for any plan year that begins at least six months prior to the publication of final rules. Please stay tuned to Compliance Corner for further updates on this topic.
OCR Announces HIPAA Settlement for Failure to Respond to Participant Requests
On September 9, 2019, the HHS’s Office for Civil Rights (OCR) announced an enforcement action and settlement resolving an investigation of Bayfront Health St. Petersburg (Bayfront). Bayfront is a Level II trauma and tertiary care center licensed as a 480-bed hospital with over 550 affiliated physicians. As a result of the settlement, Bayfront paid $85,000 to OCR and adopted a corrective action plan to settle a potential violation of the right of access provision of the HIPAA rules.
As background, the OCR began an investigation when a mother filed a complaint alleging that Bayfront provided personal health information relating to her unborn child to her more than nine months after her request. HIPAA generally requires that health care providers provide personal health information relating to the requestor within 30 days of the request. The right of access to these records extends to parents of minor children, such as an unborn child.
In addition to the $85,000 paid pursuant to the settlement, the resolution agreement requires Bayfront to comply with a corrective action plan that requires them to develop, maintain, and revise, as necessary, written access policies and procedures that comply with federal standards that govern the privacy of individually identifiable health information. Those policies must be reviewed by OCR and, upon approval, distributed to Bayfront employees and business associates. Bayfront must also revise its training materials and, subject to approval by OCR, train its employees and business associates on its policies and procedures regarding federal standards that govern the privacy of individually identifiable health information. Bayfront is obliged to report to OCR any information regarding an employee or business associate that may have failed to comply with those policies and procedures and to submit reports of its progress to OCR.
In summary, this investigation and resolution agreement provides employers with a great example of conduct that violates the right of access provision of the HIPAA privacy and security rules. Although this settlement relates to a health care provider, employers that sponsor group health plans (particularly those with self-insured plans), should provide plan participants, upon request, with their health information, and do so in a timely manner.
IRS Releases Draft Version of 2019 Form 5500-EZ Instructions
On October 3, 2019, the IRS published a draft version of the 2019 Form 5500-EZ instructions. As background, IRS Form 5500-EZ is an annual filing requirement for retirement plans that are either a one-participant plan or a foreign plan. The draft instructions are only for informational purposes and may not be used for 2019 Form 5500-EZ filings, but employers should familiarize themselves with the instructions in preparation for 2019 plan year filings. They should be reviewed in connection with the draft form discussed in the October 4, 2019 edition of Compliance Corner .
The IRS does not appear to have made any significant changes to this year’s form or instructions. While many employers outsource the preparation and filing of this form, employers should also familiarize themselves with the form’s requirements and work closely with outside vendors to collect the applicable information.
An employee became Medicare eligible in July, but continued to make pre-tax HSA deferrals and receive employer HSA contributions. How should this situation be addressed?
First, please note that simply turning age 65 does not make an individual ineligible for HSA contributions. The person only becomes HSA ineligible if he becomes entitled to (that is to say, enrolled in) Medicare. Enrollment in Medicare is not automatic for someone who turns 65, unless they start receiving Social Security.
If the employee actually enrolled in Medicare in July upon attainment of age 65, his Medicare would be considered impermissible coverage that would make him HSA-ineligible. Medicare is disqualifying coverage because it allows for cost sharing for medical expenses (other than preventive care) before the HDHP deductible is satisfied. In this situation, the employee would only be eligible to contribute for the first six months of the year. For self-only coverage, the 2019 annual HSA contribution maximum ($3,500) and 55 and older catch-up amount ($1,000) would need to be prorated; the result would be a 2019 maximum contribution of ($4500 x 6/12) or $2,250. So, the employee’s maximum 2019 contribution would be $2,250, and any funds contributed above this amount would be an excess contribution.
With respect to the employer contribution, it is important to keep in mind that HSA contributions are generally non-forfeitable. This situation does not fit the very limited exceptions for an employer’s recoupment of excess contributions, which are if the employee was never HSA eligible or the employer contributed beyond the statutory maximum ($4,500 for 2019). Nor is this a case in which there was a clear process error (for example, the contribution was credited to the wrong employee).
So, the employer would not be able to recoup the employer contributions. IRS Notice 2008-59, Question 25, makes it clear that the excess contribution cannot be returned to the employer in this type of situation:
Example. Employee N was an eligible individual on January 1, 2008. On April 1, 2008, Employee N is no longer an eligible individual because Employee N’s spouse enrolled in a general purpose health FSA that covers all family members. Employee N first realizes that he is no longer eligible on July 17, 2008, at which time Employee N informs Employer O to cease HSA contributions.
Employer O’s contributions into Employee N’s HSA between April 1, 2008 and July 17, 2008 cannot be recouped by Employer O because Employee N has a nonforfeitable interest in his HSA. Employee N is responsible for determining if the contributions exceed the maximum annual contribution limit in § 223(b), and for withdrawing the excess contribution and the income attributable to the excess contribution and including both in gross income.
To correct the excess contributions, the employee would need to remove the excess from the account by completing the appropriate form provided by the HSA custodian. Provided that the correction is made prior to the employee’s 2019 tax filing deadline (April 15, 2020, or later, if he files for an extension), the employee would not be subject to a penalty tax. If the excess contribution is not included in Box 1 of Form W-2, the employee would report the excess amount as "other income" on his individual return.
The employee must also remove any earnings on the excess amount while in the HSA. The earnings typically are the interest earned. However, if the funds were invested (as in stocks or mutual funds), the earnings would be the appreciation in value. The employee will owe taxes on the earnings and will need to include this amount as "other income" on his income tax return in the year of withdrawal. Although the amount is normally small, the IRS has a special rule for calculating the earnings.
If the excess contribution is not removed prior to the employee’s tax filing deadline, then the employee would need to file an IRS Form 5329 to pay the 6% penalty tax, but would not need to remove the earnings. Of course, the employee should consult with his tax advisor regarding any tax questions related to the excess contribution and reporting. IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, may also be helpful.
Extension of Paid Family Leave Benefits
On June 27, 2019, Gov. Newsome signed AB 83 into law. Under existing law, eligible employees may receive up to six weeks of benefits under the state’s Paid Family Leave program for an absence from work following the birth (or placement) of a new child or due to care for a family member. Under the new law, the duration of benefits is extended from six weeks to eight weeks effective July 1, 2020.
Expansion of Paid Family Leave Benefits
On September 27, 2019, Gov. Newsome signed SB 1123 into law. Under existing law, eligible employees may receive benefits under the state’s Paid Family Leave program for an absence from work following the birth (or placement) of a new child or due to care for a family member. Under the new law, an employee will also be eligible for benefits for an absence from work in connection with a qualifying exigency related to the covered active duty or call to covered active duty of the employee’s spouse, domestic partner, child, or parent in the armed forces of the US. The new law is effective January 1, 2021.
State Coverage Option for Individuals
On October 7, 2019, the Colorado Division of Insurance and the Colorado Department of Health Care Policy and Financing issued a draft report on the development of a state option for affordable health insurance coverage, as required by the Colorado General Assembly’s legislation HB19-1004. The state option would be administered by insurance companies and sold on the individual market but will scale up to the small group market over time. The proposed state option will cover all essential health benefits, many services will be pre-deductible, and average monthly premiums would be reduced by paying hospitals less. The agencies are accepting written comments on draft report until October 25, 2019. For now, there is nothing for Colorado employers to do; but employers with smaller plans will want to follow this development, as it could potentially impact small group options in Colorado.
District of Columbia
Enforcement of Employer Commuter Benefit Requirement
On August 16, 2019, the D.C. Department of Employment Services published final regulations related to the enforcement of the existing commuter benefits requirement. Since January 1, 2016, employers with 20 or more employees in D.C. must offer access to one or more transit benefit options. All employees working 50% or more of their service time in D.C. are counted. Those options are:
- Employee pays pre-tax contributions for transit benefits
- Employer pays transit benefit costs for employees (either through reimbursement or the provision of pre-paid metro cards)
- Employer provides transportation through a shuttle or vanpool
The employer must:
- Notify employees of the available transit benefit program (read the notice here)
- Provide information to covered employees on how to apply and receive benefits
- Issue benefits to covered employees that request or apply for them
- Maintain records to establish compliance with the requirements
- Record that notice was given to employees
- Records showing that elected benefits were provided
Under the final regulations, effective November 14, 2019, the penalties for failure to comply are: $100 for the first offense; $200 for the second; $400 for the third; and $800 for the fourth and subsequent offenses. Please note: an offense is considered each employee per month that is not offered at least one qualified transportation program benefit.
Surprise Billing Protection Act Signed
On April 4, 2019, Gov. Grisham signed SB 337, also known as the Surprise Billing Protection Act, effective January 1, 2020. The Surprise Billing Protection Act may apply when an insured person receives out-of-network emergency care or receives non-emergency care from a nonparticipating provider at a participating facility. Under these circumstances, the Act provides that the insured person is responsible only for the amount that would have been paid for services from a participating facility or provider. The Act also establishes a system whereby the provider is reimbursed for the difference between what the provider charged and what the insurer paid, applying a reimbursement rate set by the Act and informed by benchmarking data.
South Carolina Abolishes Common-Law Marriage
On July 24, 2019, the South Carolina Supreme Court announced that the state will no longer permit common-law marriages. However, valid common-law marriages in effect prior to July 25, 2019, will continue to be recognized.
In repudiating the common-law marriage doctrine, South Carolina follows other states, including Alabama, Georgia, and Pennsylvania. The court determined that many of the original reasons for the doctrine, such as the protection of child support and inheritance rights, no longer depend upon marital status. The opinion also acknowledged the lack of clarity regarding common-law marriage requirements, which resulted in confusion and litigation. Accordingly, the decision was intended to promote predictability by requiring couples wishing to be married to comply with the statutory requirements.
The court’s ruling will affect benefit administration not only within South Carolina, but also beyond the state’s borders, as South Carolina residents may work in or move to other states. Affected employers will need to consider the change when administering leaves, including those under the Family and Medical Leave Act (FMLA). The FMLA permits leave to care for a spouse or stepchild with a serious health condition. The FMLA recognizes a spouse or stepchild of a common-law marriage that was validly entered into pursuant to state law.
Following the decision, an employee claiming a common-law spouse under South Carolina law for benefit purposes would need to establish that the common-law marriage occurred prior to July 25, 2019. The employer can request reasonable documentation (such as an affidavit that marriage requirements were satisfied) to support such a claim. After July 25, 2019, employees entering South Carolina marriages must satisfy the statutory requirements and obtain a valid marriage certificate.
New Rules on Chiropractic Services Coverage
On June 22, 2019, Gov. Abbott signed SB 1739 into law. This law prohibits health maintenance organizations (HMOs) and preferred provider benefit plans from denying reimbursements for services provided by in-network chiropractors solely because such services are provided for chiropractors. The services must be within the scope of the chiropractor’s license. This law will apply to any health benefit plan that is delivered, issued for delivery, or renewed on or after January 1, 2020.
New Rule on Carrier’s Ability to Select Pharmacist
On May 29, 2019, Gov. Abbott signed HB 1757 into law. This law allows insurers to select a pharmacist to provide the services scheduled in the health insurance policy. The services must be within the scope of the pharmacist’s license.
This law takes applies to any health benefit plan that is delivered, issued for delivery, or renewed on or after January 1, 2020.
New Rules on Out-of-Network Balance Billing
On June 14, 2019, Gov. Abbott signed SB 1264 into law. The bill amends the Texas Insurance Code to prohibit out-of-network health care providers from billing patients insured by state-regulated insurers or health maintenance organizations (HMOs) for the difference between what the patient’s insurer or HMO chooses to reimburse and that the out-of-network provider chooses to charge when providing emergency care on or after January 1, 2020. SB 1264 also amends the mediation process outlined in the Texas Insurance Code and provides for health benefit plan issuers and administrators to mediate disputes with out-of-network providers that are facilities, as well as providing a binding arbitration process that provides for health benefit plan issuers and administrators to resolve disputes with out-of-network providers that are not facilities. The Texas Department of Insurance is proposing new rules and amendments to current rules in order to comply with new requirements under SB 1264, including updating the agency’s mediation process, creating a new division to handle binding arbitration, describe explanation of benefit notices, and implement a benchmarking database. The agency is accepting written comments on those rules through 5:00 p.m. on October 28, 2019.
Worker Misclassification Initiative
On August 8, 2019, Gov. Northam issued Executive Order No. 38. The order reauthorizes the inter-agency taskforce on worker misclassification and payroll fraud. The governor’s office believes that the misclassification of actual employees as independent contractors deprives the state of Virginia of millions of dollars in tax revenues and prevents workers from receiving protections and benefits to which they are otherwise entitled.
The order authorizes the existing taskforce to continue reporting current enforcement practices against employers and recommending procedures for more effective enforcement. Virginia employers should review their employment practices to make sure that workers are properly classified as employees or independent contractors. Employees that are improperly classified as independent contractors could put the employer at risk for penalties under the employer mandate, as well as past liability for group health plan claims, employment taxes, and workers compensation benefits.
New Rules on Balance Billing
On May 21, 2019, Gov. Inslee signed the Balance Billing Prevention Act, which takes effect on January 1, 2020, that prohibits out-of-network providers from submitting surprise medical bills to insured patients for providing emergency services in an in-network facility. The Act also includes arbitration for disputes between insurers and providers regarding the price for those services; a notice requirement describing a patient’s rights and letting them know when they can and cannot be balance billed; a requirement that the amount an insurer pays an out-of-network provider must be “commercially reasonable” as determined by payments made for the same or similar service in a similar geographic area.
New Guidance Relating to MEWA Regulation
As of July 1, 2019, the Wyoming Department of Insurance has the authority to license and regulate MEWA in Wyoming that are not under the authority of the U.S. DOL. Wyoming will license both MEWAs offering fully insured benefit plans and self-insured benefit plans. Administrative rules governing this license process have been proposed, and copies of the proposed rules as well as information on how to comment on those proposals can be found on the DOI’s website.
This material was created by PPI Benefit Solutions to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. The service of an appropriate professional should be sought regarding your individual situation. PPI does not offer tax or legal advice. "PPI®" is a service mark of Professional Pensions, Inc., a subsidiary of NFP Corp. (NFP). All rights reserved.
Industry news topics covered in the Compliance Corner are chosen based on general interest to most employers and may include articles about services not available through PPI.
An employee became Medicare eligible in July, but continued to make pre-tax HSA deferrals and receive employer HSA contributions. How should this situation be addressed?