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Exchange Subsidy Notices: Prelude to ACA Tax Assessments

After a one-year delay, the federally-facilitated exchange (www.healthcare.gov) has begun mailing Applicable Large Employers (ALEs) notices listing employees who qualified for and received advance payment of premium tax credits or cost sharing reductions (collectively, “exchange subsidies”) for one or more months to date in 2016.  There is a model federal subsidy notice; state-facilitated health exchanges may use their own subsidy notices. In 2016, the notices will go to mailing addresses that employees supplied while enrolling on an exchange and hence may include worksite addresses rather than an employer’s administrative headquarters.  For that reason, ALEs should track all work locations for receipt of the exchange notices.

Each notice will identify one or more employees who received subsidies in 2016, and if the names include those of full-time employees who were offered affordable, minimum value or higher coverage (or enrolled in coverage, even if unaffordable) for the period involved, an appeal is appropriate and must be made within 90 days of the date on the exchange subsidy notice. This Employer Appeal Request Form may be used for http://www.healthcare.gov as well as the following state-based exchanges:  California, Colorado, D.C., Kentucky, Maryland, Massachusetts, New York and Vermont.  The appeals process is carried out via mail or fax this year but will eventually convert to a digital format.

Remember, these exchange subsidy notices are not themselves assessments of ACA penalty taxes which is a separate process carried out by IRS. And the IRS will assess ACA penalty taxes for 2015 without benefit of subsidy notices for that year.   However the subsidy notices now being released do provide a “heads up” regard to potential 2016 tax liability, and by filing an appeal an ALE can build the file it will need in the event of a later penalty tax assessment. Not only will a timely appeal document the fact that no ACA penalty tax should apply, it may also prevent the employee in question from later having to refund subsidy amounts to IRS, either through a reduced tax refund or with out-of-pocket funds.

In this regard, ALEs should keep in mind that coverage that is unaffordable for exchange purposes (i.e. entitles an individual to exchange subsidies) may be affordable for employer safe harbor/penalty assessment purposes (i.e., prevents assessment of an ACA employer penalty tax). They both use the same affordability percentage – 9.66% in 2016 – but apply it to different base amounts.  The exchanges look at the employee’s modified adjusted gross income (MAGI), which may be higher than the employer’s safe harbor definition (for instance when the employee’s household includes other wage earners), or may be smaller than the employer’s safe harbor definition (for instance, when the employee has large student loan interest expenses and/or alimony payments, both of which are excluded from MAGI).  Thus there will be instances in which an employer bears no ACA penalty liability with regard to coverage that is unaffordable for exchange purposes. The appeals process will make available to an employer information as to whether an employee’s household income exceeded the affordability threshold for exchange subsidies, along with other data used to establish eligibility for exchange subsidies.  A flowchart of the exchange subsidy notice and appeals process follows:Flowchart for Handling Exchange Subsidy Notices

We do not yet have details on how the IRS will go about assessing ACA penalties on ALEs for 2015 and subsequent years, other than that employers will have an opportunity to contest a tax assessment. All the more reason to engage in the appeal process, where appropriate, with regard to subsidy notices.

It’s Time for ALEs to “Do the Math” on Controlled Group Status

Applicable Large Employers (ALEs) subject to the ACA’s employer shared responsibility and reporting duties are running out of time in which to ascertain whether or not they are part of an “Aggregated ALE Group,” the members of which are treated as a single employer for benefit plan and certain ACA purposes. This in turn requires an analysis under Internal Revenue Code controlled group rules, as discussed below.

A definitive answer to the question of aggregated group status is required in order to file the Form 1094-C transmittal for employee statements (Forms 1095-C), which is due in hard copy by May 31, 2016, or via e-filing by June 30, 2016. (E-filing is encouraged for all ALEs but is mandated for those filing 250 or more Form 1095-C employee statements).

Specifically, Part II of Form 1094-C, line 21 asks whether the “ALE Member” filing the Form is part of an “Aggregated ALE Group,” and if the answer is yes, the ALE Member must identify, in Part III, the name and EIN of all other ALE Members of the Aggregated ALE Group.  Form 1094-C, like other IRS forms, must be signed under penalty of perjury.

Some ALEs with fewer than 50 full-time employees, including full-time equivalents (FTEs), are subject to employer shared responsibility only because they are part of an Aggregated ALE Group that collectively employs 50 or more full-time/FTE employees (or, in 2015, 100 or more).

Larger employers that have always had 100 or more full-time/FTE employees of their own may also have had to determine their status as part of an Aggregated ALE Group in order to determine who should furnish Form 1095-C employee statements for employees who worked for more than one aggregated employer during the same calendar month. (Generally the employer for whom the employee worked the most hours of service would be considered the reporting employer for that month.)

In either situation, these ALEs should already know that they are members of an Aggregated ALE Group and be in a position to identify other members of the Group on Part III of Form 1094-C.

However, employers that have always had 100 or more full-time/FTE employees of their own, and who have not shared employees with other group members as described above, may not have had occasion to determine whether or not they are part of an Aggregated ALE Group with other companies related in ownership. Now they must do so in order to accurately complete Form 1094-C.

In addition to Form 1094-C reporting duties, accurate knowledge of controlled group status is necessary in the event an ALE is subject to excise tax penalties under Internal Revenue Code (“Code”) § 4980H(a).  Before applying the excise tax rate ($270 per month, in 2016) to all full-time employees, the ALE may subtract the first 30 full-time employees.  That “budget” of 30 excludible full-time employees (80, in 2015) must be allocated among members of the Aggregated ALE Group in proportion to their total number of full-time employees.[1]

The three types of Aggregated ALE Groups are:

  • a “controlled group” consisting solely of corporations as defined under Code § 414(b);
  • a group of trades or businesses that includes partnerships and LLCs, that are under “common control” as defined under Code § 414(c); or
  • businesses, usually professional service organizations, that together form an “affiliated service group” (ASG) as defined under Code § 414(m).

The controlled group/common control/ASG rules (collectively, the “common control rules”) have applied for benefit plan purposes for many years but they have achieved new prominence under the ACA employer shared responsibility and ALE reporting rules. Determining whether or not common control exists requires identification and analysis of the relevant facts and application of the law to them, in the form of the above-cited Code sections, related Treasury Regulations, other agency guidance and federal case law.  The rules governing common control status are complex and can require a significant amount of factual digging, including when business ownership interests are held by family members or in trust, and where ownership interests must be traced through several layers of entity ownership.  Applicable large employers that share ownership with other business entities, particularly those with employees, and that have not already ascertained their common control status for ACA purposes, are encouraged to get this process started without further delay.

 

[1] Although aggregated group status is used to determine status as an ALE, and in order to allocate the budget of 30 excludible full-time employees, excise tax liability is determined separately for each ALE member within the group.

 

ACA Reporting for Large Employers: Top 10 Rules for Success

Applicable Large Employers have approximately one month, until March 31, 2016,  to furnish Form 1095-C to full-time employees in relation to group health coverage offered (or not offered) in 2015.  Self-insured employers must also provide Form 1095-Cs to part-time employees who were covered under their plans in 2015.  Related IRS filing deadlines (transmittal Form 1094-C and attached Forms 1095-C) come later in the year, but the March 31, 2016 deadline to furnish employee statements is hard and final.  The attached PowerPoint presentation lists the Top 10 Rules for Success in completing Applicable Large Employer reporting, and includes bonus tips on opt-out payments, and increased ACA penalty amounts for 2015 and 2016.

Reason to Celebrate: IRS Extends ACA Reporting Deadlines

On December 28, 2015, the IRS gave Applicable Large Employers (“ALEs”) a last-minute extension of their 2015 ACA reporting deadlines via Notice 2016-4.  The original and new, extended deadlines, which apply only to reporting for 2015, are as follows:

Capture ACA II.JPGThe same extensions apply to providers of minimum essential coverage such as insurance carriers and government-sponsored programs (Medicare, Medicaid), who are required to file Form 1094-B and furnish statements to covered individuals on Form 1095-B.  Employers generally are not required to perform minimum essential coverage reporting although, as discussed in this prior post, there are circumstances under which it is required.

The extended deadlines are hard deadlines to which the IRS will not apply automatic and permissive extensions of time that would otherwise be available. Notice 2016-4 also functions as the Service’s response to any pending extension requests, which will not be formally granted.  Reporting penalties will apply for failure to timely file returns or furnish statements but the IRS may abate penalties on a demonstration of “reasonable cause”; in this regard the employer’s “reasonable efforts” to prepare for timely reporting will be taken into account as will efforts to comply for 2016.  Although not exactly clear from the Notice it would appear that the IRS is still offering penalty relief for timely filed and/or furnished but incomplete or incorrect returns and/or statements, where the filer can show that it made good faith efforts to provide complete and correct information.    Further clarification on that point would be helpful.

As has often been the case with ACA relief, this extension is offered so close to the original compliance deadlines that some ALEs may not need or even be operationally able to take full advantage of it, and the Notice makes clear that the IRS will be prepared to accept ACA returns beginning in January 2016. However even those ALEs that had already invested substantial time and money in fulfilling the original reporting and statement deadlines were struggling with the complexity of the forms and reporting codes, and the extension will allow for a less frenzied and hopefully more accurate reporting process. The extension will be even more welcome to the many employers who qualified for pay or play relief applicable to ALEs with 50 to 99 full-time employees, including full-time equivalents, and who may only now be learning of their 2015 reporting duties.

 

ACA Reporting Update: New Procedures for Requesting Family Member SSNs

In Notice 2015-68, issued September 17, 2015, the IRS has modified the steps that must be followed by insurance carriers and self-insured employers to demonstrate a “reasonable effort” to obtain Social Security Numbers or other Tax Identification Numbers (collectively, TIN) for family members enrolled in Minimum Essential Coverage (MEC), and has requested public comment on further adjustments to the requirements. Pending future guidance, following the new procedures will entitle the reporting party to “reasonable cause” relief from penalties for late or incomplete tax returns and employee statements.

Internal Revenue Code § 6055 requires that, among other information, TINs for individuals who are enrolled in MEC be reported by MEC providers. Insurance carriers (issuers) report to insureds via IRS Form 1095-B and self-insured employers report to full-time employees on Section III of IRS Form 1095-C. (Forms 1095-B and 1095-C are transmitted to the IRS under Forms 1094-B and 1094-C, respectively. The IRS issued final 2015 versions of these forms, and instructions for same, also on September 17, 2015.) If the reporting party follows the “reasonable effort” steps to obtain a family member SSN/TIN without success, it may report a date of birth for that individual on the applicable form without penalty.

The new steps required to be followed in order to demonstrate that a reasonable effort has been made to obtain an enrolled family member’s SSN/TIN are as follows:

  1. The initial request is made at the time the individual first enrolls or, if the person is already enrolled on September 17, 2015, the next open enrollment period;
  2. The second request is made at “a reasonable time thereafter” and
  3. The third request is made by December 31 of the year following the initial request.

This sequence replaces the sequence described in the preamble to final regulations under Code § 6055: initial request made when an account is opened or a relationship established, first annual request made by December 31 of the same year (or, if the initial request was made in December, by January 31 of the following year), and second annual request made by December 31 of the following year. The Notice states that that this sequence, which was lifted directly from regulations under Code § 6724, the “reasonable cause” relief statute, prompted concerns among reporting parties that it was not practical in the context of MEC reporting.

Until further guidance, it remains the case that reporting a date of birth in one year does not eliminate the need to make the necessary follow-up requests as described in the Notice.

SCOTUS Rulings Highlight ACA Paradox

The two landmark rulings by the Supreme Court last week – one upholding the ability of the federal health exchange to award premium tax credits, and one upholding the right of same-sex couples to be married in all 50 states – would not appear to be interrelated.  However the back-to-back rulings highlight an unusual paradox in the ACA regarding access to premium tax credits.  Specifically, by marrying and forming “households” for income tax purposes, individuals may lose eligibility for premium tax credits that they qualified for based only on their individual income.  This has always been the case for married couples – both opposite-sex and same-sex — but it may come as news to same-sex couples now seeking to marry in states that prohibited such unions prior to the Supreme Court ruling.

To understand this ACA paradox – that married status may reduce or eliminate premium tax credit eligibility – some background is helpful.

Since January 1, 2014, state health exchanges and the federal exchange have made advance payments of premium tax credits to carriers on behalf of otherwise eligible individuals with household income between 100% and 400% of the federal poverty level (FPL).  For a single individual this translates to annual household income in 2015 between $11,770 – $47,080.  (For individuals in states that expanded Medicaid under the ACA, premium tax credit eligibility starts at 133% (effectively 138%) of FPL, which translates to $16,243.)

For these purposes, “household income” is the modified adjusted gross income of the taxpayer and his or her spouse, and spouses must file a joint return in order to qualify for premium tax credits except in cases of domestic abuse or spousal abandonment.  A taxpayer’s household income also includes amounts earned by claimed dependents who were required to file a personal income tax return (i.e., had earned income in 2015 exceeding $6,300 or passive income exceeding $1,000).   Generally speaking, same-sex adult partners will not qualify as “qualifying relative” tax dependents, in the absence of total and permanent disability.

Therefore, adult couples sharing a home in the absence of marriage or a dependent relationship will be their own individual households for tax purposes and for purposes of qualifying for advance payment of premium tax credits.  Conversely, adult couples who marry must file a joint tax return save for rare circumstances, and their individual incomes will be combined for purposes of premium tax credit eligibility.  By way of example, two cohabiting adults each earning 300% of FPL in 2015 ($35,310) will separately qualify for advance payment of premium tax credits in 2015, presuming their actual income matches what they estimated during enrollment.  However once the couple marries, their combined household income of $70,620 will exceed 400% of FPL for a household of two ($63,720), and they will lose eligibility for premium tax credits.

The rules for figuring tax credit eligibility for a year in which a couple marries or separates are quite complex.  The instructions to IRS Form 8962, Premium Tax Credit return, provide some guidance but the advice of a CPA or other tax professional may be required.

Before the Supreme Court’s ruling last week, the Department of Health and Human Services instructed the exchanges to follow IRS guidance recognizing persons in lawful same-sex marriages as “spouses” for purposes of federal tax law, in accordance with the Supreme Court’s 2013 ruling in United States v. Windsor.  That ruling recognized same-sex marriages under federal law provided that they were lawfully conducted in a state or other country, but fell short of declaring same-sex marriage as a Constitutional right that must be made available in all U.S. states.   It is likely that HHS will update guidance to the exchanges to reflect the recent, more expansive ruling on this issue.

California Adopts FT/FTE Counting Method to Determine Small Group Market Eligibility

Update:  Governor Jerry Brown signed SB 125, discussed below, on June 17, 2015.

In 2016, when California’s small group insurance market expands to include employers of up to 100 employees, employers in the state will use the same method of counting full time and full-time equivalent employees towards that threshold, as is required under the ACA’s employer shared responsibility rules.  This will be the effect of Senate Bill 125, which has been enrolled and sent to Governor Brown for signature.  It is expected that he will sign the bill into law, and the bill is effective upon enactment.

Current California Insurance and Health and Safety Code provisions define a “small employer” as an employer that, on at least 50 percent of its working days during the preceding calendar quarter or preceding calendar year, employed at least one, but no more than 50, ‘eligible employees,’ the majority of whom were employed within California.”   An “eligible employee” is in turn defined as “any permanent employee who is actively engaged on a full-time basis  . . . with a normal workweek of an average of 30 hours per week [or at least 20, at the employer’s option] over the course of a month” at the employer’s regular place of business, and who has met any applicable waiting period requirements.”   When it first enacted ACA-compliant measures in the 2011-2012 legislative session (AB 1083), California opted to postpone expansion of this definition — from employers of up to 50, to up to 100 employees — until January 1, 2016, which is the latest expansion date that the ACA allows.

Notably, the current manner of counting employees towards the 100 employee threshold does not take into account full-time equivalent (FTE) employees, which are counted towards the definition of an Applicable Large Employer (ALE) subject to ACA employer shared responsibility (or “pay or play”) duties, as set forth in Internal Revenue Code § 4980H, and final regulations thereunder.  FTEs are determined by totaling hours of service worked in a month by employees (including seasonal workers) who average under 30 hours of service per week (but not exceeding 120 hours/month for any single employee), and dividing the total by 120, such that 10 employees averaging 15 hours per week would result in 5 FTEs.  ACA health exchange regulations require that the ACA definition apply for purposes of policies that are sold on the small group exchange (SHOP) but not with regard to non-exchange policies.  SB 125 makes the ACA counting method applicable to all small group market policies sold in the state, whether or not offered on SHOP:

“For plan years commencing on or after January 1, 2016, the definition of small employer, for purposes of determining employer eligibility in the small employer market, shall be determined using the method for counting full-time employees and full-time equivalent employees set forth in Section 4980H(c)(2) of the Internal Revenue Code.”

California Insurance Code § 10753(q)(3); California Health and Safety Code § 1357.500(k)(3), both as amended by SB 125.  Both measures apply only to nongrandfathered health plans.

As a result, and with one important exception noted below, California employers will only need to do one set of calculations to be able to determine their status as Applicable Large Employers subject to ACA pay or play rules, and their status with regard to California’s small or large group markets.

The exception is with regard to counting employees of related entities.  Both California Code provisions amended by SB 125 require employers to count employees employed by “affiliated companies” that are eligible to file a combined tax return for purposes of state taxation.  However, the test for joint filing under the California Revenue and Taxation Code is not the same as “controlled group” status under federal law, which is expressly incorporated into the employee counting rules in Code Section 4980H(c)(2).  It is possible that this was an unintended drafting discrepancy that future guidance will resolve, but in the meantime, California employers with related entities should consult their state and federal law tax advisors to make sure they are counting employees properly for California small group eligibility and ACA shared responsibility purposes.

This exception aside, SB 125 brings welcome simplification at a time when employers with between 51 and 100 employees are calculating the likely costs and complications of losing access to large group coverage, and entering a market subject to rating restrictions and mandated coverage of essential health benefits.  Although legislative measures are afoot to allow states to further postpone, past 2016, the expansion of the small employer definition, California is unlikely to adopt any such change, should it become available.

SB 125, which was sponsored by California Senator Ed Hernandez (D-West Covina) also changes the annual open enrollment period for California’ state health exchange, Covered California™ , from October 15-December 7 of the year preceding the coverage year, to November 1 of the year preceding the coverage year, through January 31 of the new coverage year.  This is also consistent with the ACA, specifically with the Final HHS Notice of Benefit and Payment Parameters for 2016.  The new open enrollment period will first apply on November 1, 2015 through January 31, 2016, for the 2016 coverage year.

Possible Outcomes from King v. Burwell

Update:  The Supreme Court upheld the provision of subsidies on the federal exchange in a 6-3 decision issued on June 25, 2015.

On March 4, 2015, the United States Supreme Court heard oral argument in King v. Burwell, a case that variously has been characterized as an attack on the ACA and the potential death knell of that complicated law.  There is no question that the Supreme Court’s decision in this matter, which is expected to issue in late June 2015, will have immediate and significant ramifications for millions of individuals, their employers, and the health care industry.  Specifically at issue is whether the approximately 6 million individuals who receive federal subsidies towards the purchase of health insurance on the “federally facilitated exchange” or “FFE,” also known as healthcare.gov, can continue receiving those subsidies, or whether the subsidies may only be awarded in the approximately 17 states, including California and the District of Columbia, that sponsor their own health exchanges.  The impact of the King decision naturally will be largest in the approximately 34 states whose residents use the FFE, but its likely damage to the health insurance market as a whole will be felt in every state.  It also will have a major impact on “applicable large employers” (“ALEs”) under the ACA (those employing, on average, 50 or more full-time employees, including full-time equivalents).  That is because no employer “pay or play” penalty taxes apply to an ALE unless at least one of its full-time employees (30 or more hours/week) has qualified for premium tax credits on a health exchange.[1]  Below we look at the facts of the case, the legal arguments on both sides, possible outcomes in the Supreme Court decision, and finally what might happen if the Court decides in favor of the King plaintiffs.

Facts Relevant to the Case

There are fairly few facts relevant to King v. Burwell because it is essentially a “test case” funded by a conservative think tank, the Competitive Enterprise Institute.  The plaintiffs (technically, “Petitioners”) are several lower-income residents of Virginia, a state that did not establish its own exchange.  Lead plaintiff David King is a limousine driver.  The grievance that the plaintiffs have in common is that the Federally Facilitated Exchange that functions in Virginia gives them access to premium tax credits at www.healthcare.gov, which are received in the form of immediate subsidies towards coverage, then reconciled against actual household income each April.  As a consequence of access to tax credits, individual health coverage is “affordable” to them (premiums do not exceed 8.1% of income).  Because affordable coverage is available to them, effective January 1, 2014 they must either purchase the coverage or pay a penalty tax.  If the premium tax credits were not available in Virginia, a non-state-exchange state, coverage would be unaffordable to them and they would not have to either buy coverage or pay a tax penalty.  In essence they are arguing that access to premium tax credits in a non-exchange state exposes them to a tax they would not have to pay if there were no federally-run exchanges.  This argument failed to succeed in federal district court and the 4th Circuit Court of Appeals affirmed that decision.

The Legal Arguments

King v. Burwell is materially different from the Supreme Court’s prior major ACA case, National Federation of Independent Business (NFIB) v. Sebelius, 567 U.S. ___ , 132 S. Ct. 2566, 183 L. Ed.2d 450 (2012).  The NFIB case challenged the constitutionality of the individual mandate, which requires individuals to secure health insurance for themselves and their families, or pay a tax penalty.  The challengers to the law characterized this as an overreach of Congress’ powers under the U.S. Constitution.  In a 5 to 4 decision, the Supreme Court ruled that the individual mandate was within Congress’ powers to impose taxes on U.S. citizens.

In the King case, by contrast, the challengers are not claiming that the ACA violates the Constitution.  They are instead looking at a few lines of text of the 906-page law that relate to how premium tax credits are calculated. The language, which is codified at Internal Revenue Code (“Code”) Section 36B(b)(2)(A), is as follows (italicized text):


(b) Premium assistance credit amount

For purposes of this section—

(1) In general

The term “premium assistance credit amount” means, with respect to any taxable year, the sum of the premium assistance amounts determined under paragraph (2) with respect to all coverage months of the taxpayer occurring during the taxable year.

(2) Premium assistance amount

The premium assistance amount determined under this subsection with respect to any coverage month is the amount equal to the lesser of—

(A) the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent (as defined in section 152) of the taxpayer and which were enrolled in through an Exchange established by the State under 1311 of the Patient Protection and Affordable Care Act [. . . . ]

The challengers argue that Congress would not have defined the calculation of premium tax credits with specific reference to “State” exchanges unless it intended to limit access to premium tax credits to state-run exchanges.

The government argues that the ACA must be interpreted as a whole, and that other section of the law are meaningless or absurd if premium tax credits are limited to state-run exchanges.  In particular they point to Section 1321 of the ACA which authorizes the Secretary of Health and Human Resources to establish an exchange on behalf of a state, and argue that a federally-run exchange would have no function or purpose if it did not award premium tax credits.    The government also argues that, if the Court found the ACA to be ambiguous on this point, it must defer to the federal agency charged with interpreting the provision, and that agency, the IRS, had already issued final regulations under Code Section 36B stating that premium tax credits are equally available on state-run and federally-run exchanges.

Oral Argument in King v. Burwell

During approximately 90 minutes of oral argument on March 4, 2015, it became fairly clear that the four “liberal” Justices (Ginsburg, Breyer, Sotomayor and Kagan) favored the government’s arguments, and that the three “conservative” justices (Alito, Scalia and Thomas) favored the challengers’ position.   The swing votes that will decide the outcome belong to Chief Justice John Roberts, who was almost silent during oral argument, and Justice Kennedy, whose line of questioning could be viewed as potentially sympathetic to the government’s position.

One issue that appeared to have traction with Justice Kennedy, and thus could possibly determine the outcome, was whether, under the challenger’s interpretation of the law, the ACA “coerced” states into starting their own exchanges by making them the only route to premium tax credits.  Federal coercion of the states would present a serious Constitutional problem, in Justice Kennedy’s words.   In fact, the Supreme Court held in its prior ACA decision that the federal government could not coerce states into expanding access to Medicaid by conditioning their access to all Medicaid money on their agreement to expand Medicaid.

Further, all of the Justices who commented seemed very conscious that a decision for the challengers could push individual insurance markets in the non-exchange states into a “death spiral” and eventual collapse.  This is because the ACA’s three main components are insurance market reforms, such as prohibiting pre-existing condition exclusions, that increase insurers exposure to risk, the individual mandate, which brings young and healthy people into the individual insurance market to mitigate that risk, and finally the premium tax credits, which make individual coverage available to people who otherwise could not afford it.  Without premium tax credits to attract younger, healthier people towards insurance, the argument goes, only the sickest individuals would purchase insurance and the health insurance industry would enter a “death spiral.”   A similar phenomenon has occurred in the past in individual states that attempted aggressive market reforms without mitigating measures.

Most Supreme Court observers concluded that the government fared slightly better during oral argument than did the ACA challengers, but were quick to add that this has little predictive value with regard to the Court’s eventual written opinion.

Possible Outcomes from the Court

It is important to note that the Supreme Court did not need to hear the King v. Burwell case; it voluntarily agreed to review the 4th Circuit court decision against the challengers even though there was no direct conflict at the federal appeal court level.  (ACA challengers had succeeded in the D.C. Circuit court in Halbig v. Burwell, a similar ACA challenge case, but that “panel” decision by the D.C. Circuit had been vacated so that all sitting judges could hear the case.  The “en banc” hearing of Halbig is on hold pending decision in King v. Burwell. )   Thus it is fair to conclude that the Supreme Court is acutely aware of the case’s very high stakes for many newly-insured Americans, for the administration that championed the law, for applicable large employers, and for the insurance industry as a whole.

What that may mean is that, even if the Supreme Court upholds the ACA challenge, and prohibits premium tax credits from being awarded in non-exchange states, it may rule in such a way that protects stakeholders from the immediate withdrawal of premium tax credits.   Here are a few of the possible ways the decision could fall:

  • Majority Verdict for the Government: if Justice Kennedy or Chief Justice Roberts cast their vote for the government, the resulting decision will preserve the “status quo” under the Affordable Care Act as we know it. Healthcare.gov will continue to award premium tax credits in the non-exchange states and individual insurance markets in those states will remain intact. This outcome would make it harder for any alternatives to the ACA, which the Republican-controlled Congress is already proposing, to gain traction and succeed.
  • Majority Verdict for the Challengers: If Justice Kennedy or Chief Justice Roberts sides with the more conservative faction of the Court, the operation of healthcare.gov in 34 states would grind to a halt and individual insurance markets in those states would soon become dysfunctional. In the non-exchange states, it is possible that individuals and families who must drop their now-unaffordable health insurance coverage will assail Governors’ mansions and the offices of Republican lawmakers with demands that they restore access to coverage, including life-saving cancer treatments and the like. Because applicable large employers in the non-exchange states will not be subject to pay or play penalty taxes, they may drop coverage they had only recently extended to employees working 30 or more hours per week. It is also possible that there will be business flight to the non-exchange states, for this reason. At the same time, non-exchange state residents may try to relocate in states that have their own exchanges, in order to receive subsidies. In essence, jobs and workers to fill them would be propelled in opposite directions.
  • A Possible Third Way: Justice Alito, who almost certainly will vote for the ACA’s challengers, raised the possibility in oral argument of a verdict for the challengers, but one whose effect is delayed by a year in order to give non-exchange states time to develop an alternative to healthcare.gov.   As this would be a voluntary process, it runs the risk that no alternative measures would be available in some states whose Governors and other elected representatives firmly oppose the ACA. Even in states that were willing to find alternatives, one year may not be enough time in which to do so. Supporters of the ACA would view this outcome as preferable, however, to a ruling for challengers that takes effect immediately. It is also possible that the justices could rule in favor of the challengers but interpret “state exchange” to include federal-state partnership exchanges, several of which already exist, and more of which are in the works already. This is consistent with the Supreme Court’s prior decision in NFIB v. Sebelius that Medicaid expansion was not something that the federal government could coerce the states into doing.

Legislative Resolutions to the Problem

In oral argument Justice Scalia asserted that Congress would take action to avert massive loss of coverage leading to a death spiral of the individual insurance market in non-exchange states.  Arguing for the government, the Solicitor General’s comment was to pause and ask “this Congress…..? to wide laughter in the courtroom.  And in fact, were Congress not so deeply divided over the ACA a simple legislative amendment would have resolve the supposed “drafting error” at the heart of King v. Burwell.

However, it is not at all impossible that members of Congress would view a Supreme Court decision for ACA challengers as a prime opportunity to gain political ground with voters by “rescuing” their health insurance, and access to subsidies, through legislation.  In fact, some legislative proposals are already being drafted and considered in Congress, however only by traditionally anti-ACA factions.   The official word from the Department of HHS is that it has no ready fix or alternative to shutting down healthcare.gov (but it is likely that the administration is considering workarounds nonetheless.  While all eyes are on the Court and its likely late-June decision, those with political ground to gain will not be standing idle.

[1] The IRS postponed employer shared responsibility duties from 2014 to 2015 in Notice 2013-45.  Under separate transition relief, generally only employers with 100 or more full-time employees (including full-time equivalents) in 2014 must offer coverage or pay the penalty for 2015, but all applicable large employers must do so in 2016 and subsequent.  The transition relief is explained in Q&A 34 of this IRS FAQ.

 

Updated SBC Rules Reflect Full ACA Implementation

As 2014 came to a close, the federal agencies charged with ACA implementation (the Treasury, Labor & Health and Human Services Departments) published proposed regulations governing the contents and delivery of Summaries of Benefits and Coverage or “SBCs,” and made corresponding changes to the SBC template, and related glossary of medical and insurance terms.   The proposed regulations, if finalized, would apply to SBCs required to be provided for open enrollment periods beginning on or after September 1, 2015, and as of the first day of the plan year beginning on or after September 1, 2015 (January 1, 2016 for calendar year plans) for other SBD disclosures (such as for special enrollments).   With the proposed regulations the agencies also released updated SBC templates (blank, and completed), and an updated uniform of key medical and insurance terms.  If finalized, the proposed regulations would amend final SBC regulations published on February 14, 2012.

SBC Update:  Contents

In essence, the proposed regulations refresh SBC contents and terminology to reflect full ACA implementation, in particular its group market reforms and the rollout, over 2014 – 2016, of both individual and employer shared responsibility regimes.   Prior to the proposed regulations, these upgrades occurred piecemeal, in the form of Frequently Asked Questions, no fewer than six of which addressed SBC issues since the final regulations were published.  (See ACA Implementation FAQs Parts VII, VIII, IX, X, XIV and XIV, located here.)  The proposed regulations helpfully consolidate all that earlier guidance and make additional changes consistent with the post-ACA coverage landscape.  With particular regard to SBCs provided to participants and beneficiaries for group health coverage (insured, or self-insured) they include the following:

  • The mandated contents of the SBC template are reduced from 4 double-sided pages to only 2 ½ double-sided pages, freeing up 1 ½ pages for voluntary disclosures such as premium costs, if practical for the coverage arrangement, or additional “coverage examples,” as described below.   There is no requirement that the extra space be filled so long as all required template disclosures are made.
  • The extra space is gained in part by removing references to annual limits on essential health benefits and pre-existing condition exclusions, which are now obsolete.
  • Added to the SBC template is a third “coverage example” which is a hypothetical walk-through of likely covered and out-of-pocket expenses an individual would experience under the benefit package or plan for specific health issues. The new coverage example is a simple foot fracture with emergency room visit.
  • The SBC template also updates pricing data for the other two coverage examples, which are normal delivery of a baby, and well-regulated Type 2 diabetes. As mentioned, carriers and self-insured plan sponsors could add additional coverage examples so long as they remain within the maximum length of 4 double-sided pages (with at least a 12 point font).
  • Added to the uniform glossary are definitions for the following medical terms: “claim,” “screening,” “referral,” “specialty drug” as well as ACA terms such as “individual responsibility requirement,” “minimum value,” and “cost-sharing reductions.” These additions increase glossary page length from 4 to 6.
  • For insured or HMO coverage, the SBC must provide a web address at which individuals can view actual insurance policies, certificates, or HMO contracts related to the SBCs. (A sample certificate for group coverage may be posted while the terms of the actual certificate are under negotiation.) Existing regulations require web addresses for lists of in-network medical providers and drug formularies as well as the uniform glossary of insurance and medical terms.
  • The proposed regulations require that the SBC state whether or not the benefit package qualifies as “minimum essential coverage” or “MEC,” or whether or not it provided at least “minimum value”; these were not required by the 2012 final regulations, but were later added for coverage effective on or after January 1, 2014.
    • Note: Although this information was somewhat esoteric in 2012 and 2013, it has now become essential for most employees to complete their income tax returns for 2014. The MEC disclosure is needed to demonstrate they met individual mandate duties first in effect last year, and the minimum value disclosure is needed in relation to advance payment of premium tax credits. This tax season is the first time that individuals who received tax credits must reconcile them against actual household income, through use of the very complicated IRS Form 8962.  Compliance with the individual mandate is also required to be demonstrated on Form 1040, at line 61, or through reporting of an exemption from the mandate via Form 8965.

SBC Update:  Delivery

The proposed regulations are intended to streamline SBC delivery rules and prevent duplicate delivery of SBCs in certain situations:

  • When an insurer/HMO (“issuer”) or self-funded plan provides an SBC upon request to someone before they have applied for coverage, it need not re-supply one upon actual application for coverage unless the SBC contents have changed in the meantime (or if the person applies for a different benefit package).
  • When a plan sponsor provides an SBC to an applicant during negotiation of terms of coverage, and the terms of coverage change, the sponsor need not provide an updated SBC until the first day of coverage (unless separately requested).
  • A group health plan that uses two or more benefit packages, such as major medical coverage and a health flexible spending account, may synthesize the information into a single SBC, or provide multiple SBCs.
  • The rule permitting a plan sponsor or issuer, upon renewal or reissuance, to provide a new SBC only with respect to the benefit package that is being renewed or reissued is extended to apply to cases in which a plan or issuer automatically reenrolls participants and beneficiaries.
  • Where a plan sponsor or carrier required to provide an SBC with respect to an individual (“original provider”) enters into a binding contract with a third party (“contracted provider”) to provide the SBC to the individual, the original provider will be considered to have met their SBC delivery duties if all of the following requirements are met:
    • The original provider monitors the contracted provider’s performance under the contract;
    • The original provider corrects noncompliance by the contract provider under the SBC delivery contract as soon as practicable, if it has knowledge of the noncompliance and has all information necessary to correct the noncompliance; and
    • The original provider communicates with participants and beneficiaries about noncompliance of which it becomes aware, but which it is unable to correct, and takes significant steps as soon as practicable to avoid future violations.
  • In instances where an insured group health plan uses two or more insurance products provided by separate issuers to insure benefits under the plan, the plan administrator will be responsible for providing complete SBCs but may contract with one of the carriers or another service provider to provide the SBC; absent such an agreement one carrier has no obligation to provide SBCs describing benefits provided by the other carrier. (It remains permissible under prior FAQ guidance to also provide several separate partial SBCs under cover of a letter or notation on the partial SBCs explaining their interrelation.)
  • The proposed rules also incorporate prior FAQ guidance that “providing” an SBC means “sending” an SBC, and an SBC is timely provided if it is sent within seven business days of request, even if it is not received within that time period. This same timing rule applies to requests to receive copies of the uniform glossary. Provisions in the final regulations on electronic delivery of the SBCs continue to apply.

Summary Chart of Disallowed Pay or Play Tactics

With the January 1, 2015 employer shared responsibility deadline fast approaching, the three government agencies charged with ACA compliance (IRS, DOL and HHS) have provided recent guidance on several strategies or tactics that have been marketed to applicable large employers as legitimate ways to reduce their coverage costs and exposure to shared responsibility penalty taxes (assessable payments).   Employer reimbursement of individual health insurance premiums is a common but not universal feature of these arrangements.  The Internal Revenue Service ruled out pre-tax reimbursement of individual health premiums in Notice 2013-54, but more recent guidance in ACA FAQ XXII and in IRS Notice 2014-69 expands the prohibition to include after-tax individual premium reimbursements, as well as other shared responsibility cost reduction strategies.  The chart attached below summarizes:

  • the disallowed strategies;
  • the reasons why they were disallowed;
  • the penalties that may apply to applicable large employers that persist in pursuing these strategies; and
  • other relevant facts and concerns.

Disallowed Tactic Chart

As with all content provided on this blog, the chart is meant to serve as a general summary of legal developments and the information it contains should not be applied to any particular factual situation without first consulting experienced tax or benefits counsel.