IRS Releases 2013 Limits for Welfare Benefit Plans
The IRS has released the 2013 inflation-adjusted maximums for certain employee welfare benefit plans and the dollar amounts used for certain discrimination tests.
For the definition of "highly compensated employee," which is used in several welfare plan discrimination tests, the threshold remains at $115,000 when determinations are based on compensation from the preceding year.
Eligible long-term care premiums that are treated as medical care expenses cannot exceed: $360 for individuals age 40 or less; $680 for ages 41 to 50; $1,360 for ages 51 to 60; $3,640 for ages 61 to 70 and $4,550 for those over age 70.
The 2013 limit on contributions to health savings accounts ("HSAs") increases to $3,250 for a self-only HSA and $6,450 for a family HSA. For 2013, a high deductible health plan ("HDHP") plan must have a minimum deductible of $1,250 for self-only coverage, and $2,500 for family coverage. The maximum out-of-pocket amount for an HDHP (including deductibles, co-payments and other amounts, not including premiums) cannot exceed $6,250 for self-only coverage and $12,500 for a family.
Employees' pre-tax contributions to health care flexible spending account plans are limited to $2,500 per year as of the first day of the first plan year beginning on or after January 1, 2013.
The maximum tax-exempt benefit from a dependent care assistance plan remains at $5,000, as this amount is not indexed to inflation.
The IRS has not yet announced the maximums for adoption assistance plans, qualified parking expense reimbursement plans or qualified transportation expense reimbursement plans.
Supreme Court's Ruling on PPACA
The U.S. Supreme Court's decision upholding most of PPACA affected many parts of the law. However, perhaps the most important effect was to leave PPACA's individual mandate intact.
Individual Mandate. PPACA's individual mandate requires most Americans to carry health insurance or pay a penalty to the IRS starting in 2014. Although the Court found that Congress did not have the power to impose the individual mandate under the Commerce Clause, it held that Congress could enact the individual mandate under its taxing power.
PPACA describes an individual's "shared responsibility payment" for not having health insurance as a "penalty," not a "tax." Nevertheless, the Court held that the shared responsibility payment could be treated as a tax for constitutional purposes. The Court noted that the payment is not so high that individuals have no choice but to buy health insurance and that the payment is collected solely by the IRS through its normal means. The Court read Congress's choice of language - stating that individuals "shall" obtain insurance or pay a "penalty" - as imposing a permissible tax on those who go without health insurance.
Employer Responsibility Penalty. In addition to invalidating the individual mandate, the dissenting justices would have invalidated the employer responsibility penalty (as well as other parts of PPACA, such as health insurance exchanges). The employer responsibility penalty requires employers with at least 50 employees to provide health insurance options that meet minimum criteria or face the possibility of a monetary penalty if one of their employees qualifies for subsidized coverage and buys health insurance through an exchange.
If the individual mandate and certain other parts of PPACA had been voided, the employer responsibility assessment would have upset PPACA's design which entailed "shared responsibility." This would have left employers as the only parties bearing significant responsibility, and that was not the intent of Congress. However, because the Court upheld the individual mandate, the employer responsibility penalty was also upheld.
Medicaid Expansion. PPACA required states to either expand Medicaid eligibility to more lower-income people or lose all federal Medicaid funding. The Court held this choice to be unconstitutional. However, the Court did hold that the federal government may withhold those additional federal funds available under PPACA from states that refuse to comply with PPACA's Medicaid expansion.
As the Supreme Court's decision leaves PPACA virtually untouched, employers should have their plan documents reassessed by qualified employee benefit professionals to ensure compliance with the law.
PPACA: What Should Employers Do Next?
Now that PPACA has survived its Supreme Court test, as well as the 2012 elections, employers must continue their implementation of PPACA's various reform and coverage mandates.
Ensure Compliance with PPACA's Current Requirements
Employers must first ensure that they are in compliance with all of PPACA's current requirements. The DOL is now randomly auditing employers to verify such compliance.
Specifically, DOL is asking audited employers to produce documents that demonstrate that their health plans have been amended to comply with PPACA reforms currently in effect (e.g., coverage of dependent children until age 26, elimination of lifetime limits on essential health benefits, and restricted annual limits on essential health benefits). Moreover, employers that sponsor non-grandfathered plans must demonstrate that their plans were amended to comply with certain additional reforms applicable to such plans.
DOL is also requesting that audited employers produce copies of notices required to be furnished to participants regarding the implementation of PPACA's reforms. Further, employers that sponsor grandfathered group health plans must provide DOL with copies of the required participant notices communicating the plan's grandfathered status.
Employers that either have not yet amended their plans to incorporate all of PPACA's reforms or that have not distributed all of the notices required by PPACA should do so immediately and, if needed, engage qualified benefits counsel to assist them in doing so.
Prepare to Implement PPACA's Next Wave of Requirements
Employers must also prepare for the next wave of reforms required by PPACA that are effective now or some time in the near future. The following is a non-exhaustive list of future PPACA requirements that employers must implement and, where appropriate, suggested next steps to help employers prepare for such implementation:
- Contraceptive Drugs and Devices. Non-grandfathered plans must offer contraceptive drugs and devices to participants on a first-dollar basis, with no participant cost-sharing. This requirement becomes effective as of the first day of the first plan year occurring on or after August 1, 2012.
- Summary of Benefits and Coverage ("SBC"). Employers that sponsor group health plans must begin distributing SBCs on the first day of the first open enrollment period occurring on or after September 23, 2012. Accordingly, employers with calendar year plans must have SBCs ready for the fall 2012 open enrollment season. Thus, employers should be working closely with their insurance providers and third party administrators to ensure that SBCs will be ready for distribution at the beginning of the 2012 open enrollment season.
- IRS Form W-2 Reporting Requirements. Forms W-2 that are issued to employees for the 2012 tax year (generally, in January 2013) must include the aggregate cost of employer-sponsored health benefits provided to such employees. (Note: This requirement is not applicable to employers with fewer than 250 employees to whom Forms W-2 must be issued.) Thus, applicable employers should be configuring their payroll systems (or working with their outside payroll service providers) so that the aggregate cost of the employer-sponsored health coverage provided to employees during a tax year can be tracked.
- Medical Flexible Spending Account Limits. PPACA requires employers to limit employees' pre-tax employee contributions to medical flexible spending account plans to $2,500 per year. The IRS recently released Notice 2012-40 (see below) to clarify that this limit (i) is a plan year (and not calendar year) limit, and (ii) becomes applicable as of the first day of the first plan year beginning on or after January 1, 2013.
- Health Care Exchange Notices. Effective March 1, 2013, employers must provide a written notice to new employees, at the time of hire, that explains:
- the existence of the insurance exchange and describes the services provided by the exchange and how to contact the exchange;
- the employee may be eligible for a premium tax credit if the employer's share of the "total allowed costs" of benefits provided under the employer's plan is less than 60%; and
- if employees purchase coverage through an exchange, they may lose any employer contribution that would have been made to the employer's plan on their behalf.
Employers must also provide current employees with a notice containing the above information no later than March 1, 2013.
- Patient-Centered Outcomes Research Trust Fund ("PCORTF") Fees. The PCORTF fee on certain insurers, and employers that sponsor self-insured health plans, will apply to plan years ending on or after October 1, 2012. Applicable employers must submit their first PCORTF payment to the IRS no later than July 31, 2013. Employers that sponsor self-insured health plans should be considering what method they will use to calculate their PCORTF fee.
- Certification of "Minimum Essential Coverage". Employers that sponsor self-insured health plans must provide certification to the U.S. Department of Health and Human Services ("HHS") regarding whether their health plans provide minimum essential coverage on and after January 1, 2014. Applicable employers will be required to file the first information returns to HHS sometime in 2015.
Employers are now tasked with implementing a myriad of PPACA requirements in a short period of time while also considering strategies to ensure continued compliance with PPACA over the long-term. To formulate the best course of action, employers must be vigilant for new developments and guidance issued concerning the implementation of PPACA's requirements. To avoid costly errors that may occur in trying to navigate the complex regulatory scheme that is PPACA, employers should consider retaining qualified benefits counsel to ensure that their compliance obligations under PPACA are appropriately satisfied.
Some States Refuse to Establish Exchanges
Although the implementation of PPACA is now a certainty based on the outcome of the 2012 elections, several states have announced that they will not establish Affordable Insurance Exchanges ("Exchanges"), which are mandated under PPACA.
The Exchanges are state-based marketplaces that will be used by individuals and small businesses to purchase health insurance. Individuals who qualify for Medicaid, federal subsidies, or tax credits will also be able to use Exchanges to select health insurance. PPACA requires Exchanges to be operational in each state by January 1, 2014. If a state fails to establish such an Exchange, the federal government will be responsible for establishing an Exchange in that state. To date, several states have announced that they will not create an Exchange, or will delay implementation of an Exchange.
In response, HHS Secretary Kathleen Sebelius has announced that the federal government is offering "a new funding opportunity to help states continue their work to implement the health care law" and has released "further guidance to help states understand the full scope of activities that can be funded under the available grant funding as they work to build exchanges."
Nevertheless, given the political nature of the PPACA dispute, it is unlikely that many of these states will change their position and establish state-based Exchanges, even with additional funding opportunities. Therefore, it is likely that in 2014 these states will be covered under federally-controlled Exchanges.
HHS has now extended the deadline for states to decide whether to build their own Exchanges to December 14, 2012. States that wish to partner with the federal government in creating an Exchange now have until February 15, 2013 to submit plans to HHS.
The extension provided in Sebelius' letter is probably in response to the fact that many states had delayed planning an Exchange until after the presidential election. As of late September, only 19 states had begun setting up an Exchange or had agreed to do so in partnership with the federal government.
IRS Issues Guidance on Salary Reduction Contribution Limits for Health FSAs
The IRS has issued Notice 2012-40 (the "Notice") to provide guidance on the $2,500 limit on salary reduction contributions to health flexible spending accounts ("health FSAs"). The Notice also sets the deadline for cafeteria plan amendments, and provides relief for certain excess contributions.
Effective Date. PPACA imposes a $2,500 limit on salary reduction contributions to health FSAs during a "taxable year." The Notice explains that: (i) because employees make salary reduction contribution elections for health FSAs on a plan year basis, the term "taxable year" refers to the cafeteria plan's plan year and not the employee's tax year; and (ii) the $2,500 limit applies to cafeteria plan years beginning on or after January 1, 2013. Thus, plan administrators of non-calendar year plans will not face the additional task of tracking salary reductions for employees' tax years.
Guidance on Limit. The Notice provides the following guidance about the $2,500 limit:
- Impact on "Other" Salary Reduction Contributions, HRAs and HSAs. The $2,500 limit only applies to salary reduction contributions made to health FSAs. The limit does not apply to salary reduction contributions used to pay health insurance premiums (e.g., through premium conversion plans) or to FSAs for dependent care assistance or adoption care. The limit also does not affect employee contributions to health savings accounts or amounts made available by an employer under a health reimbursement arrangement.
- Grace Periods. If a health FSA has a grace period (which may be up to two months and 15 days), unused contributions that are carried over into the grace period will not count towards the $2,500 limit for the following plan year.
- Employee-by-Employee Basis. The $2,500 limit applies on an employee-by-employee basis. Therefore, if only one spouse is employed, the limit remains at $2,500, regardless of how many dependents are covered by the health FSA. However, if both spouses are employed, each may elect to make up to $2,500 in salary reduction contributions, even if both participate in the same employer's health FSA.
- Employees of Two or More Employers. Employers that are part of the same controlled group are treated as a single employer for purposes of the $2,500 limit. Thus, salary reduction contributions made to health FSAs by an employee participating in multiple cafeteria plans maintained by members of the same controlled group must be limited to $2,500. However, an employee employed by two or more employers that are not members of the same controlled group may elect to contribute up to $2,500 under each employer's health FSA.
- Inflation Increases. The $2,500 limit will be increased for plan years beginning after December 31, 2013.
Amendment Deadline. The Notice clarifies that cafeteria plans must adopt amendments to comply with the $2,500 limit by December 31, 2014. In general, cafeteria plan amendments may be effective only prospectively. However, the Notice explains that an amendment to conform to the $2,500 limit that is adopted by December 31, 2014, may be made retroactively effective to 2013, provided that the plan operates in accordance with the limit for plan years beginning after December 31, 2012.
Reasonable Mistake Relief. The Notice provides that if a cafeteria plan erroneously allows an employee to elect a salary reduction of more than $2,500 for a plan year, the cafeteria plan will be permitted to retain its tax-qualified status so long as:
- the plan is amended to comply with the $2,500 limit by December 31, 2014;
- the terms of the plan are applied uniformly to all participants;
- the error results from a reasonable mistake by the employer and is not due to willful neglect; and
- the salary reduction contributions exceeding $2,500 are paid to the employee and treated as wages for income tax withholding and employment tax purposes for the tax year in which the correction is made.
DOL Updates Health Benefits Advisor for Employers Website
The DOL recently updated its "Health Benefits Advisor for Employers," the agency's interactive health plan compliance website. Known as the "Advisor," the website was launched in 2006 and provides an overview of certain federal laws that impact health care coverage provided by group health plans. It also helps employers determine whether their plans are subject to, and in compliance with, these laws.
Employers that access the Advisor are guided through a series of windows containing information on specific compliance requirements, along with yes-or-no questions designed to determine whether the employer's plan meets its compliance obligations. After answering all of the questions on a particular topic, employers are directed to a "Plan Compliance Results" page that identifies which requirements appear to be satisfied and which do not.
Specifically, the Advisor addresses compliance with:
- Consolidated Omnibus Budget Reconciliation Act ("COBRA");
- Health Insurance Portability and Accountability Act ("HIPAA");
- Mental Health Parity and Addiction Equity Act;
- Newborns' and Mothers' Health Protection Act;
- Women's Health and Cancer Rights Act;
- Genetic Information Nondiscrimination Act; and
- Michelle's Law.
The Advisor does not address compliance with PPACA. However, it does provide links to other DOL websites containing information about PPACA compliance.
The Advisor is available at: http://www.dol.gov/elaws/ebsa/health/employer/
IRS' New COBRA Audit Guidelines
The IRS recently updated its guidelines on "Audit Techniques and Tax Law to Examine COBRA Cases (Continuation of Employee Health Care Coverage)." These guidelines are used by IRS field agents when examining plans for COBRA compliance. Therefore, they are a useful tool to help employers conduct "self-audits" of their COBRA policies and procedures.
The IRS currently performs more than a dozen audit procedures for COBRA compliance, and places the burden of proof of compliance on the company. Failure to comply with COBRA can subject employers to:
- excise tax penalties of $100 per day ($200 if more than one family member is affected);
- statutory penalties of up to $110 per day under ERISA;
- civil lawsuits; and
- attorneys' fees and interest.
The minimum penalty levied by the IRS for noncompliance discovered after a notice of examination is generally $2,500. The maximum penalty for "unintentional failures" is the lesser of the amount paid during the preceding tax year by the employer for group health plans, or $500,000.
The examination processes outlined in the guidelines provide that field agents should review:
- employers' health care continuation coverage procedures manuals;
- methods by which COBRA administrators are notified that a qualifying event has occurred;
- how qualified beneficiaries are notified of their right to continued health care coverage under COBRA (including the health care continuation coverage notifications sent to qualified beneficiaries);
- how qualified beneficiaries elect to continue health care coverage;
- the premiums paid by qualified beneficiaries;
- qualified beneficiaries' personnel files to ensure all appropriate records regarding notification of COBRA rights, election or waiver of COBRA, premium payments and reasons for expiration of COBRA coverage are properly documented;
- unemployment benefit records for employees who were denied COBRA because they were terminated due to gross misconduct; and
- the internal audit procedures for health care continuation coverage, including any appeals process.
These examination guidelines are available at:http://www.irs.gov/businesses/small/article/0,,id=255893,00.html#_Toc_269
Two Federal Appeals Courts Declare Part of Defense of Marriage Act Unconstitutional
Both the First and Second Circuits recently declared Section 3 of the Defense of Marriage Act ("DOMA") as being unconstitutional. In particular, Section 3 of DOMA states that for purposes of construing federal laws, marriage is defined as "a legal union between one man and one woman as husband and wife." It also provides that "the word 'spouse' refers only to a person of the opposite sex who is a husband or a wife."
While both the First and Second Circuits have invalidated Section 3 of DOMA, their decisions do not affect Section 2 of DOMA, which gives individual states the right to recognize, or not recognize, same-sex marriages of other states. Moreover, both decisions delayed application of the rulings because the Supreme Court is expected to review the matter in the near future.
If the Supreme Court upholds these decisions on review, then same-sex couples within states that recognize such marriages could be entitled to marriage-based federal rights and benefits applicable to welfare plans, including: rights to COBRA continuation; HIPAA Special Enrollments; and cafeteria plan pre-tax contributions and status change events. However, if the Supreme Court refuses to review the case, this ruling would only apply to states within the First and Second Circuits (i.e., Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island and Vermont).
HIPAA Audit Protocols
After completing a pilot program for conducting audits under the Health Information Technology for Economic and Clinical Health ("HITECH") Act, HHS has developed an Audit Protocol for HIPAA compliance, which is available to the public. In particular, the Audit Protocol addresses three main areas of HIPAA compliance:
- privacy rules that include national standards to protect individuals' personal health information and give individuals increased access to their medical records;
- breach notification procedures when there has been a "security breach" due to unsecured Protected Health Information; and
- security rules to protect the confidentiality, integrity, availability, transmission and storage of electronic medical information.
The Audit Protocol is a guide to the compliance requirements that will be assessed through the audit. It is helpfully divided into 2 sections:
- HIPAA Privacy and Breach section, with 88 "established performance criteria" that must be met to satisfy HIPAA; and
- HIPAA Security section, with 77 points of "established performance criteria" available for audit.
Covering everything from Notices of Privacy Practices for Protected Health Information to security requirements for administrative, physical, and technical safeguards of data, the Audit Protocols make an excellent guide for an employer's "self-study" of HIPAA compliance.
The Audit Protocol is available at:www.hhs.gov/ocr/privacy/hipaa/enforcement/audit/protocol.html
Massachusetts Enacts Health Care Reform Legislation Aimed at Cost Containment and Revises Fair Share Contribution Test
Massachusetts recently enacted legislation that targets the growth of health care costs while improving health care quality and patient care. The bill, which is the third major health care legislative effort in Massachusetts since 2006, sets the first statewide target for health care spending in the United States. The legislation also eases certain requirements of the Fair Share Contribution test.
In this first-of-its-kind legislation, Massachusetts aims to limit the growth of health care costs to the same level as increases in the state's economy. The bill creates mechanisms for capping growth in health care expenditures, restructuring the delivery system and encouraging coordinated care and quality as well as incentives to adopt alternatives to the current fee-for-service payment methodologies. Major highlights are provided below.
Health Care Cost Goals. Through 2017, the bill limits both private and public health care spending to the state's economy (i.e., the gross state product). For the five-year period starting in 2018, spending would generally be limited to a half percentage below the gross state product. These limits are expected to reduce health care costs in the state by $200 billion.
Employer Incentives. The bill creates a new wellness tax credit (up to $10,000 per employer) for employers that implement recognized workplace wellness programs. In addition, health insurance companies must provide a premium adjustment for small businesses that adopt approved workplace wellness programs.
Transparency of Health Costs. The legislation directs health insurance carriers to disclose the out-of-pocket costs for a proposed health care service and prevents patients from being subsequently charged more than the disclosed amount. Moreover, health insurance carriers must provide a summary of benefits to health care consumers in an easily understandable format that shows the consumer's obligation to pay for any portion of the claim.
New Insurer Surcharge. The bill imposes a new $225 million surcharge on insurers to raise money for small community hospitals struggling to provide low-cost alternatives, create a Prevention and Wellness Trust Fund, and help small providers buy electronic health records. This surcharge will be passed on to consumers in the form of somewhat higher premiums.
Restructuring Health Care Payment System. The bill requires the state's Medicaid program, employee health care program, and all other state-funded health care programs to transition to new health care payment methodologies. The new payment models incentivize the delivery of high-quality coordinated, efficient and effective health care while reducing waste, fraud and abuse.
Reforming Medical Malpractice Laws. The legislation creates a 182-day cooling off period for the parties to a medical malpractice lawsuit to seek a negotiated settlement, and requires the exchange of certain information between the plaintiff and defendant to promote early settlement. During this period, health care providers may admit to a mistake or error and such admission may not be used as an admission of liability in court, unless the provider lies under oath. The law also creates a task force to study defensive medicine and medical overutilization.
Pharmaceutical Cost Containment. The law directs state agencies responsible for the purchase of prescription drugs to form a uniform procurement unit for bulk purchasing, and creates a commission to determine methods by which the state can reduce the cost of prescription drugs for public and private payers.
Note: Once again, the nation will be watching Massachusetts as it implements novel health care reform initiatives aimed at limiting health care costs and improving health care quality and patient care.
Changes to Fair Share Contribution Test. This recent legislation has also eased the requirements for passing the Fair Share Contribution test.
Under the Massachusetts Health Care Reform Act, employers with the equivalent of 11 or more full time Massachusetts employees that fail to make a "fair and reasonable" contribution towards the cost of group health care coverage must pay a quarterly "Fair Share Contribution" of $73.75 per full time employee. To be exempt from the payment, a smaller employer has to pass either the 25% participation test (25% of its full time employees must be covered by the employer's plan) or the 33% contribution test (the employer must pay 33% of the cost of employee-only coverage and offer the coverage within 90 days of the date of hire). Employers with more than 50 employees must pass both tests or cover at least 75% of their full time employees.
Under the new legislation, the Fair Share Contribution rules will only apply to employers that employ the equivalent of 21 or more full time employees. Also, when calculating whether 25% (or 75%) of its full time employees participate in the employer's plan, the employer may disregard any employee who has qualifying health insurance coverage from a spouse, parent, veteran's plan, Medicare or a "plan or plans due to disability or retirement." This second rule will ease the requirements for employers that have employees who chose to be covered under another plan.
Unfortunately, the new rules are not effective until July 1, 2013.