Monthly Benefits Update - March 2014
April 1, 2014
By: Trevor Holmes
Health & Welfare Plans
Treasury and the IRS Clarify Affordable Care Act Reporting Obligations
As expected, the Department of the Treasury and the IRS (the “Agencies”) finalized the employer information reporting requirements under the Affordable Care Act (the “ACA”) earlier this month. The final rules, which are designed to help the IRS enforce the employer shared responsibility provisions and the individual mandate, remain largely unchanged from the proposed rules subject to minor modifications in response to public comment. Originally intended to be effective in 2014, the new rules are effective January 1, 2015 after Treasury delayed the requirements in 2013.
The information reporting obligations only apply to applicable large employers, defined in the ACA as any employer with 50 or more full time employees in the preceding calendar year. The rules require that employers report certain information to the IRS on employer provided health coverage and also furnish employees with an information statement.
Most large employers will be required to report and furnish the information detailed in Code Section 6056. This provision requires the employer to report, for example, details about the number of full-time employees at the employer, whether the employer offered the opportunity to enroll in minimum essential coverage, and, if the employer offered coverage, details on the employee’s share of the cost to purchase coverage under the employer’s lowest cost health insurance option. Code Section 6056 also requires the employer to provide employees with a statement that includes the information that it reported to the IRS with respect each full-time employee. Employers that self-insure have additional reporting obligations, but this additional reporting can be done on the same form that the employer reports the information required for Section 6056.
The final rule also simplifies reporting requirements for employers that offer coverage to any of their full-time employees. Specifically, if the employer makes an offer of coverage that meets the minimum value and affordability requirements under the ACA, the report to the IRS only needs to include information that identifies the employee and acknowledges the fact that the employee received an offer of coverage. The information report to employees is also simplified.
For employers that participate in multiemployer welfare plans, the information reporting requirements of Section 6056 remain with the employer. The regulations, however, provide that an applicable large employer participating in a multiemployer welfare plan may agree to shift these reporting requirements to the multiemployer plan administrator. Under this type of arrangement, the employer would still be required to report and furnish information about its full-time employees who are not eligible to participate in the multiemployer plan. It is important to note that the employer would still remain subject to liability if the multiemployer plan fails to properly report or furnish the required information.
Draft forms to report information to the IRS and full-time employees will be made available by the IRS later this year. Employers may use these forms to satisfy the IRS and individual employee information reporting requirements under the final rules.
CMS Specifies Issuer Obligations to Offer Coverage Options to Same Sex Spouses
The Centers for Medicare & Medicaid Services (CMS) recently offered guidance in the form of a Q&A to insurance issuers regarding their obligations to same sex spouses when offering health insurance plans in the group or individual markets (including plans offered on the ACA healthcare exchanges). CMS issued regulations in February 2013 that require issuers to guarantee the availability of coverage; these regulations further clarified that certain discriminatory marketing practices or benefit designs will not comply with the guaranteed availability requirement. The Q&A specifies that health insurance issuer marketing practices or benefit designs that discriminate against an individual’s sexual orientation would violate the guaranteed availability requirement. Accordingly, a health insurance offering that provides coverage for opposite sex spouses would violate the guaranteed availability requirement if such coverage excluded same sex spouses who had married in a jurisdiction that recognizes same sex marriage.
Payroll Taxes/Severance Arrangements
Supreme Court Clarifies Employer FICA Withholding Obligations for Severance Payments in U.S. v. Quality Stores Inc.
Is an employer generally required to withhold and pay FICA taxes on amounts that it pays to separated employees under a severance plan? In most cases, the employer should withhold FICA from severance payments, but it has been unclear whether an employer must withhold FICA on payments made under a severance plan where those payments were not linked to unemployment compensation. In a March 25th decision, the Supreme Court ruled that payments from a severance plan that is not directly linked to state unemployment benefits are “wages” for purposes of FICA and are thus subject to withholding.
In the case, the employer filed for bankruptcy and made severance payments to its employees from two of its severance plans. These supplemental unemployment compensation benefit plans (or “SUB” plans) provided severance benefits that were generally tied to job grade and management level. The employer initially paid FICA taxes on the severance amounts but later reconsidered and requested a refund from the IRS. It argued, among other things, that the general tax withholding and FICA tax rules in the Internal Revenue Code had been drafted by Congress with the intent to broadly exempt these types of SUB plan payments from FICA taxes and withholding.
Historically, the IRS had issued rulings exempting certain SUB plan severance payments from FICA taxes. It granted these exemptions on the ground that characterizing such SUB payments as “wages” subject to withholding was problematic because it jeopardized an employee’s ability to simultaneously receive state unemployment compensation and compensation from an employer at the same time. In this case, the employer’s SUB plans had no link to state unemployment payments. Accordingly, the Supreme Court ruled that the SUB payments were wages subject to tax and FICA withholding.
Employers should be aware that the Supreme Court did not issue a blanket rule requiring that employers withhold FICA from all severance payments. Indeed, the opinion leaves open the possibility that payments from a SUB plan that are linked to unemployment benefits may be exempt from FICA withholding. In most cases, however, individual severance payments and payments from employer severance plans are taxable wages and employers should continue to pay and withhold FICA.
DOL Begins Rulemaking Process for 408(b)(2) Service Provider Fee Disclosure Guides
Earlier this month, the Department of Labor (DOL) began the process of amending the final ERISA Section 408(b)(2) service provider fee disclosure regulations to assist fiduciaries in their review of the fees that such service providers charge to a plan. Under Section 408(b)(2) of ERISA, plan fiduciaries are required to ensure that the plan pay “reasonable compensation” for services rendered to the plan. The final service provider fee disclosure regulations that the DOL issued in 2012 were designed to assist fiduciaries in evaluating whether compensation paid to plan service providers is reasonable.
In practice, since the DOL finalized these regulations, the DOL has found that service providers often provide confusing disclosures that make it difficult for fiduciaries to evaluate what fees the service provider is charging the plan. The proposed rules would require that service providers whose disclosures include references to multiple or lengthy documents provide fiduciaries with a guide to these documents. This guide, if required, would be designed to help the fiduciary quickly locate information about the service provider’s fees, including direct compensation being charged to the plan, recordkeeping fees, investment disclosures, as well as a description of the services rendered to the plan.
In preparing to formulate draft amendments to the regulations, the DOL is inviting the public to comment on the proposed amendments and will later hold focus groups of fiduciaries to small pension plans. The DOL aims to get feedback on the impact of the current 408(b)(2) regulations as it prepares the first draft of proposed amendments to the regulation.
Pension Funding Relief for Certain Multiple Employer Pension Plans Passes U.S. House and Senate
Both houses of Congress recently passed pension funding relief that will affect the pensions that charitable employers and certain rural cooperatives contribute to. The bill, titled “The Cooperative and Small Employer Pension and Flexibility Act,” will remove some of the funding requirements that the Pension Protection Act of 2006 imposed on the multiple employer pension plans that these types of employers frequently participate in. While these multiple employer plans currently have an exemption from the Pension Protection Act’s funding rules, those rules will sunset in 2017. In passing the legislation, Congress was concerned that the funding requirements would negatively impact the services that these organizations provide in light of the limited default risk that these plans face.
Deadline for Applications to the IRS 403(b) Plan Preapproval Program Extended
An IRS program designed to permit vendors seeking to offer preapproved Code Section 403(b) plans the opportunity to submit plan documents to the IRS has been extended by one year to April 15, 2015. The new program allows vendors offering volume submitter and prototype plans to submit their plan documents to the IRS for a favorable determination. The preapproval program builds on the 2009 IRS regulations that require sponsors of 403(b) plans to maintain a written plan document. Note that the program, as currently designed, does not permit employers to submit their individually-designed 403(b) plan documents to the IRS for approval.