IRS Finalizes Rule Fixing the ACA Family Glitch
On October 11, 2022, the IRS finalized its proposed rule to fix the “family glitch” in eligibility rules for the ACA premium tax credit (PTC). The new final rule will be effective starting in the 2023 tax year.
Under the so-called “family glitch” circumstance, family members were previously ineligible for a PTC if the cost of self-only coverage was affordable. A PTC for purchasing health insurance on the ACA’s marketplace is available to people who do not have access to “affordable” coverage through their jobs. Previously, spouses and children were ineligible for the PTC if the employee’s contribution for self-only coverage in the employer-sponsored plan did not exceed 9.5% of household income (indexed annually) without considering any additional employee cost-share contribution for family coverage.
To increase access to PTCs for low-income families, the new rule applies a separate PTC affordability standard for family members based on the full cost-share contribution for family coverage. Under the rule, an eligible employer-sponsored plan will be treated as affordable for family members (i.e., the spouse if filing jointly and tax dependents) if the portion of the annual premium the employee must pay for family coverage, that is, the employee's required contribution, does not exceed 9.5% of household income (indexed annually). As a result, an employee’s family may qualify for a PTC even if the employee does not.
Importantly, the new rule does not impact the employee affordability test and does not increase exposure to employer shared responsibility (employer mandate) penalties. Applicable large employers will continue to base affordability tests on the cost of self-only coverage, and employer mandate penalties will continue to be triggered only by an employee’s receipt of a marketplace PTC and not by a PTC granted to their spouse or dependents. However, employers may see an indirect impact with more families dropping employer-sponsored coverage for newly subsidized ACA marketplace coverage.
Family members of some employees may be eligible for PTCs effective January 1, 2023, if coverage under the group health plan is determined to be unaffordable under the final rule. Related Notice 2022-41 provides an additional permitted qualifying event to allow employees who participate in non-calendar year cafeteria plans to drop coverage for such family members mid-year so they can enroll in a qualified health plan through the marketplace. Certain conditions apply, and the plan must be formally amended to recognize this optional new qualifying event. Interested employers who sponsor non-calendar year cafeteria plans should consult with their document providers and carriers, as applicable, regarding the possible adoption of such an amendment.
DOL Proposes Changes to Worker Classification Rules
On October 13, 2022, the DOL released a Notice of Proposed Rulemaking that would guide employers in classifying workers as employees or independent contractors under the Fair Labor Standards Act (FLSA). The FLSA governs minimum wage and overtime requirements that apply to employees but not independent contractors.
The proposed rules would rescind and replace the 2021 issued regulations and restore a “totality-of-the -circumstances” multi-factor economic realities test rather than the two factors test in the 2021 regulations in classifying a worker as an employee vs. independent contractor. A multi-factor economic realities test includes the following:
- The opportunity for profit or loss
- The degree of control by the employer over the worker
- Whether the work is an integral part of the employer’s business
- Skill and initiative
According to the Notice of Proposed Rulemaking, ultimately, a worker who is economically dependent on the employer for work is deemed an employee, and those that are in business for themselves are independent contractors.
Although this is an employment law issue, worker status has benefits implications. Offering benefits to a worker that the employer wishes to classify as an independent contractor may be a factor in determining that the worker is actually an employee. Accordingly, employers who have contractor workers should be aware of this development and continue to familiarize themselves with state laws that may provide more stringent tests to determine whether a worker is an employee or an independent contractor. Employers should consult with employment law counsel for further information.
Federal Court Finds Employer’s Documentation of COBRA Notice Mailing Procedures Inadequate
On October 5, 2022, in Earl v. Jewel Food Stores, the US District Court for the Northern District of Illinois ruled an employer failed to document a good faith attempt to provide the required COBRA election notice to a terminated employee.
The plaintiff, Billy Earl, sued his former employer Jewel Food Stores, alleging failure to provide a COBRA election notice and multiple counts of discrimination related to his termination. Jewel Food Stores served as the group health plan administrator responsible for providing COBRA election notices. In addressing the COBRA claim, the court began with the premise that employers must be able to prove a COBRA election notice was provided in good faith, although proof of receipt is not required. An employer can satisfy this obligation by sending the required notice by first class mail with a post office certificate of mailing or certified mail and with evidence of standard office procedures for generating and mailing COBRA notices, plus evidence that the procedures were followed in a disputed instance.
Mr. Earl’s employer was only able to produce an appropriately addressed COBRA election notice and internal document certifying the election notice was mailed. There was no evidence of sending the COBRA election notice by first class or certified mail, no evidence regarding the company’s standard COBRA notice mailing procedures and no evidence regarding whether such procedures were followed as to Mr. Earl’s election notice. Accordingly, the court found the employer did not meet its burden of proving it made a good faith effort to notify Mr. Earl of his COBRA rights.
The Earl case serves as an important reminder for employers to review their COBRA election notice procedures, whether that means internal procedures or those followed by a third-party administrator. If a former employee (or other COBRA qualified beneficiary) sues their employer for failure to offer COBRA coverage, most courts have held that the plan administrator (typically, the employer) has the burden of proving the election notice was properly sent. Employers should adopt suitable record retention policies, keeping in mind they may be called upon to prove mailing years after the COBRA qualifying event.
IRS Releases 2022 Forms 1094/5-B and 1094/5-C and Draft Instructions
The IRS recently released the final Forms 1094-B/C and 1095-B/C and the drafts of general instructions for Forms 1094-B/C and 1095-B/C for the 2022 reporting year.
Forms 1094-C and 1095-C are filed by applicable large employers (ALEs) to provide information that the IRS needs to administer the employer mandate penalties and eligibility for premium tax credits, as required by the ACA under Section 6056. Forms 1094-B and 1095-B are filed by minimum essential coverage providers (e.g., insurers and self-insuring employers) to report coverage information in accordance with Section 6055. Overall, most of the formats and rules remain the same as those in the previous year. No new codes or lines were added, so the forms should be very familiar to ALEs with reporting obligations in prior years.
2022 Draft Instructions
Based on the draft instructions, employers may continue to rely on the proposed automatic extension to distribute Forms 1095-B and 1095-C to individuals. The proposed rule permanently extends the deadline to furnish the forms to 30 days after January 31, rather than the IRS extending the deadline each year. For reporting year 2022, the deadline to furnish Forms 1095-B and 1095-C to individuals is March 2, 2023.
The good faith penalty relief for incorrect or incomplete information was eliminated permanently with the 2021 reporting year. Therefore, employers should focus on accuracy and thoroughly completing the forms. The penalty for failure to provide a correct form or statement in 2022 is set to increase by $10 to $290 per form/statement in the draft instructions.
Finally, the draft instructions retain the same electronic filing threshold at 250 forms even though the IRS previously released a proposal to significantly reduce the filing threshold, requiring more ALEs to file electronically.
Keep in mind that although the forms were finalized, the instructions are still in the draft stage. Additional changes are possible, and we will keep you updated when the 2022 instructions are released.
2022 Draft Instructions for Forms 1094-C and 1095-C »
2022 Draft Instructions for Forms 1094-B and 1095-B »
2022 Form 1094-C »
2022 Form 1095-C »
2022 Form 1094-B »
2022 Form 1095-B »
IRS Releases Updated Fringe Benefit Guide for Government Employers
On October 17, 2022, the IRS released the updated Fringe Benefits Guide (Publication 5137) to assist federal, state, and local government employers in determining the correct tax treatment of employee fringe benefits, including using the appropriate withholding and reporting procedures. This publication covers:
- An overview of how to determine whether specific types of benefits or compensation are taxable
- Procedures for computing the taxable value of fringe benefits
- The taxation and exclusion rules applicable to employee benefits
- Reporting of the taxable value of fringe benefits
Though this publication is intended for government employers, it provides citations to regulations and guidance related to fringe benefits that may be helpful for private employers as they are subject to most of the same rules.
Government employers should be aware of the availability of the updated publication and most recent modifications. Private employers should refer to the IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits, regarding employees’ fringe benefits taxation and exclusion rules.
IRS Announces 2023 Inflation Adjusted Limits for Health FSAs, Commuter Benefits and Adoption Assistance
On October 18, 2022, the IRS issued Revenue Procedure 2022-38, providing certain cost-of-living adjustments for a wide variety of tax-related items, including health FSA contribution limits, transportation and parking benefits, qualified small employer health reimbursement arrangements (QSEHRAs), the small business tax credit and other adjustments for tax year 2023. Those changes are outlined below.
- Health FSA . The annual limit on employee contributions to a health FSA will be $3,050 for plan years beginning in 2023 (up $200 from 2022). In addition, the maximum carryover amount applicable for plans which permit the carryover of unused amounts is $610 (up $40 from 2022).
- Dependent FSA (DCAP) . The annual limit on employee contributions to a DCAP will remain at $5,000/$2,500 for 2023 and future years unless extended or amended by Congress.
- Qualified transportation fringe benefits . For 2023, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking increases to $300, as does the aggregate fringe benefit exclusion amount for transit passes (both up from $280 in 2022).
- QSEHRAs . For 2023, the maximum number of reimbursements under a QSEHRA may not exceed $5,850 for self-only coverage and $11,800 for family coverage (an increase from $5,450 and $11,050 in 2022).
- Adoption assistance program. The maximum amount an employee may exclude from his or her gross income under an employer-provided adoption assistance program for the adoption of a child will be $15,950 for 2023 (a $1,060 increase from the 2022 maximum of $14,890). This exclusion begins to phase out for individuals with modified adjusted gross income greater than $239,230 and will be entirely phased out with a $279,230 modified adjusted gross income.
- Small business healthcare tax credit. For 2023, the average annual wage level at which the credit phases out for small employers is $30,700 (up $2,000 from 2022).
Employers with limits that are changing (such as for health FSAs, transportation/commuter benefits and adoption assistance) will need to determine whether their plans automatically apply the latest limits or must be amended (if desired) to recognize the changes. Any changes in limits should also be communicated to employees.
PBGC Proposes Actuarial Assumptions for Determining Multiemployer Plan Withdrawal Liability
On October 14, 2022, the Pension Benefit Guaranty Corporation (PBGC) proposed a rule to provide interest rate assumptions that may be used by a plan actuary to determine a withdrawing employer’s liability under a multiemployer defined benefit pension plan. Generally, a multiemployer plan is a collectively bargained plan involving two or more unrelated employers.
Under ERISA, an employer that withdraws from a multiemployer plan may be liable to the plan for withdrawal liability, which generally represents the employer’s share of any unfunded vested plan benefits (UVBs) at the end of the preceding plan year. UVBs are the amount by which the present value of vested plan benefits exceeds the value of plan assets as of the valuation date.
For plans terminated by mass withdrawal, under ERISA Section 4044, the PBGC has specified actuarial assumptions for valuing benefits, including interest rates used to discount future benefit payments to their present value. These interest rates (the 4044 rates) are based on the average market price of a life annuity, which the PBGC determines from a quarterly survey of insurance companies. The 4044 rates can be used to approximate the cost of purchasing annuities to cover benefits.
For ongoing (i.e., non-terminating plans), the PBGC had not previously issued regulations regarding assumptions for determining withdrawal liability. Accordingly, in these situations, present value determinations have been based on actuarial interest and mortality assumptions and methods that represent the plan actuary’s best estimate of anticipated experience under the plan. According to the PBGC, three common approaches actuaries use to determine the appropriate discount rate include:
- Use of interest rate assumptions for determining minimum funding requirements.
- Use of the 4044 rate assumptions for determining the present value of vested benefits in a terminating single-employer pension plan or in a multiemployer plan that has incurred a mass withdrawal.
- A blend of both the minimum funding and 4044 rate assumptions.
However, the actuarial estimates have often resulted in disputes between the plan and employers that are resolved through arbitration or litigation.
Therefore, the proposed rule makes clear that using the 4044 rates, either as a standalone assumption or combined with minimum funding interest assumptions, represents a valid approach to selecting an interest rate assumption to determine withdrawal liability in all circumstances. In the PBGC’s view, it is reasonable to base the amount needed to settle an employer’s share of the liability on the market price to purchase annuities from private insurers because this represents the amount necessary to fund the promised pension liability, considering investment risk, mortality risk and other asset and liability risks. The proposed rule specifically permits the use of the 4044 rates, the minimum funding rates, or an interest rate anywhere in the spectrum between the 4044 rates and minimum funding rates. Actuarial assumptions and methods (other than interest assumptions) would have to be reasonable and offer the actuary's best estimate of anticipated experience under the plan.
PBGC requests comments on various aspects of the proposed rule, including whether the final rule should restrict the allowable options to a narrower range of interest rates or to only specific methodologies for determining interest rates and whether the final rule should specify assumptions or methods other than interest assumptions. Comments must be received by November 14, 2022, to be assured of consideration.
The changes in this proposed rule would apply to the determination of withdrawal liability for employer withdrawals from multiemployer plans that occur on or after the effective date of the final rule. Employers who participate in multiemployer plans should be aware of the guidance and consult with counsel or plan actuaries for further information.
Federal Register: Public Inspection: Actuarial Assumptions for Determining an Employer's Withdrawal Liability »
IRS Provides Transitional Required Minimum Distribution Guidance
On October 7, 2022, the IRS issued Notice 2022-53 (the notice), which provided clarification and transitional relief regarding changes to Code section 401(a)(9) required minimum distributions (RMDs) under the SECURE Act. The notice addressed compliance with respect to 2021 and 2022 post-death RMDs under defined contribution plans and IRAs.
As reported in our March 1, 2022, Compliance Corner article, the SECURE Act made significant changes to the post-death required minimum distribution rules effective beginning in 2020. One notable change is that distributions may only be distributed over the course of a beneficiary’s life expectancy if the beneficiary is an “eligible designated beneficiary.” As a result, distributions to many non-spouse beneficiaries would generally need to be completed by the end of the 10th calendar year following the calendar year of the employee’s death.
Furthermore, if a participant died on or after their required beginning date for distributions, the proposed regulations required that the post-death RMDs to a non-eligible designated beneficiary be paid out for each of the 10 years following the death (i.e., payment of the balance could not be postponed until the end of the 10-year period). However, the proposed regulations were not issued until February 2022, which was after the time when the 2021 RMDs should have been made.
Accordingly, the notice provides needed relief by postponing the effective date of the RMD regulations to the 2023 distribution calendar year. Additionally, under the notice, a plan will not be treated as failing to comply with RMD requirements if it did not make a “specified RMD” for 2021 or 2022. A specified RMD is an RMD to a non-eligible designated beneficiary of a participant who died in 2020 or 2021 on or after their required beginning date and did not take distributions in 2021 or 2022.
A specified RMD also includes an RMD to a beneficiary of an eligible designated beneficiary who died in 2020 or 2021 and was receiving life expectancy payments. In such cases, the beneficiary must continue to take annual distributions with a full distribution made no later than the 10th year after the year of the eligible designated beneficiary’s death.
Importantly, under the notice, the failure to make such 2021 and 2022 specified RMDs will not be treated as a plan qualification failure, nor will the affected beneficiaries be subject to the otherwise applicable 50% excise tax. Additionally, those who already paid an excise tax for a missed RMD in 2021 may request a refund of such tax.
Employers that sponsor defined contribution plans should be aware of the relief and consult with their service providers for further information.
What COBRA compliance considerations exist when an employee’s domestic partnership ends?
When eligibility for coverage is lost due to a change in relationship status, employees and employers may assume COBRA is always offered to the individual losing coverage. However, when a domestic partnership ends that is not necessarily the case.
Federal COBRA requires most employers to offer qualified beneficiaries who lose coverage as a result of a COBRA qualifying event (e.g., termination of employment, reduction of hours, divorce) the opportunity to continue health coverage for a specified time period. Unlike spouses and dependent children, domestic partners are not considered qualified beneficiaries under COBRA and therefore do not have independent election rights. In the event a domestic partnership ends, the nonemployee domestic partner does not have continuation rights under COBRA.
However, children of the domestic partnership who were considered dependents under the plan terms may have COBRA continuation rights. (Termination of a domestic partnership that causes a domestic partner's child to lose coverage under the plan is likely a qualifying event for the child, if the child will have ceased to be a dependent under the terms of the plan).
Some states have their own continuation of coverage laws (often known as “mini-COBRA”) which may apply to domestic partnerships. Employers should review state continuation laws to determine whether mandatory coverage continuation rules apply.
Additionally, employers that offer domestic partner coverage can design their health plans to provide domestic partners with COBRA-like continuation coverage. Employers interested in adding continuation coverage need to work with their insurance carrier or TPA and stop-loss provider prior to implementing continuation of coverage. Any addition to continuation coverage rights beyond what COBRA requires should be drafted in clear terms with the assistance of legal counsel.
PPI has a whitepaper that can assist you in addressing benefits issues involving domestic partners: download a copy of Domestic Partner Benefits: A Guide for Employers.
Significant Decrease Announced for 2023 Temporary Disability Insurance (TDI) and Family Leave Insurance (FLI) Premium Rates
October 25, 2022
2023 New York Paid Family Leave Premium Rate and Maximum Contribution
October 25, 2022
Paid Leave Oregon: Required “Model Notice” Poster and Employer Guidebook Released
October 25, 2022
The Oregon Employment Department that administers “Paid Leave Oregon” (Oregon state’s paid family and medical leave program) recently released the model notice poster that can be used for employers to fulfill their notice requirement to their Oregon employees. Employers must post and/or send the model notices no later than January 1, 2023.
Employers who have at least one employee working in the state of Oregon must display this Paid Leave Oregon model notice poster at each work site in a clearly visible place where employees regularly see the poster. For their remote workers, employers must share it electronically or by mail. The model needs to be provided in the same language(s) the employer uses to communicate with employees. The poster is available in 11 languages and can be downloaded or printed from the resources section of the Paid Leave Oregon website.
The covered employees' and employers' premium contributions into Paid Leave Oregon will begin on January 1, 2023; and the benefits will be available to the eligible employees on and after September 3, 2023.
The department has also released additional resources for employers, including the employer guidebook. For the 2023 premium rate announcement, please refer to the June 7, 2022, edition of Compliance Corner. Employers with Oregon employees should prepare to display or send the model notice poster, set up payroll withholdings of the employees’ contributions and review the employer guidebook.
Paid Leave Oregon Model Notice Poster »
Paid Leave Oregon Main Site »
WA Paid Family and Medical Leave (PFML) 2023 Premium Rate Announced
October 25, 2022
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.
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What COBRA compliance considerations exist when an employee’s domestic partnership ends?
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