On Dec. 16, 2015 the IRS issued Notice 2015-87, which provides lengthy and complex guidance on how various provisions of the Affordable Care Act (ACA) apply to employer-provided health coverage. The Notice provides significant guidance on the “employer mandate” rules (aka employer shared responsibility or “play-or-pay”) and on information reporting requirements. It also addresses certain ACA “market reform” provisions. (This post was updated Jan. 9, 2016, to add information on HRA provisions not included in the original post.)
This article summarizes the various changes made by Notice 2015-87. (The Q/A numbers refer to the Q/A numbers in the Notice.)
Employer mandate penalty amounts: $2,160 and $3,240 for 2016 (Q/A 13)
The original $2,000 and $3,000 penalty amounts (IRC section 4980H(a) and (b)) are adjusted each year for inflation.
- 2015 adjusted penalty amounts are $2,080 and $3,120
- 2016 adjusted penalty amounts are $2,160 and $3,240.
- The IRS anticipates that adjustments for future years will be posted on the IRS.gov website.
As background: applicable large employers may be subject to penalties if they do not offer minimum essential coverage to at least 95% of all full-time employees (the “a” penalty) or if they do offer coverage but it is not affordable” or does not provide at least minimum value to at least one full-time employee (the “b” penalty). Penalties do not apply unless at least one full-time employee qualifies for a subsidy to buy health insurance in the Marketplace/Exchange.
Affordability Percentage: Inflation adjustment to 9.66% for 2016 (Q/A 12)
Coverage offered by an ALE is “affordable” if the employee cost for self-only coverage is not more than 9.5% of household income or of one of the three affordability safe-harbors. The ACA provides that the 9.5% amount will be adjusted for inflation, but it has been unclear whether that adjustment applies to the three safe-harbors as well as to the household income test. Notice 2015-87 confirms that the inflation adjustment applies to the safe harbors as well, and that the adjusted amounts are: 9.56% for 2015 and 9.66% for 2016.
Affordability: Clarification on how HRAs, “flex credits “and “opt-out” payments affect affordability (Q/As 7, 8 & 9)
In determining whether coverage offered by an ALE is “affordable,” an on-going issue has been whether the employee contribution includes employer “flex credits” under a cafeteria plan, employer “opt-out” payments, or health reimbursement arrangements (HRAs) that reimburse employees for medical expenses or premiums. The Notice clarifies this and also provides transition relief for plan years 2015 and 2016, for arrangements that were adopted on or before December 16, 2015 (the date of Notice 2015-87). The following employer contributions DO count toward the employee required contribution, thus reducing the dollar amount of the required contribution. (Note that annual employer contribution amounts are treated as made ratably for each month.)
- HRA employer contributions the employee may use either: only to pay premiums, or to pay premiums or other cost-sharing expenses. The HRA must be integrated with the eligible employer-sponsored plan. For example, if the employee contribution for self-only coverage under the group major medical plan is $200 per month, and the employer HRA contribution for the year is $1,200 ($100 per month) and may be used either toward premiums for medical, dental or vision or for employee cost-sharing, the employee’s required contribution is $100 per month ($200 – $100).
- Employer flex credits to a cafeteria plan that may be used only to pay for health coverage or contributed to a health flexible spending account (HFSA) (the Notice calls these “health flex contributions”), but may not be used for other types of benefits (such as life insurance or dependent care) and may not be taken as taxable cash. For example, if the employee contribution for self-only coverage is $200 per month and the employer “health flex contribution” is $600 for the year ($50 per month), the employee’s required contribution is $150 ($200 – $50).
The following employer contributions do NOT count toward the employee required contribution, thus they do NOT reduce the dollar amount of the required contribution. However, if an arrangement meets the transition relief below, these payments will count toward the employee contribution for the 2015 and 2016 plan years only.
- Employer flex credits to a cafeteria plan that may be used either for health coverage or for other types of benefits (such as life insurance or dependent care), or may be cashed out. For example, if the employee contribution for self-only coverage is $200 per month and the employer flex credit is $600 for the year ($50 per month), the employee’s required contribution is still $200 per month.
The following employer contributions will increase the employee required contribution. This means the coverage is less likely to meet the affordability test. However, if an arrangement meets the transition relief below, these payments will not increase the employee contribution for the 2015 and 2016 plan years only.
- Employer “opt-out” or “cash-in-lieu” payments. These are employer payments through a cafeteria plan that may not be used to pay for health coverage but are offered to an employee only if he or she declines or waives employer coverage. Such payments have the effect of increasing an employee’s required contribution for coverage. This is because an employee who elects coverage under the health plan must forgo $100 per month in compensation in addition to paying $200 per month for coverage. For example, if the employee contribution for self-only coverage is $200 per month and the employer offers $100 per month in additional taxable wages to each employee who declines coverage, the employee’s required contribution for self-only coverage will be $300 ($200 + $100).
Transition relief: Notice 2015-87 notes that since regulatory guidance has been less than clear on the above types of payments, the following transition relief will apply for plan years 2015 and 2016, for arrangements that were adopted no later than December 16, 2015:
- All flex credits will count toward reducing the employee’s required contribution, even if they may be used for non-health benefits or taken as cash; and
- Opt-out payments will not be counted as increasing the employee required contribution.
Davis-Bacon and Service Contract Acts: Employer Fringe Benefit Payments and Affordability under the ACA (Q/A 10)
The Davis-Bacon Act (DBA) and the Service Contract Act (SCA) require federal contractors to pay workers the “prevailing wages” plus fringe benefits, although employers often may allow workers to elect cash in lieu of benefits. In Notice 2015-87, the IRS says that generally, employer fringe benefit payments (under the SCA or DBA) that may be cashed out should be treated the same as employer flex credits under a cafeteria plan that may be used for non-health benefits or cashed out. However, the same transition rule applies as stated above for flex credits: until further guidance is issued (and at least through the 2016 plan year), such employer fringe benefit payments will be treated as reducing the employee’s required contribution, but only to the extent it does not exceed the amount required under the SCA or DBA. The IRS also says it will continue to consider how to coordinate the ACA employer shared responsibility rules with the SCA and DBA rules.
Numerous Other Provisions on HRAs
The Notice confirms prior guidance (Notice 2013-54) that an HRA that covers only retirees or former employees can be used to purchase individual market coverage even once the retirees or former employees are no longer covered by a group health plan that is “integrated” with the HRA. Such an HRA will not be in violation of ACA market reforms; however, a participant in an HRA with available funds for any month will not be eligible for a premium tax credit (under IRC section 36B) for that month toward the purchase of health insurance in the marketplace. (Q/A 1)
Notice 2015-87 also confirms that an HRA for current employees cannot be used to purchase individual market coverage, whether or not the employee is covered by a group plan that is integrated with the HRA, and even if the terms of the HRA provide that it can be used for such purpose. An HRA for current employees will be considered a group health plan that fails to meet the market reforms because it is not integrated with another group health plan. (Q/A 2)
The Notice also confirms that unused amounts credited to an HRA before January 1, 2014 can be used after that date to reimburse medical expenses in accordance with the terms of the HRA without causing the HRA to fail to comply with ACA’s annual dollar limit prohibition or the preventive services requirement. This applies whether or not the HRA is integrated with another group health plan. (Q/A 3)
An HRA can be integrated with an employer’s group health plan (and thus be considered in compliance with ACA market reforms) only as to the individuals who are enrolled in both the HRA and the employer’s group health plan. Thus, an HRA that reimburses medical expenses of an employee’s spouse and/or dependents cannot be integrated with self-only coverage under the employer’s group health plan. Since many employer plans might not currently comply with this requirement, The notice also provides a transition rule under which the IRS will not treat an otherwise-compliant HRA as failing to be integrated for plan years beginning before January 1, 2017. (Q/A 4)
HRAs that reimburse only for excepted benefits. Employer plans that reimburse employees (or pay directly) for individual health insurance policies fail to comply with the ACA’s annual dollar limit prohibition and the preventive services requirement. However, these market reforms do not apply to group health plans that provide solely excepted benefits, such as stand-alone dental or vision coverage, cancer policies, hospital per diem policies, and others. Notice 2015-87 clarifies that an HRA or employer payment plan that, by its terms, reimburses (or pays directly) for premiums for individual policies that cover only excepted benefits does not fail to comply with the ACA market reforms. (Q/A 5)
Reimbursement for individual policies through a cafeteria plan. An employer cannot offer an arrangement through its cafeteria plan that reimburses the cost for individual health insurance policies, whether such arrangement would be funded solely by employee salary reduction or also by employer contributions. Such arrangement would be an employer payment plan, which would be a group health plan and would fail to comply with: 1) the ACA’s annual dollar limit prohibition (because it is considered to impose an annual limit up to the cost of the individual policies purchased), and 2) the preventive services requirements (because it does not provide preventive services without cost-sharing in all cases). (Q/A 6)
Disability Benefits from an Insurer, and “Hour of Service” (Q/A 14)
To determine whether a particular employee is full-time for purposes of the employer mandate, an employer must count an employee’s “hours of service.” This is defined as any hours for which an employee is paid or entitled to payment: 1) for work performed or 2) for periods during which no work is performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. One issue that has been unclear is whether this second category includes hours for which an employee receives disability benefit payments from a third party such as an insurance company or a trust, or whether it only includes hours for which an employee receives disability benefit payments directly from an employer.
Notice 2015-87 clarifies that a short-term or long-term disability payment made by or from a trust fund or insurer to which the employer contributed or paid premiums is deemed to be made by the employer, if the employee has not been terminated from employment. However, if the employee paid the premiums with after-tax contributions (so the benefits received are not taxable to the employee), this “would be treated as an arrangement to which the employer did not contribute, and payments from the arrangement would not give rise to hours of service.” Some employers already handle disability coverage in this manner, and this Notice will likely incent other employers to also.
Additionally, the final rules provided, and Notice 2015-87 confirms, that hours of service do not include:
- hours for which an employee receives payment under a plan maintained solely to comply with worker’s compensation, unemployment or disability insurance laws, or
- hours for which payment only reimburses an employee for medical or related expenses.
Educational Organizations and the 26-Week Break in Service Rule Q/A 15
Educational organizations (both public and private schools and universities) must treat a rehired or returning employee as an ongoing employee (as opposed to a new employee) if the employee’s non-employment period was 26 weeks or less. For other employers, the threshold is 13 weeks. The reason it matters is that if an employee is considered a new employee, the employee can be required to complete a new look-back measurement period, which could mean the employee would not be offered coverage for more than a year.
The IRS has been made aware that some educational organizations are or may be hiring workers from staffing agencies and applying the 13-week service break rule rather than the 26-week rule. Thus, Notice 2015-87 states that the IRS intends to amend existing final regulations to apply the 26-week period not only to employees of educational organizations, but also to any employees who provide services primarily to educational organizations and who are not offered “a meaningful opportunity” to provide services during the entire year.
Q/A 15 gives the example of a cafeteria worker hired through a staffing agency who is placed at a school for nine months but receives no work assignment during the three-month summer recess period (26-week rule applies) versus a cafeteria worker hired through a staffing agency who is placed at a hospital cafeteria when the school where the individual usually works is on summer recess (13-week rule applies).
Miscellaneous Other Provisions:
In addition to all the provisions detailed above, Notice 2015-87 also provides guidance on a few additional topics, including:
- TRICARE Coverage. If an employee is offered coverage under TRICARE for any month, the employer is treated as having offered such employee minimum essential coverage for that month.
- COBRA & HFSA Carry-over amounts. Notice 2015-87 explains how the COBRA continuation coverage rules coordinate with unused health FSA amounts that carry over from one plan year to the next.
- HSA eligibility when receiving Vets’ benefits. Notice 2015-87 explains when individuals who are receiving medical benefits from the Dept. of Veterans’ Affairs can also contribute to a health savings account (HSA).