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Notice of Exchange Penalties: There Aren’t Any, But Timely Compliance is Key

The Department of Labor (DOL) has clarified in a Frequently Asked Question that no fine or penalty will apply to an employer who fails timely to provide a Notice of Exchange to employees.  The Affordable Care Act amended the Fair Labor Standards Act (FLSA) to require provision of the Notice of Exchange.  The FLSA imposes corrective measures on employers that violate its other mandates, including federal minimum wage rules, but does not contain an express penalty provision for failing timely to provide the Notice of Exchange.   I earlier outlined Notice of Exchange distribution duties, which require action on or before October 1, 2013, here, and here.

This information, at this late date, is more confusing than it is helpful to employers who have already invested significant resources in preparing to deliver the Notice of Exchange.  The wording of the FAQ says that employers “should” rather than “must” provide the Notice, which is misleading, because Section 18B of the FLSA (29 U.S.C. Sec. 218B) clearly states that employers “shall” provide the Notice within the time period specified, and all prior DOL communications have used consistent wording.   The FAQ did not change this nor did it modify any prior guidance on exchange notice duties in DOL Technical Release 2013-02, including instructions on how the Notice should be delivered.   Noting the lack of express Notice-related penalties in an online article that predated the FAQ, Boston ERISA attorney Alden Bianchi identified the still-remaining risk to employers:

 “This does not mean, of course, that noncompliance is a good idea or even a viable option. The lack of penalties does not translate into a lack of consequences.  Plan sponsors still have a fiduciary obligation to be forthcoming with plan participants and beneficiaries.”

Particularly for employers with pre-existing group health plans, the Notice of Exchange potentially could be viewed by the DOL as within the scope of the employer’s required disclosures to participants and thus within the scope of an ERISA audit, or separate penalties could be imposed through amendment to the FLSA or the ACA.  (I discussed some of the existing ACA penalties in this earlier post.)

Accordingly, even in the absence of any current, known monetary penalty or fine, employers must take all measure necessary timely to provide the Notices of Exchange on or before the October 1, 2013 deadline, and to each new employee upon hire thereafter (the DOL has clarified that in 2014, providing the Notice within 14 days of hire will constitute timely delivery).

Finally the FAQ directs readers to Spanish-language versions of the DOL model Notices of Exchange.  As with the English versions there is one model notice for use by employers that do not offer group health coverage and one version for employers that do offer coverage.

IRS Details Benefit Parity for Same-Sex Spouses

In U.S. v. Windsor, the Supreme Court struck down Section 3 of the Defense of Marriage Act as a violation of the 5th Amendment’s guarantee of equal protection under the law.  Section 3 defined “marriage” and “spouse” for purposes of Federal law as limited to a legal union between one man and one woman as husband and wife.  Elimination of this standard impacts a multitude of Federal laws, and guidance from a number of Federal agencies will be needed before the ruling fully is integrated into the U.S. Code.

Some of the first of that guidance explains Federal tax treatment of same-sex spouses under certain employment benefits plans and arrangements.  The guidance was released on August 29, 2013 by the Treasury Department and the Internal Revenue Service, in the form of Revenue Ruling 2013-17 and two sets of Frequently Asked Questions (FAQs.)  I addressed this guidance briefly in my prior post.  Below I go into more detail on the key compliance points of relevance to employers:

Treatment of Same-Sex Marriage under Federal Tax Law

  • Same-sex marriages lawfully performed in any U.S. state, the District of Columbia, or a foreign county are valid as marriages under Federal tax law, regardless of where the couple reside.
    • This means that employers with operations in states that do not recognize same-sex marriage, such as Texas, must treat same-sex spouses residing in those states equal to opposite-sex spouses for Federal tax purposes, so long as the couple legally was married in a state or other locale that recognizes same-sex marriage.
    • Obviously, equal Federal tax treatment is also required in those states that currently recognize same-sex marriage: California (since June 28, 2013; also some unions prior to November 5, 2008); Connecticut, Delaware (eff. July 1, 2013); Iowa, Maine, Maryland, Massachusetts, Minnesota (eff. Aug. 1, 2013); New Hampshire, New York, Rhode Island (eff. Aug. 1, 2013); Vermont; Washington; District of Columbia.
    • For Federal tax purposes, the terms “spouse,” “husband and wife,” “husband” and “wife” and “marriage” include reference to lawful same-sex marriage as defined above.
    • Registered domestic partnerships, civil unions, or other relationships formalized under state law as something other than marriage are not treated as marriage for Federal tax purposes, whether between same-sex or opposite sex individuals.
      • The Internal Revenue Code (“Code”) permits tax-free treatment of employer-sponsored benefits, including health care, offered to employees, their spouses (now including same-sex spouses) and dependents.  Employer-sponsored benefits provided to individuals not meeting these categories constitutes taxable income to the employee; specifically “imputed” income generally equal to the value of the benefits provided.
      • These rulings take effect September 16, 2013 and subsequent, but have some retroactive effect as described below.

Compliance Point:  As a result of these rulings, employers must identify employees who are in legal same-sex marriages, and, for those employees, adjust income tax withholding, and Social Security and Medicare taxes for 2013, so that the cost of benefits provided to same-sex spouses are treated as excluded from gross income.  Employers must continue to impute income to employees for Federal tax purposes, equal to the value of benefits provided to registered domestic partners, partners in a civil union, and other non-marital relationships, whether same-sex or opposite sex.

Tax Refunds and Credits for Prior “Open” Tax Years

Individuals in Lawful Same-Sex Marriages

  • Individuals in legal same-sex marriages must file their income tax returns for 2013 and subsequent as either “married filing jointly” or “married filing separately.”
  • These individuals may – but are not required to – amend or re-file their income taxes, and claim tax refunds or credits, for all “open” tax years in which they were in a legal same-sex marriage.
    • Generally, for refund or credit purposes a tax return remains “open” for three years from the date the return was filed or two years from the date the taxes reported in the return were paid, whichever is later.
      • For individuals who timely filed their Form 1040 tax returns and paid related taxes by the April deadline each year, returns for 2010, 2011 and 2012 likely remain open, however readers must confirm with their own accountants or other tax advisors which tax years remain open for them.
      • The retroactive tax relief is as follows:
        • As mentioned, individuals in lawful same-sex marriages may re-file their federal tax returns as “married filing jointly,” or “married filing separately,” which was not previously an option under Federal law.
          • Note:  this change in filing status could significantly change the amount of  federal taxes owed and readers must consult with their own accountants or other professional tax advisors about the impact to their own bottom line.
  • Individuals may request a refund of income taxes they paid on “imputed income” resulting from benefits provided to same-sex spouses.  This relief can also take the form of a credit against future income taxes owed.
    • Example:  Alex legally was married to a same-sex spouse for all of 2012.  Alex’s employer offers group health coverage to employees, their spouses and dependents, and pays 50% of the cost of coverage elected by the employee.  The value of the employer-funded portion of coverage for Alex’s spouse was $250 per month.  Alex may file an amended Form 1040 (Form 1040X) for 2012 that reduces gross income by $3,000 ($250 x 12 months) and be refunded the taxes paid on that amount.
    • Employees who paid for their own health coverage with pre-tax dollars under a Code § 125 cafeteria plan have the option of treating after–tax amounts that they paid for same-sex spouse coverage as pre-tax salary reduction amounts.
      • Example:  Alex’s employer sponsors a group health plan under which employees must pay the full cost of spousal and dependent coverage.  However, they may do so with pre-tax dollars under a Section 125 cafeteria plan.  During open enrollment in late 2011 Alex enrolled in self-only coverage for 2012, but she entered into a legal same-sex marriage on March 1, 2012.  Alex enrolled her spouse in health coverage beginning March 1, 2012.  The monthly premiums were $500.  Alex may file an amended Form 1040 (Form 1040X) for 2012 that reduces her gross income by $5,000 ($500 x 10 months).  This puts her in the position she would have been in, had she been able to increase her salary reductions under the cafeteria plan to cover spousal coverage beginning in March 2012.
    • Other benefit plans with regard to which retroactive tax relief is available include qualified scholarships under Code § 117(d), fringe benefits under Code § 132, dependent care benefits under Code § 129, and employer-provided meals or lodging under Code § 119.
    • Note:  individuals who seek a tax refund or credit related to imputed income credited to them in past, open tax years must adjust their tax returns for those years consistent with the tax status (i.e., married filing jointly or separately) that they are claiming with respect to the refund or credit.  In other words, an individual cannot seek a refund of taxes paid for imputed income credited to them in 2012, but retain their status as a single taxpayer for 2012.

Compliance Point:  Employers need to be aware that employees in same-sex marriages may be filing amended returns and seeking tax refunds related to these benefits, and take steps to quantify the imputed income or provide other information to employees to assist in retroactive tax relief.

Employers

  • Retroactive income tax relief is only available to individuals; employers may not seek refunds for overwithheld income taxes in prior years.
  • Employers may seek a refund of Social Security and Medicare taxes paid on imputed income resulting from same-sex coverage, or claim a credit against future taxes owed.
  • The relief is available for “open” tax years which generally are the same as for individual tax returns (3 years from date of filing return or 2 years from date of paying taxes, whichever is later).
    • For purposes of calculating the open period, quarterly Form 941s are treated as if they were all filed on April 15 of a given calendar year.
    • The relief generally applies to the employer and employee portions of Social Security and Medicare taxes, however employers are limited to recovery of the employer portion only in two instances:
      • In relation to an employee who cannot be located, or
      • When the employer notifies an employee that it is seeking a refund but the employee declines, in writing, to participate in same.
    • The IRS will establish a “special administrative procedure” for employers to seek refunds or claim credits for Social Security and Medicare taxes related to same-sex spousal benefits, to be defined in future guidance.

Compliance PointEmployers should be alert to future guidance from the IRS on  the “special administrative procedures” that will apply to Social Security and Medicare tax refunds, and should take steps to quantify the amounts involved for open tax years.

Retirement Plan Issues

The IRS Frequently Asked Questions for individuals in lawful same-sex marriage begin to address same-sex spouse treatment under qualified retirement plans (QRPs), including 401(k) and profit sharing plans.  Much more guidance in this area will be needed both from Treasury and from the Department of Labor.  The following guidance applies as of September 16, 2013 and subsequent.  Future guidance will address any retroactive application of Revenue Ruling 2013-17 to retirement plans and other tax-qualified benefits, including with regard to plan amendments and plan operation in the interim between September 16, 2013 and the date such future guidance is published.

  • QRPs must treat a same-sex spouse as a spouse for all Federal tax purposes relating to QRPs, regardless of where the same-sex spouses reside.
    • For instance, a QRP maintained by an employer in Florida, which does not recognize same-sex marriage, must pay a survivor annuity to a surviving same-sex spouse of a plan participant, unless the spouse consented in writing to another beneficiary prior to the participant’s death.
    • QRPs are not required to treat registered domestic partners, partners to a civil union, or partners to other formalized but non-marital relationships as spouses, whether the partners are same-sex or opposite sex.
      • For instance, a QRP need not pay a surviving spouse annuity to a registered domestic partner upon a participant’s death.  However a plan may treat a registered domestic partner as a default beneficiary who will receive a plan benefit if the participant failed to choose another beneficiary.  Plans must also treat registered domestic partners as designated beneficiaries when they are named as such by the participant.

Compliance PointEmployers should be on the alert for future guidance on QRP administration related to same-sex spouses.  In the interim, check with your company’s accountant or other tax professional if same-sex spouse benefit questions arise.

Affordable Care Act Issues

Not all of the consequences of Federal tax recognition of same-sex marriage are positive.  Under the Affordable Care Act, couples in a legal same-sex marriage now must combine their incomes for purposes of determining eligibility for premium tax credits and cost sharing on the healthcare exchanges, beginning in 2014.  This may prevent some persons in same-sex marriages from receiving federal financial aid they would have qualified for, as unmarried individuals.

The reason for this is that financial aid towards health coverage on the exchanges is based on “household income” and household income must be between 100% and 400% of federal poverty level for financial aid to apply.  Couples whose combined income exceeds 400% of the Federal Poverty Level (currently $62,040 for a 2-person household) will be ineligible for any financial aid toward the cost of coverage even if, individually, the same-sex spouses might have qualified for coverage on their own.

Additionally, “dependent” coverage which must be offered by applicable large employers in 2015 applies to children up to age 26, but not to “spouses,” and hence not to same-sex spouses.

Hopefully, future guidance from the IRS and from Health and Human Services will address in more detail the impact that Federal tax treatment of same-sex marriages has under the Affordable Care Act.

Compliance Point:  Employers need to be aware that household income for employees in legal same-sex marriages will include their spouse’s compensation and will likely impact their eligibility for financial aid towards coverage on the health exchanges.

Model “Notice of Marketplace Coverage Options” Released

Update:  On September 4, 2013, the DOL, HHS and IRS issued a Frequently Asked Question (Part XVI) stating that it is permissible for an entity other than the employer – such as a carrier, third party administrator (TPA), or multi-employer plan – to distribute the Notice of Exchange.  The FAQ cautions that, if the employer delegates Notice distribution duties, the employer must “take proper steps” to ensure that a Notice is provided to all employees regardless of plan enrollment.   Therefore if the third party provides the Notice only to a subset of employees (for instance, an insurance carrier providing the Notice only to employees enrolled in the group health plan), this must be disclosed to the employer so that the employer can timely provide the Notice to employees who are not covered under the plan.

The U.S. Department of Labor released, on May 9, 2013 Technical Release 2013-02 on the “Notice of Exchange” employer disclosure responsibility under the Affordable Care Act, together with an updated initial notice of COBRA coverage that includes information on health coverage alternatives offered through the exchanges, now formally referred to as the “Health Insurance Marketplace.” Together with the guidance, the DOL also published two model notices of coverage on the “Marketplace,” one for employers that offer group health coverage, and one for employers that do not.

Publication of the model notices in early May comes a good bit earlier than the “late summer or fall of 2013,” which the DOL announced in January when it postponed the original March 1, 2013 employer disclosure deadline.  This is the result of numerous employer requests that that the Notice be made available earlier in the year, to provide more time for them to inform employees of upcoming coverage options through the Marketplace.  Therefore employers may use the model Notices and rely on the Technical Guidance earlier than the proposed distribution date of October 1, 2013, although only employers with self-funded group health plans will be likely to do so, given that 2014 premium rates for insured plans are not yet known. The Guidance will remain in effect until regulations on the Notice requirements are published.

Technically, the notice requirement, which is set forth in Section 18B of the Fair Labor Standards Act (FLSA), applies only to employers subject to the FLSA.  However that is a very broad category, including employers involved in interstate commerce with an annual dollar volume of business of at least $500,000.  Other categories of employer, including schools, hospitals, institutions of higher learning, nursing homes, and federal, state, and local government agencies, are automatically covered under the FLSA.  The guidance provides a link to an internet compliance tool that employers can use to determine whether or not they are subject to the FLSA, and hence the disclosure requirement.

Employers must provide the Notice of Marketplace Coverage to current full-time and part-time employees – regardless of their enrollment status under existing group plans – no later than October 1, 2013, which is also the date on which open enrollment in the Health Insurance Marketplace will begin.  Thereafter employers must provide the Notice to each new employee upon hire, which the Guidance defines as within 14 days of an employee’s start date.  Employers wanting to provide the Notice to current employees and new hires in advance of the October 1, 2013 deadline may use the Model Notices and rely on the terms of the Technical Release in doing so.

There is no requirement to provide a Notice to dependents or other individuals or are or may become eligible for coverage under the plan but who are not employees.

As outlined in my earlier post, the Notice must do all of the following:

  • Inform employees of the existence of the Marketplace, describe the services they provide, and the manner in      which the employee may contact the Marketplace to request assistance (i.e., at http://www.HealthCare.gov);
  • Inform employees that they may be eligible for a premium tax credit or for cost-sharing reductions if the      employer’s plan provides less than 60% actuarial value and they purchase coverage through the Marketplace; and
  • Inform employees that, if they purchase coverage through the Marketplace, they may lose the employer      contribution (if any) to any health plan sponsored by the employer, and that unlike exchange coverage, which is purchased with after-tax dollars, all or a portion of the employer contribution towards coverage under its own plan, if received, would be excludable from the employee’s income for Federal income tax purposes.

All of these disclosures are set forth in “Part A” of the Model Notices.  The Model Notice for employers with group health coverage also requires that the employer add a name and contact information for someone with more information about employer-sponsored coverage, which may include a human resources personnel or even a broker or third party administrator contact.

“Part B” of the Model Notices contains information on the employer and on employer-sponsored coverage, if any, in sections that are numbered to correspond to line items the employees must complete when enrolling for coverage and/or financial aid on the Marketplace.  Employers are not required to complete this section of the Model Notice unless and until an employee requests the information from them as needed to enroll on the Marketplace.  Supplying the information up front in the standardized format is a good idea, however, as it will allow employees to enroll in the Marketplace without seeking individualized assistance from the employer.  The additional information sought from employers that do not provide group health coverage is as follows:

  • Employer name
  • Employer Identification Number (EIN)
  • Employer address
  • Employer phone number
  • City
  • State
  • Zip code
  • Contact information for employer representative
  • Phone number of contact person, if different from employer general number
  • Email address for contact person.

The additional information sought from employers that do provide group health coverage is identical except they must identify a contact person with information about employer sponsored coverage.  There are also entries for the employer to describe plan eligibility rules, whether or not dependent coverage is offered, and whether the plan meets minimum value (60% actuarial value) and affordability standards.  It notifies employees that, even if the employer plan provides minimum value and is affordable, they may qualify for financial aid on the Marketplace based on their household income.  (Note that this likely would happen only if certain deductions such as alimony or payment of student loan interest reduced someone’s household income to a point lower than the income the individual received from employment.  In such an instance the employer would not be subject to an IRC Section 4980H penalty tax so long as their plan met “affordability” for that individual, based on the safe harbor definition of compensation they selected and use.)

The Model Notice for employers that do provide coverage also contains a section corresponding to the “Marketplace Employer Coverage Tool” that employers voluntarily may complete and provide to employees.  The questions it covers are as follows:

  • Whether the employee currently is eligible for employer-sponsored coverage or will be eligible in the next 3 months
  • Whether the employer offers a health plan that meets the minimum value standard
  • Premium amounts (on a weekly, bi-weekly, semi-monthly, monthly, quarterly, or annual basis) for the lowest-cost plan offered by the employer that meets minimum value standards, factoring in any discount offered for tobacco cessation programs (but not any other wellness incentives).  (This is consistent with the proposed regulations on Minimum Value and other premium tax credit eligibility issues that were published on May 3, 2013).
  •  For employers whose plan year will end soon (at the time they prepare the Notice) and who know that the health plans they offer will change, a description of the changes to be made, including that the employer will not offer coverage, or will begin offering affordable, minimum value coverage, in which case premiums (on a weekly, bi-weekly, semi-monthly, monthly, quarterly, or yearly basis) must be estimated, along with the date on which the changes will occur.

Employers are free to prepare their own versions of the Notice of Marketplace Coverage provided that it covers all the required disclosures and provides the information that employees will need to enroll for coverage, and financial aid, on the Marketplace.  In addition, the Guidance states that the Notice must be provided in writing in “a manner calculated to be understood by the average employee,” a standard which presumably is met by the Model Notices.   Employers may deliver it by first-class mail, in person at the workplace, or electronically if DOL safe harbor requirements  – set forth at 29 CFR § 2520.104b-1(c) – are met.

California Expands Domestic Partner Health Insurance Coverage to Out of State Providers

Last year California Governor Jerry Brown signed into law a provision that, if it successfully can be implemented, will close a loophole in the California Insurance Equity Act which exempts out of state employers from having to offer domestic partner health insurance coverage to employees residing in this state.

Originally enacted in 2004, the California Insurance Equality Act (AB 2208) amended the California Insurance Code to require that insurance policies that were “marketed, issued, or delivered” to a California resident treat registered domestic partners equal to lawfully-married, opposite sex spouses. Similarly the Health & Safety Code required domestic partner coverage to be offered by California HMOs. For group health coverage this rule generally went into effect as of January 1, 2006. This rule still applies to all manner of insurance contracts within California, not just those providing group health coverage.

The original Act, however, did not apply to insurance coverage issued “outside of California to an employer whose principle place of business and majority of employees are located outside of California.” Cal. Ins. Code § 10112.5. It also did not specifically apply to HMO contracts formed outside of California.

This meant that California residents employed by certain out-of-state companies could not extend group health coverage to their domestic partners lawfully registered with the California Secretary of State.
Effective January 1, 2012, SB 757 closes that loophole, but only with regard to group health insurance and HMOs issued outside of California to any employers. Other types of insurance coverage are not affected.

The law requires that a domestic partner be registered with the California Secretary of State in order to be covered and also that, if the employer require proof of such registration for coverage, it must also require that opposite-sex couples provide proof of their marriage in order to obtain spousal coverage. Written documentation also is required for proof of the end of a marriage or domestic partnership.

It is not clear how the California Insurance Department or the California Department of Managed Health Care will enforce this rule against insurers and HMOs that are not licensed under California law and whose contract is with an out-of-state employer. The office of California Senator Ted Lieu, who sponsored the bill, is working with those agencies towards an enforcement mechanism. It is also possible that the “full faith and credit” clause of the U.S. Constitution could be invoked to require other states to conform to California law. If the law can be enforced it will impact the terms of coverage for non-California companies with California employees. It would not likely be preempted by ERISA, however, because it directly governs insurers and HMOs, and only indirectly impacts employer-sponsored group health plans.

Anthem Limits Small-Group Renewals to Non-Grandfathered Plans

Anthem Blue Cross, one of the largest California group and individual insurers, has announced that effective October 1, 2011 it will only renew small group policies (2 – 50 employees) for employers that do not claim “grandfathered” status for purposes of many changes under PPACA. This will mean that small group plans insured with Anthem Blue Cross will have to “map” their coverage to a new policy with another carrier, in order to avoid loss of grandfathered status. (“Mapping” relief is described in amended interim final grandfathering regulations issued in November 2010).

Many grandfathered group health plans – small group or otherwise – have adopted such status in order to remain exempt from nondiscrimination rules that apply to insured group health plans for the first time under PPACA. Nondiscrimination rules – which generally prohibit plan provisions that favor “highly compensated individuals” -were to go into effect on January 1, 2011 for calendar year plans and are to be modeled on the nondiscrimination rules that have always applied to self-funded group health plans. However, the IRS has suspended enforcement of nondiscrimination rules for insured arrangements until it can issue regulations that describe the standards plans must satisfy. While it is hoped that the IRS regulations will describe design “safe harbors” that automatically meet nondiscrimination requirements, there is no guarantee that such guidance will be available before October of this year.

This puts small group plans insured by Anthem Blue Cross in a difficult place if they want to maintain “discriminatory” plan designs – i.e., those that provide any accellerated eligibility or more favorable coverage terms to “highly compensated individuals” – a group that includes 10% or more shareholders, as well as the top 25% of employees ranked by pay.

In order to remain grandfathered, employers will need to locate another carrier whose terms of coverage are virtually identical to Anthem Blue Cross’s small group product. Carriers may charge the employer more for such coverage than they are paying to Anthem Blue Cross – and employers cannot pass the cost increases on to employees without losing grandfathered status. Employers for whom the price squeeze is too much will have to relinquish grandfathered status and offer benefits on equal terms to non-highly compensated and highly compensated groups, alike. This could prove unaffordable for many employers in sectors such as hospitality and retail, which often limit group health coverage to administrative or management employees.

Anthem Blue Cross’s announcement – attached below – gives several reasons for abandoning the grandfathered small group market, including lack of employer interest in maintaining grandfathered plans, the administrative complexity of offering grandfathered and non-grandfathered coverage options, cost efficiencies available for a more homogeneous client base, and similar moves by other insurers. Blue Shield of California last year announced that it would not offer grandfathering to new small group plans or to large group plans on standard policies, retaining the option only for highly customized insured plans.

News Flash-Grandfathering