IRS Releases Supplemental Guidance on Employer “Play or Pay”
On December 16, 2015, the IRS released Notice 2015-87 providing guidance on a wide range of health benefit issues. Some portions pertain only to reimbursement arrangements that are seldom offered by the typical employer, while other portions provide important clarifications on Affordable Care Act (ACA) rules that affect many employers.
In this article, we review Notice 2015-87 specifically with respect to the ACA’s employer shared responsibility (“play or pay”) rules for applicable large employers (ALEs). ALEs generally are employers that had an average of 50 or more full-time and full-time-equivalent employees in the prior year.
ALEs may be assessed one of two potential play-or-pay penalties:
- Penalty “A” for failure to offer minimum essential coverage to at least 70 percent* of full-time employees; or
- Penalty “B” for failure to offer affordable minimum value coverage to a full-time employee.
*For 2015. For 2016 and later, the threshold increases to 95 percent.
Notice 2015-87 confirms the penalty amounts, as adjusted for inflation:
- Penalty A is $2,080 for 2015 and $2,160 for 2016.
- Penalty B is $3,120 for 2015 and $3,240 for 2016.
Penalties are not triggered unless at least one of the ALE’s full-time employees receives a government subsidy to buy individual insurance through a public Marketplace (Exchange). Penalties, if any, are determined monthly; i.e., 1/12th of the above amount per month.
Employer-sponsored coverage is deemed affordable if the employee contribution for self-only coverage does not exceed 9.56 percent (2015) or 9.66 percent (2016) of the employee’s income. The percentages are an increase from 9.5 percent and welcome news to ALEs.
Flex Credits, Cash-in-Lieu, and HRAs
Employers offering flex credits and/or cash-in-lieu benefits through cafeteria plans have questioned how to determine the employee’s contribution for purposes of “affordability.” Similar questions apply to health reimbursement arrangements (HRAs) that reimburse the employee’s health coverage contributions. Notice 2015-87 clarifies these issues.
First, flex credits and HRAs will count toward reducing the employee’s contribution if certain conditions are met:
- The flex credits can only be used for health benefits (e.g., health coverage costs, health flexible spending accounts). E.g., if self-only coverage costs $100 and the flex credit is $75, the employee’s contribution is deemed to be $25.
- The HRA can be used to pay health coverage contributions (whether or not the HRA also can be used for other health expenses). In that case, the employer’s HRA contributions for the current year count toward reducing the employee’s contribution. E.g., if self-only coverage costs $100 and the employer provides a $600 annual HRA that can be used to pay coverage costs, the employee’s contribution is deemed to be $50 ($100 – ($600/12)).
On the other hand, flex credits that can be used for health and non-health benefits (e.g., dependent care spending account), and/or that can be taken as cash, do not reduce the employee’s contribution. E.g., if self-only coverage costs $100 and the flex credit is $50, the employee’s contribution is deemed to be $100 because the flex credit is disregarded. (See below regarding transition relief.)
Lastly, a cash-in-lieu benefit (i.e., cash option under a cafeteria plan for employees that waive or opt out of health coverage) is counted as an additional employee cost for purposes of determining “affordability.” E.g., if self-only contribution is $100 and cash-in-lieu benefit is $50, the employee’s contribution is deemed to be $150. (See below for transition relief.)
Transition relief: Recognizing that regulatory guidance on treatment of flex credits and cash-in-lieu benefits has been unclear, Notice 2015-87 provides transition relief for plan years 2015 and 2016. Specifically, with respect to cafeteria plan arrangements that were adopted no later than December 16, 2015, for purposes of determining “affordability”:
- ALEs are allowed to count flex credits (including those that can be used for health and non-health benefits and/or taken as cash) toward reducing the employee’s contribution, provided the ALE does not adopt substantial increases in the flex credits after December 16, 2015.
- ALEs are allowed to disregard cash-in-lieu benefits.
Notice 2015-87 also explains § 6056 information reporting issues related to this type of transition relief.
On a separate matter, employers that are subject to provisions of the Service Contract Act, Davis-Bacon Act, prevailing wage, or similar laws are advised to review Notice 2015-87 for clarification regarding fringe benefit payments.
Disability Benefits and Hours of Service
The play-or-pay rules define an “hour of service” as each hour for which the employee is paid or is entitled to payment by the employer for the performance of duties, vacation, holiday, illness, disability, layoff, jury duty, military leave, and leave of absence. This generally has been interpreted to include sick leave and salary continuation benefits for disabled employees if paid by the employer but not to include third-party benefits paid under group short-term and long-term disability insurance policies.
Notice 2015-87 confirms that an hour of service does not include any hours after employment terminates, hours for which the employee receives benefits under a workers’ compensation, unemployment, or state disability insurance law, or hours for which payment is solely for medical expenses.
Unfortunately, however, the notice also indicates that, for purposes of crediting hours of service, payments are deemed to be employer payments regardless of whether paid directly by the employer, or paid indirectly such as through a trust or insurer if the employer contributes to the cost. In other words, the ALE would be required to credit hours of service while disabled employees receive group short-term disability or long-term disability insurance benefits if the employer had contributed to the premium cost.
Service Breaks (13- and 26-week rule)
The play-or-pay rules generally provide that educational institutions (i.e., public or private schools and colleges) cannot treat rehired or returning employees as new hires unless the break in service was 26 weeks or longer. Non-educational employers, however, may use a 13-week rule. The IRS is concerned that some schools and colleges may attempt to avoid the 26-week rule by contracting with staffing agencies instead of employing workers directly. In Notice 2015-87, the IRS announces it is considering a regulation to extend the 26-week rule to employees of staffing agencies that primarily serve educational institutions.
Section 6056 Penalty Relief
The IRS previously indicated it would not impose penalties on ALEs for incorrect or incomplete 2015 Forms 1095-C and 1094-C if they can demonstrate good faith efforts to comply with the § 6056 reporting requirements. Notice 2015-87 expands the penalty relief to include late forms if the ALE can show reasonable cause for missing the deadline.
In addition to important clarifications on the ACA’s play or pay rules, Notice 2015-87 addresses a variety of other benefits-related topics, including:
- Health reimbursement arrangements (HRAs), including retiree-only and excepted-benefits-only type HRAs.
- Employer payment plans.
- Health savings accounts (HSAs) for taxpayers eligible for veteran benefits.
- Health flexible spending accounts (HFSAs), including carryover amounts and COBRA rules.
In summary, Notice 2015-87 provides lengthy and complex guidance on a wide range of employer health benefits. It includes the most significant guidance on the ACA play-or-pay rules since the final regulation was released in February 2014. On several issues, the IRS is requesting comments (due February 18, 2016) and intends to propose additional rules at a later date. Employers and their advisors are encouraged to review the details of Notice 2015-87 and to consider its applicability to specific employer situations.