“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.

IRS Proposed Rules to Cover PPACA Research Fees

The Patient Centered Outcomes Research Institute (PCORI), a nonprofit corporation newly required by the Patient Protection and Affordable Care Act (PPACA), is being established to advance comparative clinical effectiveness research. Intended to assist patients, clinicians, purchasers, and others in making informed health decisions, PCORI will be funded in part by fees paid by issuers of certain health insurance policies and sponsors of self-insured health plans. Recently, the Internal Revenue Service (IRS) Dept. of Treasury issued proposed rules addressing the following…

Calculation of the Fee
The fee will be imposed for seven years (i.e. policy/plan years ending on or after October 1, 2012 and before October 1, 2019). The amount of the fee is equal to:

               Average Number of Lives Covered[1]   x   Applicable Dollar Amount

The applicable dollar amount is $1 for years ending on or after October 1, 2012 and before October 1, 2013 (Jan. 1, 2013–Dec. 31, 2013 for calendar year plans), but increases to $2 for years ending on or after October 1, 2013 and before October 1, 2014 (Jan. 1, 2014–Dec. 31, 2014 for calendar year plans). In the case of policies/plans beginning on or after October 1, 2014, the applicable dollar amount is to be adjusted to reflect projected increases in national health expenditures.   

Policies and Plans Subject to the Fee
The regulations define a health insurance policy—that is subject to the fee—as any health insurance policy (including under a group health plan) issued with respect to U.S.residents. The fees paid by self-insured health plan sponsors apply to plans established or maintained by an employer or employee organization that provides health coverage, as long as any portion of that coverage is not provided through an insurance policy.  NOTE: Health insurance policies/self-insured health plans that are not subject to the fee include any policy or plan in which essentially all coverage consists of excepted benefits (i.e. limited-scope dental or vision plans).

Benefit Accounts
The proposed rules do not exclude all such plans from the definition(s). However, if two or more arrangements have the same plan year and are established or maintained by the same plan sponsor, the arrangements may be treated as a single self-insured health plan. For example, if a plan sponsor maintains a HRA in addition to major medical coverage, the HRA and medical plan may be treated as one.

The regulations provide that a health FSA is excluded from the definition of an “applicable self-insured health plan” and therefore is not subject to the fee. They further clarify that Archer medical savings accounts and health savings accounts (HSAs) are not subject to the fees, but—unlike other PPACA provisions—that the fees may be imposed on retiree-only medical plans, even those with fewer than two active participants.

Payment of the Fee
Although excise taxes are generally reported and paid quarterly, the proposed rules state that issuers and plan sponsors may report and pay the PCORI fees once per year, on July 31.

The regulations provide detailed instructions regarding how to identify the plan sponsor of a self-insured health plan. In the case of a plan established or maintained by a single employer, the plan sponsor is the employer. If a plan is maintained by two or more employers, the plan sponsor is the employer identified as such in the plan’s documents (i.e. the Plan Document or Summary Plan Description). If no designation has been made, then each plan sponsor that maintains the plan is responsible for the portion of the fee that is attributable to said employer’s own employees.

PPACA requires that the issuer of the policy pay the fee for fully insured health coverage (including a fully insured group health plan), and that the plan sponsor pay the fee in the case of a self-funded health plan. Although a TPA (like TASC) may agree to assist in calculating and/or remitting the payment, the responsibility ultimately rests with the issuer or plan sponsor.

While the PCORI fee is unlikely to drive plan design, it is one more factor that deserves a closer look. It may be most significant with respect to HRAs, since failing to adequately integrate one of these account-based plans with major medical coverage can result in effectively doubling the amount of the fee.

Further analysis will be provided during our next Capital Connection webinar on Tuesday, May 22.


[1] The average number of covered lives includes all participants and beneficiaries [i.e. covered employees (regardless of whether full- or part-time), covered retirees, covered spouses and covered dependents]. For health FSA and HRA coverage, each participant may be treated as a single life, regardless of how many other individuals (e.g., spouse, dependents, and other beneficiaries) are actually covered.

TICK-TOCK: “Super” Committee’s Thanksgiving deadline approaches

The Joint Committee for Deficit Reduction (Super Committee) is responsible for putting together a package that reduces the nation’s debt by at least $1.5 trillion over the next 10 years. Seven of the committee’s 12 members must agree to a plan, to be fast-tracked for an up or down vote (simple majority) in both houses of Congress, with no allowances for amendments. The Super Committee must vote on a package by November 23 and report to Congress by December 2. Congress must then vote on it by December 23.

The Super Committee is allowed to meet the $1.5 trillion target through a combination of spending cuts, tax increases, and entitlement reforms. Meanwhile, if the committee fails to come up with a package that meets the mandate—or if the package subsequently fails to pass in Congress—then automatic spending cuts of $1.2 trillion will begin in January 2013 and continue over the next decade. The mandatory across-the-board cuts, also known as “sequestration” in legislative lingo, were built into the original debt limit agreement approved in August.

Consistent with past bipartisan precedent/practice established in the 1980s, the automatic cuts triggered by failure are seen as draconian by many, and split evenly between defense and domestic programs (both entitlement and discretionary). Funding to critical programs like infrastructure, education, public health (i.e. medical research, HIV/AIDS, disease prevention, etc.) and a host of other discretionary programs will be severely cut or sharply reduced...while Medicaid, Social Security, unemployment insurance and civilian/military retirement—which are exempt from the trigger—would be left untouched. Likewise, any cuts to Medicare would be capped and limited, and tax subsidies are exempt from the automatic cuts. That means oil and gas subsidies—along with subsidies for homeowners, retirement savings, business start-ups, etc.—will remain in place.

The automatic cuts are often discussed in Washington as if they’re certain, as if Congress cannot prevent their inevitability. In reality, federal budget deals have seldom, if ever, gone the distance intact… Most often they have been changed, waived, ignored, or even abandoned altogether. Put more simply: the across-the-board spending cuts may never go into effect.

The committee’s task, while daunting, is made even more difficult by a divided Congress and ongoing battles about federal healthcare reform, along with a presidential campaign season that is already in full swing. Meanwhile, Senate Democrats may well be adding to the complexity of the issue. Indeed, the Joint Committee for Deficit Reduction itself was the brainchild of Senate Majority Leader Harry Reid (D-NV), who therefore has a vested interest in the Super Committee’s success, an interest that may not jive with that of a diverse Democratic Party. Some rank and file Democrats—particularly in the House—are beginning to posit that a Super Committee failure would be preferable to a “bad” deal crafted by the panel.

The Constitution is not on the side of those pushing for automatic cuts.  Under Article I, Section 7, each Congress has an equal right to legislate. So the 112th Congress can pass a bill setting the federal deficit for this year and next year (2011-12), but that’s about it. Anything that goes beyond the first week of January 2013, when the 113th Congress will be sworn in, is subject to change by that Congress, and every subsequent Congress.

OVERALL IMPACT ON TASC PROVIDERS (AND CUSTOMERS): LITTLE TO NONE!  At present it appears that we will not be affected by the auto-cuts, although the consequences of the Super Committee’s work are as yet unknown. TASC’s Governmental Affairs team will continue to monitor the proceedings and keep you informed of any changes.