On December 16, 2015 the Internal Revenue Service (IRS) issued Notice 2015-87 (the Notice), which provides guidance on a variety of Patient Protection and Affordable Care Act (ACA) topics. These topics include health reimbursement arrangements (HRAs), cafeteria plans, inflation adjustments, hours of service calculations, health flexible spending arrangements (health FSAs), COBRA, and penalty relief. This Client Alert highlights key guidance discussed in the Notice.
The Notice provides a significant amount of guidance regarding HRAs and ACA compliance. For example, the Notice addresses whether certain HRAs may be used to purchase individual market coverage, whether an HRA may make certain reimbursements without causing the HRA to comply with the ACA’s annual dollar limit prohibition and the preventive services requirement, and whether an HRA that provides family coverage may be integrated with self-only coverage under an employer’s group health plan. The Notice also discusses how employer contributions to an HRA are taken into account for purposes of determining whether an employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan.
The Notice addresses how employer flex contributions to a cafeteria plan are taken into account for purposes of determining whether an employer has made an offer of affordable minimum value coverage under an eligible employer-sponsored plan. The Notice discusses various scenarios regarding flex contributions and the determination of whether offered coverage is considered affordable.
The ACA’s employer shared responsibility regulations provide three safe harbors for determining whether offered coverage is considered affordable. The Notice states that the IRS intends to issue regulations to address how the references to 9.5% in the three affordability safe harbors are adjusted for inflation. For plan years beginning in 2015, employers may rely on using 9.56% (instead of 9.5%) and 9.66% for plan years beginning in 2016.
The ACA’s employer shared responsibility provision generally imposes penalties if (a) a large employer fails to offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and at least one full-time employee enrolls in coverage through an Exchange and receives a premium tax credit or cost-sharing reduction, or (b) a large employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, but the coverage does not provide minimum value and/or is not affordable and at least one full-time employee enrolls in coverage through an Exchange and receives a premium tax credit or cost-sharing reduction. Each penalty is indexed for inflation. For 2015, the “a” penalty is adjusted from $2,000 to $2,080 and for 2016 is adjusted to $2,160. For 2015, the “b” penalty is adjusted from $3,000 to $3,120 and for 2016 is adjusted to $3,240.
“Hour of Service” Definition
The Notice clarifies the definition of “hour of service” used in the employer shared responsibility regulations. The Notice states that for purposes of calculating an employee’s hours of service, an “hour of service” does not include (i) an hour for which an employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers’ compensation, or unemployment or disability insurance laws; (ii) an hour of service for a payment which solely reimburses an employee for medical or medically related expenses incurred by the employee; or (iii) any hours after the individual terminates employment.
The Notice also provides that periods during which an individual is not performing services but is receiving payments due to short-term disability or long-term disability result in hours of service for any part of the period during which the recipient retains status as an employee of the employer, unless the payments are made from an arrangement to which the employer did not contribute directly or indirectly. A disability arrangement for which the employee paid with after-tax contributions is treated as an arrangement to which the employer did not contribute, and payments from the arrangement would not give rise to hours of service. Additionally, periods during which the employee is not performing services but is receiving payments in the form of workers’ compensation wage replacement benefits under a program provided by the state or local government do not result in hours of service.
Health FSAs, Carryovers, and COBRA
The Notice explains how health FSAs affect COBRA continuation coverage. The Notice states that amounts carried over from one plan year to another plan year under a health FSA are included in determining the amount of the benefit a qualified beneficiary is entitled to receive during the remainder of the plan year in which a COBRA qualifying event occurs. However, the Notice provides that the maximum amount a health FSA may require to be paid for COBRA continuation coverage does not include unused amounts carried over from prior years. Instead, the applicable COBRA premium is based on the sum of any nonelective employer contribution and the employee’s salary reduction election for the year. The Notice also explains that if a health FSA allows non-COBRA beneficiaries to carry over unused amounts, the health FSA must allow similarly situated COBRA beneficiaries to make carryovers, subject to the same terms that apply to non-COBRA beneficiaries. The health FSA is not required to permit a COBRA beneficiary to have access to any employer contributions to the health FSA made during the carryover period or to elect additional salary reduction amounts for the carryover period. The carryover is limited to the applicable COBRA continuation period.
The Notice also permits a health FSA to place certain limits on carryovers. A health FSA may limit the availability of the carryover of unused amounts to individuals who have elected to participate in the health FSA the next year, even if participation that next year requires the individual to make a minimum salary reduction election to the health FSA for the next year. Additionally, the Notice permits a health FSA to limit the ability to carry over unused amounts to a maximum time period. A health FSA could limit the ability to carry over unused amounts to one year. For example, if a participant carried over $100 and did not elect any additional amounts the next year, the health FSA could provide that any amounts remaining at the end of that year be forfeited.
The Notice reiterates the IRS’ prior relief for incorrect or incomplete ACA reports (e.g., Form 1095-C) filed with the IRS or furnished to individuals in 2016 for the 2015 calendar year. The IRS will not impose certain penalties on an employer if the employer can show that it made good faith efforts to comply with the information reporting requirements.
If you sponsor an HRA, cafeteria plan, or health FSA, you should consider whether the guidance provided in the Notice affects plan administration. For example, if your health FSA permits carryovers, you may want to consider amending the plan to limit carryovers. You should use the inflation-adjusted amounts when estimating potential ACA penalty costs and applying the affordability safe harbors. The definition of “hour of service” used for determining “full-time employees” for ACA purposes should be reviewed to ensure the proper hours are being excluded or included, as applicable.
If you have any questions regarding the Notice, please contact a member of our Employee Benefits Practice Group listed below.