Obama’s Budget Proposal Tweaks Cadillac Tax

Administration’s outline also has a potential impact on Flex Plans

Last week, the Obama Administration released its (final) budget proposal for the 2017 fiscal year. And although presidential budgets are usually viewed as highly partisan documents, there are a few noteworthy provisions in this particular budget proposal that will be of interest to TASC Providers / Clients.

Cadillac Tax Changes                                                                                                   As ACA supporters attempt to ease the opposition toward this controversial policy item, which is unpopular with both political parties,* the administration is backing what they’ve dubbed “sensible improvements” in an effort to decrease the likelihood that employer plans will trigger the excise tax.

Health plan costs by geographic regions                                                                   Under the proposal, a health plan would be considered high cost and subject to the tax if it exceeded the greater of the current law threshold ($10,200 for individual coverage and $27,500 for family coverage) or a new “gold plan average premium” which would be determined/calculated and published for each state.** A family multiplier would be applied to this amount to create the family threshold. This reform is intended to protect employers from paying the tax only because they are in high-cost locales and ensure that the penalty remains targeted at the appropriate population (i.e. those with overly generous plans).

GAO study                                                                                                                     The President’s budget also requires that the Government Accountability Office (GAO) study the potential effects of the excise tax on entities with unusually sick employees…presumably leading to legislative measures if the study finds that such firms are adversely impacted.

FSA salary reduction                                                                                            Currently, each employee’s actual FSA salary reduction contribution is counted in determining whether the cost of coverage for that employee exceeds the limit and is subject to the excise tax. But under the new recommendations, employers would determine the average amount of FSA salary reduction contributions for similarly situated employees and use that average amount in determining the cost of coverage.

Elimination of Dependent Care FSAs                                                                          As part of the administration’s attempt to increase the child and dependent care tax credit and create a larger credit for taxpayers with children under the age of 5, dependent care FSAs would no longer be permitted.  The executive branch believes that the new credits would provide better assistance to families with children then is currently available through a dependent care FSA.

Of course, the budget request of a president in his final year in office – particularly one facing a hostile Congress – is unlikely to lead to enacted legislation. That said, this proposal at least offers an insight into some of the interesting options that the next president might pursue, depending on his/her political leanings.

Overall, these provisions simply fall short of the mark and do not address TASC’s core concerns; in fact, they seem to be just as – if not more – administratively complex than the rule it attempts to replace. While we appreciate recognition of the budget’s implicit acknowledgment that the excise tax is imposed inequitably on those who live in high-cost geographic areas, this adjustment completely disregards the other uncontrollable factors that are used to calculate the tax, as well as the detrimental effects the tax could have on employer-sponsored health care plans.

The Cadillac Tax does nothing to help reduce the cost of health care or improve its quality. Instead, it places unparalleled financial challenges on employers, siphoning off resources that otherwise could sustain or improve benefits for workers and their families. Therefore, TASC continues to support full repeal of the tax or at the very least a carve-out exempting contributions to FSAs, HRAs and HSAs from the tax’s calculation. 

* Clear bipartisan majorities of both the House and Senate have voted to repeal the tax, and ALL presidential hopefuls – including both Democratic candidates – have also publicly called for repeal.

** A “gold” level plan is a tier of coverage found on a state-based or federally-facilitated public marketplace; would be calculated based on a weighted average of the lowest cost (self-only) silver level plans, multiplied (by 8/7) to simulate the cost of an actuarially equivalent gold plan.

Compliance of Premium Reimbursement Arrangements

Earlier today, the Dept. of Labor issued additional FAQs (Part XXII) regarding implementation of PPACA. Specifically, the guidance addresses application of the market reform provisions on HRAs, certain health FSAs and other employer health care arrangements.

TASC Governmental Affairs is currently in the process of reviewing this latest release in order to assess the effect–if any–on our NESP/NEFSA Plan. We will communicate further on this topic in the near future.

Excepted Benefits

Late last Friday, the Dept. of Health & Human Services (HHS), the Dept. of Labor (DOL) and the Internal Revenue Service (IRS) issued proposed rules amending the excepted benefits* regulations.

The statutes establish four categories of excepted benefits…

1) Non-health: automobile insurance, liability insurance, workers compensation, and accidental death/dismemberment coverage;
2) Limited Scope: vision, dental, long-term care and certain health FSAs;**
3) Non-coordinated: specified diseases/illnesses coverage (such as cancer policies) and hospital indemnity insurance; and
4) Supplemental: Medicare, the Civilian Health & Medical Program or Tricare.

The guidance released last week appears to impact the second category of excepted benefits highlighted above (limited scope). TASC Governmental Affairs is currently in the process of reviewing this new information in order to assess the effect – if any – on our products and services. We will communicate further on this topic in the near future.

* Excepted benefits are generally exempt from the healthcare reform requirements added by HIPAA and PPACA.

** These benefits must either be provided under a separate policy, certificate, contract, etc. or otherwise not be an integral part of a group health plan, whether insured or self-insured.

“Use-or-Lose” Rule Modified for Health FSAs

$500 Rollover Provides Greater Flexibility to Plan Participants

Yesterday, the Treasury and IRS issued a notice modifying the long-standing “use-or-lose” rule for health flexible spending arrangements (FSAs). To make health FSAs more consumer-friendly and provide added flexibility, the updated guidance permits employers to allow plan participants to rollover up to $500 of their unused health FSA balances remaining at the end of a plan year.

This action seems to directly reflect public comments received by the agencies in recent years; an overwhelming majority of feedback pointed to the difficulty for employees of predicting future needs for medical expenditures, the need to make FSAs accessible to employees of all income levels, and the desire to minimize incentives for unnecessary spending at the end of the year.

For nearly 30 years, employees eligible for health FSAs have been subject to the use-or-lose rule, meaning that any account balances remaining unused at the end of the year are forfeited. Under current law, plan sponsors have the option of allowing employees a grace period permitting them to use amounts remaining unused at the end of a year to pay qualified FSA expenses incurred for up to two and a half months following year-end.

As with all new legislative activity, TASC’s Governmental Affairs team is closely examining the new rollover policy and its impact on our Clients and their employees. In fact, we are currently in the process of analyzing how the policy will work with a Client’s optional “grace period” and/or “run-out period” to determine what – if any – adjustments need to be made operationally in order to best serve our customers…and then will update our guidelines, procedures and administrative materials accordingly.

More information to follow; be on the look-out for additional communication from TASC (including here at the Capital Connection) in the coming weeks, in an effort to ensure peace of mind for TASC Providers, Clients and Participants!

Click here to view the document (in its entirety): IRS Notice 2013-71

AgriPlanNOW / BizPlanNOW Section 105 Plans

Recent guidance issued by the IRS (Notice 2013-54) and Dept. of Labor (Technical Release 2013-03) regarding annual limit provisions will impact some business owners across the nation. Already the mandated PPACA changes are causing a state of confusion and uncertainty. In what ways will this legislation impact AgriPlanNOW/BizPlanNOW Section 105 Plans?

As always, TASC is working hard to research what’s best for you. Meanwhile, the recent government shutdown, ongoing debt limit negotiations, and PPACA implementation issues—not to mention the myriad of conflicting interpretations—elicit our present course of action: make no hasty decisions. Even in the calmest of times, it makes the most business sense to gather all the facts before setting or changing a direction that affects the administration of AgriPlanNOW/BizPlanNOW Plans. This philosophy of analysis has never been more apt than in today’s windy climate.

At present we do know that Health Reimbursement Arrangement (HRA) plans covering fewer than two employees (i.e. one) will experience no change….no matter whether the Plan is paired with group or individual insurance, is for medical or dental & vision expenses, includes or does not include a maximum limit cap, and so on. Simply put, nearly all AgriPlanNOW/BizPlanNOW Plans are unaffected by this guidance.

We are investigating the potential impact on our customers with multiple-employee plans and accessing what changes need to be made. As we work out the details, we will analyze these Clients to better understand their health insurance coverage, medical expenses, and account history. Once we gather this information and have more clarity on regulations, requirements, and timing, we will work with these Clients to identify the appropriate plan design to best ensure their maximum tax benefits continue.

Stay tuned; continue to monitor this site for further updates.

Alert: Agencies Issue Clarifying Guidance

Late Friday, the Dept. of Labor (DOL) and the Internal Revenue Service (IRS) issued guidance on how the annual limit and preventive services rules will apply to the Patient Protection & Affordable Care Act (PPACA). IRS Notice 2013-54 and DOL Technical Release 2013-03, which mirror each other, specifically address what type of HRAs, FSAs and other employer healthcare arrangements will/will not be considered compliant as of January 1, 2014.

TASC Governmental Affairs is currently reviewing this complicated guidance to assess the effect on our products and services. We will communicate further on this topic in the near future.

“State of Celebration” Prevails

Treasury & IRS issue DOMA Guidance; ruling applies to tax provisions and employee benefits.

On August 29th federal administrators announced that “legally” married same-sex couples will be treated as married couples for federal tax purposes, regardless of where they live. In other words, the agencies have adopted a “state of celebration” rule rather than take a “state of residence” approach. Legal same-sex marriages are recognized in California, Connecticut, Delaware, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Hampshire, New York, Rhode Island, Vermont, Washington, and the District of Columbia.

The guidance, stemming from the Supreme Court ruling earlier this summer that overturned the Defense of Marriage Act, says same-sex couples can begin filing tax returns as “married filing jointly” or “married filing separately” for the 2013 tax year.*

Per Revenue Ruling 2013-17, “taxpayers may rely on this revenue ruling retroactively with respect to any employee benefit arrangement/plan ONLY for purposes of filing original, amended, or adjusted returns…or for a tax refund with respect to employer-provided health coverage or fringe benefits that were provided by the employer (and are excludable from income).” Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

Treasury and the IRS intend to issue further instruction on exactly how cafeteria plans and other tax-advantaged accounts should treat same-sex spouses prior to the effective date of this Revenue Ruling (Sept. 16, 2013). Besides taking into account the potential consequences of retroactivity for all parties involved, such guidance is expected to provide sufficient time for any necessary plan amendments so that affected benefits may retain the favorable tax treatment for which they otherwise qualify.

This situation will require employers in all states – not just those listed above – to prepare for spousal benefit requests. Originally, TASC had asked that all DOMA-affected changes of election and new enrollments be entered by August 31, 2013. However, given these recent developments, that window will now remain open until further notice. We at Capital Connection encourage you to watch the blog for further developments.

NOTE: The ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

* Individuals who were in same-sex marriages may file original or amended returns for one or more prior tax years still open under the statute of limitations. Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011 and 2012.

Employer Mandate Delayed

Announcement is a welcome—though temporary—reprieve.

Allowing employers additional time to prepare, the Obama administration will delay by one year the requirement that businesses with more than 50 employees* provide health insurance. Now to commence in 2015, the “Employer Mandate” is part of the Patient Protection & Affordable Care Act (PPACA).

The delay may signal the Treasury Department’s recognition that the initial reporting requirements were too complex and needed to be simplified/streamlined prior to implementation. It’s no secret that this particular provision (also called Employer Shared Responsibility or Play-or-Pay) is deemed by many to be among the most complex parts of the law. Indeed, firms of all sizes had been scrambling for answers and guidance to deal with the red tape, potential costs, and tax implications. Of greatest concern—and subject to considerable debate and analysis—are rules determining applicable companies and workers, the definition of what constitutes a 50-employee firm, and which employees qualify as full-time staff (and therefore merit coverage).

While not immediately clear just how much the decision will cost the government, most certainly it will mean less revenue due to the loss of anticipated penalty dollars. The Congressional Budget Office (CBO) recently projected that the mandate would generate $10 billion in revenue in fiscal year 2015, presumably from employers who chose not to offer coverage in 2014.

Other key 2014 PPACA requirements remain unchanged, including the individual mandate** and the Patient Centered Outcomes Research Institute (PCORI) fee.*** Also unchanged are the state-based/federally-facilitated health insurance marketplaces, which face difficulty in determining who is entitled to subsidies…especially if employers fail to report the coverage they provide (if offering insurance at all).

Treasury is expected to issue transitional guidance in the very near future, with proposed rules to follow later this summer or early fall. We will provide additional updates as they become available.

* Small businesses (those with fewer than 50 workers) are exempt from the Employer Mandate.

**The requirement that individuals obtain health insurance coverage or pay a penalty of $95 or 1% of household income (whichever is higher).

***The Institute is charged with examining the “relative health outcomes, clinical effectiveness, and appropriateness” of different medical treatments. This mandate also includes a new fee imposed on employers and insurance carriers. Due annually each July, this fee affects Clients with Plan years ending 2012 through 2019.

Court’s DOMA decision changes employee benefit and tax law landscape

Calling it an unconstitutional violation of the Fifth Amendment, the U.S. Supreme Court has struck down a federal law defining marriage as between one man and one woman.  The landmark 5-4 decision comes 17 years after the Defense of Marriage Act (DOMA) received bipartisan Congressional support and was signed by President Clinton.

The high court’s ruling extends federal recognition to same-sex marriages in the states where they are legal, and will add the country’s most populous state—California—to the 12 others in that category…meaning about 30 percent of Americans live in states recognizing same-sex marriage.  Meanwhile, the Justice’s opinion has no direct effect on the constitutional amendments in 29 states that limit marriage to traditional couples.

This over-turn of DOMA is expected to involve a major overhaul of federal rules affecting employee benefits administration and payroll operations.  Same-sex couples who legally wed, where allowed, now must be treated as spouses under the Internal Revenue Code (IRC), the Employee Retirement Income Security Act (ERISA), and more than 1,000 other federal laws.

Here are just a few examples…

FICA Taxes          

Before the Supreme Court decision, employer-paid healthcare coverage for a same-sex spouse was not excluded from income, because the Internal Revenue Service (IRS) did not recognize the marriage.  The value of the benefit was therefore included in income and subject to both employer and employee payroll taxes.

Just as with heterosexual spouses, these amounts are no longer included in income for same-sex couples who are recognized as married under state law.  Employers may be able to file refund claims and amend Forms W-2 to exclude the value of healthcare coverage provided to a same-sex spouse for open tax years (generally 2010, 2011, and 2012).

Benefits

These rights and rules now must be extended to same-sex spouses for marriages that are valid under state law:

  • COBRA continuation health coverage;*
  • the ability to use a spouse’s flexible spending account (FSA), health reimbursement arrangement (HRA) or health savings account (HRA); and
  • leaves of absence under the Family & Medical Leave Act (FMLA).

Although many outstanding/unresolved issues still remain, employers and affected employees alike should begin to determine what initial changes are needed.  Further IRS guidance is anticipated!  Stay tuned to the Capital Connection, as future posts will discuss the effects of the decision in more detail.


Note: For federal purposes, including COBRA, the change is effective as of June 26, 2013.  As of that date, a same sex couple that is married under state law has the same right to COBRA as an opposite sex married couple.  Therefore, TASC will administer same sex couples exactly the same as opposite sex couples (i.e. same premium rates, 36 month events, etc.).  This does not affect the domestic partner rules currently administered under COBRA as the domestic partner did not gain rights under this change.